An open letter to the 10 largest banks:
May I say that you astound me! The list of parties calling for your dismemberment is growing. Where are the intelligent replies? Where are the efforts to enter and leverage the court of public opinion?
Our esteemed U.S. Attorney General Eric Holder has said he fears large financial institutions have become "Too Big to Jail." What a bunch of bologna! Should we assume Holder has forgotten how the law works?
There is a little matter of the Sarbanes-Oxley Act of 2002, which requires officers to certify the appropriateness of their financial statements and disclosures. Don't publically traded banks sign SOX certificates each quarter? Would not violations invite repercussions?
Here is another interesting complication to the "Too Big to Jail" argument: There is a regulator known as the Federal Deposit Insurance Corp. This corporation has legions of lawyers that file actions against people and banks. In 2010, more than 900 cases were filed, according to data available on the FDIC's website. The numbers have fallen off since then, but not by much. The average of cases filed annually for 2011 and 2012 is about 760 cases.
Again, should we assume our AG is completely ignorant of existing laws policing financial institutions? My guess is his admission to Congress on "Too Big to Jail" is an attempt to lay the groundwork for new punitive laws. Where is your unified voice? Where is your objection, your representation, to this move?
It is no secret that representation for large-scale financial institutions in the capital has lost a unified voice; it may lack the former commanding presence. Lobbying efforts have failed to claim any decisive victories in recent years.
Why is there no apparent desire to stand fast? I work with many senior bankers and none would recommend the industry to their children. This speaks volumes about the dejected spirit of bankers. Do you roll over? Will you be led meekly to the shears? Will you say nothing and be broken up?
While it is true that as of December 2012, bank income was up, loan interest income is sinking faster than the Titanic, according to the FDIC's December 2012 Quarterly Banking Profile.
Income is clearly being driven by other assets. Are these not the assets which a breakup would effectively eliminate: the nontraditional banking assets? Where is the voice that explains slowly to breakup proponents, such as Richard Fisher of the Federal Reserve of Dallas, that nonlending income currently supports retail banking at the large banks?
Remember banking is the last great American labor-intensive industry. As an economist, I understand that a breakup of the banks would be disastrous. For starters, there are indications retail banking would implode. Interest income is so low as to make this form of lending unprofitable.
Additionally, current FDIC insurance assessments are based on total assets, not simply deposits or lending assets. Breaking up the largest banks would results in lopsided balance sheets and could complicate the existence of the FDIC Deposit Insurance Fund, since Congress has a mandated level of deposit insurance fund liquidity.
The DIF must meet certain liquidity targets by 2020. Breaking up the largest banks would mean those banks making the largest payments to the DIF would have their assessment base, and also the payments, dramatically cut. It is unlikely the DIF would be able to meet statutory liquidity targets under such conditions.
When banking is diversified, the nonbanking assets are supervised by bank examiners. If the banks are broken up, who will then regulate these businesses? AIG was one of the greatest bailouts. Who regulated that firm? If the top banks are broken up, do we create more AIGs?
Your silence on these matters speaks volumes. Congress and regulators are listening and can easily take silence as a green light to pass legislation that limits the size of your financial institutions.
As a consultant, I am often asked by regulators about my perceptions on banking. When next approached, how should I describe the ten largest banks, which collectively make up more than two-thirds of the U.S. banking industry? If you cannot find your legs or a unified voice on which to stand, why should I present an argument against a breakup?
When next I travel to D.C., what would you have me say? I would welcome a reply.
Timothy Alexander is the managing director of Triune Global Financial Services, which provides appraisal services, forensic investigations and collateral review for banks.