Senator Kaufman Proposes Best Financial Reform Proposal Yet: Cap Liabilities
Senator Ted Kaufman strikes at the heart of the problem in a fin reform proposal, that is leaps and bounds ahead of the Wall Street co-opted bag of concentrated excrement that is the Dodd proposed "Bill", (which incidentally is also dumber than a bag of hammers in terms of actually regulating any of the really salient risk factors - the thing does not even account for the GSE's $6 trillion in debt for god's sake) whose only purpose is to make sure banks can blow themselves up once again and this time so spectacularly that only Mars would be able to bail out not only America but the world, in the process wiping out all of America's wealth. As Kaufman notes: "The prudent solution is to shrink these institutions to a manageable size at which they can actually be effectively regulated." We completely agree. It is time for this president to actually do something instead of just looking all grave when reading from a teleprompter, pretending he cares about Main Street - and the right thing is to enact the Kaufman-Brown proposed legislation into law immediately. Our only addition: demand that the DOJ look over the trading books of every bank and determine which ones pass a monopoly threshold designation. If Holder and Varney need help in doing their job properly, we will gladly volunteer our services.
The salient points in the proposal:
Size Limits on Our Largest Financial Institutions
- Imposes a strict 10% cap on any bank holding company’s share of the total amount of deposits of insured depository institutions in the United States.
- Establishes limits on the liabilities of large banking and nonbanking financial institutions:
- A limit on the non-deposit liabilities (including off-balance-sheet ones) of a bank holding company or thrift holding company of 2% of GDP.
- A limit on the non-deposit liabilities (including off-balance-sheet ones) of any non-bank financial institution that poses a risk to the financial system of 3% of GDP.
Statutory Leverage Ratio
- Codifies a 6% leverage limit for bank holding companies and selected nonbank financial institutions into law.
As Kaufman points out, idea of size caps is supported by Thomas Hoenig, President of the Kansas City Fed; Paul Volcker, former Chairman of the Federal Reserve; Mervyn King, Governor of the Bank of England; Richard Fisher, president of the Dallas Fed; Robert Reich, Secretary of Labor under former President Clinton; and commentator Arnold Kling of the National Review.
Here is the Kaufman speech defending this idea which is so simple, it is brilliant:
SPEECH ON BROWN-KAUFMAN SAFE BANKING ACT
By U.S. Senator Edward E. Kaufman
April 21, 2010
Mr. President, it is a simple proposition: We can either limit the size and leverage of “too big to fail” financial institutions now, or we will suffer the economic consequences of their potential failure later. Breaking apart too-big-to-fail banks is the necessary first step in preventing another cycle of boom-bust-and-bailout.
This debate is a test of whether the power of that idea can spread and gain support. Though it is clearly the safest way to avoid another financial crisis, this idea must overcome tremendous resistance from Wall Street banks and their politically powerful campaigns against structural financial reform.
Moreover, the idea must overcome the inertia and caution in a Congress drawn to easier ideas that may work. But how much should we gamble that they will work? Limiting size and leverage are redundant fail-safe provisions to prevent a dangerous outcome. Senator Brown and I are proposing a complementary idea, not a substitute.
The current bill has many important provisions that we support. But under its approach, we must hope the financial stability oversight council can identify systemic risks before it's too late. We must hope that regulators will be emboldened to act in a timely manner when before they failed to act. We must hope better transparency and financial data will produce early warning signals of systemic danger so clear that a council and panel of judges will unhesitatingly agree. We must hope that capital requirements will be set properly in relation to risks that all too often remain purposefully hidden from view. We must hope the resolution authority will work when we know it has no cross-border authority to resolve global financial institutions.
And under the current bill we must hope all future presidents will appoint regulators as determined to carry out the same strict measures preached belatedly by today's regulators who have been converted by the traumatic experience of their own failures.
All rules to restrict excessive risk-taking in banking have a "half-life," because the financial sector is full of smart people with an incentive to find their way around rules - particularly to load up on risk, as this is what provides them excessive profits and big bonuses.
I would rather not pin the future of the American economy on so much hope. I would rather Congress act now definitively and responsibly to end too big to fail.
The changes in regulations envisioned today would help initially, but they could quickly erode - particularly by the next free market candidate who wins the presidency and appoints regulators who only believe in self regulation.
A legislative size and leverage restriction would last far longer.
Remember, the Depression era banking laws provided a foundation for financial stability for almost 50 years.
Some argue that we need massive banks, but recent studies show that over $100 billion in assets, financial institutions no longer achieve additional economies of scale -- they simply become dangerous concentrations of financial power that benefit from an implicit government guarantee that they will be saved if they fail. With this implicit guarantee, these firms will continue to have every incentive to use massive amounts of short-term debt to finance their purchases of risky assets -- that is, until they bet wrong, cause the next crisis, and the taxpayers must bail them out again.
