“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
– Henry Ford
In case you were wondering what the cost is of “Too Big to Fail” banks, the Federal Reserve has an answer – $440 million (about $4 for every household in the US). If that seems low, well, it is. It’s just what it costs to have “enhanced regulation” of those banks that have been declared “systemic” – legalese for protected by you and I.
Where did that number come from? It comes at the end of a long, watered-down process that has finally defined just what it means to be one of the protected investment banks. It’s all the result of Dodd-Frank regulation that does more harm than good if this is all they can manage. But perhaps we can make a bit more out of it …
The new rules came down from the Fed on Monday. The tab for “enhanced regulation” that includes “stress tests” and a lot of little things is share among about 70 of the largest banks in the nation. These are the ones for whom there is an implicit guarantee that no matter what they do they will not be allowed to fail.
JP Morgan’s share is $44 million, which is a bit over 0.2% of their projected profits this year. As the largest bank they pay the largest cut, so it only goes down from there.
Why is this paltry sum being collected at all? In the original Dodd-Frank bill, a larger assessment designed to build up a $50 billion fund that would cover bailouts in the future – something of a FDIC for investment banks. It was derided at the time as nowhere near enough, given that the TARP in 2008 cost $418 billion. Nevermind. Even that was thrown out before the bill became law, as was another tax designed to discourage short-term borrowing. What was left was the li’l token tab to cover the extra regulation – and even that took 3 years to implement.
The problem with all this is that in the end Dodd-Frank winds up doing more harm than good. It has established a particular class of systemic banks that are good for a bailout without funding that potential bailout. What is the real cost of that?
When Moody’s shotgunned out a round of downgrades of investment bank bonds last summer Morgan Stanley got a special notice. They were cut down two notches over a series of goofs, including the botched facebook IPO. But they escaped third cut that would have thrown them into “junk” status. The reason given? The implicit guarantee that they are backed by the US taxpayers. Morgan Stanley is able to borrow at the same rate as a more solvent but smaller company simply because they are “Too Big to Fail”. This is how we get into a serious problem with socialized risk.
Keeping the institution alive is one thing, and that may be necessary. But has anyone ever lost their job or gone to jail? Sen. Elizabeth Warren of Massachusetts has been asking this, and the short answer is “no”. The longer answer was put rather eloquently by the freshman Senator, who has been on a tear against both the big banks and those who supposedly regulate them in Senate hearings:
“If an agency is unwilling to go to trial it is because they are “too timid” or lack resources. … The consequence is that if large financial institutions can break the law and drag in billions in profits and settle for a few million in fines, then they don’t have much incentive to follow the law. … Every time there is a settlement and not a trial, it means we didn’t have the days and days and days of testimony about what those financial institutions were up to.”
What is the cost of “Too Big to Fail” as a public policy? The price tag is a lot more than the $440 million that the Fed is assessing, but they know that, too. What’s important right now is that two things are going on simultaneously.
The watered-down nonsense that came from Dodd-Frank is making just enough headlines that it is highlighting the problem – even in the more business oriented press where the market distorting advantage of big banks is despised. And it’s fueling the sensible questions that Senator Warren, aggressively opposed by the finance industry, is asking as she grills the regulators who can’t even enforce the weak rules that are in place to any degree of satisfaction.
This is the kind of stuff that generates movements, even revolutions. Let’s see where it goes.