Appearing before the House Financial Services Committee on June 26, 2013, Richard W. Fisher, President of the Federal Reserve Bank of Dallas, invoked none other than Patrick Henry in support of his plea that Congress overhaul the Dodd-Frank Act ["DFA"] (which Fisher damned with the faint praise of being "well-intentioned") in order to correct the systemic threat posed by financial institutions that remain too big to fail.
. . . I want to recognize the common goal that we all share—ending "too big to fail" and taxpayer-funded bailouts. However, as iconic patriot Patrick Henry said in one of his greatest speeches, "Different men often see the same subject in different lights." I recognize and respect a difference of opinion on this critical issue of how to eliminate taxpayer-funded bailouts. But I trust that in the marketplace of ideas and after careful deliberation—such as this hearing—our democratic process will shine through and decisions will be made that are in the best interest of our country.
In the same speech, Patrick Henry also appealed to all perspectives to do right: "This is no time for ceremony," he said, for it "...is one of awful moment to this country."
The great patriot was, of course, addressing the injustice of perpetuating the rule of the British Crown. This morning, I want to address what I consider the injustice of perpetuating financial institutions that are so large, complex and opaque that they are seen as critical to the proper functioning of our economy and are therefore considered "too big to fail."
Fisher made his case: less than a dozen "megabanks" control two-thirds of the assets in the U.S. banking industry; each of these megabanks are capable of seriously damaging the national economy; any one of the megabanks, because of their size and "interconnectedness" with other large financial institutions, could threaten to bring down the economy. DFA's thousands of pages of statutes and regulations is "long on process and complexity but short on results" to the point that, after nearly three years, "very little positive reform has been implemented."
He did not stop at pointing out the problem. Instead, Fisher offered some common sense reforms:
- Limit deposit insurance and access to the Fed's discount window to traditional commercial bank deposits, lending intermediation and payment system functions.
- Enhance creditor discipline by requiring customers, creditors and counterparties of all non-bank affiliates and the parent holding companies to acknowledge, in writing, that there are no government guarantees backstopping their investment.
- Restructure financial holding companies so that each of their subsidiaries is subject to a speedy bankruptcy process.
- Resize banking subsidiaries of holding companies so that their complexity and footprint make them "too small to save."
Fisher argued, "No bank would remain so significant and interconnected to the financial system that its demise would spell the unraveling of the financial system. In these new circumstances, all banks that warranted closure would fail the old fashioned way; they would be gone, with their stockholders' equity written down to zero, their bondholders saddled with haircuts and their insured depositors left unharmed."
Turning again to Patrick Henry, Fisher called upon Congress to act while action could still avert disaster: "In my introduction, I referred to Patrick Henry. In the speech I quoted, he went on to say, 'It is natural to man to indulge in the illusions of hope. We are apt to shut our eyes against a painful truth, and listen to the song of that siren till she transforms us.' I implore the members of this important committee and the Congress to not succumb merely to the illusion of hope. Don't listen to the siren song of the megabanks and their lobbyists. Take action to deal with the unfair advantages that these institutions enjoy. They will spend millions of dollars to try to perpetuate their brand of crony capitalism. Resisting their entreaties is the right thing to do. Leveling the playing field is a just cause for 99.8 percent of American banks and for all Americans."
As we prepare to observe the 237th anniversary of our independence from the British Crown, what do you think about Fisher's remarks? Would his proposed reforms help level the playing field? Let us know in the comments.
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