Sen. Ted Kaufman: 'We need to pass something so a similar crisis doesn't happen for another 50 years'
Earlier today, Sens. Ted Kaufman (D-Del.) and Sherrod Brown (D-Ohio) introduced the Safe Banking Act, a proposal to end the too-big-to-fail problem by ending too-big-to-fail banks. The legislation sets firm size limits and capital requirements and forces banks above those limits to either shrink or be broken into pieces. I spoke to Kaufman this afternoon, and an edited transcript of our conversation follows.
Tell me about the Safe Banking Act.
It's a way to bring down the size of banks and deal with too-big-to-fail. And it's just one piece of the puzzle. There'll be a bill that does a very hard Volcker rule. And I'd like to return to Glass-Steagall. But even if you did break these banks apart, you need to place caps on their size. And that's the Safe Banking Act. A bank can only have insured deposits as big as 10 percent of GDP. A bank holding company or thrift holding company's nondeposit liabilities -- including off-balance-sheet ones -- can only be 2 percent of GDP. And any nonbank financial institution's liabilities are limited to 3 percent of GDP.
Why do we need this? There's already the Dodd bill and the Frank bill. Both of them give regulators new tools and information to get into the financial system and detect and, hopefully, resolve problems. Why take this next big step and break the institutions up?
Regulators already have the power to do so many things. The 1970 Bank Holding Act, for instance, gave the Federal Reserve the power to terminate a bank's ability to engage in nonbank activity if the activities were creating undue concentration. They could break up a bank if it posed a threat. But the regulators didn't do it. Now, you can say we have new regulators. But you need to be thinking further forward to a future president who will implement another self-regulation strategy and let the regulators walk off the field.
In 1929, we had a massive depression. After it was over, Congress came in and put Glass-Steagall into place and other rules and that lasted for 60 years. Then it began eroding in the late 90s and we got ourselves in trouble. We need to pass something so a similar crisis doesn't happen for another 50 years. As they say, good fences make good neighbors. The Senate should put the fences up. And then the regulators can come in and do their work. But they need good rules.
In your speech introducing the legislation, you said that regulations have a “half-life.” Explain that.
The half-life is until Wall Street finds a way to get around it or we get regulators who don't want to enforce regulations. The people at these firms are very smart and it's just a matter of time till they find a way to work around regulations. Ezra, every person I talk to who is removed from the banking industry believes the number one thing we need to do is end too-big-to-fail. And another problem is that being too-big-to-fail means you also get better rates than smaller banks because the market knows the government will bail you out. So that gives them a competitive advantage. And that makes them even bigger!
Some say you're going too far. Yes, Wall Street got out of control in recent years. But it generally does good work, performing important functions for the economy. Break up the banks and you'll choke off legitimate innovation and efficiencies, which will hurt the economy.
So far as the advantages of size go, there's a wonderful report by the executive director of the Bank of England who says there are no economies of scale after you've got $100 billion in assets. Now we have banks with $2 trillion in assets. And we've complicated this by getting JP Morgan Chase to buy Washington Mutual and getting Wells Fargo to buy Wachovia. So now this problem is worse than it was.
Another criticism is that 'too-big-to-fail' is the wrong way to think about this problem. It's really too-interconnected-to-fail, or too-exposed-to-derivatives-to-fail.
But the point is, they'd be smaller. If you bring down Bank of America, it'll take a long time to do. These banks have wholesaling, they borrow short-term and lend long-term, they operate in countries around the world. Smaller is better when you're trying to wind things down. Number two, when you have these massive banks, their portfolios all look identical. But that increases the systemic risk. About 85 percent of the derivatives were among five banks! That wasn't how banks looked in Wilmington. Let's get a banking system that looks like how most banks in this country operate.
How, specifically, would your bill work? Let's take Bank of America, which is well over your limits. Your legislation passes. What happens to B of A? Who carries it out?
What they have to do is bring their size down over a period of time. I actually trust regulators. They just need the rules. If they don't do it in three years, the Federal Reserve requires them to raise capital or sell assets.
Photo credit: By Jonathan Ernst/Reuters
Posted by: nisleib | April 21, 2010 5:00 PM | Report abuse
Posted by: visionbrkr | April 21, 2010 5:09 PM | Report abuse
Posted by: magellan1 | April 21, 2010 5:31 PM | Report abuse
Posted by: greenmountainboy | April 21, 2010 6:11 PM | Report abuse
Posted by: joesmithdefend | April 21, 2010 7:05 PM | Report abuse
Posted by: justin84 | April 21, 2010 7:15 PM | Report abuse
Posted by: WrongfulDeath | April 21, 2010 8:05 PM | Report abuse
Posted by: BertEisenstein | April 21, 2010 8:53 PM | Report abuse
Posted by: wd1214 | April 21, 2010 8:56 PM | Report abuse
Posted by: fair001 | April 21, 2010 10:08 PM | Report abuse
Posted by: staticvars | April 21, 2010 10:33 PM | Report abuse
Posted by: tomtildrum | April 21, 2010 11:37 PM | Report abuse
Posted by: cdorbg | April 22, 2010 12:11 PM | Report abuse
The comments to this entry are closed.