[Congressional Record (Bound Edition), Volume 159 (2013), Part 2]
[Senate]
[Pages 2063-2066]
[From the U.S. Government Publishing Office, www.gpo.gov]




                            TOO BIG TO FAIL

  Mr. BROWN. Mr. President, I welcome Senator Vitter and his 
cooperation in this matter. I appreciate the work he has done on the 
issue. He and I are going to address the concentration of the financial 
system in this country and what that means to the middle class, what it 
means to business lending for small businesses, and again what it means 
to the potential of too big to fail, which is something Senator Vitter 
has been a leader on for a number of years. Both of us are members of 
the Senate Banking Committee.
  More than 100 years ago, in 1889, one of my predecessors, Senator 
John Sherman, a Republican, and author of the Sherman Antitrust Act--
who actually lived in my hometown of Mansfield, OH, and was the only 
other Senator from that city who served here--said:

       I do not wish to single out Standard Oil Company . . . 
     [s]till, they are controlling and can control the market so 
     absolutely as they choose to do it; it is a question of their 
     will. The point for us to consider is whether, on the whole, 
     it is safe in this country to leave the production of 
     property, the transportation of our whole country, to depend 
     upon the will of a few men sitting at their council board in 
     the city of New York, for there the whole machine is 
     operated?

  At the time, Senator Sherman was speaking about the trusts--
specifically Standard Oil but other trusts as well--that were large, 
diverse industrial organizations with outsized economic and political 
power, not just economic power but also political power. His words are 
as true then as they are today. Today our economy is being threatened 
by multitrillion dollar--that is trillion dollar--financial 
institutions. Wall Street megabanks are so large that should they fail, 
they could take the rest of the economy with them.
  If this were to happen, instead of failure, taxpayers are likely to 
be asked again to cover their losses and to bail them out just as we 
did 5 years ago. This is a disastrous outcome because it transfers 
wealth from the rest of the economy into these megabanks and suspends 
the rules of capitalism and perpetuates the moral hazard that comes 
from saving risk-takers from the consequences of their behavior.
  Just as Senator Sherman spoke against the trusts in the late 19th 
century, today people across the political spectrum--both parties and 
all ideologies--are speaking about the dangers of the large, 
concentrated wealth of Wall Street megabanks.
  In 2009, another Republican--and one a little more familiar to a 
modern audience--Alan Greenspan said:

       If they're too big to fail, they're too big . . . in 1911 
     we broke up Standard Oil. . . . Maybe that's what we need to 
     do.

