If the first step in recovery is admitting that you have a problem, then Wall Street might need an intervention to wean itself from the too-big-to-fail problem. In the past two weeks we have seen the Wall Street spin machine working overtime. The megabanks and their supporters have issued forceful denials that too-big-to-fail exists and benefits these institutions.
The latest came in an issue brief from the nation’s largest financial firms and five of their water-carrying national trade associations denying that they benefit from taxpayer-funded subsidies. The Financial Services Forum, Financial Services Roundtable, Clearing House, Securities Industry and Financial Markets Association, and American Bankers Association say they question the methodology of a study that found that megabanks enjoy an $83 billion subsidy from their explicit taxpayer support.
The megabanks also cite a separate International Monetary Fund report that found that their funding advantage amounts to “only” 20 basis points. Of course, community bankers know that 20 basis points can make or break the bank on Main Street. But to Wall Street firms used to periodic taxpayer bailouts, that’s chump change.
Anyway, they said, the Dodd-Frank Act has fixed the problem. Yes, the very Dodd-Frank Act that, until yesterday, has been vilified by these same associations and too-big-to-fail banks as horrible, wrong, destructive, and in need of a complete repeal. After trillions of dollars in taxpayer support following the 2008-10 Wall Street financial crisis, they say, this one piece of legislation has solved everything, neglecting to mention that the size of the five largest banks have increased nearly 20 percent since the beginning of the financial crisis in 2007.
The response is reminiscent of a recent American Banker op-ed declaring that the too-big-to-fail problem is a myth. The op-ed from the Cato Institute’s Louise Bennetts similarly cited the Dodd-Frank response as reason not to downsize the megabanks into more manageable parts. In my own response to that op-ed, I wrote that the end of too-big-to-fail is great news for the financial markets and for community banks, but that someone needs to tell the Justice Department and the financial market about all this.
You see, U.S. Attorney General Eric Holder just last week told Congress that the size of the largest financial firms is inhibiting prosecutions because of fears of the subsequent impact on the financial system. So if too-big-to-fail and too-big-to-jail do not exist, the Justice Department can move ahead with its prosecutions.
But I don’t think Wall Street wants to hear that either. I’m sure they’ll come up with another excuse why they do not need to be held accountable. (And, really, isn’t accountability what this is all about?) In fact, I’d guess that their Wall Street spin machines are already on it.
Denial of accountability, it’s not pretty. Wall Street, we need to talk.