I have been in Washington for 10 years as CEO of ICBA, and I have seen everything from the Wal-Mart bank charter fight to the financial crisis and Wall Street bailouts of 2007-09 and everything in between. I have seen some nasty battles inside the Beltway, and I’ve even engaged in a few myself.
But with the momentum building for legislation to take on the too-big-to-fail problem once and for all, I don’t think I’ve ever seen so many lobbyists in this town. In fact, there are more Wall Street lobbyists swarming Capitol Hill than there will be cicadas buzzing around the Washington metro area this summer. With the weather warming up, it’s almost as if the blue suits and power ties are sprouting right up out of the ground.
I, for one, can’t blame them. The Terminating Bailouts for Taxpayer Fairness Act (S. 798), introduced by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.), has reignited the debate over the too-big-to-fail problem. The bipartisan legislation would implement higher capital levels on large financial institutions to address their government guarantee against failure—one of our nation’s most outrageous distortions of the free market system.
To limit taxpayer vulnerabilities, protect against future crises and level the playing field for community banks, the TBTF Act would set capital standards based on an institution’s size and complexity. The bigger the bank, the greater its systemic risk, the higher its capital rate. It’s as simple as that. Additionally, the legislation includes a variety of regulatory relief measures for community banks. These much-needed reforms, which range from expanding mortgage-lending opportunities under new regulations to supporting greater accountability in bank exams, will help offset some of the red tape that has bound Main Street because of the misdeeds on Wall Street.
But let’s not forget, the TBTF Act isn’t the only game in town. Several other members of Congress, from House Financial Services Monetary Policy Subcommittee Chairman John Campbell (R-Calif.) on the right to Sen. Bernie Sanders (I-Vt.) on the left, have introduced separate bills to take on the too-big-to-fail problem. Regulators such as FDIC Vice Chairman Thomas Hoenig and Federal Reserve Bank of Dallas President and CEO Richard Fisher have introduced their own plans, while newsmakers such as MIT economist Simon Johnson have identified too-big-to-fail as one of our nation’s greatest threats.
So with ICBA, community bankers, regulators, members of Congress, economists, consumer advocates and the American public supporting new measures to deal with the too-big-to-fail risk to our financial and economic system, there’s no wonder why Wall Street lobbyists are out in full force.
Like the cicadas that burrow out of the ground every 17 years, the lobbyists are beginning to swarm as Washington heats up. The problem is that the lobbyists are louder and make an even bigger mess. So I encourage community bankers everywhere to make sure their voices are heard in Washington so Congress will not let the Wall Street hired guns once again maintain the too-big-to-fail status quo. With so much at stake, it’s time for Main Street to grab the flyswatters.
Are you ready to join us?
Surprise, They’re At It Again
In the latest news from the “color me unsurprised” department, JPMorgan Chase is reportedly under investigation for manipulating energy prices and lying under oath about the scheme. According to The New York Times
, the Federal Energy Regulatory Commission is considering whether to pursue regulatory actions against JPM for charging California and Michigan $83 million in excessive payments that had a harmful impact on energy markets, not to mention the taxpayers of these states. Further, a top executive at the megabank is believed to have lied to investigators about her knowledge of the shady transactions.
I don’t know about anyone else, but I’m about as shocked as Claude Rains was to find gambling at Rick’s Café in Casablanca
. The only difference is that the rest of us aren’t picking up any winnings—we’re all losers on this deal. The only winners here—the high-stakes gamblers at JPMorgan—are the same people who brought us the financial crisis and Great Recession just a few short years ago. And I mean literally—these are the same exact people. The executive accused of lying to investigators helped develop the credit default swaps that played a role in tanking the markets back in 2007 and 2008.
Of course, these are just the latest revelations of underhanded dealings at the nation’s too-big-to-fail firms. The Times
reports that regulators also are investigating JPMorgan’s use of faulty documents in pursuing lawsuits against delinquent credit card customers, while separate investigations are focusing on the megabank’s role in the Bernie Madoff Ponzi scheme. Meanwhile, regulators continue investigating whether global megabanks colluded to rig Libor interest rates to maximize profits.
