Banks and the Government

Here is a quick quiz. First, you need a bit of background. Beginning in 2008, the federal government poured hundreds of billions of dollars into the American banking system. Major banks like Citibank and Bank of America were rescued by the feds with massive infusions of taxpayer cash. We were told at the time that these banks were just "too big to fail". Washington had seen the chaos that the failure of Lehman Brothers had caused in the fall of 2008, and no one wanted to take the risk of the world financial system collapsing if one of these super-sized banks went down.

In the years after the bailout, the Democrats and president Obama pushed for and passed the so-called Dodd Frank legislation which, we were told, would impose needed regulations on the banks so as to end the era of too big to fail.

So here is the quiz: Now that the Dodd Frank legislation has been in place for two years, which of the following is correct?

a) The ten largest banking institutions in the USA comprise a smaller portion of the total banking industry than was the case in 2008.
b) The ten largest banking institutions in the USA comprise a larger portion of the total banking industry than was the case in 2008.

The answer, of course, is "b". In other words "too big to fail" has been changed by Obama into "even bigger so we can't even think about failure."

One may wonder what the point of Dodd Frank was if it did nothing to deal with the problem which is the supposed cause of the legislation. The answer, of course, lies in what Dodd Frank does. It imposes substantial regulatory burdens on all banks. The regulatory burden is now so large, that many smaller banks can no longer afford to compete with the big ones. The cost of certain types of banking activities has been raised to the point that only those banks that undertake a multitude of that sort of activity can spread the cost enough to be able to afford the transactions. Let me explain: A big bank like Bank of America has to spend five million dollars to comply with the new regulations imposed by Dodd Frank in order to continue to deal with credit default swaps. Since Bank of America does such transactions many times each day, the cost per transaction is not that great. A small bank, on the other hand, which would do only about 50 of these transactions per year, can no longer afford to compete. After all, that small bank would now be forced to spend $100,000 per transaction just to compete. This forces the small banks out of the market and insulates the big banks from competition. Of course, this helps the big banks get bigger and the lack of competition allows the big banks to charge more for such transactions.

Dodd Frank also puts all sorts of regulations on banks which have nothing to do with banking. The best example of this are the required diversity offices in all banks that deal with the federal government. The feds will no longer deal with a bank unless it has the requisite diversity in its workforce and an office to make sure that the diversity persists. This is just another burden on the system to achieve social goals of the liberals.

Another problem of the new Obama regulatory paradigm for banks is that favoritism or crony capitalism has snuck its way into the system. With so much power for government regulators, many banks have begun to hire employees to deal with the regulators not on the basis of what they know but of who they know. The banking system is being weakened by the Obamacrats awarding favors to their cronies.

None of this has had the effect of ending too big to fail. Indeed, Obama and the Obamacrats did not push for even a single measure that would have that result. The Obamacrat goal was not protecting the American banking system so much as it was taking over American banks.

Once Obama has been defeated and his minions purged from the levers of power, it will be time for the banking system to be put right. The key here is to inject competition back into the system and to allow small and startup banks to grow so that they can compete. We also need to get rid of the giant banks that have the power to threaten the very foundation of the American economy. A simple plan to do this would run as follows:

1. Repeal Dodd Frank.
2. Reimpose the old limitation between commercial banking and investment banking. The commercial banking system ought to be safe from damage due to the overly risky trading strategies of the investment bankers.
3. Revise the antitrust laws so that they define "monopolization" as acquiring more than 7% of the total deposits in any one of the Federal Reserve Bank's twelve districts. The statute should have an effective date of January of 2014. That would give the banks that are already too large a chance to split into two or three pieces as necessary to comply with the statute.
4. Clarify the statutes regarding misuse of customer funds. There should never be another instance like MF Global where a bank/brokerage house takes funds from its clients accounts to invest for its own purposes without swift criminal prosecution of the perpetrators. (Of course, one wonders whether or not there would have been prosecutions in the MF Global case but for the presence of Corzine with all of his Obamacrat connections.)