Kaufman Says Mega-Banks Too Large for Any Regulator to Handle
Says old rules that kept commercial banks separate from investment banks were best rules
March 11, 2010
WASHINGTON, D.C. – Senator Ted Kaufman (D-DE) on Thursday said that a "reshuffled" regulatory deck to oversee banks that are "too-big-to-fail" is not a sufficient solution to the problems that led to the Great Recession of 2008, and called on Congress to draw "hard, statutory lines between banks and investment houses."
Kaufman added that the burden of proof on devising a solution to the Great Recession – arguably the biggest economic crisis since 1929 – should be "upon those who would only tinker at the edges of our current system of financial regulation." It should not be on those who propose reinstating time-honored rules that maintained financial stability for more than 50 years.
"After a crisis of this magnitude, it amazes me that some of our reform proposals effectively maintain the status quo in so many critical areas, whether it is allowing multi-trillion-dollar financial conglomerates that house traditional banking and speculative activities to continue to exist and pose threats to our financial system, permitting banks to continue to determine their own capital standards, or allowing a significant portion of the derivatives market to remain opaque and lightly regulated," said Kaufman.
Kaufman cited figures from MIT professor Simon Johnson and Yale Law School researcher James Kwak, who estimate that the six largest U.S. banks now have total assets in excess of 63 percent of our overall GDP. Only 15 years ago, the six largest US banks had assets equal to 17 percent of GDP. Said Kaufman: "We haven’t seen such concentration of financial power since the days of Morgan, Rockefeller and Carnegie."
Kaufman noted that in response to the last crisis, the financial safety net that covers these behemoth institutions grew even larger. "The result," he said, is that "they will continue to grow unchecked, using insured deposits for speculative activities without running any real risk of failure on account of their size. ... By statutorily splitting apart massive financial institutions that house both banking and securities operations, we will both cut these firms down to more reasonable and manageable sizes and rightfully limit the safety net only to traditional banks."
In addition, said Kaufman, we also need an Independent Consumer Financial Protection Agency (CFPA), one with "strong and autonomous rulemaking authority and the ability to enforce those rules at nonbanking entities like payday lenders and mortgage finance companies." Unfortunately, said Kaufman, and despite its importance, the CFPA has become something of a "shiny object" – like the public option in the healthcare debate — that has "distracted the focus of debate away from the core issues of 'too-big-to-fail.'"
"We can address these problems by reimposing the kind of protections we had under Glass-Steagall," said Kaufman, who since arriving in the Senate in January 2009, has made fighting for investor protections a hallmark of his tenure. "We need to rebuild the wall between the government-guaranteed part of the financial system and those financial entities that remain free to take on greater risk."
"To those who say 'repealing Glass Steagall did not cause the crisis, that it began at Bear Stearns, Lehman Brothers and AIG,' I say that the large commercial banks were engaged in exactly the same behavior as Bear Stearns, Lehman and AIG – and would have collapsed had the federal government not stepped in and taken extraordinary measures," Kaufman continued.
And he said that the idea a resolution authority is sufficient to handle "too-big-to-fail-banks" is illusory. "It is like the harbor master in Southampton adding more lifeboats to the Titanic, rather than urging the ship to steer clear of the icebergs," Kaufman said. "We need to break up these institutions before they fail, not stand by with a plan waiting to catch them when they do fail."