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Public Statements

Too Big to Fail

Floor Speech

By:
Date:
Location: Washington, DC

Mr. BROWN. Mr. President, I welcome Senator Vitter and his cooperation in this matter. I appreciate the work he has done on the issue. He and I are going to address the concentration of the financial system in this country and what that means to the middle class, what it means to business lending for small businesses, and again what it means to the potential of too big to fail, which is something Senator Vitter has been a leader on for a number of years. Both of us are members of the Senate Banking Committee.

More than 100 years ago, in 1889, one of my predecessors, Senator John Sherman, a Republican, and author of the Sherman Antitrust Act--who actually lived in my hometown of Mansfield, OH, and was the only other Senator from that city who served here--said:

I do not wish to single out Standard Oil Company ..... [s]till, they are controlling and can control the market so absolutely as they choose to do it; it is a question of their will. The point for us to consider is whether, on the whole, it is safe in this country to leave the production of property, the transportation of our whole country, to depend upon the will of a few men sitting at their council board in the city of New York, for there the whole machine is operated?

At the time, Senator Sherman was speaking about the trusts--specifically Standard Oil but other trusts as well--that were large, diverse industrial organizations with outsized economic and political power, not just economic power but also political power. His words are as true then as they are today. Today our economy is being threatened by multitrillion dollar--that is trillion dollar--financial institutions. Wall Street megabanks are so large that should they fail, they could take the rest of the economy with them.

If this were to happen, instead of failure, taxpayers are likely to be asked again to cover their losses and to bail them out just as we did 5 years ago. This is a disastrous outcome because it transfers wealth from the rest of the economy into these megabanks and suspends the rules of capitalism and perpetuates the moral hazard that comes from saving risk-takers from the consequences of their behavior.

Just as Senator Sherman spoke against the trusts in the late 19th century, today people across the political spectrum--both parties and all ideologies--are speaking about the dangers of the large, concentrated wealth of Wall Street megabanks.

In 2009, another Republican--and one a little more familiar to a modern audience--Alan Greenspan said:

If they're too big to fail, they're too big ..... in 1911 we broke up Standard Oil. ..... Maybe that's what we need to do.

If anyone thought the biggest banks were too big to fail before the crisis, then I have bad news: They have only gotten bigger.

These are the six largest banks and their growth patterns in 1995--18 years ago--had combined assets that were 18 percent of GDP. Today they have combined assets over 60 percent of GDP. Over that time, 37 banks merged 33 times to become the top 4 largest behemoths, which now range from $1.4 trillion in assets to the largest, Bank of America and JPMorgan Chase, which is around $2.3 or $2.4 trillion in assets.

That is $2.3 trillion in assets. Since the beginning of the fiscal crisis, three of these four megabanks have grown through mergers by an average of more than $500 billion.

The 6 largest banks now have twice the combined assets of the rest of the 50 largest U.S. banks. These 6 banks--Morgan Stanley, Goldman Sachs, Wells Fargo, Citigroup, JPMorgan Chase, Bank of America--the combined assets of 6 banks, are larger than the next 50 largest banks. Put another way, if we add up the assets of banks 7 through 50, the bank that resulted would only be half the size of a bank made from the assets of the top 6.

As astonishing as these numbers are, they don't tell the whole story. Many megabank supporters argue that U.S. banks are small relative to international banks.

But as Bloomberg reported last week, FDIC Board member Tom Hoenig has exposed a double standard in our accounting system that allows U.S. banks to actually shrink themselves on paper. Under the accounting rules applied by the rest of the world, the 6 largest banks are 39 percent larger than we think they are. That is a difference of about $4 trillion. If that is the case, instead of being 63 percent of GDP under international accounting rules, these 6 banks are actually 102 percent of GDP. Let me say that again. The six biggest banks' combined assets are slightly larger than the entire size of our economy. When measured against the same standard as every other institution in the world, we see the United States has the three largest banks in the world. These institutions are not just big, they are extremely complex.

