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Dodd Wants No Part of Safe Banking

Sen. Chris Dodd (D-CT) (photo: kthread)

Ezra Klein interviews Chris Dodd, chairman of the Senate Banking Committee, who contrasts Sherrod Brown and Ted Kaufman on the issue of breaking up the mega-banks. Note the opening of this answer:

CD: I don’t agree with Paul Krugman a whole hell of a lot of stuff, but I agree with him on this one. It’s not size; we’re preoccupied with size. And I’m not suggesting that any size is okay, but it’s really risk, it’s these other elements in here. A relatively innocuous product line in a relatively small company can pose huge, systemic risk. That said, in our bill, we provide the authority to break up companies. That is clearly in the bill, the authorization to do that under certain circumstances. But I’m not sure that we ought to become so preoccupied with it. And again, I’ve looked at the 13 Bankers book, and so forth, that approach, and I hear this, by the way, not just from them, but from CEOs of major corporations. This is not some left/right question. But I just don’t think that it makes a lot of sense. I don’t think it’ll prevail.

What we’ve done here says that if you’re going to become a certain size, that’s fine. But you’re going to have to meet different capital standards, you’re going to have different criteria that are going to protect us against the possibility you can fail. And just in case you have any doubts about this, if you do fail, all your management’s fired, all your shareholders lose, all your creditors lose, you can’t go back into the business for years to come. So yeah, you can get bigger, but there are going to be a lot of things to insulate us and our economy from the kind of hazards you could pose by your size.

Earlier in the interview, Dodd intimates that US Senators are too uninformed to come up with proper regulatory rules, which is why he leaves a lot of his solutions in the bill to the discretion of regulators (he actually says, “What’s the competency of Congress?”). As Ted Kaufman noted yesterday, regulators have much of the authority to do this type of limiting on size or leverage right now. They haven’t done it, they’ll never do it, and ultimately Congress has the authority and responsibility to write clear rules.

But this really seems like a retrospective rather than a prospective way of dealing with financial crises. Dodd seems to think that the discretionary threat of dissolution will act as a deterrent to bankers to staying within the lines of size and particularly risk. Tim Geithner basically said the same thing on Good Morning America today. While he acknowledged the danger in having the six largest banks control 63% of all assets, he focused far more on what would happen “in the future” if they treated those assets like a stake at a casino again:

“Our view is that we need to make sure that you’re limiting how big they can get and how risky that they can get. But if, in the future, if they mess up and they take themselves to the edge of the cliff again, then we want to make sure we can put them out of existence, dismember them, break them up safely without the American taxpayer having to bail them out again,” Geithner said.

But the American taxpayer would be innumerably affected by a big bank failing again. Setting aside the Federal Reserve and FDIC support that banks have accessed and could in the future, the financial crisis triggered a Great Recession and a mass of job loss that we probably won’t emerge from fully for a decade. And that would probably happen even if the Dodd system worked perfectly and a struggling firm was wound down properly. Why would you want to prioritize resolution over prevention? And the best way to prevent the ability for the financial sector to crash the economy in the future, not by my reading but the reading of many of the experts, is to shrink it – to make it less risky and less of a behemoth, with all the political influence that carries.

The way Dodd answers this question about whether we should accept an economy where the financial sector creates 40% of all profits is just astonishing:

CD: I don’t like the equation. I don’t believe you ought to be giving up manufacturing and the kind of job creations that go on with producing things. Putting aside the debate on what should happen to the financial sector, I worry about a country that is innovative enough to produce plasma televisions, but not smart enough to figure out how to make them here […] So the notion of getting back to an economy where, again, institutions are performing back to more of their core functions is something that I think is important. I don’t restore Glass-Steagall in this bill. But we come pretty close to trying to at least push or cajole or lure institutions back to more core functions. Banks being banks. We’ve got to move this thing back, and I think we achieve a lot of that through this bill. That answers your question, we need to get back to the time before 40 percent of our economic success was just coming up with fancy instruments that allowed people to make a profit off of them without producing much.

Why are we pushing and cajoling and luring? Why aren’t we mandating and determining and forcing?

Clearly the battle lines have been drawn, and there’s a major philosophical difference between those who hope the financial industry will learn their lessons and those who want to remove all doubt.

