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March 8, 2018 By Richard Bowen

Robin Hood and the Too Big To Fail! Is He Too Late to Help on the Crapo Bill?

Source: AndScene – Flickr.com, CC BY-SA 2.0

Legend has it that Robin Hood, a former archer for Richard the Lionheart, took on the Sherriff of Nottingham, whose autocracy and exorbitant taxation of the town’s citizens were crippling the economy. Robin Hood went on to gain fame for fighting injustices imposed by the rich on the poor. However, in this present scenario – there are too few Robin Hoods and many Sheriffs.

What should be all over the front pages of every major paper in this country and loudly discussed is Senator Mike Crapo (R-ID) Chairman of the Senate Banking Committee’s proposal of a major rollback of the 2010 Dodd-Frank Act, The Economic Growth, Regulatory Relief, and Consumer Protection Act.

Photo: United States Senate – Official Photo of Mike Crapo from Senate Website, Public Domain

This move would come in the midst of the 10th anniversary of the greatest Wall Street collapse and economic catastrophe since the Great Depression. Wall Street has already whittled down the 2010 Dodd-Frank financial reform legislation by a thousand cuts. 

Our present administration has  encouraged  changes in regulatory processes which, to some degree, held larger banks in check; and so the Senate plans to vote this week on the bill which supposedly will allow hundreds of smaller banks to avoid some of the stricter federal rules ushered in as part of the 2010 Dodd-Frank law, while leaving the toughened regulatory regime largely intact for the nation’s biggest banks. 

And by the way, change to Dodd-Frank is needed. Dodd-Frank originally was passed to largely reign in egregious behavior, primarily by the big banks leading up to the 2008 financial crisis, but unfortunately imposed heavy burdens on community banks, especially in regards to compliance. Some assert that the very rule which was formulated to curb the “too big to fail,” created a system of “too small to succeed.”

More than a few experts point an accusing finger at Dodd-Frank. A Harvard University working paper released in early 2015, argues Dodd-Frank is the culprit contributing to fewer community banks.

However, the changes may open the door to even more fraud and actions which may again undermine our economy. There appear to be many provisions in the bill which are being described as “tokens” designed to give cover to a bill which is  largely made up of financial sector “giveaways.”

One of the most egregious “give always” is a significant shift in which banks are considered “systemically important” and thus subjected to greater oversight and tighter rules. Currently, banks over $50 billion in assets fall into that category. The proposal would move the threshold to $250 billion—a 500 percent jump that would erase the mandate of enhanced scrutiny for 25 of the 38 largest banks in the country. 

According to Pam Martens and Russ Martens, “The situation with the anticipated vote this week in the Senate is so critical that Senator Elizabeth Warren has released a video about the threat on YouTube.” In the video, she says that the proposed legislation “takes about 25 of the 40 largest banks in this country and just moves them off the special watch list and treats them like they were tiny little community banks that just couldn’t do any harm to the economy.”

Senator Warren adds: “Those exact same 25 banks that are being taken off the watch list got about $50 billion in taxpayer bailout money during the last crash.”

The bill also presently contains language changing the definition of a major component of calculated capital called the supplementary leverage ratio, exempting certain deposits from “custodial banks.” As written, the measure would have assisted just two U.S. banks, State Street and Bank of New York Mellon.

So it shouldn’t surprise anyone that the large banks are up in arms that they presently can’t take advantage of this exemption, as written, and they are pushing to expand the exemption in a way that analysts and former government regulators say would undermine a central pillar of the Dodd-Frank law.

John Gerspach, Citi’s Chief Financial Officer, said: “We obviously don’t think that is fair, so we would like to see that be altered.” Thus Citigroup, along with JPMorgan, are actively lobbying to have language also allowing the large banks to take advantage of this lesser-minimum-capital calculation which, by some estimates, could reduce their required capital by up to one-third. 

Yet, as the Martens remind us, “Let’s not forget that Citigroup was the poster child of the 2008 financial crash. It had loaded up on dodgy off-balance sheet “assets,” lied about its subprime debt exposure, and then received the largest taxpayer bailout in U.S. history. In December 2014 Congress allowed Citigroup to take a chainsaw to Dodd-Frank.” 

“Even though this fight hasn’t garnered as much attention, its impact is significant,” said Isaac Boltansky, policy research director for Compass Point, an investment bank. “It signals the next round in the Dodd-Frank wars.” 

The Act could possibly alleviate some of the cumbersome and inordinate costs of compliance which has crippled smaller independent community banks, driving many of them to have to sell out to larger competitors.

On first blush, it could be a much-needed assist to community banks, yet it is generating a great deal of controversy on many levels. While supported by the Independent Bankers Association, Community Bankers Association and surprisingly many Democrats, many others are expressing grave concern.

“This bill lets larger banks get even bigger by acquiring smaller banks without triggering any increased regulatory scrutiny,” Marcus Stanley, policy director at Americans for Financial Reform (AFP), told The Financial Times.  AFP also notes that the bill allows the rolling back of mortgage-lending protections and weakens the Volcker Rule—part of Dodd-Frank that prevents banks from using their own money to trade.

Aaron Klein, a fellow at the Brookings Institution who helped write Dodd-Frank as chief economist for the Senate Banking Committee, said changes to the leverage ratio could create a “slippery slope” in which banks start arguing for more exemptions, effectively blunting the rule’s power.

Pointing out that many banks below the proposed minimum size level of $250 billion in assets had to be bailed out by the U.S. government in the last crisis, Paul Volcker, former Federal Reserve Chairman and author of the Volker Rule, suggested a $100 billion threshold, or lower, would be more reasonable.

“I am pleased that the Senate Banking Committee has forged ahead with meaningful bipartisan financial reform to ease the unnecessary strain on small banks,” he said in a letter addressed to Senator Sherrod Brown. However, “an increase to $250 billion would go too far,” Volcker added, referring to the bill’s most controversial provision.

The possibility of a “carve out,” as this broadening of the ”custodial bank” exemption is being called, is making many of the supporters of the bill very nervous. “This is not a tweak,” said Sheila C. Bair, former chairwoman of the Federal Deposit Insurance Corporation. “This could be a very significant weakening of bank capital rules.”

2008 should have taught us some lessons. It appears it did not.

Not only have we not held the perpetrators of the 2008 debacle accountable, we punished the smaller banks who supported their customers and have been steadily encouraging the too big to fail to have another shot at causing another financial debacle. If there were ever a time when we needed Robin Hood, it is now.

Related Posts

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  • History Repeats Itself… Congress Tries to Reinstate Controls on the TBTF Banks

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Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.

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Playing for High Stakes: The Principles and Practice of Ethical Leadership

Dark Citi: The Story of a Whistleblower

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Now an ethical leadership speaker, Richard Bowen was Citigroup's Business Chief Underwriter during the housing bubble.

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