According to the Federal Reserve Bank of Dallas, the 5 largest U.S. banks now have 19,654 subsidiaries. On average, they have 3,900 subsidiaries each and operate in 68 different countries. These institutions are not just massive and complex--I don't object so much to that--it is they are also risky.

According to their regulator, the Office of the Comptroller of the Currency--and I met with them today--none of these institutions has adequate risk management. Let me say that again. In stress tests, not one of the largest 19 banks has shown adequate risk management.

It is simply impossible to believe that these behemoths will not get into trouble again. We saw what happened with one of the best managed banks with a lot of employees--some 16,000, 17,000, 18,000 employees in my State alone--at one site with 10,000 employees in Columbus: JPMorgan Chase, a well-managed bank with a very competent CEO but a bank that not so long ago lost $6 billion or $7 billion.

It is impossible to believe they will not get into trouble again and they will not be unwound in an orderly fashion should they approach the brink of failure.

If you don't believe me, ask Bill Dudley, President of the Federal Reserve Bank of New York. He said recently that ``we have a considerable ways to go to finish the job and reduce to intolerable levels the social costs'' of a megabank's failure. He said that more drastic steps ``could yet prove necessary.''

Governor Dan Tarullo, from the Federal Reserve, threw his support behind a proposal first introduced by the Presiding Officer's predecessor, Senator Ted Kaufman, and me to cap the nondeposit liabilities of the megabanks some 3 years ago in this body.

These men are not radicals; they are some of the Nation's foremost banking experts.

History has taught us we never see the next threat coming until it is too late and almost upon us. When we passed the Dodd-Frank Act, it contained tools that regulators can use to rein in risk taking.

Unfortunately, many of those rules have stalled, and most will not take effect for years, because it is not just the economic power of the banks but the political powers so often having their way in this city and with regulators all over the country.

Dodd-Frank focuses on improving regulators' ability to monitor risks and enhancing the actions that regulators can take if they believe the risk has grown too great. Over the last 5 years alone we have seen faulty mortgage-related securities, we have seen foreclosure fraud, and we have seen big losses from risky trading, money laundering, and LIBOR rate digging.

Until the Dodd-Frank rules take effect, the rest of us more or less have to stand by idly as megabanks take more risks that almost inevitably and eventually lead to failure.

We shouldn't tolerate business as usual, monitoring risk until we are once again near the brink of disaster. We should learn from our recent history. We should correct our mistakes by dealing with the problem head on. That means preventing the anticompetitive concentration of banks that are too big to fail and whose favored status encourages them to engage in high-risk behavior.

How many more scandals will it take before we acknowledge that we can't rely on regulators to prevent subprime lending, dangerous derivatives, risky proprietary trading, financial instruments that nobody understands, including the people running the banks in many cases, and even fraud and manipulation.

Wall Street has been allowed to run wild for years. We simply cannot wait any longer for regulators to act. These institutions are too big to manage, they are too big to regulate, and they are surely still too big to fail.

We can't rely on the financial market to fix itself because the rules of competitive markets and creative destruction don't apply to Wall Street megabanks as they do to businesses in Louisiana or Delaware or Ohio. Megabanks' shareholders and creditors have no incentive to end too big to fail. As a result, they will engage in ever-riskier behavior. In the end, they get paid out when banks are bailed out.

Taking the appropriate steps will lead to more midsized banks--not a few magabanks--creating competition, increasing lending, and providing incentives for banks to lend the right way.

If there is one thing the people in Washington love, it is community banks. Senator Vitter has been very involved in helping community banks deal with regulations and other kinds of rules. Cam Fine, the head of the Independent Community Bankers of America, is calling for the largest banks to be downsized because he sees that his members, the community banks--there might be 50 million, 100 million, or less than that in assets--are at a disadvantage.

Just about the only people who will not benefit from reining in these megabanks are a few Wall Street executives. Congress needs to take action now to prevent future economic collapse and future taxpayer-funded liabilities.

Before yielding, I wish to thank Senator Vitter, who recognizes this problem with an acuity that most don't have, and for joining me in doing something about it. I am pleased to announce today that we are working on bipartisan legislation to address this too-big-to-fail problem. It will incorporate ideas put forward by Tom Hoenig, Richard Fisher, and Sheila Bair. Senator Vitter will talk about his views in a moment.

