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.
The largest banks enjoy a huge funding advantage due to their TBTF status. Big bank executives have openly admitted that they manipulated LIBOR, Wall Street CEOs mismanaged risk and forced a taxpayer bailout, in essence these banks failed. The open actions against bankers you note, unfortunately are against community bankers, not the ones who created the problem. While too small to save banks are closed almost every Friday and their directors sued for civil money penalties and the like, the biggest bank CEOs are taking home fat paychecks and outsized bonuses on the backs of hard working tax paying Americans.
AG Holder is correct, these mega banks have become too big to jail, so much for equal justice under the law. So much for blind justice. It is a double standard that threatens to destroy our economy and our country. This country was built on the back of community banking, and the economic recovery will be fueled by community banking. If those organization that should have been prosecuted cannot be for fear of economic impact, then indeed it is time to break them up. The biggest banks in this country are nearing anti-trust violations just like big oil, what happened? TR broke them up.
The time has come for their greed, reckless disregard for economic risk and harm to the American public to come to an end. They have failed to self police and now must be broken up to save our country's future; the future of our children and grandchildren.
When Federal Reserve presidents suggest they need to be broken up, and the most partisan Congress ever can come together in bi-partisen agreement that they should be broken up, it is time. Break up the big banks and remove the morale hazard of TBTF/TBTJ.
Government safety nets give protected institutions an implicit subsidy and incentives to expand their risk-taking. Standard accounting statements do not record the value of this subsidy and forcing subsidized institutions to show more accounting capital will do little to curb their enhanced appetite for risk. I believe we need new accounting and ethical standards that would reclassify the legal status of the financial support a firm receives from the safety net and record it as an equity investment. The purpose is to recognize statutorily that a safety net is a contract that promises to deliver loss-absorbing equity capital to firms at times when no other investors will. The explicit recognition of the public's stakeholder interest in difficult-to-unwind firms is a first and necessary step toward assigning to their managers enforceable fiduciary duties of loyalty, competence, and care towards taxpayers. These duties are meant to parallel those that managers owe to shareholders, including the right to share in the firm's profits and to receive information relevant for assessing their investment. The second step in this process is to change managerial behavior: to implement and enforce a series of requirements and penalties that can lead managers to measure and record on the balance sheet of each subsidized firm-- as a special class of equity-- the capitalized value of the safety-net subsidies it receives from its "taxpayer put." Incentives to report and service this value accurately in corporate documents - and in government reports making use of them--should be enhanced by installing civil sanctions such as a call on the personal wealth of officials who can be shown to have engaged in actions intended to corrupt the reporting process and by defining a class of particularly vexing acts of safety-net arbitrage as criminal theft.