  If anyone thought the biggest banks were too big to fail before the 
crisis, then I have bad news: They have only gotten bigger.
  These are the six largest banks and their growth patterns in 1995--18 
years ago--had combined assets that were 18 percent of GDP. Today they 
have combined assets over 60 percent of GDP. Over that time, 37 banks 
merged 33 times to become the top 4 largest behemoths, which now range 
from $1.4 trillion in assets to the largest, Bank of America and 
JPMorgan Chase, which is around $2.3 or $2.4 trillion in assets. That 
is $2.3 trillion in assets. Since the beginning of the fiscal crisis, 
three of these four megabanks have grown through mergers by an average 
of more than $500 billion.
  The 6 largest banks now have twice the combined assets of the rest of 
the 50 largest U.S. banks. These 6 banks--Morgan Stanley, Goldman 
Sachs, Wells Fargo, Citigroup, JPMorgan Chase, Bank of America--the 
combined assets of 6 banks, are larger than the next 50 largest banks. 
Put another way, if we add up the assets of banks 7 through 50, the 
bank that resulted would only be half the size of a bank made from the 
assets of the top 6.
  As astonishing as these numbers are, they don't tell the whole story. 
Many megabank supporters argue that U.S. banks are small relative to 
international banks.
  But as Bloomberg reported last week, FDIC Board member Tom Hoenig has 
exposed a double standard in our accounting system that allows U.S. 
banks to actually shrink themselves on paper. Under the accounting 
rules applied by the rest of the world, the 6 largest banks are 39 
percent larger than we think they are. That is a difference of about $4 
trillion. If that is the case, instead of being 63 percent of GDP under 
international accounting rules, these 6 banks are actually 102 percent 
of GDP. Let me say that again. The six biggest banks' combined assets 
are slightly larger than the entire size of our economy. When measured 
against the same standard as every other institution in the world, we 
see the United States has the three largest banks in the world. These 
institutions are not just big, they are extremely complex.
  According to the Federal Reserve Bank of Dallas, the 5 largest U.S. 
banks now have 19,654 subsidiaries. On average, they have 3,900 
subsidiaries each and operate in 68 different countries. These 
institutions are not just massive and complex--I don't object so much 
to that--it is they are also risky.
  According to their regulator, the Office of the Comptroller of the 
Currency--and I met with them today--none of these institutions has 
adequate risk management. Let me say that again. In stress tests, not 
one of the largest 19 banks has shown adequate risk management.
  It is simply impossible to believe that these behemoths will not get 
into trouble again. We saw what happened with one of the best managed 
banks with a lot of employees--some 16,000, 17,000, 18,000 employees in 
my State alone--at one site with 10,000 employees in Columbus: JPMorgan 
Chase, a well-managed bank with a very competent CEO but a bank that 
not so long ago lost $6 billion or $7 billion.
  It is impossible to believe they will not get into trouble again and 
they will not be unwound in an orderly fashion should they approach the 
brink of failure.
  If you don't believe me, ask Bill Dudley, President of the Federal 
Reserve Bank of New York. He said recently that ``we have a 
considerable ways to go to finish the job and reduce to intolerable 
levels the social costs'' of a megabank's failure. He said that more 
drastic steps ``could yet prove necessary.''
  Governor Dan Tarullo, from the Federal Reserve, threw his support 
behind a proposal first introduced by the Presiding Officer's 
predecessor, Senator Ted Kaufman, and me to cap the nondeposit 
liabilities of the megabanks some 3 years ago in this body.
  These men are not radicals; they are some of the Nation's foremost 
banking experts.
  History has taught us we never see the next threat coming until it is 
too late and almost upon us. When we

