Sens. Brown and Vitter on GAO: 'Too Big To Fail Is Not Dead and Gone At All'
Senators Sherrod Brown (D-Ohio) and David Vitter (R-La.) spoke with Bloomberg Television's Peter Cook about a Government Accountability Office report on bank subsidies, financial regulation, and proposed legislation impose a 15 percent capital requirement on the largest banks.
Both Senators Brown and Vitter stress that the GAO report bolsters case that "too big to fail" is still a problem. Vitter said: "I think this report is further ammunition that this is a continuing issue. Too big to fail is not dead and gone at all. It exists. The number goes up and down depending on the state of the economy, the state of risk, but it clearly exists."
Brown said: "I think it changes the debate in that it reinforces the case that Senator Vitter and I have been making that in times of crisis that investors will flock to the largest banks if they're in a - if they think too big to fail still exists in investors. So it doesn't matter what David and I think. What matters is the investors. The market thinks too big to fail is still with us. In times of bad economic crisis they're going to go in greater number to the larger banks, again with getting even bigger subsidies than they get now."
PETER COOK: I am joined by Senator Vitter and Senator Brown, who today will hold this hearing and release this long-awaited government accountability office report on too big to fail. And let me put the question right to you. I'll go to you, Senator Brown, first. This report I understand the testimony has now been posted on the website. Did the GAO conclude, as you all have suggested, that the biggest banks in this country are getting an implicit subsidy because they're deemed too big to fail?
SEN. SHERROD BROWN (D-OH): Yes. They're already getting a subsidy. We know that from a variety of different reports even prior to this, and different studies, 80, 90, 100 basis points, $80 billion subsidies probably wasted. And we also know is the banks get larger and larger, 25 percent larger just since the crisis. We also know that in times of crisis the advantage is even bigger to the big banks. And that's particularly alarming.
COOK: And my understanding is the GAO study may have something in here for everyone, Senator Vitter, that some of the testimony posted already suggests that while there may have been an advantage during the crisis maybe it's been reduced or eliminated, as the treasury suggested, since that time. Can your critics make the case, listen if there was a subsidy it's gone away?
SEN. DAVID VITTER (R-LA): Well first of all the megabank seems to be arguing there was never a subsidy, no subsidy. Now they're having to admit, yes, there was or is a subsidy, and they're arguing about the amount of it. The report says it may have gone down some with economic conditions and getting much better. The report also says if we go back to the same crisis conditions of 2008 the subsidy goes up. So I think clearly there is a too big to fail subsidy or cost of funding advantage. And I don't think it's been reduced significantly if you factor in the general economy.
COOK: Yes. Senator Brown, as you said, there have been a lot of studies looking at this issue. The IMF posted one. Some of the banking groups have posted their own showing there isn't a subsidy out there. How does this report change the debate in your view, if it does at all?
BROWN: Well I think it changes the debate in that it reinforces the case that Senator Vitter and I have been making that in times of crisis that investors will flock to the largest banks if they're in a - if they think too big to fail still exists in investors. So it doesn't matter what David and I think. What matters is the investors. The market thinks too big to fail is still with us. In times of bad economic crisis they're going to go in greater number to the larger banks, again with getting even bigger subsidies than they get now.
COOK: Will this report actually have a specific subsidy number?
VITTER: I don't think it will. But, Peter, you mentioned numerous reports. There have been numerous reports, about 16. Two funded by the megabanks said no big deal. All of the others said, yes there is a significant too big to fail subsidy. Some of those other reports quantify that like Bloomberg saying $87 billion, or excuse me, $83 billion.
COOK: Yes, a Bloomberg View number that was posted last year. Again, senator, we have the Treasury Department saying we think Dodd-Frank has addressed this. We agree there was a problem potentially, but there have been regulatory changes since then that addressed these issues. There's no need, for example, for the legislation you all are talking about this morning.
VITTER: Yes. Well you would expect that out of treasury. They're a big defender that everything has been solved. I think this report is further ammunition that this is a continuing issue. Too big to fail is not dead and gone at all. It exists. The number goes up and down depending on the state of the economy, the state of risk, but it clearly exists. And again you even have corporate treasurer types saying, yes this is something we look at in terms of where we put our money particularly in times of a bad economy.
COOK: What is this - what happens to your legislation in light of the (Senate)? Is there the political will nearly six years removed from the crisis to actually make further regulatory changes here?
BROWN: Well there's great support for this bill. And it's not a majority yet in the House. The Senate and Wall Street has a lot of influence here, but more and more of our colleagues understand these banks are not just too big to fail. They're too complex to regulate. They're too big or too complicated to manage. Look at the problems these largest banks have had. And ultimately the problem is that this just encourages risky behavior. If you're too big to fail there's incentives to engage in risky behavior. You make more money when you engage in risky behavior.
COOK: Well now why not let the regulatory changes that have already been (inaudible) -
BROWN: Well and I think they've helped. I don't argue that Dodd-Frank didn't help with these regulatory changes with Title II and other things. But I do argue they didn't help nearly enough. It's partly about size. It's partly about complexity and it's partly about fair play. And these banks go in the capital markets and they get a better interest rate than the Huntington, or Fifth Third or Key in my state or community banks.
VITTER: Peter, the other measurement that's significant is what Sherrod mentioned there is a clear trend toward much greater consolidation. And that was a preexisting trend, but it's been actually accelerated significantly since the crisis. And that is very dangerous in a lot of (inaudible).
COOK: So your message to Wall Street, Senator Brown, is this report bolsters your case and they should expect a new push for your legislation?
BROWN: Yes. And I think you're also going to see from the regulators, I mean after David and I introduced our bill you saw FDIC, you saw OCC and you saw the Fed, Feds enact higher capital standards, not as high as we where we're passive, we'll push higher capital standards, not as high as we think, but moved in that direction. I think this debate, shows like this and these discussions that David and I have been involved in with others help to contribute that debate to get this to be taken more seriously than it has been.
COOK: And the debate is going to continue on with this report in your hearing today. Thanks very much for joining us.
BROWN: Thank you.
COOK: A preview from Senator Brown, Senator Vitter, still an unusual political couple here in Washington, two senators, Republican and Democrat on this too big to fail issue.