Brown Delivers Major Address On Efforts To End “Too Big To Fail” Policies

Brown and Vitter Announce Plans to Introduce Legislation that Would Eliminate Government Subsidies Enjoyed by Trillion-Dollar Megabanks, Help Community Banks Compete

WASHINGTON, D.C. – U.S. Sen. Sherrod Brown (D-OH) delivered a major address on the Senate floor today regarding efforts to end “Too Big to Fail” policies that put our economy at risk. Immediately following Brown’s address, U.S. Sen. David Vitter (R-LA), Brown’s colleague on the Senate Banking Committee, also delivered remarks on the Senate floor. Brown and Vitter announced plans to introduce legislation that rein in Wall Street megabanks.

Growth of Six Big Banks“Ohio taxpayers on Main Street should not be the safety net for risky bets that megabanks make on Wall Street,” Brown said. “The American public doesn’t want us to wait until another crisis develops. They want us to ensure that Wall Street megabanks will never again monopolize our nation’s wealth or gamble away the American dream. We cannot restore Americans’ faith in the financial markets and in representative government until we ensure that taxpayers are not paying for Wall Street’s failures.”

Banks Bigger than GDP ChartBrown, who chairs the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, is the author of the Safe, Accountable, Fair & Efficient (SAFE) Banking Act, legislation that would prevent any one financial institution from becoming so large and overleveraged that its collapse could put our economy on the brink of collapse or trigger the need for a federal bailout. Brown’s legislation is gaining broad bipartisan support, most recently, from the Washington Post’s George Will.

On a Level Playing Field ChartTogether, Brown and Vitter have successfully pressed the Government Accountability Office (GAO) to conduct a study of the economic benefits that the “too-big-to-fail” megabanks receive as a result of actual or perceived taxpayer funded support. They’ve also urged the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) to simplify and strengthen capital rules for banks.

Banks - How Big Is Big ChartEarlier this month, Federal Reserve Governor Daniel K. Tarullo, one of the nation’s foremost experts on financial regulation, made the case for the SAFE Banking Act. Footage of his exchange with Senator Brown is available HERE.

Full text of the speech, as prepared for delivery, is below.

In 1889, Senator John Sherman, a Republican from my home state of Ohio, and the author of the Sherman Antitrust Act said:

“I do not wish to single out Standard Oil Company … [s]till, they are controlling and can control the market so absolutely as they choose to do it; it is a question of their will. The point for us to consider is whether, on the whole, it is safe in this country to leave the production of property, the transportation of our whole country, to depend upon the will of a few men sitting at their council board in the city of New York, for there the whole machine is operated?”

At the time, Senator Sherman was speaking about the trusts – large, diverse industrial organizations with outsized economic and political power.

His words are as true then as they are today – but today, our economy is being threatened by multi-trillion dollar financial institutions. Wall Street megabanks that are so large that, should they fail, they would take the rest of the economy with them.

Instead of failure, however, taxpayers are likely to be asked to cover their losses, to bail them out as we did five years ago.

This is a disastrous outcome because it transfers wealth from the rest of the economy into these megabanks and it suspends the rules of capitalism, perpetuating the moral hazard that comes from saving risk-takers from the consequences of their behavior.

Just as Senator Sherman spoke against the trusts in the late 19th century, today, people are speaking out about the dangers of the large, concentrated wealth of Wall Street megabanks.

In 2009, another Republican, Alan Greenspan said “If they’re too big to fail, they’re too big … In 1911 we broke up Standard Oil … Maybe that’s what we need to do.”

If you thought that the biggest megabanks were too big to fail before the crisis, then I have bad news for you: they have only gotten bigger.

In 1995, the six biggest U.S. banks had assets equal to 18 percent of GDP.  Today they are about 63 percent of GDP.

Over that same time, 37 banks merged 33 times, becoming the four largest behemoths that now range from $1.4 trillion to $2.3 trillion in assets.

Since the beginning of the financial crisis, three of these four megabanks have grown through mergers by an average of more than $500 billion.

The six largest U.S. banks now have twice the combined assets of the rest of the 50 largest U.S. banks.

Put another way, if you add up the assets banks seven through 50, the bank that resulted would only be half the size of a bank made from the assets of the top six.

As astonishing as they are, these numbers do not tell the whole story.

Many megabank supporters argue that U.S. banks are small relative to international banks.

