Senator Kaufman Proposes Best Financial Reform Proposal Yet: Cap Liabilities

Tyler Durden's picture

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:


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.           


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Stu's picture

Goldman CEO Blankfein feels that ‘government is out to kill them.’

[link to]

Goldman CEO Blankfein feels that ‘government is out to kill them.’

Blankfein, the embattled CEO of Goldman Sachs, told clients in a telephone call yesterday that he feels under siege due to a Securities and Exchange Commission probe that scrutinizes Goldman for misrepresenting a debt product tied to subprime mortgages. Blankfein, apparently channeling his inner Glenn Beck, reportedly told investors that “the government is out to kill” his firm:

*****One person who received a call from the Goldman chief said he was told the regulator’s case against the bank was politically motivated and would ultimately “hurt America”. <…>

“He was very aggressive,” said one person called by Mr Blankfein on Wednesday. “He feels that the government is out to kill them, that they are under attack and the whole thing is totally political.”

Mr Blankfein said the SEC action “hurts America”, this person said.

truont's picture

Somebody!  Call a WHAAAAAMBULANCE!  Lord Blankfeiny is whiney!

Crab Cake's picture

Goldman CEO Blankfein feels that ‘government is out to kill them.’

Mr. Blankfein, I could be wrong but, I don't think it's the government that's out to kill you and your company...

SteveNYC's picture

Yes, with all the cash they have loaded on Goldman in the past 2 years, I guess the weight of it all coul crush you? But I'm sure it is all for love, as opposed intent to kill. Poor ol' Lloyd.

crosey's picture

I would rather have a bill that does not guarantee anything beyond deposits (up to $250k).  That way, if the banks want to blow themselves up, go right ahead and learn the lesson the hard way.

Trouble with my approach is that, unless there are codified caps, the banks will just go on scaring the shit out of the stupid legislators, and getting what they want.

So, I guess Kaufman-Brown have the best approach.

buzzsaw99's picture

decent people are horribly outnumbered.

Crab Cake's picture

"The few who understand the system, will either be so interested in its profits, or so dependent on its favors that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantages...will bear its burden without complaint, and perhaps without suspecting that the system is inimical to their best interests."
- Rothschild Brothers' of London communiqué to associates in New York June 25, 1863

lesterbegood's picture

We do not need any more new laws! Restore the U.S. Consttitution! Doing this will rid the people of the IRS, Federal Reserve, CFR, Trilateral Commission, NAFTA, CAFTA, Patriot Act and it's progeny, like Homeland Security.

Demand from your elected officials that they Restore the Constitution!

lizzy36's picture

Hey it's the "O" show. 

Lot's of words + Lloyd in the audience (where o where is the house of Dimon).

What about the $400bln ot taxpayer dollars for fannie and freddie Mr. President?

Anyone dare to ask which democratic senator helped kill reform of fannie and freddie in 2005?  Or which was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry?

Ahhh......the hypocrisy of politicians is only matched by star athletes entering sex rehab.

Grifter's picture

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

The above made me think of this old clip, specifically 1:10 in:

"...and some huge meteor is like 'well f*ck that...'"

alien-IQ's picture

Just the mere fact that TD used the term "dumber than a bag of hammers" makes me very happy.  It's a favorite of mine.


Now if ZH can find a way to incorporate the terms:

"The depth of a $99 paint job"


"Don't piss down my back and tell me it's raining"

I'd be eternally thankful.



Mitchman's picture

With all due respect, I think the original of that last one is "You're pissing on my shoes and telling me it's rain!"  I suggest we start with this as a riposte to 99% of what our President says to be followed as a riposte to 99% of what Helicopter Ben says.

john_connor's picture

Terrific proposal and great post.  Thanks. 

The more that we can grab this political football away from the administration, and Repubs for that matter, the more likely that real reform will happen.  I am not holding my breath however.

BTW, is anyone else sick of this halo crap when MSM photographs Obama? (Check out MW front page).  I am, and I am not fooled.



Caviar Emptor's picture

Obama: "There is no dividing line between Wall Street and Main Street" (!)

