On March 20, 2013, more than two years after the Dodd-Frank financial reform legislation had become law, Federal Reserve chairman Ben Bernanke made it clear that the problem of too-big-to-fail banks had not been solved. “Too Big To Fail is not solved and gone,” he said in a press conference. “It’s still here.”[1] That is, providing an orderly liquidation process for bankrupt banks would be insufficient in keeping the U.S. economy free of vulnerability from even one of the biggest banks taking down the financial sector merely by going bankrupt. Congress should not have missed or minimized this point while working on the Dodd-Frank Act. The self-interested power of Wall Street in Washington and the need of campaign funds in Congress coalesced to dilute the law in spite of the detriment to the public good.
Suggesting that more legislation might be needed, Bernanke said, “Too Big To Fail was a major source of the crisis . . . and we will not have successfully responded to the crisis if we do not address that successfully.”[2] More would be needed to rid the U.S. economy of the threat of banks too big to fail. If holding more capital does not make the big banks safer, “we will have to take additional steps.” This, he said, “is important.” Yet somehow his voice was not adequately heard. Other voices were louder on Capitol Hill.
Meanwhile, Wall Street banks faced little downside. Because the mammoth size of big banks such as Citibank and Bank of America makes their failure a threat to the viability of the financial system and even the overall economy, such size is an advantage to the banks because the bankers can reasonably bet that the U.S. Government would have to bail them out even if they face financial ruin by having taken on too much risk as the economy sours. The sense of invincibility, plus lower borrowing costs, could lead big banks to not only stay big (or even get larger!), but also take bigger risks. Bankers at such banks may even feel free to commit fraud because U.S. Attorney General Eric Holder admitted in 2013 that large banks were nearly immune from government prosecution for crimes, given the risks to the economy from the failure of a convicted bank. What about the fraudulent bankers who sold "crap" while claiming the mortgage-based bonds were sturdy? In short, the risk taken on by a big bank could easily outstrip even the additional capital requirements in the Dodd-Frank Act.
Even apart from reckless banking at the top of the U.S. financial system, if a sizable market in the U.S., such as many of the housing markets, were to collapse all at once, as in 2007-2008, many banks would be hit. The additional reserves would not likely buttress individual banks from the domino effect that was evinced, albeit halted, in September 2008. I submit that more money in reserves would have stopped the cascading momentum. While higher reserves might safeguard a bank while others are intact, the claim seems doubtful at best when the undercurrent from the momentum of many banks being hit at once or in a row is strong. It is no accident, I contend, that the Obama campaign of 2008 accepted $1 million from Goldman Sachs.
1. Mark Gongloff, “Ben Bernanke: ‘I Agree With ElizabethWarren100 Percent’ On Too Big To Fail,” The Huffington Post, March 20, 2013.
2. Ibid.
2. Ibid.