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Why Are Banks "Freaking" Over Too-Big-To-Fail Legislation?

'If this bill passes, these banks would no longer be Too Big To Fail. So we'd probably have to downgrade them.' Well... 'Duh'

Jon Queally, staff writer

Senator David Vitter (R-La.) (L) and Senator Sherrod Brown (D-Ohio) announcing the details of their "Too Big to Fail" legislation at the U.S. Capitol on April 24. (Photo: Win McNamee/Getty Images)

A rather wonky, bipartisan piece of legislation was introduced in the US Senate recently by Sen. Sherrod Brown (D-OH) and Sen. David Vitter (R-LA).

And though there's no clear signal yet about the likelihood of its passage in Congress, one thing that might brighten the day for those who think the largest financial institutions are an unhealthy and destructive force in the overall economy is this: Wall Street hates the proposal.

Or, as Rolling Stone's Matt Taibbi puts it, "Man... the finance sector freaking."

Describing the Brown-Vitter proposal as a "more elegant solution to the problem" of too-big-to-fail banks than previous attempts, Taibbi explains that

Rather than impose size limits, it simply insists that banks with over $500 billion in assets maintain higher capital reserves than are currently required. Companies like J.P. Morgan Chase, Wells Fargo, Morgan Stanley, Goldman Sachs, Citigroup and Bank of America will have to keep capital reserves of about 15 percent, about twice the current amount.

More interesting than the contours of the proposal—though the way it targets the largest banks is vital—Taibbi says the more interesting developments occurred after the bill was introduced:

As soon as Brown-Vitter was introduced, a very interesting thing happened. The Independent Community Bankers of America, or ICBA, issued a press release boosting the bill. "ICBA strongly supports this legislation," the release read, "and urges all community banks to join the association in advocating passage of legislation to end too-big-to-fail."

This was a big thing. It was the first time since the crisis that a prominent financial industry group opposed the will of the TBTF banks.

And so the defection of the smaller community and regional banks make the overall likelihood of passage more possible, but what remains, of course, is the resistance to the new regulations that will come from the megabanks themselves.

Strangely, however, as Taibbi points out, is that the first large institution to come out against the bill was not a large bank, but one of the nation's large ratings agencies, Standards & Poor.

On this development—which shows just "how completely fucked and corrupt our current system is"—Taibbi writes:

Having a ratings agency bent to monopolistic bank influence give a bad rating to a piece of legislation designed to . . . curb monopolistic bank influence is a bad surrealistic joke[...]

Remember, one of the primary causes of the financial crisis in the first place was the corruption of the independent ratings agencies. In the crisis years, companies like S&P and Moody's and Fitch were so desperate to avoid losing business from the big investment banks (who paid the ratings firms to rate products like mortgage-backed securities) that these companies often gave embarrassingly overenthusiastic grades to a generation of toxic assets."

But here's the key part, according to Taibbi, of the S&P's opposition to the Brown-Vitter bill, and it's contained in the report the rating firm put together in opposition the proposal which shows—at least in their estimate—why forcing larger capital requirements would be a problem.

Looking at this language from the S&P report:

Under our methodology, we would potentially no longer factor in government support if we believed that once large banks are broken up, we would not classify these banks as having high systemic importance.

Taibbi translates:

If this bill passes, these banks would no longer be Too Big To Fail. So we'd probably have to downgrade them.

"Well – duh!" says Taibbi, who then continues:

It's nuts. A true capitalist auditor would be sick to the point of vomiting at having to upgrade a company based upon its sleazy co-dependent relationship with the government. This report expresses just the opposite, and shows how backwards things have gotten on Wall Street.

I've talked to a number of people on the Hill and in finance in the finance sector in the last week and they all say the same thing. The tone of reports like this S&P thing, and op-eds by other bank-friendly critics, are more strident and desperate than we've seen previously and suggest a genuine fear that this bill may pass.

Meanwhile, of course, Brown-Vitter remains locked inside the Senate Banking Committee where recent history and knowledge of Wall Street's stranglehold on Washington says it will likely stay.

As Jessica Eisinger at Pro Publica writes,"It probably won’t get passed, but its underlying premise cannot be dislodged from the Washington conversation."

We'll see.


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