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Meet Newt Gingrich: The Community Banking Candidate

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WASHINGTON — In a presidential race dominated by fights over the debt limit and job creation, it is unusual for a candidate to devote much attention to the impact of Dodd-Frank on small banks.

But Newt Gingrich has rarely taken the conventional route.

The former House Speaker, whose candidacy has been marred by the sudden defection of his senior staff and lackluster fundraising, is the only Republican presidential contender to talk in depth about his objections to the regulatory reform law.

In fact, in a sit-down interview Friday, he sounded a lot like a community banker.

"The game is rigged against small banks at two levels," Gingrich said in an interview at his Washington office. "One is that the aggregated marginal advantage of borrowing money that is set up here by the Fed is profitable if you are a very, very large bank. It's not nearly as profitable if you are a small bank. You have that disadvantage."

The other problem comes from what he sees as the massive new regulatory burden spurred by the year-old law.

"The regulatory burden can be handled by a large multinational bank as part of their general management process. It kills a small bank," he said.

In a wide-ranging conversation, Gingrich cited fears that community banks are near the brink of extinction, repeatedly slammed Washington "bureaucrats" who micromanage the financial system and challenged the wisdom and efficacy of creating a consumer protection agency.

Although many politicians like to praise community banks in general, it's unclear how much their fate truly bothers them. For Gingrich, it's hard to escape the sense that the issue is a core part of his conservative philosophy.

"I have a particular passion for getting back to a community-based, small-business based, local entrepreneurial system," he said. "The whole base of the American model is local citizens with local resources providing local leadership. When you get to huge bureaucratic institutions, so you are branch #643, you have no capacity to provide local leadership anymore."

The former Speaker of the House also shared many small bankers' distrust for, and distaste of , government interference. In his view, the government's response to the financial crisis just made the situation worse.

"We had a crisis in 2008 because there were banks that were too big to fail," Gingrich said. "They are now bigger. How could the United States adopt a reaction to banks being too big to fail by making them bigger? They have a larger market share today, which is the opposite of rational behavior."

Instead, the government should have found a way to encourage small bank expansion.

"You would ideally like to have a policy that maximized the growth of small banks that were small enough that they could fail without risk to the general economy," Gingrich said.

Like Tom Hoenig, the president of the Federal Reserve Bank of Kansas City, Gingrich said that Dodd-Frank solidified, rather than eliminated, the concept of too big to fail.

By designating certain firms as "systemically important financial institutions," the government is essentially signaling it will support those companies in a crisis, Gingrich said.

He also warned that the Financial Stability Oversight Council, which is headed by the Treasury Secretary and designed to detect and prevent systemic risks, is a dangerous entity that could lead to significant problems.

"When you have a handful of people that have the power to intervene in institutions that have billions of dollars, you have an invitation to corruption on a grand scale," Gingrich said. There is an "inherent, inevitable corruption of having a Treasury committee appointed by the president micro-manage banks. It's unavoidably a corrupting influence."

Gingrich argued that the overall problem with the law is its attempt to micromanage the system. The financial crisis wasn't caused by a lack of authority on the part of regulators, but their failure to use the powers they already had. Giving them more abilities just doesn't make sense, Gingrich said.

"You already have a whole series of agencies that if they had done their job, it would have worked," he said. "We are now going to add more layers of agencies on top of the agencies we already have with the premise that the next one is going to be smarter and better."

A better strategy would have been to pursue — and criminally prosecute — bad actors during the financial crisis, including companies like Goldman Sachs & Co. that sold products that they themselves were betting against.

"That clearly is a conflict of interest in which one side of Goldman Sachs is betting against another side of Goldman Sachs," Gingrich said. "I am for punishing people who break the law. I am for people at equity losing money if they violate basic rules of honesty. I am not for trying to find a way to create a 100% mistake-proof future based on bureaucrats. That's both an invitation to corruption and it's an invitation to destroy the entire free market system by drowning it in petty regulations."

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Comments (2)
These days some lucky banks, by paying with a little of capital increase spread out over many years, will be denominated by the Basel Committee and other bank regulators, as Globally Systemic Important Financial Institutions G-SIFIs. They will thereby formally have been awarded a profitable "Too-big-to-fail" franchise.

At that moment all other banks also become de-facto Globally Systemic Unimportant Financial Institutions, in other words almost declared as irrelevant banks.

If the G-SUFI's do not fight back or protest they're toast! Our dear George Bailey would not have stood a chance against a Basel Committee. Did we really authorize our bank regulators to do this?

PS. Our loony malfunctioning bank regulations explained in an apolitical red and blue! http://bit.ly/mQIHoi

Per Kurowski
A former Executive Director at the World Bank (2002-2004)
http://subprimeregulations.blogspot.com/
Posted by Per Kurowski | Tuesday, July 26 2011 at 6:30AM ET
Mr. Gingrich is the most sane and logical man in Washington. Other than Willlian Isaac he appears to be the only person who acknowledges the impact this administration has had on community banks as well as the need for them across this country.
Posted by pdf98511868 | Wednesday, July 27 2011 at 1:14PM ET
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