Nearly three years after Congress passed the most far-reaching new regulations on Wall Street since the Great Depression, worries have resurfaced that the biggest U.S. banks have only grown in size and remain bailout candidates because they are “too big to fail.”
The latest fears cropped up as a result of statements by Attorney General Eric H. Holder Jr., who raised hairs on Capitol Hill last month when he testified that the Justice Department hasn’t indicted any of the major U.S. banks or their top officers in cases of financial crimes in the wake of the 2008 global financial crisis because he has been concerned that doing so might hurt the economy or destabilize financial markets.
“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy,” he told the Senate Judiciary Committee. “That is a function of the fact that some of the institutions have become too large … [which] I think it has an inhibiting influence.”
Though Mr. Holder’s testimony didn’t initially get much publicity, his comments soon provoked outrage across a broad spectrum of legislators, from conservatives such as House Financial Services Committee Chairman Jeb Hensarling, Texas Republican, to liberals such as Sen. Sherrod Brown, Ohio Democrat. Key legislators have since written Mr. Holder to demand an elaboration of his statement, which on its face amounts to an admission that the 2010 Dodd-Frank Wall Street reform law signed by President Obama did not accomplish one of its major goals: ensuring the government would never again have to worry about “too-big-to-fail” banks.
Sen. Bob Corker, Tennessee Republican, and Sen. Mark Warner, Virginia Democrat, questioned whether Mr. Holder was placing the top executives of the world’s biggest banks above the law and pointed out that the Wall Street reform law was supposed to remove the danger that such banks pose for the economy when they massively fail by setting in place procedures for the government to take over and liquidate the banks.
“Like many of our colleagues, we believe that criminal behavior at any institution ought to be prosecuted,” they wrote. “If the administration believes that the orderly liquidation process is insufficient in some respect, then the administration and Congress should address any necessary changes right away to ensure that no institution is ‘too big to jail.’”
While legislators were still smoldering over the Holder comments, Federal Reserve Board Chairman Ben S. Bernanke added fuel to the fire last week when he acknowledged that, despite sharply increased capital requirements for the biggest banks and a slew of proposed regulations aimed at reining in their power and discretion to get into risky ventures, Washington still hasn’t eliminated the “too big to fail” problem.
“I don’t think ‘too big to fail’ is solved now. We’re doing a number of things which, I think, will help,” he said at a press briefing.
The Fed chairman suggested that before legislators try to pass new legislation, they wait until all the rules are in firmly in place to see if they start to work as intended to curb the banks’ power. Among the pending regulations targeting the problem are requirements that big banks set aside more reserves for risky investments that could lead to their collapse; write “living wills” explaining to regulators how to break them apart in case of failure; and prohibit them from establishing in-house hedge funds and trading for their own profit, among other risky ventures.
Despite the proliferation of rules aimed at reining in the big banks, Mr. Bernanke said that it may not be enough.
The “too-big-to-fail” syndrome “was a major source of the crisis, and we will not have successfully responded to the crisis if we do not address that issue successfully,” he said. “If we don’t achieve the goal, I think we’ll have to do additional steps. … It’s not just something we can forget about.”
Breaking up is hard to do
Since a raft of regulations doesn’t seem to have eliminated the problem, legislators are starting to flock again to the idea of breaking up the big banks as perhaps the simplest way to ensure their failure does not reverberate through the economy. Hundreds of smaller banks failed during and after the financial crisis, and were shut down without causing a ripple in the markets.The option of breaking up the big banks has drawn interest from left-leaning legislators like Sen. Elizabeth Warren, Massachusetts Democrat, and right-leaning ones like Sen. David Vitter, Louisiana Republican. It also has been championed by some regulators at the Federal Reserve and Federal Deposit Insurance Corp., which were given some tools to downsize the big banks as part of the 2010 law that they so far haven’t used.
The top four banks - J.P. Morgan & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. - continue to hold nearly 70 percent of the nation’s bank deposits and dwarf the rest of the banking system with assets ranging from $1.4 trillion at Wells Fargo to $2.4 trillion at J.P. Morgan. Small community banks that have to compete with the megabanks for customers and deposits are pushing hard for a breakup or other drastic remedies.