WASHINGTON — Attorney General Eric Holder's unexpected admission last week that some banks are effectively "too big to jail" continues to reverberate throughout the banking world, sparking an industry protest.
The remarks have provided fresh momentum for a movement to break up the big banks, something that industry representatives are keen to interrupt.
A number of industry associations joined together on Monday to launch a counteroffensive, releasing a policy brief that downplays recent estimates that the country's largest institutions enjoy a funding advantage due to their "too big to fail" status.
"The value provided by large diversified institutions is particularly important to large, globally active U.S. corporations, and to the further development of global markets for U.S. goods and services — both of which contribute directly and importantly to economic growth and job creation here at home," wrote the Financial Services Forum, the Financial Services Roundtable, The Clearing House, Securities Industry and Financial Markets Association and the American Bankers Association, in their joint brief. "Flawed arguments regarding subsidies to large banking companies are at best out of date, and their use to call for draconian structural limits on the financial industry is out of step with the diverse financial needs of the 21st century U.S. economy."
The groups were specifically taking issue with an estimate cited recently by Sen. Elizabeth Warren that big banks receive an $83 billion subsidy. The groups said that estimation was based on "flawed methodology and on the extrapolation of stale and unreliable market data collected before passage of the Dodd-Frank Act."
"Any funding advantage is fading or has reversed to become a penalty," the groups said.
But lawmakers that support more regulations for big banks quickly dismissed the industry groups' arguments, calling them biased.
"Despite the claims made by the paid cheerleaders of the megabanks, 'too big to fail' is alive and well, and the banks receive taxpayer subsidies," said Sen. David Vitter, R-La., a co-author of a pending bill that could break up the big banks, in a press release. "[Federal Reserve Board] Chairman [Ben] Bernanke knows it, the market knows it, and the taxpayers know it. This is exactly what we believe our GAO study we got will get to the bottom of — the facts."
The Government Accountability Office agreed earlier this year to estimate the economic benefits of being "too big to fail" based on a request by Vitter and Sen. Sherrod Brown, D-Ohio. The report is still pending.
Holder's comments, meanwhile, have also sparked a March 7 Moveon.org petition asking the Obama administration "to break up the big banks and prosecute the criminals who used them to destroy our economy." By Monday afternoon, the petition had garnered more than 93,000 signatures.
"The most amazing thing just happened. The Obama administration finally admitted the truth of what we've been saying all along: giant Wall Street banks have become too big to prosecute," the petition says. (http://www.signon.org/sign/action-tell-obama-to)
House lawmakers are also reacting to last week's spate of news, including Holder's comments and testimony by a top Treasury official at a Senate Banking hearing on Thursday.
House Financial Services Committee Chairman Jeb Hensarling and Rep. Patrick McHenry, R-N.C., head of the panel's subcommittee on oversight and investigations, penned a letter on Friday to Holder and Treasury Secretary Jack Lew. Their missive requested records related to Justice Department, Office of the Comptroller of the Currency and Financial Stability Oversight Council efforts to quantify the economic impact of criminal prosecutions and enforcement actions against big banks.
Other policymakers are also continuing their push to break up the big banks. Richard Fisher, president and chief executive of the Federal Reserve Bank of Dallas, a long-time critic of "too big to fail," laid out his plan for ending the problem in a Wall Street Journal editorial over the weekend.
Fisher and Harvey Rosenblum, the bank's executive vice president and director of research, wrote that the Dodd-Frank reform law's "stated promise — to end 'too big to fail' — rings hollow," arguing instead that the "return of marketplace discipline and effective due diligence of banking behemoths is long overdue."
The Fed officials then laid out a proposal to restructure and reduce the size of the largest bank holding companies so that they can go through a speedy bankruptcy process if necessary, and so that the banks themselves become "too small to save."
The officials also recommended rolling back deposit insurance for all but traditional commercial banks, and requiring creditors, counterparties and others involved with non-insured institutions to sign a guarantee acknowledging there is no government backstop for their investment.