Less than 24 hours after his swearing-in ceremony, U.S. Treasury Secretary Timothy Geithner surprised Camden R. Fine with an invitation to a one-on-one meeting about the financial crisis.
“I about fell out of my chair,” said Fine, president of the Independent Community Bankers of America, a Washington- based trade group with about 5,000 members. He was in a corner office overlooking the White House at the Treasury Department the next morning, telling Geithner that behemoths such as Citigroup Inc. and Bank of America Corp. were a menace, he said.
“They should be broken up and sold off,” Fine, 58, said he declared, as Geithner scribbled notes before thanking him for his time and ushering him out into the January chill.
The Treasury secretary didn’t follow through on Fine’s suggestion, just as he didn’t act on the advice of former Federal Reserve Chairman Paul Volcker, or Federal Deposit Insurance Corp. head Sheila Bair, or the dozens of economists and politicians who pressed the White House for measures that would limit the size or activities of U.S. banks.
One year after the demise of Lehman Brothers Holdings Inc. paralyzed the financial system, “mega-banks,” as Fine’s group calls them, are as interconnected and inscrutable as ever. The Obama administration’s plan for a regulatory overhaul wouldn’t force them to shrink or simplify their structure.
“We could have another Lehman Monday,” Niall Ferguson, author of the 2008 book “The Ascent of Money” and a professor of history at Harvard University in Cambridge, Mass., said in an interview. “The system is essentially unchanged, except that post-Lehman, the survivors have ‘too big to fail’ tattooed on their chests.”
Policy of containment
After the deepest recession since the 1930s — the world’s largest economy has shrunk 3.9 percent since the second quarter of last year — and more than $1.6 trillion in worldwide losses and writedowns by banks and insurers, President Barack Obama decided on a policy of containment rather than a structural transformation.
His proposal for revamping the way the U.S. monitors and controls banks doesn’t include taking apart institutions, supported by taxpayer loans, that have grown in scope and size since Lehman imploded. The biggest, Charlotte, N.C.-based Bank of America, had $2.25 trillion in assets as of June, 31 percent more than a year earlier, and about 12 percent of all U.S. deposits.
Instead, the Obama plan would label Bank of America, New York-based Citigroup and others as “systemically important.” It would subject them to capital and liquidity requirements and stricter oversight, relying on the same regulators who didn’t understand the consequences of a Lehman failure. And while companies could be dismantled if they got into trouble, they, their creditors and shareholders could also be bailed out with taxpayer money, according to the plan.
The chief architects, Geithner, 48, and National Economic Council director Lawrence Summers, 54, say they don’t think it would be practical to outlaw banks of a certain size or limit trading activities by deposit-taking banks, according to people familiar with their thinking. Geith ner and Summers declined to be interviewed.
“It’s a very difficult thing to say as a national policy goal that we’re going to limit the success of an American firm,” said Tony Fratto, 43, a spokesman for President George W. Bush and former Treasury Secretary Henry Paulson who now heads a Washington consulting firm.
Fed given oversight
The lesson of Sept. 15, 2008, is that limits may be necessary, according to Fine and other critics of the government’s regulatory proposals.
Lehman, the leading underwriter of mortgage-backed securities in 2008, was done in by too much borrowing and too many real estate investments that couldn’t be sold easily. When the property market turned sour and creditors wanted more collateral for loans or their money back, the investment bank had to fold.
It had $613 billion in debt and so many deals with so many companies that its bankruptcy set off a chain reaction the government and other Wall Street firms didn’t anticipate.
The president’s fix is to empower the Fed to put the brakes on banks, hedge funds, insurers or other financial firms whose crash could have a crippling domino effect. About 25 companies may qualify based on their assets and on factors such as funding relationships, Fed Chairman Ben Bernanke told the House Financial Services Committee on July 24.
“Special resolution authority would give the government the tools it needs to let firms fail in times of severe economic distress without destabilizing the entire financial system,” Deputy Treasury Secretary Neal Wolin said.
A Financial Services Oversight Council — made up of the heads of the FDIC, the Securities and Exchange Commission, the Commodity Futures Trading Commission and other agencies — would advise the Fed on potential threats.
The Treasury would be able to take over and wind down financial institutions with an authority modeled on powers held by the FDIC, which guarantees deposits and can close and sell failing banks under its jurisdiction. A Consumer Financial Protection Agency could restrict what it viewed as unsuitable products for Americans.
The existence of such a regulatory framework might have averted Lehman’s chaotic end — and the economic crisis that followed — because cheap money wouldn’t have been allowed to inflate a real estate bubble with questionable mortgages and mortgage derivatives, according to Austan Goolsbee, a member of the president’s Council of Economic Advisers.
“One of the fundamental principles of the plan is that if you’re menacing to the system, someone is going to regulate you very closely,” said Goolsbee, 40. “They’re going to be in there watching everything you do.”
