There will be a hearing tomorrow that will help shape how banks are broken up or thought of as posing a risk to the economy. What gets decided, not just tomorrow, will truly shape how regulatory reform moves forward in this country. We at ANWF think it's important the public is a part of the discussion. Our discussion on systemic risk is just as important and we need to make sure they hear us. The House Financial Services Committee will hold a hearing titled "Systemic Regulation, Prudential Matters, Resolution Authority and Securitization" on Thursday, October 29, at 9:30 a.m.
The way I see systemic risk is this: I don't care how innovative and new your product is if it's mostly based on air and fluff (speculation) then it's not innovative or useful and if a large enough percentage of your portfolio is made up of that fluff and your company is growing disproportionately larger than 90%+ of the rest because of that fluff, and you're large enough that you're extremely interconnected with many parts of the market equal to your share in the market, then you're a systemic risk poser. Numbers could be put to all of these parts and set as limits. The limits will be clear and not subjective. And then, there is the question of bailouts, if you're bigger than $100 billion in assets, you're going to get a bailout from a Democrat or a Republican, so you better not be bigger than $100 billion.
Here are the panelists on the hearing who will help make arguments for who should or should not be regulated and what systemic risk is. The issue of who needs to be watched over is muddled because there is a difference between small and large banks and small banks think they shouldn't be regulated further since they didn't cause the crisis. Though we're here to see greater competition in the industry, including helping small and medium-sized banks be even better servicers to the public, there's a strong reason why small banks should be watched over -- anyone can be collusive, create a problem, etc. It has been true that small and medium-sized banks have posed less of a systemic risk, make more community or small business loans, and have lower rates. Overall, they have been better for the average consumer. Small and medium banks should be watched over but treated differently, possibly regulated with lower requirements for how much cash on hand they must have per transaction/deposit and their systemic risk needs to be measured differently.
Notice that the first panel has one person -- Geithner. Not sure how panels have been broken up. According to members of the Americans for Financial Reform, a coalition we are a part of, Jane Dirista, Michael Menzies, and Trumka will most likely speak on the side of the public. We expect great things from Sheila Bair, Tarullo, and Dugan on panel 2.
Panel one
* The Honorable Timothy F. Geithner, Secretary, U.S. Department of the Treasury
Panel two
* The Honorable Sheila Bair, Chairman, Federal Deposit Insurance Corporation
* The Honorable John C. Dugan, Comptroller, Office of the Comptroller of the Currency
* The Honorable Daniel K. Tarullo, Governor, Board of Governors of the Federal Reserve System
* Mr. John E. Bowman, Acting Director, Office of Thrift Supervision
* The Honorable Thomas R. Sullivan, Insurance Commissioner of the State of Connecticut on behalf of the National Association of Insurance CommissionersPanel three
* Mr. Richard Trumka, President, American Federation of Labor and Congress of Industrial Organizations
* The Honorable Richard Baker, President and Chief Executive Officer, Managed Funds Association
* The Honorable Phillip Swagel, Visiting Professor, McDonough School of Business
Georgetown University* Mr. Scott Talbott, Senior Vice President for Government Affairs, The Financial Services Roundtable
* Mr. Steven A. Kandarian, Executive Vice President and Chief Investment Officer, Metropolitan Life Insurance Company
* Mr. R. Michael S. Menzies, Sr., President and Chief Executive Officer, Easton Bank and Trust, Co. on behalf of the Independent Community Bankers of America
* Mr. Peter Wallison, Arthur F. Burns Fellow in Financial Policy Studies, The American Enterprise Institute
* Ms. Jane D'Arista, Americans for Financial Reform
* Mr. Edward L. Yingling, President and Chief Executive Officer, American Bankers Association
* Mr. T. Timothy Ryan, President and Chief Executive Officer, Securities Industry and Financial Markets Association
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1)Lawrence Goodwyn’s “The Populist Moment: A Short History of the Agrarian Revolt in America,” one of the truly great works of American history and how to build a foundation for 20th century American political economy.
2)William Greider’s “Secrets of the Temple: How the Federal Reserve Runs the Country,” picks up where Goodwyn’s left off. An essential read in understanding money, banking and finance in the 20th century.
3)Kevin Phillips’ “Bad
Money: Reckless Finance, Failed Politics, and the Global Crisis of
American Capitalism,”
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MELTDOWN CAUSES: Articles and Interviews 1. Finger of blame points to shadow banking’s implosion -Financial Times "FINANCIAL INNOVATIONS" 1. Genesis of the Debt Disaster -Financial Times WHAT TO DO ABOUT THE BIG BANKS THAT FAIL? 1. Willem Buiter -FT ANTITRUST 1. Breaking up the Banks -Zephyr Teachout REGULATION 1. Regulatory Capture -Thomas Frank WHAT'S IT MEAN FOR THE ECONOMY? 1. Evolution or Revolution -Bill Gross Blogs |
By Michael McKee and Scott Lanman
Oct. 15 (Bloomberg) -- U.S. regulators should consider breaking up large financial institutions considered “too big to fail,” former Federal Reserve Chairman Alan Greenspan said.
Those banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations. That squeezes out competition and creates a danger to the financial system, Greenspan told the Council on Foreign Relations in New York.
“If they’re too big to fail, they’re too big,” Greenspan said today. “In 1911 we broke up Standard Oil -- so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”
At one point, no bank was considered too big to fail, Greenspan said. That changed after the Treasury Department under then-Secretary Hank Paulson effectively nationalized Fannie Mae and Freddie Mac, and the Treasury and Fed bailed out Bear Stearns Cos. and American International Group Inc.
“It’s going to be very difficult to repair their credibility on that because when push came to shove, they didn’t stand up,” Greenspan said.
Fed officials have suggested imposing a tax or requiring higher capital ratios on larger banks to ensure the firms’ safety and reduce some of the competitive advantage from the implied subsidy. Greenspan said that won’t work.
“I don’t think merely raising the fees or capital on large institutions or taxing them is enough,” Greenspan said. “I think they’ll absorb that, they’ll work with that, and it’s totally inefficient and they’ll still be using the savings.”
‘Really Arbitrarily’
The former Fed chairman said while “just really arbitrarily breaking down organizations into various different sizes” goes against his philosophical leanings, something must be done to solve the too-big-to-fail issue.
“If you don’t neutralize that, you’re going to get a moribund group of obsolescent institutions which will be a big drain on the savings of the society,” he said.
“Failure is an integral part, a necessary part of a market system,” he said. “If you start focusing on those who should be shrinking, it undermines growing standards of living and can even bring them down.”
To contact the reporter on this story: Michael McKee in New York at mmckee@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net