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passed the Dodd-Frank Act, it contained tools that regulators can use 
to rein in risk taking.
  Unfortunately, many of those rules have stalled, and most will not 
take effect for years, because it is not just the economic power of the 
banks but the political powers so often having their way in this city 
and with regulators all over the country.
  Dodd-Frank focuses on improving regulators' ability to monitor risks 
and enhancing the actions that regulators can take if they believe the 
risk has grown too great. Over the last 5 years alone we have seen 
faulty mortgage-related securities, we have seen foreclosure fraud, and 
we have seen big losses from risky trading, money laundering, and LIBOR 
rate digging.
  Until the Dodd-Frank rules take effect, the rest of us more or less 
have to stand by idly as megabanks take more risks that almost 
inevitably and eventually lead to failure.
  We shouldn't tolerate business as usual, monitoring risk until we are 
once again near the brink of disaster. We should learn from our recent 
history. We should correct our mistakes by dealing with the problem 
head on. That means preventing the anticompetitive concentration of 
banks that are too big to fail and whose favored status encourages them 
to engage in high-risk behavior.
  How many more scandals will it take before we acknowledge that we 
can't rely on regulators to prevent subprime lending, dangerous 
derivatives, risky proprietary trading, financial instruments that 
nobody understands, including the people running the banks in many 
cases, and even fraud and manipulation.
  Wall Street has been allowed to run wild for years. We simply cannot 
wait any longer for regulators to act. These institutions are too big 
to manage, they are too big to regulate, and they are surely still too 
big to fail.
  We can't rely on the financial market to fix itself because the rules 
of competitive markets and creative destruction don't apply to Wall 
Street megabanks as they do to businesses in Louisiana or Delaware or 
Ohio. Megabanks' shareholders and creditors have no incentive to end 
too big to fail. As a result, they will engage in ever-riskier 
behavior. In the end, they get paid out when banks are bailed out.
  Taking the appropriate steps will lead to more midsized banks--not a 
few magabanks--creating competition, increasing lending, and providing 
incentives for banks to lend the right way.
  If there is one thing the people in Washington love, it is community 
banks. Senator Vitter has been very involved in helping community banks 
deal with regulations and other kinds of rules. Cam Fine, the head of 
the Independent Community Bankers of America, is calling for the 
largest banks to be downsized because he sees that his members, the 
community banks--there might be 50 million, 100 million, or less than 
that in assets--are at a disadvantage.
  Just about the only people who will not benefit from reining in these 
megabanks are a few Wall Street executives. Congress needs to take 
action now to prevent future economic collapse and future taxpayer-
funded liabilities.
  Before yielding, I wish to thank Senator Vitter, who recognizes this 
problem with an acuity that most don't have, and for joining me in 
doing something about it. I am pleased to announce today that we are 
working on bipartisan legislation to address this too-big-to-fail 
problem. It will incorporate ideas put forward by Tom Hoenig, Richard 
Fisher, and Sheila Bair. Senator Vitter will talk about his views in a 
moment.
  The American public doesn't want us to wait. They want us to ensure 
that Wall Street megabanks will never again monopolize our Nation's 
wealth or gamble away the American dream.
  To those who say that our work is done, I say we passed seven 
financial reform laws in the 8 years following the Depression, so it is 
clear there is precedent for not just one time, one fix, but a 
continued addressing of this problem until we know we have the strength 
of the American financial system returned to the way it once was.
  Thank you, Mr. President.
  The PRESIDING OFFICER. The Senator from Louisiana.
  Mr. VITTER. Mr. President, I am proud to join Senator Brown on the 
Senate floor to echo those comments. I agree that too big to fail, 
unfortunately, is alive and well, and that poses a real threat to all 
of us--to consumers and citizens everywhere and fundamentally to the 
American economy.
  Coming out of the financial crisis, it seemed to me that the biggest 
threat and the biggest problem was continuing too big to fail. I think 
now, several years after the passage of Dodd-Frank, we have objective 
numbers and evidence that it did not bury too big to fail. Again, they 
are objective numbers and evidence and pricing in the market that too 
big to fail is alive and well.
  I think the fact that Senator Brown and I are both here on the floor 
echoing each other's concerns, virtually repeating each other's 
arguments, is pretty significant. I don't know if we quite define the 
political spectrum of the Senate, but we come pretty darn close. Yet we 
absolutely agree about this threat.
  I think Senator Brown's historical analogy is right. It is like the 
unfettered growth and power of the trusts in the late 19th century, and 
there too folks of all sorts of ideologies correctly recognized that 
threat--liberal Democrats as well as Senator Brown's Republican 
predecessor, Senator Sherman, and, of course, the biggest Republican 
trust-buster of all, Teddy Roosevelt. It is the same issue. It is the 
intense concentration of power. As a conservative, I am very suspicious 
and nervous about that, whether it is when it is in government or 
whether it is when it is in the private sector.
  I think the sort of bipartisan consensus that, perhaps, we personify 
on the Senate floor is also growing outside Congress and outside this 
institution. Senator Brown alluded to some of it, but let me flesh that 
out.
  We have, for instance, the Federal Reserve Board Governor, Dan 
Tarullo. He was appointed by President Obama. He was a prominent figure 
in drafting and implementing Dodd-Frank. He recently lamented:

       . . . to the extent that a growing systemic footprint 
     increases perceptions of at least some residual too-big-to-
     fail quality in such a firm--

  Meaning a megabank--

     notwithstanding the panoply of measures in Dodd-Frank and our 
     regulations, there may be funding advantages for the firm, 
     which reinforces the impulse to grow.

  In a little more blunt terms, our colleague, Senator Elizabeth 
Warren, who is also a figure in coming up with Dodd-Frank, said 
recently in our Banking Committee hearing with Chairman Bernanke:

       I'd like to go to the question about too-big-to-fail; that 
     we haven't gotten rid of it yet. And so now we have a double 
     problem, and that is that the big banks--big at the time that 
     they were bailed out the first time--have gotten bigger, and 
     at the same time that investors believe that too-big-to-fail 
     out there, that it's safer to put your money into the big 
     banks and not the little banks, in effect creating an 
     insurance policy for the big banks that the government is 
     creating this insurance policy--not there for the small 
     banks.

  In a similar way, we have those concerns echoed in the real world 
outside this body on the right as well.
  Recently, George Will said:

       By breaking up the biggest banks, conservatives will not be 
     putting asunder what the free market has joined together. 
     Government nurtured these behemoths by weaving an improvident 
     safety net and by practicing crony capitalism.