CommunityThe Bullpen

Dodd Wants No Part of Safe Banking

Ezra Klein interviews Chris Dodd, chairman of the Senate Banking Committee, who contrasts Sherrod Brown and Ted Kaufman on the issue of breaking up the mega-banks. Note the opening of this answer:

CD: I don’t agree with Paul Krugman a whole hell of a lot of stuff, but I agree with him on this one. It’s not size; we’re preoccupied with size. And I’m not suggesting that any size is okay, but it’s really risk, it’s these other elements in here. A relatively innocuous product line in a relatively small company can pose huge, systemic risk. That said, in our bill, we provide the authority to break up companies. That is clearly in the bill, the authorization to do that under certain circumstances. But I’m not sure that we ought to become so preoccupied with it. And again, I’ve looked at the 13 Bankers book, and so forth, that approach, and I hear this, by the way, not just from them, but from CEOs of major corporations. This is not some left/right question. But I just don’t think that it makes a lot of sense. I don’t think it’ll prevail.

What we’ve done here says that if you’re going to become a certain size, that’s fine. But you’re going to have to meet different capital standards, you’re going to have different criteria that are going to protect us against the possibility you can fail. And just in case you have any doubts about this, if you do fail, all your management’s fired, all your shareholders lose, all your creditors lose, you can’t go back into the business for years to come. So yeah, you can get bigger, but there are going to be a lot of things to insulate us and our economy from the kind of hazards you could pose by your size.

Earlier in the interview, Dodd intimates that US Senators are too uninformed to come up with proper regulatory rules, which is why he leaves a lot of his solutions in the bill to the discretion of regulators (he actually says, “What’s the competency of Congress?”). As Ted Kaufman noted yesterday, regulators have much of the authority to do this type of limiting on size or leverage right now. They haven’t done it, they’ll never do it, and ultimately Congress has the authority and responsibility to write clear rules.

But this really seems like a retrospective rather than a prospective way of dealing with financial crises. Dodd seems to think that the discretionary threat of dissolution will act as a deterrent to bankers to staying within the lines of size and particularly risk. Tim Geithner basically said the same thing on Good Morning America today. While he acknowledged the danger in having the six largest banks control 63% of all assets, he focused far more on what would happen “in the future” if they treated those assets like a stake at a casino again:

“Our view is that we need to make sure that you’re limiting how big they can get and how risky that they can get. But if, in the future, if they mess up and they take themselves to the edge of the cliff again, then we want to make sure we can put them out of existence, dismember them, break them up safely without the American taxpayer having to bail them out again,” Geithner said.

But the American taxpayer would be innumerably affected by a big bank failing again. Setting aside the Federal Reserve and FDIC support that banks have accessed and could in the future, the financial crisis triggered a Great Recession and a mass of job loss that we probably won’t emerge from fully for a decade. And that would probably happen even if the Dodd system worked perfectly and a struggling firm was wound down properly. Why would you want to prioritize resolution over prevention? And the best way to prevent the ability for the financial sector to crash the economy in the future, not by my reading but the reading of many of the experts, is to shrink it – to make it less risky and less of a behemoth, with all the political influence that carries.

The way Dodd answers this question about whether we should accept an economy where the financial sector creates 40% of all profits is just astonishing:

CD: I don’t like the equation. I don’t believe you ought to be giving up manufacturing and the kind of job creations that go on with producing things. Putting aside the debate on what should happen to the financial sector, I worry about a country that is innovative enough to produce plasma televisions, but not smart enough to figure out how to make them here […] So the notion of getting back to an economy where, again, institutions are performing back to more of their core functions is something that I think is important. I don’t restore Glass-Steagall in this bill. But we come pretty close to trying to at least push or cajole or lure institutions back to more core functions. Banks being banks. We’ve got to move this thing back, and I think we achieve a lot of that through this bill. That answers your question, we need to get back to the time before 40 percent of our economic success was just coming up with fancy instruments that allowed people to make a profit off of them without producing much.

Why are we pushing and cajoling and luring? Why aren’t we mandating and determining and forcing?

Clearly the battle lines have been drawn, and there’s a major philosophical difference between those who hope the financial industry will learn their lessons and those who want to remove all doubt.

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David Dayen

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