Pethokoukis

Would Mitt Romney break up the banks? Would Paul Ryan?

I’ve noted that on several occasions Paul Ryan has been critical of big banks and seemingly in support of the Volcker Rule. Ezra Klein highlights those instances and wonders if Ryan is in favor of breaking up the big banks.

A few thoughts of my own:

1. I have explicitly asked Mitt Romney, Ryan’s new boss, about this:

PETHOKOUKIS: Richard Fisher, head of the Dallas Fed, recently called for the breakup of large banks. Should we break up the big banks to ensure financial stability in the future and avoid another “too big to fail” problem?

ROMNEY: I’m not looking to break apart financial institutions. I think what caused the last collapse was a convergence, almost akin to a perfect storm, of many elements in our economy and regulatory structure. … And if we have in place modern regulation and regulators who are keeping their eye on the ball, there’s no reason to think we will go into another crisis of the kind we just endured as a result of the mortgage meltdown.

2. Up until recently, my sources tell me,Team Romney was completely unaware that there was a “break up the big banks” (BUBB) movement on the right. Certainly his political advisers are unenthusiastic.

3. Yet, this is still a bleeding-edge policy issue among conservatives that many see at odds with the idea of deregulation and less government intervention. Of course, the counter argument is that the reason banks are so big and interconnected is due to government incentives like Too Big To Fail.

4. But that being said, Ryan understands the danger of crony capitalism to the U.S. political economy, and the Wall Street-Washington nexus — not Solyndra — is the number one example of this. I would guess he has an open mind on the issue.

5. Some on the right who are concerned about TBTF offer a different solution than BUBB. Here is economist Bob Stein on the various options:

In theory, one way is Dodd-Frank, the route favored by the Obama Administration and congressional Democrats: Increase regulation, give regulators more discretion, and hope they do their jobs better than any set of regulators ever has. Essentially, this approach gives more power to the same kinds of people who missed the shenanigans of Bernie Madoff, MF Global, Stanford Financial, and Peregrine Financial. And that’s just in the past few years. Faith over experience.

Another route is to break up the big banks. As Alan Greenspan has said, “If they’re too big to fail, they’re too big.” The problem with this approach is that it eliminates the efficiencies provided by large banks and assumes there is no possible beneficial tradeoff for bank size above a certain level.

A third option would be gradually, but substantially, raising capital requirements for banks considered TBTF. Not the small increase already scheduled under Dodd-Frank. Instead, lift capital requirements to at least 25% over the next twenty years and apply it to all assets, including government debt. (Yes, that means you, Uncle Sam.)

Institutions that don’t want to hold more capital wouldn’t have to; they’d simply have to stay small enough to fail. And in the meantime, we could dispense with the Dodd-Frank rulebook that tries to substitute the judgment of government regulators for what these firms really need, which is more equity to back up risk-taking.

6. Recently, the much-respected Guggenheim Securities Washington Research Group compiled a list of possible candidates to be Treasury Secretary in a Romney Administration. I have highlighted one fascinating possibility:

· Former World Bank President and Deputy Secretary of State Robert Zoellick. Zoellick could also be a logical choice for Secretary of State. Few in Washington have the resume or the policy chops of Zoellick who currently resides as a senior fellow at Harvard’s Kennedy School.

· U.S. Senator Bob Corker (R-Tenn.). The former businessman and Chattanooga Mayor is a leading voice on the Senate Banking Committee.

· Hewlett Packard CEO and President Meg Whitman. The former President and CEO of eBay, Whitman lost a high-profile race for California Governor in 2010 and is a national finance chair for Romney.

· Former Senator Judd Gregg (R-N.H.). The former Granite State Governor and Senate Budget Chairman was a 2008 and 2012 backer of Romney. Gregg was an architect of TARP and whipping support for Bernanke’s re-confirmation vote. Gregg is currently an advisor to Goldman Sachs, which could produce an additional speed bump.

· U.S. Senator Rob Portman (R-Ohio). A VP finalist and former OMB Chief, Portman could fill a number of Cabinet roles.

