Perhaps counterintuitively, the financial Goliaths supported the Dodd-Frank Act.
Goldman Sachs CEO Lloyd Blankfein has argued that the vast bulk of Dodd-Frank was good and that his firm would "be among the biggest beneficiaries of reform." Blankfein told the Senate, "We’re not against regulation. We partner with regulators."
At the keynote address for Citigroup’s financial services investor conference March 7, 2012, Vikram Pandit, then Citi’s CEO, kissed President Obama’s ring, singing the praises of increased regulation.
CEO Jamie Dimon has said JPMorgan Chase supported 70% to 80% of Dodd-Frank. Since the 1990s, Dimon and his wife have given more than half a million dollars to Democratic candidates who supported Dodd-Frank in lockstep, including Hillary Clinton, Chuck Schumer, Chris Dodd, John Kerry, Barack Obama, Debbie Stabenow, and Joe Biden.
In 2010, it was reported that Bank of America CEO Brian Moynihan said he was voting for Congressman Barney Frank – one of the regulatory straitjacket’s principal architects.
Why would bank chieftains support stifling regulation? Could they be progressives believing society is better served if banking is a public utility?
In New York bank CEOs’ social circles, soft leftism is fashionable and they’re uncomfortable making a full-throated defense of free-market capitalism. Given anti-bank sentiment and increased state power over banking, deference to Caesar is understandable.
But a dollop of cynicism is in order. Dodd-Frank works to their advantage.
While Dodd-Frank mandates higher capital requirements for large banks and exempts issuers with under $10 billion in assets from punitive debit price controls, it tilted the playing field decidedly to giants’ advantage. The more onerous the regulatory burden, the more difficult it is for smaller banks and new entrants to compete.
Massive regulation provides a deep moat protecting large financial institutions against competition from community banks and innovators. B of A, Chase, Citi and Wells Fargo have legions of lawyers, compliance staff and lobbyists to manage regulators, and they’re hiring more. Wells Fargo increased government relations spending by more than 40% in 2011.
The army banks deploy dealing with regulation is a deadweight loss. It doesn’t serve customers (savers or borrowers), design better products or develop new markets. It caters to regulatory overlords, typically folks who’ve never made a loan, much less built a business.
The Goliaths are getting bigger. From 1995 to 2009 the six largest banks’ assets increased from 18% of gross domestic product to 68%. They’re considered by regulators, politicians, management and the market to be systematically important, too big, too interconnected, and therefore too big to fail. Consequently TBTF institutions enjoy a funding advantage over smaller banks, which will be permitted to prosper or fail. Harvey Rosenblum, an economist at the Federal Reserve Bank of Dallas, suggests the difference in funding costs may be as much as a percentage point or more.
Worrying about economic concentration, a century ago Justice Louis Brandeis contended that corporations beyond a certain size and complexity became less efficient and less innovative. With de facto government-sponsored enterprises such as B of A, Chase, Citi, Goldman, Morgan Stanley and Wells Fargo, Brandeis’ fear is truer than he could have imagined.