The American public doesn't want us to wait. They want us to ensure that Wall Street megabanks will never again monopolize our Nation's wealth or gamble away the American dream.

To those who say that our work is done, I say we passed seven financial reform laws in the 8 years following the Depression, so it is clear there is precedent for not just one time, one fix, but a continued addressing of this problem until we know we have the strength of the American financial system returned to the way it once was.

Thank you, Mr. President.

BREAK IN TRANSCRIPT

Mr. BROWN. I know Senator Alexander is waiting to speak. I thank Senator Vitter for his work on this issue. I remember the first discussions Senator Vitter and I had about this when he was asking some tough questions of a couple of regulators--it might have been the Secretary of the Treasury as well as a couple of other regulators--on capital standards and how important it was that, as he just mentioned, these banks have the kinds of capital standards, have the kinds of capital reserves that are so important in making sure these banks are healthy. Probably most of us in our lives have seen the movie ``It's a Wonderful Life,'' and we know what happens to a bank that is not capitalized; a small-town example of a bank that served the country in ways that community banks do. It is a very different story today, perhaps.

But I think his insight into the importance of capital reserves and then continuing these discussions, we both came to the realization that, as he pointed out, people all across the political spectrum--some of my more Democratic colleagues, people such as George Will and others--have been very involved as business leaders and speaking out on issues that matter.

So I thank Senator Vitter for his work. We will be working on legislation, and I am hopeful more of my colleagues see how important this issue is so we can continue to work together.

I yield the floor.

BREAK IN TRANSCRIPT

Mr. BROWN. Mr. President, I will speak briefly, and then I will certainly yield to Senator Alexander.

I appreciate very much Senator Vitter's words and comments and insight. I wish to expand for 2 or 3 minutes on one thing he said about the subsidy that these largest six banks get.

We can see again on this chart that 18 years ago these six banks' total assets were 18 percent; 18 years ago it was 18 percent of GDP. Today, through mergers and growth--and I would argue unfair competition in many cases--they are over 60 percent. But what Senator Vitter said, which I think is important to expand on a bit, is the subsidies these banks get--Bloomberg said it was about $83 billion a year in subsidies they get because of government action or inaction, frankly. It is interesting, that $83 billion, when we are talking about the sequester today is about $85 billion, is not relevant, except putting it in some context.

But the reason they have this $83 billion subsidy, $85 billion subsidy or so--$83, $84, $85 billion--or they have the advantage, when they go in the capital markets, of getting the advantage of 50, 60, 70, 80 basis points--and 80 basis points is eight-tenths of 1 percent in interest rate advantage--is because the capital markets believe their investments in these banks are not very risky because the markets believe these banks are too big to fail because they have the government backup for them.

So if they have no risk, people are willing to lend money to them at lower interest rates. That is why the Huntington Bank in Columbus, OH, a large regional bank with about $50 billion in assets, or Key, a larger bank in Ohio--still, though, a regional bank--or banks in Coldwater, OH, or Sycamore, OH, or Third Federal in Cleveland--banks that maybe own only a few tens of millions or even up to $1 billion in assets--do not have that advantage. They pay higher interest rates when they borrow because the people who lend to them know they are not going to get bailed out if something bad happens.

It is only these six largest banks that have that advantage. So because they can borrow money from the markets at a lower rate, they are, in effect, being subsidized because we have not fixed this too-big-to-fail problem for the Nation's banks.

So it is not a Senator or a conservative Republican or a progressive Democrat from Louisiana or Ohio making this case that they are getting this advantage; it is the capital markets that have decided, yes, these are too big to fail, so we are going to lend them money at lower rates than we would lend to the Huntington or Key or Third Federal or FirstMerit in Ohio.

Fundamentally, that is the issue; that it is our actions or inactions that have given these banks a competitive edge that nobody through acts of government--whether you are a liberal or a conservative--should believe it should be part of our economic system and our financial system.

I thank Senator Vitter and yield the floor.

BREAK IN TRANSCRIPT


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