· Former White House Chief of Staff Erskine Bowles. There will be at least one Democrat in the Cabinet, per tradition. Bowles is the Bowles of Simpson-Bowles and is definitely a wild card, but stranger things have happened.

 · FDIC Director Thomas Hoenig. The darkest of the dark horses, the former Kansas City Federal Reserve President has a fan in Sen. Richard Shelby (R-Ala.) and is the author of the plan to break up the big banks (require commercial banks to divest their broker dealers).

Hoenig would be a stunning and blockbuster pick.

7. But if there were some secret plan to bust up the banks or dramatically raise capital levels, why not announce it now? Yes, it might superficially operate at cross currents with Romney’s small government message. But such a move would dramatically tell voters that Romney-Ryan would approach Wall Street in a much different way than the Obama administration.

Indeed, the story told by former TARP Inspector General Neil Barofsky in his great new book Bailout is one of the White House and Obama Treasury Department coddling banks and dishing out TARP funds with no strings attached. A really devastating portrait of regulatory and cognitive capture. A lot there for Romney-Ryan to capitalize on if they want.

16 thoughts on “Would Mitt Romney break up the banks? Would Paul Ryan?

  1. Too many conservatives agree with Bob Stein’s thinking:
    “The problem with this approach is that it eliminates the efficiencies provided by large banks and assumes there is no possible beneficial tradeoff for bank size above a certain level.”

    What efficiencies are provided by very large banks? I haven’t seen much. Mostly, they provide the vast shareholders’ (and public) capital to fund multi-billion dollar bets on proprietary trading desks (c.f., JP Morgan’s “hedge”), and to allow issuers to have capital issues sold before they come on the market, transferring all the risk from the borrower (who has control over what is being done with the money) to the lender (who doesn’t, but who has an implicit backstop from the rest of the financial system, and ultimately the taxpayer.) So we get: Facebook—grossly overpriced, giving shareholders almost no rights, and paying the founders back many times over for a business that was already doing well and making them a lot of money. They make even more money, and someone else bears the risk. DO WE REALLY NEED TO ENCOURAGE THIS?

    I would like to see any serious academic demonstrate what the benefits are of our super-sized banks, and which of those benefits could not be provided by a system of somewhat smaller, more competitive, and more specialized financial institutions. Everyone just assumes that you’ve got to be bigger without ever proving why. Now, even Sandy Weill thinks it was a mistake!

    • Sandy Weill thinks breaking up the banks is a good idea so he can swoop in, buy these smaller banks, and form a TBTF bank of his own.

  2. Would he break up the big banks and bank cabals? I would HOPE so! The rich,the big banks,the federal res and the CFR are the root to the disease in America. Fiat money,money that is created out of nothing, without an asset to back it has become the poison that rots the soul and creates the greed.
    The banks and the fiat money system HAVE to end in the forms that they are and be recreated based on a sound,asset backed currency that is issued ONLY by the govt and NOT a private entity that is the fed res. That day in 1913 when the govt turned the control and printing of our currency over to the fed res was the very first day that the poison entered and infected America.

    To restore America,the elites,the CFR and the bank cabals MUST be ended.

  3. I’ve been saying for a while that Romney would be wise to campaign on breaking up the banks. Not only is it good policy (read David Skeel’s “The New Financial Deal” for a discussion of just how badly Dodd-Frank fails to solve the problem), but it has broad support from all parts of the political spectrum, and Obama would have to either oppose breaking up the banks or admit that his Dodd-Frank bill doesn’t get the job done.

    This might just be the rare case when good politics is also good policy.

  4. Breaking up the banks is “at odds with the idea of deregulation and less government intervention”, of course. But the real, practical counter-argument is this: How else do we eliminate on-going public risk/private profit? The re-cap idea is fine for the long run — we set rules for those who would become “too big” again in the future. But I say the need to eliminate the public risk is immediate. So call this die-hard libertarian a BUBBA – Break Up the Big Banks Advocate! Plenty of libertarians and conservatives have come to the same conclusion.