That last line told it ALL. 
It's un-American to be critical of Wall Street. And there will be no acknowledgement that the needs of the real economy are different from the needs of Wall Street.

HarryWanger's picture

Certainly is a different world we live in now that the market actually goes up when Obama speaks. Used to be an automatic dive. He may be suffering in the Main St. polls but Wall St. seems to be warming up to the Prez. I wonder why.....

Cyan Lite's picture

This legislation has a snowball's chance...

weinerdog43's picture

It turns out that Kaufman is not running for re-election, and can therefore tell the truth.  Pretty sad state of affairs that only a single Senator has the stones to stand up and say what needs to be said. 

Hondo's picture

Limiting liabilities is a very good idea.  The whimps will say that is will slow growth....there are many reasons that won't happen and will actually produce competition and diversification withing the lending community.

ArsoN's picture

I would prefer eliminating the central bank.  Since that doesn't appear to be an option this is probably as good of a way of treating the symptoms as any other.  

Marc45's picture

We already have a cap on liabilities.  Unfortunately, this was pretty much ignored when mark-to-market was deemed unnecessary.  Let's face it, the banks have everyone by the balls.

chindit13's picture

"Stocks rally on no-reform Reform Bill"

lovejoy's picture

Warren Mosler, running for Senator Dodd'a seat,  has some interesting proposals for banks.

"U.S. banks are public/private partnerships, established for the public purpose of providing loans based on credit analysis. Supporting this type of lending on an ongoing, stable basis demands a source of funding that is not market dependent. Hence most of the world's banking systems include some form of government deposit insurance, as well as a central bank standing by to loan to its member banks.

 The hard lesson of banking history is that the liability side of banking is not the place for market discipline. Therefore, with banks funded without limit by government insured deposits and loans from the central bank, discipline is entirely on the asset side. This includes being limited to assets deemed 'legal' by the regulators and minimum capital requirements also set by the regulators.

Given that the public purpose of banking is to provide for a payments system and to fund loans based on credit analysis, additional proposals and restrictions are in order:

  1. Banks should only be allowed to lend directly to borrowers, and then service and keep those loans on their own balance sheets. There is no further public purpose served by selling loans or other financial assets to third parties, but there are substantial real costs to government regarding the regulation and supervision of those activities. And there are severe consequences for failure to adequately regulate and supervise those secondary market activities as well. For that reason (no public purpose and geometrically growing regulatory burdens with severe social costs in the case of regulatory and supervisory lapses), banks should be prohibited from engaging in any secondary market activity. The argument that these areas might be profitable for the banks is not a reason to extend government sponsored enterprises into those areas.
  2. US banks should not be allowed to contract in LIBOR. LIBOR is an interest rate set in a foreign country (the UK) with a large, subjective component that is out of the hands of the US government. Part of the current crisis was the Federal Reserve's inability to bring down the LIBOR settings to its target interest rate, as it tried to assist millions of US homeowners and other borrowers who had contacted with US banks to pay interest based on LIBOR settings. Desperate to bring US interest rates down for domestic borrowers, the Federal Reserve resorted to a very high risk policy of advancing unlimited, functionally unsecured, US lines of credit called 'swap lines' to several foreign central banks. These loans were advanced at the Fed's low target rate, with the hope that the foreign central banks would lend these funds to their member banks at the low rates, and thereby bring down the LIBOR settings and the cost of borrowing US for US households and businesses. The loans to the foreign central banks peaked at about600 billion and did eventually work to bring down the LIBOR settings. But the risks were substantial. There is no way for the Fed to collect a loan from a foreign central bank that elects not to pay it back. If, instead of contracting based on LIBOR settings, US banks had been linking their loan rates and lines of credit to the US fed funds rate, this problem would have been avoided. The rates paid by US borrowers, including homeowners and businesses, would have come down as the Fed intended when it cut the fed funds rate.
  3. Banks should not be allowed to have subsidiaries of any kind. No public purpose is served by allowing bank to hold any assets 'off balance sheet.'
  4. Banks should not be allowed to accept financial assets as collateral for loans. No public purpose is served by financial leverage.
  5. US Banks should not be allowed to lend off shore. No public purpose is served by allowing US banks to lend for foreign purposes.
  6. Banks should not be allowed to buy (or sell) credit default insurance. The public purpose of banking as a public/private partnership is to allow the private sector to price risk, rather than have the public sector pricing risk through publicly owned banks. If a bank instead relies on credit default insurance it is transferring that pricing of risk to a third party, which is counter to the public purpose of the current public/private banking system.
  7. Banks should not be allowed to engage in proprietary trading or any profit making ventures beyond basic lending. If the public sector wants to venture out of banking for some presumed public purpose it can be done through other outlets.
  8. Use FDIC approved credit models for evaluation of bank assets. I would not allow mark to market of bank assets. In fact, if there is a valid argument to marking a particular bank asset to market prices, that likely means that asset should not be a permissible bank asset in the first place. The public purpose of banking is to facilitate loans based on credit analysis rather, than market valuation. And the accompanying provision of government insured funding allows those loans to be held to maturity without liquidity issues, in support of that same public purpose. Therefore, marking to market rather than evaluation by credit analysis both serves no further public purpose and subverts the existing public purpose of providing a stable platform for lending."
4shzl's picture

