Wall Street ‘No Snitchin’ Culture

That is the topic of a new piece by Ted Kaufman today. According to Kaufman, the common wisdom among bankers is that the biggest six of the Too Big To Fail banks ought to be broken up or at least subject to greater regulatory requirements. And why don’t you hear more about this? Apparently the No Snitchin’ culture is big among the Joseph A. Banks-suited set too.

During Senate consideration of the Dodd-Frank Wall Street Reform Act, I never understood why regional and small banks stood with the mega-banks in opposing congressional efforts to constrain systemic risk. They opposed the reinstitution of the Glass-Steagall Act, which from 1933 to 1999 had separated commercial and investment banks. They fought successfully against the Brown-Kaufman amendment, which placed a (still huge) limit on bank size and sought reasonable limits on leverage. And they were against derivatives reform, even though the big six do 85 percent of the trading in those complex instruments.
I still don’t get it.
Because the market knows the government would never let the mega-banks fail, they borrow funds at rates substantially lower than smaller banks, putting those banks at a significant competitive disadvantage.
This also puts the American taxpayer at risk as the mega-banks gorge on debt to fund risky trading strategies they hope will drive up their gigantic profits.
Why do we let Goldman Sachs and JPMorgan Chase keep growing as global financial behemoths, placing all of us at risk, when congressional action to limit their size would help other banks to better compete and serve U.S. commerce?

Kaufman refers to a recent piece written by Robert Wilmers, the CEO of M&T that bought Wilmington Trust. Wilmers makes a strong case for returning banking to a more recognizable — and community-oriented — business. He also notes, that without that, Too Big To Fail remains a Sword of Damocles handing above all of our heads. (And really, when I read this, I thought that Wilmers may have made the best case ever for the Move Your Money crowd. When the next crisis comes, smaller banks won’t be diverted from your business.)

Senator Kaufman created quite a platform for himself in trying to take on the persistent risk that remains the large banking business. It is really good to see him continuing to try to raise everyone’s awareness here.