Banking and Finance Law Daily Wrap Up, DODD-FRANK ACT—Senators disagree with TBTF assessment; public interest group applauds call for funding, (Dec 6, 2013)

By John M. Pachkowski, J.D.

Following the remarks made by Treasury Secretary Jacob J. Lew at the Pew Charitable Trusts on the state of Wall Street Reform, including recent progress implementing new rules of the road designed to better protect taxpayers, promote sustainable growth and job creation, and make the financial system safer and more resilient, Senators David Vitter (R-La) and Sherrod Brown (D-Ohio) disagreed with Lew’s claim that the Obama Administration has overcome “too big to fail.”

“Too big to fail”. During his speech, Lew stated, “And as a matter of law, [the reform measures] state clearly that no financial institution is “too big to fail.” He added, “ending ‘too big to fail’ requires us to be confident that in a future crisis, we can and will use the tools that the law provides.” Also in his speech, he noted, “While we will not know how well these tools work for certain until they are tested by a true crisis, several things are clear. Dodd-Frank ended ‘too big to fail’ as a matter of law; tough rules are now in place to make sure banks have the capital to absorb their own losses; monitoring through stress tests is underway; and resolution authorities and plans are in place. There is a growing recognition of these changes, and market analysts are now factoring them into their assumptions.” Finally, he stated, “Earlier this year, I said if we could not with a straight face say we ended ‘too big to fail’, we would have to look at other options. Based on the totality of reforms we are putting in place, I believe we will meet that test.”

Funding. Lew also stated that it is essential that Congress provide adequate funding for the regulators. But, if annual funding does not meet this goal, he continued, Congress should consider moving the market regulator budgets out of the current budget process, as the president has proposed, and treat them like the banking agencies, which are self-funded through industry fees. That way, instead of unpredictable funding that shifts from year to year, oversight of the markets and institutions will be guaranteed. Political winds may shift, the secretary emphasized, but the government’s ability to focus on safe markets must be constant.

Living on another planet. Vitter noted, “If Lew thinks he can claim victory over ‘too big to fail’ today, I’d tell him he’s living on another planet. Independent study after independent study shows that too big to fail is alive and well with the Wall Street megabanks and they still enjoy a cost of funding advantage over their smaller competitors. Eliminating the megabanks federal handouts—and addressing the problem of ‘too big to fail’ financial institutions—is a simple matter of common sense, and it absolutely still needs to be addressed. The megabanks have been growing at a rapid pace since the financial meltdown—largely on the backs of U.S. taxpayers. I’ll continue fighting to protect the taxpayers from financial risks by implementing a systemic solution, increasing the minimum amount of capital the megabanks are required to have.”

Premature victory lap. Brown added, “It is premature for anyone to take a victory lap when ‘too big to fail’ policies are still alive and well. Despite what some on Wall Street and in Washington may say, our work is not finished. Regulators have failed to finalize key rules to address the issue—including orderly liquidation rules, enhanced capital and leverage rules for systemically important institutions, limits on the Fed’s emergency lending power, and pushing risky derivatives out of federally insured banks. As long as the market believes that certain institutions have the implicit support of taxpayers, and provides a funding advantage based upon that support, Sen. Vitter and I will continue fighting to hold megabanks accountable for their risky investments.”

GAO findings. Vitter’s claim that megabanks enjoy a cost of funding advantage was backed by a recent Government Accountability Office report that found that Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase & Co., Morgan Stanley, and Wells Fargo & Co were able to borrow below-market interests rates, demonstrating an economic benefit of being “too big to fail.” Brown and Vitter, who requested the GAO investigation, are also authors of the Terminating Bailouts for Taxpayer Fairness Act, legislation that would require the largest and most interconnected financial institutions to maintain a 15 percent capital ratio to ensure taxpayers will not serve as the backstop for risky investments.

Vital need. Commenting on Lew’s remarks, Dennis Kelleher, President of Better Markets, Inc., an independent nonprofit organization that promotes the public interest in the financial markets stated, “Treasury Secretary Lew’s speech today at the Pew Charitable Trusts was a ringing endorsement of the vital need for strong financial reform to protect the American people, the financial system and the economy from another devastating crash. His frank acknowledgement that this is not a choice, but a solemn obligation and duty should be the guiding principle for everyone engaged in the process of financial reform.” In regards to funding, Kelleher noted, “the Secretary recognized that durable, effective financial reform will require ongoing and constant vigilance by aggressive and well-funded public officials. He set a very high bar not just for himself, but also for other regulators, policy makers and market participants.” Kelleher concluded, “Secretary Lew recognizes that failing to properly fund the regulators is nothing more than ‘virtual deregulation,’ which takes the cops off the Wall Street beat and puts Main Street at grave risk.”

Companies: Bank of America; Better Markets, Inc.; Citigroup; Goldman Sachs; JPMorgan Chase & Co.; Morgan Stanley; Pew Charitable Trusts; Wells Fargo & Co

LegislativeActivity: DoddFrankAct FinancialStability SecuritiesDerivatives