By Peter Schroeder - 03/09/13 02:48 PM EST
Attorney General Eric Holder’s surprising comments this week about difficulties prosecuting big banks has lit a new spark under the debate over large financial institutions that has lingered for years on Capitol Hill.
“It was remarkably candid,” said Camden Fine, president and CEO of the Independent Community Bankers Association. “Attorney General Holder’s comments didn’t just throw fuel on the fire, it threw an entire refinery on the fire.”
In response to a question from Sen. Charles Grassley (R-Iowa), Holder admitted that, effectively, the Justice Department could not fully pursue cases against large and influential financial institutions, out of concern over the collateral damage charges could impose on the broader economy.
“The size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy,” he said. “That is a function of the fact that some of these institutions have become too large."
To Wall Street skeptics, the message could not be clearer: The nation’s biggest banks have grown beyond control and must be broken up.
“Holder’s admission makes action – however improbable – imperative,” said Robert Borosage, co-director of the liberal Campaign for America’s Future. “A nation of laws and markets cannot abide huge private financial institutions that are accountable to neither.”
But some banking industry backers maintain that the “too big to fail” problem is anything but, and while blasting big banks might make good politics, there is little policy heft to it.
“Too big to fail, at least as it’s been an object of debate in recent months, is more an emotional than a rational issue,” said Wayne Abernathy, executive vice president for the American Bankers Association. “When you get into the practicalities, I don’t know any of the arguments that don’t begin to break down fairly quickly.”
Abernathy contends that Holder’s message was muddled at the end of the wide-ranging hearing, and that he was saying that it was better to pursue charges against individuals at financial firms rather than the firm as a whole.
While Holder did say the best deterrent would be to punish individuals involved in bad financial actions, he also added that bank size does have an “inhibiting influence ... on our ability to bring resolutions that I think would be more appropriate.”
Financial regulators, including the Treasury Department, have been adamant that new tools contained in the Dodd-Frank financial reform law bring an end to “too big to fail” by specifically prohibit future bailouts, and allowing regulators to step in and wind down a single ailing institution without damaging the entire financial system.
Despite those claims, skepticism has lingered on both sides of the aisle. Republicans, no fans of Dodd-Frank, have argued the law actually codifies the “too big to fail” phenomenon, by explicitly labeling the most critical financial institutions by deeming them “systemically significant.”
Dodd-Frank defenders dispute that notion, pointing out that financial institutions are doing all they can to avoid earning the title, which also comes with heightened regulatory requirements and oversight.
Nonetheless, the persistent notion that the nation’s biggest banks have gotten too big has refused to go away, and in fact has brought together some of the strangest pairings on Capitol Hill. Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) have cosponsored legislation capping bank size, despite the fact that the two rarely see eye to eye on anything else.
And Sen. Elizabeth Warren (D-Mass.), who attracted attention for a series of grilling regulators during Senate Banking Committee hearings, has received plaudits from Republicans on the panel, including Vitter and Sen. Mark Kirk (R-Ill.).
The issue may be bringing together lawmakers, but it is also dividing the banking industry. Community banks insist that the problem is real and persistent, while others in the industry dismiss it out of hand.
“The markets are telling us what size of institutions they want,” said Abernathy. “It is a distraction.”
“The system is out of whack,” said Fine. “At one time, we had a richly diversified banking system in this nation. Today, we have an oligarchy.”
Holder’s comments actually spilled over to another hearing the next day, when the Senate Banking Committee invited a handful of financial regulators to testify about efforts to crack down on money laundering by banks. There, members from both parties openly accused regulators of pursuing weak-knee’d settlements against major financial institutions, even when there was evidence of years of criminal conduct.
Sen. Jeff Merkley (D-Ore.) accused regulators of creating a “prosecution-free zone” for big banks.
Financial regulators insisted that they did all they could to punish banks and pursuing criminal charges fell to the Justice Department.
Some regulators maintain that even if “too big to fail” exists today, it may be eliminated once Dodd-Frank is fully implemented. Federal Reserve Governor Jerome Powell said as much Thursday.
“It's absolutely fundamental that we're all equal before the law. And that's why we're all committed to ending too big to fail,” he said. “The question in the end is, is it enough? And I think we'll know the answer to that in the relatively near future.”
There are few indications scrutiny of big banks is waning anytime soon. On Friday, the Senate Permanent Subcommittee on Investigations will unveil and discuss its report on the massive trading losses suffered by JPMorgan during its “London Whale” debacle, and likely will invite bank executives to testify.
That same day, Richard Fisher, president of the Federal Reserve Bank of Dallas and one of the more conservative central bank officials, will deliver remarks to the Conservative Political Action Conference (CPAC). Fisher has been an outspoken advocate of breaking up “too big to fail” banks, and his remarks at the political conference serve as an indication of how the topic has advanced from the weeds of wonkiness.