Too Big 2.0 Fail

June 26, 2013

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Three top banking officials told Congress today that America’s biggest banks are still seen as too big to fail. Appearing before the House Financial Services Committee, Richard Fisher, president of the Dallas Fed; Thomas Hoenig, the FDIC’s  vice chairman, and Jeffrey Lacker, president of the Richmond Fed, all argued that big US banks benefit from a market subsidy based on the perception they’d be rescued by the government in a crisis.

The too big to fail issue was supposed to be solved by the 2010 Dodd-Frank legislation — indeed, President Obama has taken a “never again” stance on bank bailouts. Still, there’s been a mini-chorus of late that isn’t quite so sure. Last week Philadelphia Fed president Charles Plosser said the Dodd-Frank rules come up short (his solution: more bank capital). Sheila Bair, the former head of the FDIC, was a bit more positive in her congressional testimony today, suggesting that regulators need to simply finish the rules. Ben Bernanke said in May that too big to fail “must end,” but that “we’re moving in the right direction.”

Both Lloyd Blankfein and Jamie Dimon have suggested their banks can already be wound down without a cost to taxpayers. In apparent response to a Bloomberg report that found big banks enjoy a taxpayer subsidy worth $83 billion a year, Goldman Sachs put out its own report and found that a slight pre-crisis funding advantage for big banks has turned into a funding disadvantage. Harvard Law School’s Mark Roe, however, points out that Goldman’s study doesn’t look at banks’ short-term debt.

Meanwhile, the FDIC’s “complexity czar” has his own problem with America’s big banks: they don’t have workable plans to wind themselves down in bankruptcy. Bloomberg reports that the FDIC’s Jim Wigand isn’t happy with the first drafts of the “living wills” filed by the 11 biggest U.S. banks. Big banks have until October to submit new living will drafts. If they don’t get their affairs in order, banking consultant Karen Shaw Petrou tells Bloomberg, one or more big banks will “likely to be required to restructure.” This is not a new threat: in February the FT reported that not only might banks be required to hold more capital for having shoddy living wills — they could even be broken up. — Ryan McCarthy

On to today’s links:

Startups
“In 30 days, my startup will be be dead” – MyStartupHas30DaysToLive

EU Mess
Debt-laden Italy could lose up to $40 billion – thanks to pre-Euro derivatives contracts – FT
The Greek bailout could mean a windfall for execs at failed banks – NYT

Remuneration
In the last 30 years, CEO pay has increased 875% – Economic Policy Institute
“The “say on pay” experiment is a bust” – Jesse Eisinger

Mean Recovery
The below average US recovery, in 8 charts – WSJ

Right On
“Let them eat soccer”: A blistering op-ed on Brazil’s current problems – Elio Gaspari
“I supported Brazil’s World Cup bid, but the expense is now crippling us” – Romario

Terse Rebuttals
The price of milk and bread is skyrocketing! Oh, wait, no it’s not – Paul Krugman

Good Questions
“Is David Gregory a journalist?” – Frank Rich

Primary Sources
“DOMA writes inequality into the entire United States Code.” – Justice Kennedy’s full opinion
First quarter GDP growth revised down to 1.8% – BEA

New Normal
Why are so many college graduates driving taxis? – Peter Orszag

China
Chinese banks, maybe not so risky after all – Scott Krisiloff

RIP
Legendary oil trader and former fugitive Marc Rich has died – Reuters

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