Make Wall Street Choose: Go Small or Go Home

Senators Sherrod Brown (D, Ohio) and David Vitter (R, Louisiana) have a good op-ed in the NYT from yesterday: Make Wall Street Choose: Go Small or Go Home

Yesterday they introduced legislation that aims to end too big to fail and level the playing field for banks, big and small, by requiring sufficient capital reserves.  What a revolutionary notion…

I really hope this is genuinely good legislation that isn’t overly complex or loaded with loop holes.  Even if it is good legislation it’ll be tough to overcome Wall Street’s influence over congress.  I’m hopeful but not holding my breath.

Some excerpts:

Today, the nation’s four largest banks — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — are nearly $2 trillion larger than they were before the crisis, with a greater market share than ever. And the federal help continues — not as direct bailouts, but in the form of an implicit government guarantee. The market knows that the government won’t allow these institutions to fail.

It’s the ultimate insurance policy — one with no coverage limits or premiums.

These institutions can then borrow and lend money at a lower rate than regional banks, Main Street savings and loan institutions, and credit unions.

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Unfortunately, existing capital rules are insufficient to prevent another crisis and are either too complex to administer or too easy to manipulate.

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Our bill aims to end the corporate welfare enjoyed by Wall Street banks, by setting reasonable capital standards that would vary depending on the size and complexity of the institution.

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Our proposal also curtails the expansion of the government safety net for Wall Street by limiting taxpayer support to traditional banking operations. Under our legislation, financial institutions would be prohibited from transferring nonbank liabilities — like derivatives, repurchase agreements and securities lending — into federally supported banks that benefit from deposit insurance. This would ensure that the government safety net protects only the commercial bank, not the risky investment-banking arms of the megabanks. If the megabanks want to remain large and complex, that’s their choice — but Americans should not have to subsidize their risk-taking. If they fail, their executives and investors — not taxpayers — should pay the price.

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