While $100 billion banks would be smaller, they are not small banks – and such banks would have no trouble competing around the world.
And, under this bill, we would still have banks far bigger than even that size. Just because other countries subsidize mega-banks that could send those countries spiraling into a financial crisis should not make us want to do the same. Most people in the oil industry did well after the breakup of Standard Oil (including its shareholders) and the break-up of AT&T helped to make the telecom industry in this country more dynamic and competitive.
As I said, the current Senate bill contains many important provisions that address the causes of the financial crisis. But why risk leaving oversized institutions in place when they are “too big to fail?” Instead we should meet the challenge of the moment and have the courage to act to limit the size and practices of these literally colossal financial institutions, the stability of which is a threat to our economy.
This bill is the best hope to ensure future decades of financial stability and the livelihoods of the American people. This bill would put the days of "too big to fail" forever behind us.
And for those with an even worse attention span than CDS traders, here is a must watch video that captures the essence:
BROWN: Senator, you know, this is – this is – some people think about this as – it's a pretty big step to decide, you know, we want to limit the size of banks and it's not something we like to do. We don't want to do more regulation than we have to. We don't want to tell successful companies not to grow. But when you look at – when you look at what's happened in the past, you look at what Senator Kaufman said, that we did this right in the 1930's and it protected our financial system, with a few hiccups but with no serious, serious problems until the end of this last decade when President Bush and the Congress – starting with President Clinton; President Bush accelerated it, weakened regulation, repealed regulation and when there were regulators appointed, you might use the term "lap dogs" -- that might not be a Senatorial word.
KAUFMAN: People who basically believe that self-regulation will work. Alan Greenspan was also quoted as saying that we should break the banks up. “Standard Oil wasn’t bad.” At the time he said, after it was over, a year later he gave a speech and he said, “look, you know, I really thought self-regulation would work and I’m dismayed that it didn't.”
And the way I put it, it’s like there was a whole group of folks -- not just in the financial regulatory [area], but all over the government -- who basically believed the markets are great. I am a big believer in markets, but I also like football. And the idea that somebody would say: “hey, you know football is really great but the referees keep blowing their damn whistles and they stop the play. Let's get the referees off the field so football players can be football players.” That's what we essentially said.
We knew what would happen if you pulled all the referees off the field. I wouldn't want to be in the pile. And that’s what essentially we said with this. We said we're going to pull the referees off the field and see what happens. These were good people. They just didn't believe that they had to regulate. We're now seeing the results.
And Senator Brown, people say to us, when we propose these things — I’m sure you get the same questions — I’ve got several press people say to me “look, why don't we just leave it up to the regulators?” They can set these numbers. We shouldn't set these numbers. Let me read from a couple of things. The 1970 bank holding company act amendments gave the Fed the power to terminate a [company’s] authority to engage in nonbanking activities, basically doing what we're talking about doing, if it find such actions necessary to prevent undue concentration of resources. I wonder if that went on recently?
Decreased or unfair competition, conflict of interests, or unsound banking practices. They had -- the Fed had the power to do this. They did not do this. The Financial Reform Recovery Enforcement Act also gave them the power to restrict an institution's size. What we're talking about now is giving the regulators essentially what they already have in the present bill. What Senator Brown and I are saying and the other cosponsors are saying is, look, the buck stops here. We should tell the regulators what these percentages are going to be because if you leave it up to them -- this is very difficult.
As Senator Brown said, these are very powerful people and very powerful institutions. And they hire the very best people to come and make their arguments. So if you're sitting there running a regulatory agency and you're saying, “Oh, my God, I don't want to do this, I don't want to shrink these things down.”
And remember one other thing, too. As bad as things were in this latest crisis, think about what's happened during this crisis. They've all exploded. What did we have happen? J.P. Morgan Chase, they now include Washington Mutual, a $400 billion bank. Bank of America now includes Merrill Lynch. Wells Fargo now has Wachovia. These things were big. We de-regulated, we changed the laws. Now they are bigger.
As he says, 63% -- their assets are 63% of the gross domestic product of this country. 15 years ago they were 17% of gross domestic product. What do we have to do before someone sends the message that these things are too big and that this Congress not pass the buck to the regulators who didn't do the job in the past?
Let me just say this: I think the world of our regulators now. I don't think [there are] people regulating now who basically believe that we shouldn't regulate. 1933 we made a decision that helped us through three generations. What are we doing now as Senators on the floor passing legislation based on the fact, “I trust my regulators now.” Why aren't we passing legislation that will work over the next two or three generations?
Something that will work whether we get a president that believes we should have a market or not. Whether we have a good regulator or a bad regulator. Why shouldn't the United States do its job and basically lay out restrictions of the kind that are in this bill so that the regulators have [clear lines]. Then they can enforce it. They can do the enforcement, which is their job. But we [must] send a clear message to people that this is what we have to do.