But as Bloomberg reported last week, FDIC Board Member Tom Hoenig has exposed a double-standard in our accounting system that allows U.S. banks to shrink themselves on paper.

Under the accounting rules applied by the rest of the world, the six largest banks are 39 percent larger than we think they are. That’s a difference of about $4 trillion.

Instead of being 63 percent of GDP, they are actually about 102 percent of GDP.

Let me say that again: the six biggest banks are slightly larger than the size of our entire economy.

When measured against the same standard as every other institution in the world, we see that the United States has the three largest banks in the world.

These institutions are not just big, they are extremely complex.

According to the Federal Reserve Bank of Dallas, the five largest U.S. banks now have 19,654 subsidiaries – on average they have 3,930 subsidiaries and operate in 68 different countries.

These institutions are not just massive and complex – they are also risky. 

According to their regulator, the Office of the Comptroller of the Currency, none of these institutions has adequate risk management.

Let me say that again: not one of the largest 19 banks has adequate risk management.

It is simply impossible to believe that these behemoths will not get into trouble again, and they will not be unwound in an orderly fashion should they approach the brink of failure.

If you don’t believe me, ask Bill Dudley, President of the Federal Reserve Bank of New York.

He said recently that “we have a considerable ways to go to finish the job and reduce to tolerable levels the social costs” of a megabank’s failure.

He said that more drastic steps “could yet prove necessary.”

Governor Dan Tarullo, from the Federal Reserve, has thrown his support behind a proposal first introduced by Senator Ted Kaufman and me to cap the nondeposit liabilities of megabanks.

These men are not radicals. They are some of the nation’s foremost banking experts.

History has taught us that we never see the next threat coming until it is too late.

That’ we passed the Dodd-Frank Act, which contains tools that regulators can use to rein in megabanks’ risk-taking.

Unfortunately, many of those rules have stalled, and most will not take effect for years.

Dodd-Frank focuses on improving regulators’ ability to monitor risk and enhancing the actions that regulators can take if they believe that risk has grown too great.

In the last five years alone we have seen faulty mortgage-related securities; foreclosure fraud; big losses from risky trading; money laundering; and Libor rate rigging.

Until Dodd-Frank’s rules take effect, the rest of us are standing idly by as megabanks take more risks that will eventually lead to near failure.

We shouldn’t tolerate business as usual, monitoring risk until we are once again near the brink of disaster; we should learn from our recent history and correct our mistakes by dealing with the problem head-on.  

That means preventing the anticompetitive concentration of banks that are too big to fail, and whose favored status encourages them to engage in high-risk behavior.

How many more scandals will it take before we acknowledge that we can’t rely on regulators to prevent subprime lending, dangerous derivatives, risky proprietary trading, and even fraud and manipulation?

Wall Street has been allowed to run wild for years. We simply cannot wait any longer for regulators to act.

These institutions are too big to manage, they are too big to regulate, and they are surely still too big to fail.

We cannot rely on the financial market to fix itself because the rules of competitive markets and creative destruction do not apply to the Wall Street megabanks.

Megabanks’ shareholders and creditors have no incentive to end “too big to fail” – they get paid out when banks are bailed out.

Taking the appropriate steps will lead to more mid-sized banks – not a few megabanks – creating competition, increasing lending, and providing incentives for banks to lend the right way.

Cam Fine, the head of the Independent Community Bankers of America, is calling for the largest banks to be downsized because he sees that his members are at a disadvantage.

Just about the only people who will not benefit from reining in these megabanks are a few Wall Street executives.

Congress needs to take action now to prevent future economic collapse and future taxpayer-funded bailouts. 

I want to thank my colleague, Senator Vitter, who recognizes this problem and is joining me in doing something about it.

I am pleased to announce today that we are working on bipartisan legislation to address this “Too Big to Fail” problem.

It will incorporate ideas put forward by Tom Hoenig, Richard Fisher, and Sheila Bair.

Senator Vitter will talk more about his views in a moment.

Mr./Madame President, the American public doesn’t want us to wait until another crisis develops.

They want us to ensure that Wall Street megabanks will never again monopolize our nation’s wealth or gamble away the American dream.

To those who say that our work is done, I say that we passed seven financial reform laws in the eight years following the Great Depression.

We cannot restore Americans’ faith in the financial markets and in representative government until we ensure that taxpayers are not paying for Wall Street’s failures.

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