    “But if there were some secret plan to bust up the banks or dramatically raise capital levels, why not announce it now?”

    Indeed, why not? He risks letting Obama beat him to the punch…

    “A lot there for Romney-Ryan to capitalize on if they want.”

    …and neutralizing this vulnerability!

    I firmly believe that the 1st candidate to become a BUBBA wins!

  5. Corrupt Obama is absolutely refusing to allow even Corzine to be prosecuted. Obama says he is the defender of Medicare but steals over 700 billion from it and says he is for the people against the greedy wall street yet doesn’t prosecute a single one of them versus Clinton and Bush both going after thousands of them. Obama is the most two-faced man to ever walk the planet.

    Who really unchained Wall Street?

  6. I would go beyond Andrew Clearfield and say that even if there are efficiencies provided by large banks, the problems created by their tbtf status almost certainly outweigh the value of those efficiencies.

  7. I agree with Mr. Clearfield. Any gains shareholders or consumers have seen in big bank efficiencies are surely offset the costs of our prolonged recession and mortgage crisis meltdown. It smacks of crony capitalism — I feel that there were several big bank cooks (or crooks) in the kitchen which left small banks out. I’ll gladly pay a few bucks per year service fee for my inefficient DDA account at a local bank and avoid the next junk-bond/derivative soup that no one can understand, let alone assess risk.

  8. The problem with BUBB is defining the meaning of “big” – there is no relevant meaning of “big”, just like there was no solid definition of “too-big-to-fail” – it just becomes something to be gamed – to bribe the right regulator. Banks weren’t bailed out because they WERE too-big-to-fail, but because someone said they were, and noone challenged it well enough. Basically the regulators said “We don’t know how to wind them down”. If they don’t know how to wind them down, it is not simply a matter of size but of the complexity of instruments. The problem with BUBB is that the instruments will still be there, and the regulators still won’t understand how to deal with them. Banks will be smaller, but still “systemically important” and will still get bailed out. The answer is capital requirements to insure that complex instruments can be unwound – which should be draconian for overly complicated instruments. If there’s a reason for the complexity it will be worth it. If there isn’t a reason for the complexity, it shouldn’t be worth the cost to complicate the system. That is the path toward effective regulation.

  9. Bring back Glass-Stegall and make banking (not investing) boring. Leverage limited to <x10. Let the gamblers use their money not taxpayer money

  10. Look, the problem is that these folks in the big banks are very well connected politically and have lots of campaign and other funds to throw around. They went for Obama big time in 2008 and now they may be slightly favoring Romney. These politicians get heartburn when they think about biting the hand that feeds them. Many of these folks are their Harvard buds also. Don’t count on Romney to do much in this department. At the very least there needs to be a reintroduction of the separation between commercial and investment banking á la Glass-Stegall Act.

  11. “Breaking up the banks” is a full stupid narrative when it includes preserving the Federal Reserve system and fiat money at the same time. There is in fact only one real bank (Federal Reserve) regulating and controlling banking prices and supply, everyone else is a branch or special interest relating to the overall financial system. The left focuses on the private counter party corruption results and the right on the government excess which is supported by the government subside and corruption of the current fiat system. Obviously both are true but most politics is a statist orthodox and neither party really would want reform. Large government would have trouble with the limits of real and private money, which is why it was abolished in the first place. So the hypocrisy of the “on wall street crowd” especially is on full display, they are pinheads who still believe in ‘better regulation” as a solution rather than face their own corruption and dependency on the wealth redistribution currency devaluation provides for political insiders which in fact they are. The sloth lobby.

  12. The government is to big to fail. Maybe we should break up the government? The government was more responsible than the banks for the financial crisis.

  13. One problem with the Bigger Regulation approach is that only the largest banks can afford the attorneys and compliance experts. Small and mid-sized banks are at a tremendous disadvantage in terms of the cost of compliance. (This is why some of the biggest are actually in favor of more regulation.)

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