And let’s not forget the Senate Permanent Subcommittee on Investigations report that found that JPM used federally insured deposits to fund a portfolio of complex financial instruments used for risky trades that resulted in billions of dollars in losses. The report also found that JPM misinformed investors, regulators, lawmakers and taxpayers about the “London Whale” trades and actually hid $600 million in losses.
In other words, there is no lack of evidence that the too-big-to-fail financial firms pose fundamental risks to our global financial system. These institutions, which enjoy a taxpayer-subsidized funding advantage over community banks, are not only incentivized to take outsized risks with the understanding that taxpayers are there to bail them out if their gambles don’t pay off. They also know that the worst thing that will happen to them is the acceleration of an enormous severance package.
I was a community banker for 25 years. If even one of these transgressions had happened on my watch I would have been stripped clean of everything I owned and publicly hung out to dry on Main Street just before they hauled me off to the state penitentiary. Too-big-to-fail institutions are making a mockery of our nation's lawmakers and regulators. It is time to restore discipline to our financial system. This is the United States of America, a nation founded on laws, principles and equality.
No wonder lawmakers are pushing the TBTF Act (S. 798) to implement higher capital levels on the largest megabanks to address their too-big-to-fail market distortions and to ensure they can pay off their own debts if they go bust. Taking on the too-big-to-fail problem head on is the only way to end this relentless string of arrogant abuse by our nation’s largest financial firms. And we need to do it now before we get it wrong again, because next time will be too late.
Main Street Heroes
Last week, Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) showed that they stand with Main Street America by filing a bill that does something real and meaningful about the anti-free-market government policies that have taken root in this nation in the form of "too big to fail" and "too big to jail." And standing right with them is Sen. Jeff Sessions (R-Ala.), another Main Street hero who is standing up for true free market capitalism, a free market economy, and this nation's Main Street banks and small businesses.
By cosponsoring S. 798, the TBTF Act, these senators are making a statement that they will not be bullied or intimidated by those whose interests are to keep our nation’s free markets anything but free. Like Teddy Roosevelt, who busted up the power of the trusts a century ago, these senators understand that markets run by oligopolies are not really free. So when others were intimidated, they stood up to the big money oligarchs and demanded that they put their own capital at risk, not the taxpayers. Capitalism is about capital—not taxpayer subsidies.
Sen. Sessions stood tall last week with Main Street heroes Sens. Brown and Vitter to say enough is enough. ICBA and the 7,000 community banks we represent nationwide witnessed who the true Main Street heroes are in the U.S. Senate. We urge all senators to stand with Main Street America and support S. 798.
Help Community Bank Voice Blossom in Washington
Spring is just about my favorite time of year in Washington. The weather warms and puts an end to the winter chill. The cherry blossoms bloom and bring new life to the city. And hundreds of community bankers swarm Capitol Hill for ICBA Washington Policy Summit meetings with lawmakers to secure a future for our beloved industry.
Serene, isn’t it? While meeting with members of Congress and regulators about financial policy is not exactly a springtime stroll through the park, it is absolutely critical to our industry’s survival. Any one of the challenges we community bankers face would have any industry reeling. Collectively, they are a mortal threat.
Our government-supported competitors—including too-big-to-fail financial institutions, credit unions and the Farm Credit System—enjoy taxpayer-funded subsidies and advantages. Meanwhile, community banks face increasing and unnecessary regulatory burdens as well as the prospect of draconian Basel III capital guidelines. Only by directly engaging policymakers can we effect needed changes to our financial and regulatory systems. That’s why we’re in Washington, today and every day—to ensure community banks can continue serving their communities as they have for generations.
This week’s summit in Washington has been a huge success, particularly with the introduction of the Brown-Vitter TBTF Act (S. 798) to combat both too-big-to-fail and community bank regulatory burdens. But community bankers do not have to be in the nation’s capital to make a difference. ICBA makes it easy for those back home to make their voices heard in Washington—all you have to do is go to our “Be Heard” grassroots website. From there, it’s easy to send an email message, make a phone call, or even tweet your member of Congress on some of the community banking industry’s top policy priorities.
