By James Pethokoukis
Federal Reserve Chairman Ben Bernanke isn’t just a central banker, he’s a banking supervisor and regulator. And in that role, he said something very interesting Wednesday. While acknowledging that markets “to some extent” now think it more likely government would let a major financial institution fail, he also said the “too big to fail” problem “is not solved and gone.” And later: “I don’t think too big to fail is solved now. … [It is] a real problem and needs to be addressed, if at all possible.”
Point taken. Smartly addressing the issue could involve a) capping bank size, b) restructuring how banks operate, or c) making them fund their loans with more unborrowed money — or some combo of all three. Wall Street would change dramatically.
The move to “break up the big banks” (BUBB) seems to be slowly gaining momentum on Capitol Hill. Analyst Jaret Seiberg of Guggenheim Securities Washington Research Group gives it a one-in-three chance of happening, describing the possibility as a “real risk.”
He says that “if Congress was ever given the chance for an up or down vote on whether to break up the biggest banks, the big banks would lose every time.” Not only are regulators are looking to pressure the biggest banks to voluntarily shrink, but going after big banks “provides cover for lawmakers and regulators to offer help to community banks, regional banks, and credit unions.”
Now here’s why Seiberg doubts that “up or down” vote will happen:
1. The Obama administration has never pushed to break up the mega banks. So there is no cover coming from the President and no pressure for action coming from the White House or its political operation.
2. This is not really something the average voter cares about. What matters more is how much one pays to use an ATM or how hard it is to get a mortgage. The size of banks is not a major worry for most.
3. TARP made the government money. In fact, the government is even likely to collect more money from Fannie and Freddie than it invested in the enterprises. As a result, there is not as big of an outrage over the so-called bail out of the banking system.
4. We get no impression that leadership in the House or Senate wants to take on this fight. Without the strong support of leadership on both sides of Capitol Hill, these measures cannot advance.
5. Big corporations would likely fight any effort to break up the mega banks. They may not love the mega banks, but we suspect they would worry that letting the government break up big banks simply because of their size would create a precedent to go after large companies in other sectors of the economy.
6. Lawmakers from major financial centers in the United States would work behind the scenes to kill any effort to break up the banks. The argument will be that it could diminish New York’s place in the international financial community, which could result in job losses.
7. On the regulatory front, we believe the agencies will tighten the screws on the mega banks.
Yet we also believe the banks are prepared to wait out the agencies until the environment changes. And the environment is definitely changing. We heard a Republican lawmaker on Wednesday argue to the FDIC that it was wrong for them to limit C&D lending to 100% of capital.
If lawmakers are willing to argue for a return to concentration levels that helped cause the crisis, then it is hard to see how the anti-big bank campaign can maintain momentum for more than a few years.
Good points and a needed reality check. (I will address each point in a forthcoming post.) The roots of this variant of crony capitalism run deep. Uprooting them won’t be easy. A lot of educational spadework needs to be done, clearly. But from a center-right perspective, this is a pro-market policy issue with political potency and immense rebranding potential.