Five years after an alarming Wall Street tailspin, legislative efforts to reign in big banks struggle for support. ideastream's Bill Rice and Brian Bull discuss one bill involving Ohio Senator Sherrod Brown.
Rice: I’m Bill Rice, you’re listening to 90.3
This Sunday marks five years since the Lehman Brothers collapse, a financial disaster that sent stocks plummeting and eventually spurred a government bailout. Calls for reform and reigning in “too big to fail” banks have inspired legislation, including a bipartisan effort involving an Ohio Senator.
This spring, Democrat Sherrod Brown and Louisiana Republican David Vitter introduced the “Terminating Bailouts for Taxpayer Fairness Act”…or “Brown-Vitter” for short. Here to talk about its intent – and prospects -- is ideastream’s Brian Bull.
Bull: Hello, Bill.
Rice: Let’s get to the gist. What’s the key provision to Brown-Vitter?
Bull:This bill targets the so-called megabanks - that is, banks with more than $500 billion in assets… so banks like Wells Fargo, JP Morgan Chase, Goldman Sachs….
Rice: Names we’ve become very familiar with over the last five years, because they were bailed out by the federal government when the financial markets crashed.
Bull: Exactly. And the reason they had to be bailed out was they were so big, and so deeply enmeshed in the national and global economy, their failure threatened to trigger mass economic collapse. So the government stepped in and bailed them out, loaning them more than $800 billion– and that’s where the term “too big to fail” comes from.
Rice: So over the course of five years there’s been a debate as to what we can do to prevent banks from being so vulnerable, and one of those ideas is being championed by Senator Sherrod Brown that I mentioned in the intro. What does Brown want to do?
Bull: What Brown and Vitter want to do is raise the reserve capital requirement for those big, $500+ billion banks to fifteen percent.
Rice: What would that do?
Bull: It would make them more stable - better protect them from default and collapse. When we say a bank has so much money in assets, that’s not cash on hand. In fact, banks typically have very little cash on hand – or capital reserves - they’re only required to have five percent – so that’s a nickel for every dollar in assets, with the rest lent out, invested or otherwise put to work in the economy.
When investments go south, as they did on a huge scale in 2007, they need to have enough money – enough reserves on hand - to cover the loss, and Senator Brown feels reserves of only 5 percent makes it too likely that the next financial crisis will require another government bailout – the banks won’t be able to cover the loss. So he wants to raise that to 15 percent, making it more likely that those big banks could survive without a bailout. .
Rice: Brown introduced this bill back in April, and it was talked about for awhile, but hasn’t really gained much traction. Why not?
Bull: Well…several reasons.
One, there has been other issues overshadowing financial reform, including the prospects of a government shutdown and now Syria.
Two, opponents say there is already financial reform that’s taken place since the big shakeup five years ago – the Dodd-Frank bill, which has been in place for three years Here’s Sherrod Brown’s Republican counterpart, Ohio’s Rob Portman, on Brown-Vitter.
Portman01: “My concern of course, is that we not add more regulations at a time when under Dodd-Frank already, we’re seeing higher costs for consumers for all kinds of financial products.”
Rice: So Portman’s saying we’ve already got the Dodd-Frank Act in place, let’s not burden banks and their clients any more than necessary. Even though there’s much debate as to whether Dodd-Frank is going to do what it set out to do.
Bull: Which gets to another challenge for Brown-Vitter, and that’s lobbyists. It’s probably safe to say the banking industry will marshal its forces to either bog down or revise Brown-Vitter to the point where its impact is blunted.
Here’s Steve Buser, professor emeritus of economics at Ohio State.
Buser: “I will say that it’s a challenging piece of legislation, so I’d be a little surprised if it were to survive intact.”
Bull: Now Buser suggests big banks might be more keen on a minimum of 8 percent capital requirement, versus Brown-Vitter’s 15 percent, so that may be up for negotiations. That’s something Bill Isaac leans towards. He’s Senior Managing Director and Global Head of Financial Institutions for FTI Consulting, Chairman of the Fifth-Third Bank Corporation, and former chairman of the FDIC.
Rice: That’s a long business card.
Bull: Yes it is. Isaac commends Senators Brown and Vitter for their bipartisan approach – something rare these days in Congress -- but he says their proposal to raise large bank capital requirements goes too far and would quote --- destroy the economy.
Isaac: “These banks control well over 50 percent of the banking assets in the country, and if we raise their capital standards to 15 percent, there’s no doubt in my mind that it’ll cause those banks to shrink their balance sheets, rather than go out and raise a bunch of very expensive new capital.”
Rice: Maybe Senator Brown and other banks would be okay with large financial institutions paring down.
Bull: Maybe. But I doubt the mega-banks want that.
Rice: In the time we have left, Brian, what’s Senator Brown got to say about his bill’s prospects?
Bull: I talked to him earlier this summer, and at last check he said he had two Republicans and two Democrats who’d be willing to sign on as co-sponsors. Not a tidal wave, exactly. He thinks the bill has a chance, but it may take awhile, maybe a couple of years.
Brown: “It’s gonna take awhile because we’re up against Wall Street. And Wall Street doesn’t lose often, either in Congress or with the regulatory agencies. But it doesn’t mean the fight’s not important.”
Rice: Brian, thanks for your time.
Bull: Thanks for having me on, Bill.
Rice: ideastream’s Brian Bull, updating us on the Brown-Vitter legislation. I’m Bill Rice, 90.3