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It's been three years since the financial crisis, which spurred the great recession. In that time little has been done to fix the 'too big to fail' banks or the government sponsored agencies — Fannie Mae and Freddie Mac — responsible for the global economic meltdown.
Today U.S. banks are bigger than ever. The top four banks in the United States — J.P Morgan, Bank of America, Wells Fargo and Citigroup — control 62% of total commercial assets in this country, up 8% from five years ago, reports The Wall Street Journal.
The Dodd-Frank bill was supposed to rein in the banks, but clearly has failed to do much to date, in part because the banks and many Republicans have been fighting to repeal the legislation. A big point of contention in the bill is the so-called Volcker rule, which would prevent firms from using customer deposits for trades made for the bank's own accounts. The banks have also been pushing back against calls to revamp debit card rules, as well as the outright breakup of the institutions.
Three years of inaction on the too big to fail issue has not gone unnoticed by the American people, as evidenced by the Occupy Wall Street movement, which has spread to cities across the country. But the outcry for change has not completely fallen on deaf ears in Washington. On Wednesday, a Senate subcommittee held a hearing on whether or not Dodd-Frank goes far enough and what more, if anything, should be done.
Former FDIC Chairman Shelia Bair, M.I.T. economics professor Simon Johnson and former Assistant Secretary of the Treasury under President Bush Phillip Swagel headlined the hearing. Swagel, also a senior fellow at the Milken Institute, joined The Daily Ticker to give his take the state of the U.S. banks and what more can be done to prevent another crisis.
Regardless of what you think of the big banks, they have "cost and benefits," he says. "I think large financial institutions are a fact of life" and "the issue is what is the best way to supervise and regulate them."
In his opinion, the solution is a two-prong approach to be enforced through both the Dodd-Frank bill and the Basel Accords.
Dodd-Frank: Regulators need to do a much bettor job, he says, and one way to do that is by using the rules to be implemented under the legislation. But he is not in favor of the Volcker rule.
"The Volcker Rule is meant to solve a problem that didn't really matter in the crisis and doesn't clearly exist, and would be very difficult to solve even if it did exist because it's so difficult to tell what's prop trading from what's normal market making," he said yesterday before the committee.
Basel Accords: The Basel rules set a global standard for bank reserve and liquidity requirements. "More capital will make it so banks can take more losses before they fail, but it will also impact their lending," he says. "There is a trade-off between safety and economic vitality and the question is how do we find the right balance between the two."
On the housing front, the government sponsored enterprises Fannie Mae and Freddie Mac have directly cost the U.S. taxpayer nearly $151 billion in the last three years; the indirect costs have been much higher. But again, little has been done to fix the problems surrounding those agencies.
That was the topic of a Senate Banking hearing on Tuesday hearing, where Senator Bob Corker (R-TN) took to task Deputy Treasury Secretary Neal Wolin. "I am surprised that you have not come forth with any solution," said Corker. "You really just didn't have the appetite for taking it on."
Swagel agrees with Corker's assessment and believes the Obama administration has really "dropped the ball" on this issue.
"The Obama administration knows that the GSEs are a huge issue," says Swagel. "They were an important contributor to the crisis and they have done nothing but put forward a report that was just a menu of options."
Check the accompanying video for Swagel's ideas to fix the GSEs.
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