OPINION - Banks Too Big to Fail or Exist

"Too big to fail is too big to exist" by Rep. Brad Sherman (D-CA), The Hill 5/17/2012

Is it any wonder why banks like JP Morgan can take such great risks? We have set a precedent whereby our major banks operate with an implicit guarantee that the government will be standing by to bail them out. JP Morgan’s multibillion dollar debacle is just the latest example of why we must better regulate Wall Street, and break up entities that are deemed too big to fail. Taxpayers may not have needed to bail JP Morgan out this time, but a recent history lesson should remind us why banks that are too big to fail are too big to exist.

In October 2008, some big Wall Street firms that had made bad investments in the imploding mortgage market decided that taxpayers should cover their losses. Wall Street flooded into Congress and demanded that taxpayers bail them out by using tax money to buy $700 billion worth of their bad mortgages. Wall Street called them “toxic assets” and called their bailout plan TARP, the Toxic Asset Recovery Program. The plan was for the taxpayers to buy their near-worthless toxic assets, so Wall Street could recover their investments. Our cash, for their trash.

After TARP was blocked in the House, the program was retooled. Not a dollar of taxpayer money was used to purchase toxic assets. Instead we bought preferred stock, a much better investment, and our losses a small fraction of what they would have been.

Today the biggest banks have an unfair competitive advantage through access to a lower-cost capital. Since they are regarded as “too big to fail,” they can receive loans at a lower rate because they have a safety net that the small and medium sized banks don’t have: the backing of the US taxpayer. This should not be – every financial institution should compete for capital based on the soundness of its balance sheet, and no financial institution should be able to claim that there is a special federal safety net available to its investors because of the institution’s sheer size.

The financial regulatory reform we passed under the Dodd-Frank Act already tasks the Federal Reserve and other regulators to identify the financial institutions that are so big that if they were to fail it would be a systemic problem for the country. The problem is, once these banks are identified, what should we do about it? Regulators, including the Fed and the Treasury have the authority under the Dodd-Frank to break up the largest banks, but it is highly unlikely they will use that authority. I believe that once we identify an institution as too big to fail, we must force it to divide.

Every protozoa has the intelligence to divide once it reaches a certain size, and the division is necessary to maintain health. Certainly the brilliant men and women on Wall Street are capable of intelligently dividing their behemoth firms.

Never again should a financial institution be able to claim: “if we go down, the U.S. economy is going down with us.” By breaking up these institutions long before they face a crisis, we ensure a healthy financial system where all firms can compete in the free market. No longer should giant financial institutions be able to get low-cost capital by telling investors that even if the institution is mismanaged it will be able to obtain a bailout from the federal government. That is why I have introduced the “Too Big to Fail, Too Big to Exist Act,” (HR 4963). This bill mandates the break-up of any institution identified by the regulators in the Dodd-Frank process as too big to fail. The legislation is similar to legislation authored by Sen. Bernie Sanders (I–Vt) and introduced in the 11th Congress and legislation authored by Sen. Sherrod Brown (D-Ohio) and recently introduced in the 112th Congress.

My legislation is cosponsored by Rep. Maurice Hinchey (D-N.Y.) and I invite additional cosponsors.