Two written interviews with Kaufman from the past 48 hours.
The Goldman Sachs hearings have provided palpable momentum to a charge led by Senators Kaufman and Brown to limit the leverage, size and scope of the too-big-to-fail banks.
And as a result, their earnings. To wit, there was a report out yesterday highlighting that current derivatives legislation could cost Goldman Sachs us much as 41% of their profits. For FY '10 that would be $4 billion. Ouch.
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From Ezra Klein at the Washington Post
Tell me about the Safe Banking Act.
It's a way to bring down the size of banks and deal with too-big-to-fail. And it's just one piece of the puzzle. There'll be a bill that does a very hard Volcker rule. And I'd like to return to Glass-Steagall. But even if you did break these banks apart, you need to place caps on their size. And that's the Safe Banking Act. A bank can only have insured deposits as big as 10 percent of GDP. A bank holding company or thrift holding company's nondeposit liabilities -- including off-balance-sheet ones -- can only be 2 percent of GDP. And any nonbank financial institution's liabilities are limited to 3 percent of GDP.
Why do we need this? There's already the Dodd bill and the Frank bill. Both of them give regulators new tools and information to get into the financial system and detect and, hopefully, resolve problems. Why take this next big step and break the institutions up?
Regulators already have the power to do so many things. The 1970 Bank Holding Act, for instance, gave the Federal Reserve the power to terminate a bank's ability to engage in nonbank activity if the activities were creating undue concentration. They could break up a bank if it posed a threat. But the regulators didn't do it. Now, you can say we have new regulators. But you need to be thinking further forward to a future president who will implement another self-regulation strategy and let the regulators walk off the field.
In 1929, we had a massive depression. After it was over, Congress came in and put Glass-Steagall into place and other rules and that lasted for 60 years. Then it began eroding in the late 90s and we got ourselves in trouble. We need to pass something so a similar crisis doesn't happen for another 50 years. As they say, good fences make good neighbors. The Senate should put the fences up. And then the regulators can come in and do their work. But they need good rules.
In your speech introducing the legislation, you said that regulations have a “half-life.” Explain that.
The half-life is until Wall Street finds a way to get around it or we get regulators who don't want to enforce regulations. The people at these firms are very smart and it's just a matter of time till they find a way to work around regulations. Ezra, every person I talk to who is removed from the banking industry believes the number one thing we need to do is end too-big-to-fail. And another problem is that being too-big-to-fail means you also get better rates than smaller banks because the market knows the government will bail you out. So that gives them a competitive advantage. And that makes them even bigger!
Some say you're going too far. Yes, Wall Street got out of control in recent years. But it generally does good work, performing important functions for the economy. Break up the banks and you'll choke off legitimate innovation and efficiencies, which will hurt the economy.
So far as the advantages of size go, there's a wonderful report by the executive director of the Bank of England who says there are no economies of scale after you've got $100 billion in assets. Now we have banks with $2 trillion in assets. And we've complicated this by getting JP Morgan Chase to buy Washington Mutual and getting Wells Fargo to buy Wachovia. So now this problem is worse than it was.
Another criticism is that 'too-big-to-fail' is the wrong way to think about this problem. It's really too-interconnected-to-fail, or too-exposed-to-derivatives-to-fail.
But the point is, they'd be smaller. If you bring down Bank of America, it'll take a long time to do. These banks have wholesaling, they borrow short-term and lend long-term, they operate in countries around the world. Smaller is better when you're trying to wind things down. Number two, when you have these massive banks, their portfolios all look identical. But that increases the systemic risk. About 85 percent of the derivatives were among five banks! That wasn't how banks looked in Wilmington. Let's get a banking system that looks like how most banks in this country operate.
How, specifically, would your bill work? Let's take Bank of America, which is well over your limits. Your legislation passes. What happens to B of A? Who carries it out?
What they have to do is bring their size down over a period of time. I actually trust regulators. They just need the rules. If they don't do it in three years, the Federal Reserve requires them to raise capital or sell assets.
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From Tim Fernholz at American Prospect
You and Sen. Sherrod Brown have proposed an amendment that would cap the size of the largest banks and, in effect, break them up. How do you sell this to people who are leery of what seems like a radical move?
First off, we've broken up things before. We broke up Standard Oil, we broke up AT&T, we broke up the accountants, too. A lot of the changes we're talking about, the mergers, are just new. When you look at the reasons these banks are so big -- and you know how big they are -- remember the reason JP Morgan Chase is so big is because they bought Washington Mutual when it was in trouble, and Wells Fargo bought Wachovia, and Bank of America bought Merrill Lynch [during the crisis]. It is pretty straightforward, now that these are back on their feet, that it makes sense to break them up.
The real thing that we have to do here is make sure we don't have institutions that are too big to fail.
These things are massive, some of them are over $2 trillion in assets, [and] trying to resolve them [if they fail] will be very, very difficult.
If your amendment doesn't pass and this bill doesn't break up the banks, is the legislation still worth passing, or should progressives say, scrap this and try again next year?
Look, this is going to be a process. We have to pass something. I think it would be good to do what [Sens.] Maria Cantwell and John McCain want to do: Reinstitute Glass-Steagall for these banks [to separate commercial banking from riskier investment banks]. I've been doing this for a long time. At the end of the road, you go to the floor of the Senate, you either vote yes or no. … We are a long way from having a bill or even knowing what the ultimate bill will look like.
What else is missing in the bill that you hope to see added?
My No. 1 priority would be to reinstitute Glass-Steagall and pass the Brown-Kaufman amendment. [There is an] amendment by Sens. Merkley and Levin that I support that would really make sure, at the very minimum, that the bill includes a real Volcker rule, which would say that banks couldn't be involved in proprietary trading.
One of your staff was telling me the other day that when you first started to revisit this issue, you were surprised by what had changed since you were at business school in the '60s. What surprised you most?
First off, the idea that you would have commercial banks, investment banks, and insurance companies all in the same roof. Glass-Steagall was an article of faith when I was in business school: Commercial banks were created to be low-risk organizations; that's why we have them FDIC-insured. To allow them to get into investment banking, which is a high-risk, high-return business, just has never made any sense to me. … We went through a period where the idea was prominent that "we don't need regulators, this is free enterprise." As Alan Greenspan said afterward, he was dismayed because self-regulation didn't work, which I never thought would work.
What's your take on Republican opposition to this bill over the last few months?
I've got a rule that I got from the guy I worked for, Vice President Biden, that I don't spend a lot of time trying to figure out what other people's motivations are. That's one of the things that's really destructive to the process.
I think they should be helpful, just coming out of their own political interest. There's never been a strong political affection for Wall Street in the parts of the map that are red. Where were the populists from? Sen. Johnny Isakson of Georgia, who I really like a lot, he and John Cornyn of Texas, and Sen. Shelby of Alabama came out a few weeks ago and said we really should look at breaking up the banks. The kind of alliances that went on with the recovery act and health-care reform aren't really operational for this issue.
Just looking at the Republican states, see what the folks in those states feel about Wall Street banks. Clearly there's a Republican Party position, but I think they're in for a big surprise when a whole bunch of folks who are on the more progressive side of the spectrum come together with people on the very conservative part of the spectrum and all agree we've got to stop "too big to fail" from happening again. What it's going to take is going after the Wall Street banks.