<div dir="ltr">
<div class="">
<div class="">
<a href="http://www.nytimes.com/"><img src="http://graphics8.nytimes.com/images/misc/nytlogo153x23.gif" alt="The New York Times" hspace="0" vspace="0" align="left" border="0"></a>
</div>
<div class="">
</div>
</div>
<br clear="all"><hr size="1" align="left">
<div class="">April 27, 2013</div>
<h1>Trying to Slam the Bailout Door</h1>
<h6 class="">By
<span>
<a href="http://topics.nytimes.com/top/reference/timestopics/people/m/gretchen_morgenson/index.html" rel="author" title="More Articles by GRETCHEN MORGENSON"><span>GRETCHEN MORGENSON</span></a></span></h6>
<div id="articleBody">
<p>
THERE’S a lot to like, if you’re a taxpayer, in the new bipartisan bill
from two concerned senators hoping to end the peril of big bank
bailouts. But if you’re a large and powerful financial institution
that’s too big to fail, you won’t like this bill one bit. </p>
<p>
The legislation, called the Terminating Bailouts for Taxpayer Fairness Act, emerged last Wednesday; its co-sponsors are <a title="Press release about the bill from Senator Brown’s Web site." href="http://www.brown.senate.gov/newsroom/press/release/brown-vitter-unveil-legislation-that-would-end-too-big-to-fail-policies">Sherrod Brown</a>, an Ohio Democrat, and <a title="Press release from Senator Vitter’s Web site." href="http://www.vitter.senate.gov/newsroom/press/vitter-brown-unveil-legislation-that-would-end-too-big-to-fail-policies">David Vitter</a>,
a Louisiana Republican. It is a smart, simple and tough piece of work
that would protect taxpayers from costly rescues in the future. </p>
<p>
This means that the bill will come under fierce attack from the big
banks that almost wrecked our economy and stand to lose the most if it
becomes law. </p>
<p>
For starters, the bill would create an entirely new, transparent and
ungameable set of capital rules for the nation’s banks — in other words,
a meaningful rainy-day fund. Enormous institutions, like JPMorgan Chase
and Citibank, would have to hold common stockholder equity of at least
15 percent of their consolidated assets to protect against large losses.
That’s almost double the 8 percent of risk-weighted assets required
under the capital rules established by Basel III, the latest version of
the byzantine international system created by regulators and central
bankers. </p>
<p>
This change, by itself, would eliminate a raft of problems posed by the
risk-weighted Basel approach. Under those rules, banks must hold lesser
or greater amounts of capital against assets, depending on the supposed
risks they pose. For example, holdings of United States government
securities are considered low-risk and require no capital to be held
against them. Securities or loans that are riskier require more of a
buffer against loss. </p>
<p>
There are many problems with this arrangement. First, the risk
assessments on various types of assets rely heavily on ratings agency
grades. In the housing boom, toxic <a href="http://topics.nytimes.com/your-money/loans/mortgages/index.html?inline=nyt-classifier" title="More articles about mortgages." class="">mortgage</a>
securities carrying triple-A ratings were considered low-risk, too. As
such, they didn’t require hefty capital set-asides. </p>
<p>
We all know how disastrous that was. So chalk up this plus for
Brown-Vitter: Eliminating risk-weights as part of a capital assessment
means less reliance on unreliable ratings. </p>
<p>
Risk-weighted asset calculations also give bankers a lot of freedom to
understate the perils in their institutions’ holdings. </p>
<p>
The bill prevents another type of fudging by requiring off-balance-sheet
assets and liabilities and derivatives positions to be included in a
bank’s consolidated assets. In addition, the capital cushion that a bank
would hold under the bill is liquid and can absorb losses easily. This
capital measure would be more transparent than the current system and
could not be manipulated. </p>
<p>
In a truly courageous move, Brown-Vitter would require United States
financial regulators to abandon Basel III. An earlier version of Basel
did nothing to prevent the financial crisis and encouraged banks to
binge on leverage. </p>
<p>
Taxpayers would not be the only beneficiaries in the Brown-Vitter bill.
Community banks, which weren’t responsible for bringing the nation’s
economy to the brink, would be operating on a more level playing field
with the jumbo banks. These large institutions have lower financing
costs than community banks because the market understands that
regulators will never let them fail. </p>
<p>
“This bill will inject more market discipline on the financial services
industry,” Mr. Brown said in an interview on Thursday. “The megabanks
have a choice to make: they can increase their capital or bring down
their size.” </p>
<p>
Brown-Vitter has other attributes as well. It would bar bank regulators
from giving nondepository institutions access to Federal Reserve lending
programs. And it would make it harder for bank holding companies to
move assets or liabilities from nonbanking affiliates, like derivatives
bets held at a brokerage unit, to the protective umbrella of the parent
company that might be rescued by taxpayers in a financial disaster.
</p>
<p>
<a title="Biographical information." href="http://fdic.gov/about/learn/board/hoenig/bio.html">Thomas M. Hoenig,</a>
the vice chairman of the Federal Deposit Insurance Corporation,
supports the bill. “It’s finally taking the discussion in the right
direction toward improving the stability of banks and the financial
system more broadly,” Mr. Hoenig said in an interview on Friday.
Brown-Vitter would also put the United States in a leadership position
on financial soundness, he added, which other countries could emulate.
</p>
<p>
Both Mr. Brown and Mr. Vitter acknowledge, of course, that they will
have to wage war with the financial services machine to move the bill
forward. And last week, right on cue, the big-bank protection team went
to work, warning of economic mayhem that would result if Brown-Vitter
became law. </p>
<p>
Standard & Poor’s, for example, published a report forecasting a
possible credit crisis resulting from passage of the bill, “further
reducing economic growth prospects.” With more money in a capital
cushion, there would be less money to lend, the banks say. </p>
<p>
And Tony Fratto, a strategist who represents the large banks, called the
bill’s capital requirements “a penalty rate.” He added in an e-mail:
“This bill is being introduced in the context of significant
improvements to the safety of the financial sector. By historical and
international standards, large U.S. banks are very safe.” </p>
<p>
Mr. Brown and Mr. Vitter are also up against the Obama administration,
which continues to argue, in lock step with the banks, that the
Dodd-Frank legislation has already eliminated the threat of big and
risky enterprises. </p>
<p>
But Mr. Vitter told me that risks remained in the banking system, and
that he wasn’t the only one making that judgment. “There is a growing
bipartisan concern that ‘too big to fail’ is still unfortunately alive
and well,” Mr. Vitter said. “I’m not trying to suggest passing this bill
will be a cakewalk, but it’s a completely different landscape than it
was a year ago.” </p>
<p>
Now comes the hard work of getting support for their bill from Senate colleagues. </p>
<p>
A little over a month ago, the Senate held a nonbinding vote on the
problems posed by megabanks. Its members voted 99 to 0 to “to end ‘too
big to fail’ subsidies or funding advantage for Wall Street megabanks.”
</p>
<p>
Brown-Vitter would achieve those goals while also protecting taxpayers.
As such, it will be interesting to see which senators retreat from their
earlier positions by refusing to support the bill. Constituents on the
alert for hypocrisy, take note. </p>
<div class="">
</div>
</div>
<br clear="all"><br>-- <br>Art Deco (Wayne A. Fox)<br><a href="mailto:art.deco.studios@gmail.com" target="_blank">art.deco.studios@gmail.com</a><br><br><img src="http://users.moscow.com/waf/WP%20Fox%2001.jpg"><br>
</div>