So whether you are in Washington, D.C., Washington, Mo., Washington state or anywhere else in this great nation of ours, I strongly encourage you to engage in the discussions that will determine your future. This is your industry, your franchise and your responsibility. The season is here, and the outcome is in your hands.
Senate Letter on Too-Big-To-Fail, Basel a Solid Step Forward
Community bankers received a double dose of good news this week with a letter from a bipartisan group of U.S. senators to financial regulators on too-big-to-fail and Basel III. The lawmakers called on regulators to help address the too-big-to-fail problem by advancing Basel III capital guidelines on large institutions while recognizing that a stricter capital regime is not necessary for community banks. It’s not the answer to community bankers’ prayers, but it’s a good start.
Sens. Bob Corker (R-Tenn.), Sherrod Brown (D-Ohio), Elizabeth Warren (D-Mass.), David Vitter (R-La.) and Susan Collins (R-Maine) wrote that strengthening capital requirements will help protect the public against financial instability and too-big-to-fail. “The Basel III capital standards were designed for large, internationally active banks, as was appropriate,” they wrote. “We urge you to complete work on capital standards for the largest banks before turning to the smaller institutions.”
Well, hallelujah, I couldn’t agree more. The tangible capital levels at the most systemically risky banks must fully reflect the risk embedded within their balance sheets. We would go further—much higher tangible capital levels should be required against the hundreds of billions of dollars of off-balance-sheet risk held at these institutions. Over-reliance on “risk-weighted assets” contributed to the financial collapse of these firms. As an example, several types of securitized mortgage-backed securities were judged to be almost riskless before the crisis, and we all know what happened there.
ICBA and community bankers nationwide have been screaming bloody murder about these issues because of the fundamental inequities and threats they pose to our financial system. While too-big-to-fail creates systemic risks and inhibits free market competition, imposing Basel III capital standards across the board would penalize community banks and Main Street communities for Wall Street’s sins. As I’ve written here before, if the federal banking regulators want to reduce the nation’s commercial banking system to a handful of banks, imposing Basel III on community banks is the way to do it.
So this bipartisan letter is a step in the right direction on both issues—toward targeting new capital guidelines on the largest financial firms to help remove their taxpayer-funded backstop. While they aren’t the end-all, be-all fix to our too-big-to-fail problem, stronger capital rules for the largest and most systemically risky financial firms will help remove this unfair competitive advantage over smaller institutions and protect the U.S. taxpayer.
In other words, increasing the megabanks’ capital requirements helps restore the line between private risk and socialized losses. Let’s hope that our banking regulators take heed of these senators’ warnings, which ICBA and community bankers have been raising for years. We must end too-big-to-fail today and restore a free market for tomorrow.
Public Growing Increasingly Sick of Too-Big-To-Fail Disease
Well, it’s official: the community banking industry’s push to end the too-big-to-fail plague once and for all has gained momentum. From regulators and industry advocates to members of Congress and the news media, it’s evident that Washington is abuzz yet again on the controversial topic of too-big-to-fail. And it’s not only Washington that has opinions on the issue. A recent study shows widespread support for ICBA’s campaign to break up the largest megabanks to address this scourge and put the word “free” back in front of “markets” once again.
The Rasmussen Reports survey
found that half of all U.S. adults favor breaking up the 12 largest megabanks, which control nearly 70 percent of the banking industry, while only 23 percent were opposed. This is up from an October 2009 poll, in which 43 percent of Americans said that banks considered too big to fail should be broken up into a series of smaller companies. In addition, 55 percent said the government should let too-big-to-fail banks go out of business if they can no longer meet their financial obligations.
This tells me one thing: the American public is getting fed up. For community bankers who live and breathe financial news and policy on a daily basis, the too-big-to-fail epidemic is top of mind. We see the impact on our financial system day in and day out—in our regulatory workload, in our cost of funds relative to the megabanks, and in the inequitable treatment of Main Street and Wall Street. Now it appears the average Joe and Joanne have had their fair share of it too—and they are just as sick of it as is their community banker down the street.