In other words, let's make 'em rate-regulated utilities.  Works for me.

fsudirectory's picture

b-b-b-b-b-bb-b- but thats socialism noooooo how will they EVER compete !!, sorry I was channeling CNBC

Ned Zeppelin's picture

Have the TBTFs read this? Dodd will have a lot of friends in high places if they get wind of this guy's "radical" proposals.

RonnieHonduras's picture


I guess this is better than the alternative, but it's still crrrrrap. Especially the pilining on the free market stuff.

Bottom line: the free market has nothing to do with the current fiasco or system, and the analogy made to footbal without referees is totally apples and oranges.

And I suspect most readers here get this, but just in case... The system as it stands is an artficial construct, a political - banking nexus that opperates as if certain systematic assumptiosn are immutable requirements for life.   Central banking, for example.  Fractional reserve banking. Fiat currency. 

So, if those system features are assumed absolute necessities, then the above proposal and observations would seem more sensible.  After all, if you've given certain politically connected players the ability to play with $billinos minted out of thin air, and assert that without such favoritism, all life ends, then it goes without saying that a lack of regulating those players to establish some limits to the pace of their reckless looting is stupid.  Implied, the deregulation of the players in this horribly misdesigned system opened to door for the looting to go on in plain sight, warts and all. Blaming free market advocates is a red herring.  This is corporatism plain an simple before re-regulation and after whatever they cook up in the next 18 mos, nothing free-market about it.

Every grifter knows the best scams are when the victim has no idea he's being scammed.  You can then scam.  Scam some more.  And scam again.   At best, the above proposal is nothing more than an attempt to slow the pace of scamming to something less visible.  As if the implied fraud of fractional reserve banking and outright monetization are so delightful to those subsidizing it.  

Parasites should know better than to get so drunk with themselves as to kill their host in the process.  This proposal merely restates that first rule of parasitism into law.

Ned Zeppelin's picture

Regulating banks as utilities is just another way to reinstate Glass-Steagall. You want to party? Do it on your own money. No FDIC insured assets in the mix. 

This is not hard. Rubin, etc. all got their way with all this deregulation shit, and it took them no time to bring down the whole thing. Assholes - all of them.  Time to get everybody back inside the corral.  At gunpoint, if need be.

RonnieHonduras's picture

All glass steagall did was turn off the lights, add roofies to the common man's cocktail, and use extra lube.  It was still a bend-over rape in progress, only so slow the victim was less aware.  Who want's to be part of THAT corral?

What Rubin et al repealed amounted to ending the roofies, throwing out the lube, and instead of going slow, giving the common man the triple-team.  When the lights went on, nobody like's what they saw. 

Fixing the problem IMO does not include turning lights off again, and going back to eating roofies, and feeling better because we're back to going slow with lube.

That's all the above proposal is.

RonnieHonduras's picture

Oh, and YES, they should party on their own dime. No bailouts. No FDIC. No fractional reserve banking. End the Fed.