Neel Kashkari, the new President of the Federal Reserve Bank of Minneapolis, recently publicly expressed a view that big banks should perhaps be broken up to prevent a recurrence of the taxpayer bailout of 2008. In reaction, Mr. Heltman interviewed six big bank advocates and two supporters of Mr. Kashkari’s position. The big bank advocates Mr. Heltman quoted are as follows:
1. GREG BAER, president of the Clearinghouse Association and former executive of JP Morgan Chase and Bank of America;
2. KAREN SHAW PETROU, managing partner at Federal Financial Analytics;
3. TONY FRATTO, partner at Hamilton Place Strategies and former Treasury official in the Bush Administration;
4. DAVID HIRSCHMANN, president and chief executive of the Center for Capital Market’s Competitiveness at the US Chamber of Commerce;
5. H. RODGIN COHEN, senior chairman at the Sullivan & Cromwell law firm; and
6. JOHN DEARIE, acting chief executive of the Financial Services Forum.
The following supporters of Mr. Kashkari’s position quoted in the article are:
1. MARCUS STANLEY, policy director for Americans for Financial Reform; and
2. DENNIS KELLEHER, president of the public advocacy group Better Markets.
Inasmuch as this reporting was published in the American Banker, perhaps it is not surprising that the 6 - 2 pro-big bank advocates vs. financial reform advocates ratio would be considered a fair fight. Nevertheless, a careful reading of the article demonstrates that Mssrs. Stanley and Kelleher more than held their own in the discussion. That is, they were given chances to respond to the stated pro-big bank positions until the very end of the article. However, at that point the reporter chose to end the article by quoting Mr. Fratto at length, giving him the last word with no opportunity for either Mr. Stanley or Mr. Kelleher to respond. The following comprise the final two paragraphs of the article:
Had the reporter permitted either Mr. Marcus or Mr. Kelleher to respond to Mr. Fratto, I imagine this is how they might have done so:
Mr. Fratto considers it unfair and problematic that the banking industry should require a formal cap on size inasmuch as no one is asking for similar caps on large firms engaged in aerospace, telecommunications or technology. But those businesses do not enjoy the benefit of either Federal Deposit Insurance or access to the Federal Reserve window in times of financial upheaval. Mr. Fratto must know that banks are vastly different from all other businesses in that respect.
Moreover, banks are far more heavily leveraged than the businesses of aerospace, telecommunications or technology. Banks have only 6-9% of their assets in the form of equity; the rest is all borrowed. Conversely, the other businesses mentioned are more likely to have at least 75% of their assets in equity with 25% or less in borrowed funds. Obviously Federally insured banks are very different from other businesses in this respect as well and, more fundamentally, banking and commerce have always been separate in America.
In Mr. Fratto’s second paragraph, he employs a colorful analogy, stating that after the Titanic hit the iceberg (it would have been wrong) to decide that there should be no more big boats. Obviously true. However, a better analogy was employed several years ago by John Reed, the former Citigroup CEO who, after many years of advocating for the repeal of Glass-Steagall, discovered how damaging that repeal was to the nation’s economy and changed his view entirely. Mr. Reed was quoted several years ago as follows: “I would compartmentalize the industry for the same reason you compartmentalize ships. If you have a leak, the leak doesn’t spread and sink the whole vessel.”
Additionally, here’s a quote from Mr. Reed’s recently released 2010 interview with the Financial Crisis Inquiry Commission, where he questioned the structure of combining retail and investment banking - basically, Citigroup’s entire model:
Finally, while Mssrs. Stanley and Kelleher have indeed provided excellent counter arguments to those of the big bank advocates, we at Better Banking Law have additional strong arguments which refute many of the assertions made by such big bank advocates and welcome your inquiries.