Americans don’t typically spend their days pondering things like financial services policy, systemic risk and moral hazard. At least, not until these things begin to have a noticeable impact on their day-to-day lives. And I think that’s what is starting to happen.
After the worst financial outbreak since the Great Depression was headed off by trillions of dollars in taxpayer assistance to the institutions that caused it, Americans began to take notice. After reports that JPMorgan Chase hid from regulators $600 million in what would balloon to $6.2 billion in losses on high-risk trades funded in part by federally insured deposits, the public began to wonder. After the U.S. attorney general flat-out told Congress that the largest financial institutions are above the law because of their size, the American public began to demand action to address what is an obvious and fundamental distortion of our financial markets. The public has begun to realize that our “free” markets are anything but free.
This should come as no surprise to anyone, even the “untouchables” on Wall Street. The too-big-to-fail disease touches each one of us because it represents a taxpayer-funded interference in the free market that increases financial risks. This affects our jobs, our communities and our future. There is also the issue of judicial fairness, of Main Street community bankers rolling up their sleeves to disinfect the mess while Wall Street titans are rewarded for their ruinous practices.
At any rate, the Rasmussen poll shows that Americans are sick and tired of our too-big-to-fail problem. They are witnessing the impact first-hand and want a cure. And they are beginning to understand that only by restructuring these institutions can we eliminate their taxpayer-funded backstop against failure, restore our free market–based financial system and inoculate our economy from its too-big-to-fail problem for the long term.
Guest Blog: As the Wall Street World Spins
By Terry J. Jorde
With too-big-to-fail financial firms getting soaked by bad press over their risky practices and preferential treatment, it should come as no surprise that they and their supporters have turned the spin machine on high to divert attention. The latest effort came in an op-ed posted on the American Banker website
that appears to completely divorce the benefits of being too big to fail from their cause: the size and systemic risks posed by these financial giants.
In the op-ed, attorney George Sutton concludes that three things are driving the growth of large banks: market demand, access to capital and regulatory burden. He is right, but for all the wrong reasons. I would suggest that what is driving the growth of megabanks is market demand because they are too big to fail, access to capital because they are too big to fail, and regulatory burden resulting from the egregious sins of those same banks that are (wait for it) too big to fail.
Sutton writes that the megabanks have advantages over their competitors because the market demands their services and because smaller institutions are hamstrung by regulations. I couldn’t agree more. The problem is the cause of these phenomena. First of all, markets seek out the largest financial firms because they enjoy a government guarantee against failure. We’ve already seen the guarantee in action, and who wouldn’t want to put their money in an institution where risk is virtually eliminated? And why do community banks have this crushing regulatory burden anyway? These burdens are the direct result of the greed of large financial institutions and financial crises they’ve spawned on Wall Street.
Meanwhile, if “diversification is the cardinal rule in investing,” as the author writes, then what justifies a financial system in which a handful of banks control 80 percent of our nation’s economy? That certainly didn’t work well for us in the recent economic meltdown, and the biggest banks have grown 20 percent larger since the crisis. Further, Citi and Chase were not the “source of strength” that helped their banks grow their way out of the crisis. Instead, they collapsed under their own weight, and the American taxpayer was the source of strength that bailed them out.
Finally, the op-ed suggests that if too-big-to-fail financial firms are downsized, financial services will be driven from the regulated banking sector to the unregulated shadow banking industry. Yet Sutton neglects to mention that the five largest bank holding companies controlled 19,654 nonbank subsidiaries as of the second quarter of 2012. Much of the shadow banking world is housed within the very financial conglomerates that seek to blame community banks for suggesting that taxpayer subsidies should not prop up too-big-to-fail institutions.
Let’s get out of the spin cycle. The fact is that the too-big-to-fail banks are too big to manage and too big to regulate. And despite attempts by Wall Street and its apologists to muddy the waters, the crystal-clear truth is that too-big-to-fail distorts the financial markets, puts taxpayers at risk and leads to stricter regulations on the entire banking system. Megabanks must be downsized and restructured so the nation’s community banks and the communities they serve are not hung out to dry.
Terry J. Jorde is ICBA senior executive vice president and chief of staff.