Christopher Papagianis

Election has big banks in crosshairs

Christopher Papagianis
Jul 27, 2012 16:43 UTC

Sandy Weill’s comments this week are just the latest dustup in the debate about the existence of financial institutions that are labeled by regulators and market participants as being too big to fail. Despite the criticisms leveled at these firms, the largest banks have only gotten bigger over the last few years – and U.S. regulators still appear underprepared to resolve a future failure of a systemically important financial institution without setting off broader market panic.

Against this backdrop, new bank reform proposals are likely to get a lot more attention on Capitol Hill heading into the November election. Catalysts for this debate are sure to include the stories around JPMorgan’s London Whale trader and the brewing Libor scandal.

In a recent paper, academics Frederic Schweikhard and Zoe Tsesmelidakis examined the borrowing advantage that large financial institutions had from 2007 to 2010 as result of the market’s perception that their liabilities were backed by the federal government. Taxpayers subsidized TBTF banks to the tune of $130 billion, according to their findings. Citigroup was the single biggest beneficiary of government support, totaling $50 billion, but even well capitalized JPMorgan is estimated to have gained $10 billion in value from taxpayer guarantees.

Privately, the big banks think this is old news. They are quick to note that Congress addressed the issue of taxpayer bailouts back in 2010, when it passed the 2,000-page Dodd-Frank financial reform bill. Among its many directives, the law created a new systemic risk council of regulators and tasked it with designing and implementing a new “resolution regime” for big and complex financial institutions. The goal was to empower a new council to regulate and oversee the failure of future financial institutions and to guard against taxpayer guarantees or systemic consequences for the overall economy. While it’s certainly debatable whether Dodd-Frank achieved some progress in this area, credit rating agencies are still signaling to the market that the government would likely step in and protect bank creditors. As long as this is true, big banks continue to have a borrowing advantage. Even granting additional discretion to regulators solves nothing if economic vulnerabilities still make a bailout the less harmful choice when the next crisis arrives.

During the debates this fall, Mitt Romney will surely confront President Obama on the limitations of the financial reforms that his administration advanced, including the Dodd-Frank Act. The TBTF problem stands above all others in this area and presents an opportunity for a defining contrast before the election. A new choir of analysts – including those on the right that are steeped in both policy and political strategy – are also starting to argue that what looks like good policy on the big banks might also be good politics (see here and here and here).

Is Uncle Sam ever truly an investor?

Christopher Papagianis
May 2, 2012 19:48 UTC

Last week, a debate erupted about whether the government’s massive Troubled Asset Relief Program (TARP) made or lost taxpayers money. Assistant Secretary for Financial Stability Timothy Massad and his colleagues at the Treasury Department argue that TARP is going to end up costing a lot less than originally expected and may even end up turning a profit for taxpayers. Breakingviews Washington columnist Daniel Indiviglio scoffs at this, arguing that TARP “looks more like a loss of at least $230 billion.”

While the two sides are miles apart on their calculations (and it is important to examine why), their disagreement reflects a broader philosophical dilemma that deserves more attention. It concerns whether the U.S. government should be held to the same standards as private investors. Put another way, should policymakers adopt the same analytical approach that private-market participants use to evaluate or measure the prospective return on new investments? The answer has important consequences for defining the roles for the public sector and private enterprise – and particularly how the U.S. government accounts for all of its trillions in direct loan programs and loan guarantees.

Let’s start by using TARP as a case study. The calculation Treasury uses is simple: If a bank that received a TARP capital injection pays back the original amount, then the taxpayer broke even. If some interest or dividend income (i.e., on the government’s ownership stake from the injection) is generated, then the taxpayer likely made a profit on the investment.