WASHINGTON, D.C. — Today, U.S. Sen. Sherrod Brown (D-OH) chaired a hearing of the Banking Subcommittee on Financial Institutions and Consumer Protection. The hearing, entitled “Examining the GAO Report on Government Support for Bank Holding Companies,” will address a November 2013 report by the U.S. Government Accountability Office (GAO) that studied the economic benefits that the “too-big-to-fail” megabanks receive as a result of taxpayer funded support during the 2007-2008 financial crisis. The report, requested by Brown and Senator David Vitter (R-LA), found that large bank holding companies were able to borrow below-market interest rates, disproportionately benefitted from bailout programs, and received special treatment from regulators.
The hearing also examined what further steps should be taken to prevent future bailouts of megabank institutions, including Brown and Vitter’s Terminating Bailouts for Taxpayer Fairness Act (TBTF Act). Brown and Vitter’s legislation would require the largest and most interconnected financial institutions to maintain a 15 percent capital ratio to ensure taxpayers will not serve as the backstop for risky investments.
Those testifying at the hearing were:
- Mr. Lawrance Evans, Director, Financial Markets and Community Investment, U.S. Government Accountability Office. Testimony: HERE
- Dr. Luigi Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance, University of Chicago Booth School of Business. Testimony: HERE
- Dr. Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, MIT Sloan School of Management. Testimony: HERE
- Dr. Harvey Rosenblum, Adjunct Professor of Finance, Cox School of Business, Southern Methodist University and Retired Director of Research, Federal Reserve Bank of Dallas. Testimony: HERE
- Dr. Allan Meltzer, Allan H. Meltzer University Professor of Political Economy, Carnegie Mellon University Tepper School of Business. Testimony: HERE
Brown’s remarks as prepared for delivery:
This hearing will come to order. I thank the witnesses for being here today, and thank you Senator Toomey and his staff for working with us on this hearing.
Today’s topic is how government policies support “Too Big to Fail” megabanks, and what we can do about it.
I have often said that my vote in 2008 for the Troubled Asset Relief Program, or TARP, was both the best vote of my career and the worst vote of my career.
It was the best vote because we could not have allowed the economy to be destroyed.
But it was the worst vote because we allowed Wall Street to run wild for too long, and the only option presented was a $700 billion bailout.
Five years later, according to the firm SNL Financial, the four largest banks control about 42 percent of the banking industry – up from less than 9 percent in 1990.
Between 1990 and 2009, 37 financial institutions merged 33 times to become the nation’s four largest bank holding companies.
Three of 1990’s top five banks are now part of our nation’s largest bank.
In 1995, the top six banks had assets equal to 17 percent of GDP. Today, they are more than 60 percent.
While many megabank supporters point out the benefits of large banks, a 2011 IMF report also shows that governments bail out bigger banks.
So it should come as no surprise that the Congressional Oversight Panel for TARP found that the six biggest Wall Street banks received a total of $1.27 trillion in government support, including accounting for 63 percent of the Fed’s average daily lending.
There are important lessons in this first Government Accountability Office report.
First, megabanks borrowed at a discounted rate against assets that the market was not accepting.
And the result is a subsidy for the megabanks.
The CEOs of the largest banks understood this – according to Secretary Paulson, two of them called it “cheap capital.”
In 2011, Bloomberg estimated that the terms of the Fed’s loans provided the six largest banks with a $4.8 billion profit – an amount equal to 23 percent of their combined net during the life of the loans.
The GAO report we will discuss today also confirms that Treasury paid substantially more than market value for the assets it purchased.
The Congressional Oversight Panel estimated that this provided the six biggest megabanks with a subsidy of $25 billion.
These are only small parts of the benefit that they have gotten because of their size.
Second, megabanks borrowed more than small banks because they use more volatile and short-term funding sources, not just deposits.
Support for the three largest banks averaged more than 10 percent of their total assets – much higher than their capital ratios at the time.
Finally, we see that walls that were supposed to protect traditional banking were ignored and the safety net was stretched as far as possible.
With all of these benefits, it is no wonder that the CEO of our nation’s largest bank said that 2008 was its “finest year ever.”
Since then, our banking industry has become even more, not less consolidated.
Today, the four largest bank holding companies are about $2 trillion larger than they were before the financial crisis.
And the four most complex institutions each have more than 2,000 subsidiaries – only 12 of which are commercial banks; more than 11,000 are non-banks.
This first report shows that the largest Wall Street banks borrow on favorable terms directly from the federal government during turbulent times.
And, I expect that the second report will show that the government’s implicit support enables Wall Street banks to borrow on favorable terms from the market in ordinary times.
Two things are clear:
The largest Wall Street banks are so much larger and more concentrated than they have ever been.
And because of their size, they receive financial benefits that are not available to regional and community institutions like Huntington Bank and the First National Bank of Sycamore.
There is broad agreement that this is unacceptable.
Senator Vitter and I offered an amendment to the Senate budget calling on Congress to eliminate this subsidy, and it was approved 99-0.
However, it was stripped from the recent budget deal without explanation.
If we all agree that no institution should be “Too Big to Fail,” and if we all agree that bailouts must end, then we must agree that we will do something about it.
I look forward to hearing the witnesses’ views on what that should be.