Big Banks’ Biggest Foe Says It’s Time to Break Up
Business + Economy

Big Banks’ Biggest Foe Says It’s Time to Break Up

iStockphoto/The Fiscal Times

As president of the Dallas Federal Reserve Bank, Richard Fisher has little in common with the remnants of the Occupy Wall Street movement.

A former investment banker with degrees from Harvard and Stanford, Fisher appears on the surface to be a voice of the establishment. He espouses faith in markets. His silvering hair is slicked back. His dark wool suit is cut conservatively.
But Fisher sees “too big to fail” megabanks as a repressive force in American society. By dint of the possibility that they might fail again—despite the reforms under Dodd-Frank—taxpayers would inevitably be on the hook to bail them out with billions upon billions of dollars, he warns.

“These institutions, as a result of their privileged status, exact an unfair tax upon the American people,” Fisher said in a Wednesday night speech in Washington. “Moreover, they interfere with the transmission of monetary policy and inhibit the advancement of our nation’s economic prosperity.”

With the powerful platform of the Fed, Fisher unveiled on Thursday what he deems to be a “simple” plan to break-up big banks. Remove the federal safety net and these institutions would behave more responsibly, possibly spinning off their riskiest divisions under market pressure.

Fisher proposes limiting government deposit insurance and short-term Fed loans to only the retail side of banking. People’s checking accounts would still be safe, but banks—knowing they might go bust—would no longer make the kind of risky speculative bets that led to the 2008 financial crisis.

His thinking is that Americans would no longer be saddled by the somewhat invisible tax of financial bailouts. The megabanks have “sludge” that makes it difficult for the Fed’s monetary policy to flow smoothly into the economy. As a result, mortgage rates did not fall as quickly as Fisher would have liked after the Fed lowered interest rates through a series of unprecedented measures in recent years to stimulate the economy.

Just because a central banker floats a reform, doesn’t mean it will easily jump through congressional hoops—particularly considering the current gridlock and President Obama’s tendency to talk in the past tense about ending the need for bailouts.

James Chessen, chief economist at the American Bankers Association, a lobby group, noted that overhauls are rarely as simple as their advocates present them and complexity often confounds the process. When The Fiscal Times asked Chessen about dividing up the big banks, he referenced an editorial published in August by the association’s former chairman, Art Johnson, chairman and CEO of the United Bank of Michigan.

Johnson’s argument is that banks of different sizes provide services to a radically different set of customers. Just as a community bank might approve a small business loan, a fully integrated multinational bank with far-flung global operations provides an array of services to an auto manufacturer.

“The strength of the banking industry — and the American economy — lies in its diversity,” Johnson wrote. “As trusted and reputable providers of financial products and services, banks of all shapes and sizes are inextricably tied to the growth and prosperity of the communities we serve.”

After the Wednesday night speech, Fisher said he had been called “unsolicited” by lawmakers from both parties. “A Tea Party activist will likely be as interested in this as you might have Sen. Sanders of Vermont,” Fisher said, referring to Bernie Sanders, an independent who has described himself as a democratic socialist.

The effort to break-up banks didn’t die with the passage of Dodd-Frank, which critics say only enshrined the likes of JP Morgan Chase, Goldman Sachs, Citigroup and Bank of America as “systemically important” institutions. The dozen largest banks hold 69 percent of all the assets, dwarfing the capabilities of their more than 5,600 other competitors. The megabanks benefit, critics argue, because the implicit promise of a bailout improves their credit rating, making them cheaper to borrow.

Fisher claims his plan removes the competitive advantages that megabanks currently enjoy with their lines of credit, making it easier for community banks to compete for customers and help the metaphorical Main Street. That’s also his sales pitch to lawmakers.

Interestingly, the desire to challenge these institutions has largely not been fueled by the 2011 Occupy protesters camped out in cities across the country. Oddly enough, it comes from buttoned-down bureaucrats, lawmakers on both sides of the aisle, and one major financial powerbroker.

The presidents of the Federal Reserve banks for New York and Richmond, William Dudley and Jeffrey Lacker, each have misgivings about bank sizes, while Fed Governor Daniel Tarullo recently expressed an interest in limiting bank risk by having them depend more on long-term debt for funding. Tom Hoenig, a former Kansas City Fed president, received Senate approval last year to become a director of the Federal Deposit Insurance Corporation largely because of his criticism of big banks. And, in what some regarded as a blatant betrayal, Sandy Weill, the architect of the 1998 merger forming Citigroup, told CNBC this summer that investment banking should be separate from the commercial side.

Sen. Sherrod Brown, D-Ohio, proposed last year putting a cap on bank sizes. Brown recently partnered with Sen. David Vitter, R-La., to request that the Government Accountability Office study the preferential treatment megabanks receive from the belief that they’ll get bailed out in the event of disaster.

Brown’s office has been in “consistent contact” with Fisher, said Lauren Kulik, a spokeswoman for the senator who said that both men agreed about the risk posed by those large banks capable of wiping away a major chunk of the Gross Domestic Product in a disaster.

“Sen. Brown has been hearing more and more from his colleagues on both sides of the aisle who agree with this approach,” Kulik said. “It is clear that more can be done – Congress passed seven financial reform laws after the Great Depression – and the tide is clearly turning on this issue.”

Fisher also thinks the appetite for financial reform has not been exhausted by the massive challenges of implementing the 2010 Dodd-Frank regulations. But he concedes as a failed 1993 Senate candidate in Texas that politics is beyond his expertise.

“I’m not a politician,” he said. “I tried that once. I was a massive failure at it. I’m a central banker. But this idea, it seems to me is politically palatable to both the right and the left.”