Sunday, March 10, 2013

Too Big to Fail, Too Big to Jail; But Breaking Up is Hard to Do

Last week, U.S. Attorney General Eric Holder’s update to the Senate Judiciary Committee included the following comment on 'Too Big to Jail banks: “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute — if we do bring a criminal charge it will have a negative impact on the national economy, perhaps even the world economy. I think that is a function of the fact that some of these institutions have become too large.” (The concern about “the too big to jail” is most recently associated with the lack of criminal prosecution against HSBC for years of money laundering.)

Also, please note the following comments from an exchange between U.S. Senator Elizabeth Warren and Federal Reserve Chairman Ben Bernanke during a Senate Banking Committee meeting (February 28). Warren: "So when are we gonna get rid of 'too big to fail?”, Bernanke: "As somebody who's spent a lot of late nights dealing with these problems, I would very much like to have confidence we can close down a large institution without causing damage to the economy", Warren: "Big banks are getting a terrific break, and little banks are just getting smashed", Bernanke: "I agree with you 100%". Warren’s “terrific break” referred to a Bloomberg news article (February 20, 2013) that reported “too big to fail banks” receive $83 billion annually in special support from the Federal Reserve that is not available to most other banks.

  • Regarding Holder’s comment – while having a high-level White House player highlight the “too big to jail” issue is significant, it is less clear what follow-up actions will take place.
  • Regarding Warren’s concerns – her views on the need for change at the big banks are well known and she will remain focused on these issues in the coming years.
  • Regarding the $83 billion in big bank special treatment - it is ironic that debates about $85 billion of U.S. budget cuts received months of attention, while this special support for the largest banks is less well known and understood.
  • Regarding financial reform - the 2,300 page Dodd–Frank Act remains a muddled work in progress, but the Glass-Steagall Banking Act of 1933, which was only 30 pages long, led to broad reforms when it was enacted. The objective of Glass-Steagall was “to provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes”.
  • Perhaps a Glass-Steagall version 2.0 could deal with “too big to fail/jail” problems and provide the added benefits of increased 1) competition in the financial sector, 2) job creation as new entities emerge and 3) demand for service providers as the market expands.

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