“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Wednesday, September 09, 2009

Too big to fail. More federal control on just about everything.

Bank bill tackles ‘too big to fail’ issue
BY LESLIE WIMMER Fort Worth Business Press
September 07, 2009

A bill currently sitting in a U.S. Senate committee would give the Federal Deposit Insurance Corp. the power to break apart bank holding companies a panel of banking and finance officials believe are too big to fail.

The bill, nicknamed “The Resolution Reform Act of 2009,” would authorize the creation of a panel made up of regulators from the Federal Reserve, FDIC, Office of Thrift Supervision, Office of the Comptroller of the Currency, and other organizations, which would determine if a bank holding company is too big to fail and how to break the company apart to sell its assets, or “unwind” a holding company, said Greg Hernandez, a FDIC spokesman.

The bill does not address how officials would determine what defines a “too big to fail” company, Hernandez said.

But, local banking and finance professionals have mixed opinions about the bill, with some officials saying the government already is too involved in the banking and

finance industries, and others saying legislation to address “too big to fail” companies may level business playing fields.

Sen. Bob Corker, R-Tenn., sponsored the bill, which is co-sponsored by Sen. Marr Warner, D-Va., and Sen. Kit Bond, R-Mo., and introduced the bill on July 30, 2009. It currently sits in the U.S. Senate Committee on Banking, Housing and Urban Affairs.

“The FDIC has the authority to wind down a failing bank, but not a failing bank holding company, which has exacerbated the moral hazard problem we’ve seen over the past 18 months,” Corker said in a statement. “It’s important that we take our time with regulatory reform, but in the interim we need the ability to resolve bank holding companies in an orderly way.”

In his statement, Corker added that FDIC Chairman Sheila Bair told him having a resolution mechanism in place to deal with “too big to fail” financial institutions would have reduced the risk to the economy in the current recession, and would have created better market discipline across the system.

A resolution mechanism would have “reduced market uncertainty about who would be next, who would in, and who would lose,” Corker said in a statement.

Brian Happel, Fort Worth market president with BBVA Compass Bank, said he doesn’t think the bill – or bills similar to the Resolution Reform Act – are a good idea.

“I think the focus should be more on governance,” Happel said. “The focus should be more on making sure banks have good management, an experienced management team in place that’s accountable. Also, making sure that business models banks have in place are sound business models that make sense, and making sure that the values of that company are very clearly identified and that principles are being practiced.

“As you look under a lot of the underlying problems that have taken place out there, greed has played in part,” Happel said. “Had those other [principles] been in place, you would have eliminated or at least lessened the impact of what greed could have on those banks.”

Stanley Block, a Texas Christian University finance professor, said he is against the legislation, adding that he believes the government should get out of the banking business as much as possible after the United States comes out of the current financial crisis.

“I’d hate to think in this country that the government could break up a bank holding company at its will,” Block said. “I think there should be adequate regulation to make sure banks don’t get in too risky a situation, but I don’t think the government should be making a decision that a bank holding company is too large and needs to be broken up.”

OmniAmerican Bank’s President and Chief Executive Officer Tim Carter said government intervention since late 2008 has made competition difficult between large conglomerate banks and smaller community banks.

“There’s been a lot of debate about the large banks and what happened to all of the TARP dollars,” Carter said. “I do believe it’s created an unlevel playing field for big banks versus community banks. All that money that went in [to larger banks] was done almost essentially overnight, very quickly, with no due diligence, [the government] picked winners and picked losers.”

Banks the government chose to invest in with TARP funds have been given a competitive edge over other banks in that larger corporations can raise more funds in the current credit markets by paying more than the market rate because they have federal dollars on their balance sheets, Carter said.

“I see this as one step in trying to address ‘too big to fail,’ but it’s not going to be the only step, there needs to be other things,” Carter said.

The definition of “too big to fail” has yet to be clearly defined, Block said, but he believes bank holding companies on par with the United States’ largest banking companies, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo & Co. would fall in the category.

“I would say the definition would be that a bank is so large that its failure would cause the financial markets to tremble, that it would cause international fear about the banking system in the U.S. and the rest of the world,” Block said.


  1. If there are organizations that are too big too fail, and there are, they are usually creations of legislative privilege not given to smaller firms.

    This could be on a de facto basis as the smaller firms may not have either the capital base, legal firepower, or market control to take advantage of the legislation that was created by the lobbies for the mega-firms.

    The dreary predictable result of legislative regulation will be that it will hardly nick the large corporations and will diabolically further hurt small business.

    You can bet on thatt.

  2. Let them start with Freddie Mac and Fannie Mae.

  3. deuce,

    It was once a principle of economics that a monopoly could not exist absent government fiat. The classic models were the sundry European "East India" companies and their ancillaries.

    Are we finding ourselves moving "back" into a neo-mercantilist model? The emphasis on the acquisition of monitary/monitized reserves is intriguing.

  4. There's a tremendous amount of angst about banks and bankers. Meanwhile many think that Wall Street will revert to business as usual.

    It's all way above my pay grade but it sure looks like the whirled is still struggling to get a handle on what's happened. So far this year, 89 banks have failed and some say that we're only about a third of the way through the threshing process.

  5. File it under, "Democracy is Hard."

  6. whit,

    A story about Buffett, this morning, was not convincingly optimistic. Despite his best efforts to smile, Buffett's selling volume outstrips his buying.

    Yesterday, close to 460 US banks were on the "troubled" list. Furthermore, again from yesterday, the 5 largest US banks have reduced consumer loans by 79%, year to year, with business loans faring little better.