  Peggy Noonan, another well-known conservative, has said:

       If you are conservative you are skeptical of concentrated 
     power. You know the bullying and bossism it can lead to. . . 
     . Too big to fail is too big to continue. The megabanks have 
     too much power in Washington and too much weight within the 
     financial system.

  So I do think there is a real and growing consensus in this body, in 
Washington, and in the real world, as I have suggested by those 
observers' quotes, and I think we need to build on that consensus and 
act in a responsible way.
  Senator Brown and I have been doing that, first with joint letters to 
Chairman Bernanke and others, focusing on the need for significantly 
greater capital requirements for the biggest

[[Page 2065]]

banks. We think this would be the best and first way we should try to 
rein in too big to fail, to put more protection between megabank 
failure and the taxpayer, more incentive for the megabanks to perhaps 
diversify, perhaps break up, or at least correctly price their size and 
risk to the financial system.
  We are following up on that initial work that was reflected in 
letters and specific suggestions to Chairman Bernanke with legislation 
that is quite far along, and I know we will be talking about more both 
today and in the near future.
  With that, let me invite Senator Brown to round out his comments, and 
then I will have a few more words to say.
  The PRESIDING OFFICER. The Senator from Ohio.
  Mr. BROWN. I know Senator Alexander is waiting to speak. I thank 
Senator Vitter for his work on this issue. I remember the first 
discussions Senator Vitter and I had about this when he was asking some 
tough questions of a couple of regulators--it might have been the 
Secretary of the Treasury as well as a couple of other regulators--on 
capital standards and how important it was that, as he just mentioned, 
these banks have the kinds of capital standards, have the kinds of 
capital reserves that are so important in making sure these banks are 
healthy. Probably most of us in our lives have seen the movie ``It's a 
Wonderful Life,'' and we know what happens to a bank that is not 
capitalized; a small-town example of a bank that served the country in 
ways that community banks do. It is a very different story today, 
perhaps.
  But I think his insight into the importance of capital reserves and 
then continuing these discussions, we both came to the realization 
that, as he pointed out, people all across the political spectrum--some 
of my more Democratic colleagues, people such as George Will and 
others--have been very involved as business leaders and speaking out on 
issues that matter.
  So I thank Senator Vitter for his work. We will be working on 
legislation, and I am hopeful more of my colleagues see how important 
this issue is so we can continue to work together.
  I yield the floor.
  Mr. VITTER. Again, I thank Senator Brown for his partnership. Senator 
Brown, with those posters, made crystal clear the facts. The fact is 
that since the financial crisis, the megabanks have only continued to 
grow in size, in dominance, and in market share. In fact, that has 
accelerated significantly.
  Some folks will say: Oh, well, that was a preexisting trend. That is 
because of a number of factors.
  It is certainly true there are a number of factors at issue. But the 
growth has only accelerated since the crisis and Dodd-Frank. It has not 
let up. In addition, there have been several recent studies that 
actually quantify the fact that too big to fail is a market advantage, 
is, in essence, a taxpayer subsidy, as Elizabeth Warren suggested, for 
the megabanks.
  An FDIC study released in September says that. It says:

       The Dodd-Frank Wall Street Reform and Consumer Protection 
     Act of 2010 was explicitly intended to, in part, put an end 
     to the TBTF [too big to fail] de facto policy.

  But it concludes that:

       The largest banks do, in fact, pay less for comparable 
     deposits. Furthermore, we show that some of the difference in 
     the cost of funding cannot be attributed to either 
     differences in balance sheet risk or any non-risk related 
     factors. The remaining unexplained risk premium gap is on the 
     order of 45 bps [basis points]. Such a gap is consistent with 
     an economically significant ``too-big-to-fail'' . . . subsidy 
     paid to the largest banks.

  Another recent study and working paper is an IMF working paper. It 
simply attempted to quantify that taxpayer too-big-to-fail subsidy. 
According to that study, before that financial crisis, the subsidy:

       . . . was already sizable, 60 basis points. . . . It 
     increased to 80 basis points by the end [of] 2009.

