I try not to write about things I don’t know much about, and I’ll be the first to admit I understand little about high finance. But I do know this: If something is too big to fail, then it’s too big.
That’s a lesson the United States should have learned through the bailouts of the past few years. Unfortunately, it hasn’t. The banks that were too big to fail and had to be bailed out in 2008 have become even bigger now.
You remember the bailouts, of course. According to the website ProPublica, 927 recipients – financial institutions, auto companies, insurers and others – have received $606 billion from the taxpayers.
The good news is that the recipients have repaid $364 billion of that money. Counting what Uncle Sam has made off dividends, interest and other fees, taxpayers are down only $126 billion so far. Remove Fannie Mae, Freddie Mac, and General Motors from the picture, and the government would have made a profit.
The bank bailout led to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was supposed to solve the problem. Instead, its regulations make it easier for big banks to dominate the market. Bloomberg Businessweek reported last year that the top five banks – JP Morgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs – were twice as large as they were a decade earlier relative to the economy. According to the Independent Community Bankers of America, the top three banks now control more assets than 7,000 community banks across the country.
You know how people say they are going to "the bank"? Maybe someday we’ll say we’re going to The Bank. With their huge legal teams and unlimited resources, the big banks are more equipped than their smaller competitors to deal with the regulations the big banks’ own irresponsibility has caused. And because investors in the credit markets know the government will bail these big banks out, they offer them better rates, giving them a competitive advantage over community banks.
Sam Sicard, president and C.E.O. of First National Bank of Fort Smith, knows this firsthand. His bank – a larger community one – has seen its number of employees working on risk management and compliance issues increase from four to six with another one needed thanks to Dodd-Frank. It’s harder for his bank, which took no bailout money, to absorb that kind of cost than it would be for Citigroup, which took $45 billion (and then paid it all back plus $13.4 billion). While First National is big enough to handle the regulations, Sicard says they create a incentive for some smaller community banks to sell themselves to bigger institutions. Meanwhile, he says it’s harder for consumers to get loans in the wake of the financial industry’s near collapse.
It should be clear that the big banks’ ever-increasing power is a bad idea for everyone except maybe the big banks. The Senate, which can’t agree on anything, voted 99-0 in March on a nonbinding resolution calling for an end to favors given big banks because credit markets believe the government will bail them out.
The resolution’s sponsors, Senators Sherrod Brown, D-Ohio, and David Vitter, R-La., recently introduced the Terminating Bailouts for Taxpayer Fairness Act, which would require big banks to maintain 15 percent of their assets in capital – in other words, actual money that they can get to if they need it. Smaller banks would be required to maintain eight percent, while community banks would continue to maintain about 10 percent, as they do now.
The bill is meant to ensure bigger banks have liquid assets in case something goes wrong and to level the playing field with smaller banks.
The bill was filed only recently, and Arkansas’ senators, John Boozman and Mark Pryor, say they have not had enough time to study it in order to take a position. Boozman’s office told me he does support the concept and doesn’t want another bailout. Pryor’s office said he voted for an amendment during the debate on Dodd-Frank that would have required big banks to maintain more capital. The amendment failed.
The Independent Community Bankers of America supports the bill. Sicard supports the concept that big banks need to maintain more capital.
"We need to have incentives to increase, in my opinion, the number of banks to diversify that concentration and to limit that systemic risk on the economy," he told me. "In my mind, we’re doing the opposite. We actually are making it where it’s easier to operate the bigger you are."
And the bigger they are, the worse the consequences when they fail. What will it take to bail them out next time?
Steve Brawner is an independent journalist in Arkansas. His blog — Independent Arkansas — is linked at arkansasnews.com. His e-mail address is firstname.lastname@example.org.