  Then, most recently, Bloomberg has tried to put pen to paper and 
refine that calculation, and Bloomberg's calculation is $83 billion--an 
$83 billion subsidy of the five biggest U.S. banks, specifically 
because of artificially cheap rates created by the market believing 
they are too big to fail.
  I do not like huge size and dominance in market share, period. But 
certainly--certainly--we should not have government policy that is 
driving it, that is exacerbating it. It seems to me that should be a 
solid consensus left and right, Democrat and Republican.
  Senator Brown and I are following up on our previous work and 
drafting legislation. Of course, we are not ready to introduce that 
today. But it would fundamentally require significantly more capital 
for the megabanks and would distinguish between megabanks and other 
size banks; namely, community banks, midsized banks, and regional 
banks. The largest banks would have that significantly higher capital 
requirement.
  It would also try to walk regulators away from Basel III and 
institute new capital rules that do not rely on risk weights and are 
simple and easy to understand and are transparent and cannot be gamed 
the way we think Basel III can be manipulated and gamed.
  Requiring this would do one or both of two things. It would better 
ensure the taxpayer against bailouts and/or it would push the megabanks 
to restructure because they would be bearing more cost of that risk to 
the financial system.
  In addition, we are contemplating and discussing another section of 
this bill that would do something that I think is very important to do 
at the same time: create an easier--not a lax but a more appropriate 
regulatory framework for clearly smaller and less risky financial 
institutions such as community banks.
  Again, I thank Senator Brown for his partnership. I thank him for his 
words today. I look forward to continuing to work on this project, as I 
believe a true bipartisan consensus continues to grow on this issue.
  Mr. BROWN. Mr. President, I will speak briefly, and then I will 
certainly yield to Senator Alexander.
  I appreciate very much Senator Vitter's words and comments and 
insight. I wish to expand for 2 or 3 minutes on one thing he said about 
the subsidy that these largest six banks get.
  We can see again on this chart that 18 years ago these six banks' 
total assets were 18 percent; 18 years ago it was 18 percent of GDP. 
Today, through mergers and growth--and I would argue unfair competition 
in many cases--they are over 60 percent. But what Senator Vitter said, 
which I think is important to expand on a bit, is the subsidies these 
banks get--Bloomberg said it was about $83 billion a year in subsidies 
they get because of government action or inaction, frankly. It is 
interesting, that $83 billion, when we are talking about the sequester 
today is about $85 billion, is not relevant, except putting it in some 
context.
  But the reason they have this $83 billion subsidy, $85 billion 
subsidy or so--$83, $84, $85 billion--or they have the advantage, when 
they go in the capital markets, of getting the advantage of 50, 60, 70, 
80 basis points--and 80 basis points is eight-tenths of 1 percent in 
interest rate advantage--is because the capital markets believe their 
investments in these banks are not very risky because the markets 
believe these banks are too big to fail because they have the 
government backup for them.
  So if they have no risk, people are willing to lend money to them at 
lower interest rates. That is why the Huntington Bank in Columbus, OH, 
a large regional bank with about $50 billion in assets, or Key, a 
larger bank in Ohio--still, though, a regional bank--or banks in 
Coldwater, OH, or Sycamore, OH, or Third Federal in Cleveland--banks 
that maybe own only a few tens of millions or even up to $1 billion in 
assets--do not have that advantage. They pay higher interest rates when 
they borrow because the people who lend to them know they are not going 
to get bailed out if something bad happens.
  It is only these six largest banks that have that advantage. So 
because they can borrow money from the markets at a lower rate, they 
are, in effect, being subsidized because we have not fixed this too-
big-to-fail problem for the Nation's banks.

[[Page 2066]]

  So it is not a Senator or a conservative Republican or a progressive 
Democrat from Louisiana or Ohio making this case that they are getting 
this advantage; it is the capital markets that have decided, yes, these 
are too big to fail, so we are going to lend them money at lower rates 
than we would lend to the Huntington or Key or Third Federal or 
FirstMerit in Ohio.
  Fundamentally, that is the issue; that it is our actions or inactions 
that have given these banks a competitive edge that nobody through acts 
of government--whether you are a liberal or a conservative--should 
believe it should be part of our economic system and our financial 
system.
  I thank Senator Vitter and yield the floor.
  The PRESIDING OFFICER (Mr. Cowan). The Senator from Tennessee.
  (The remarks of Mr. Alexander pertaining to the introduction of S. 
421 are printed in today's Record under ``Statements on Introduced 
Bills and Joint Resolutions.'')
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Alaska.

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