At various hearings this week, Secretary Geithner and an array of pundits from left and right asserted that too-big-to-fail, or TBTF, is too hard to kill – THTK? Based on this, Democrats are coalescing around calls that big banks be torn asunder, while Republicans are reviving demands for bankruptcy-only systemic resolutions. We thought the issue of systemic resolution and regulation would subside a bit, if only out of widespread post Dodd-Frank fatigue syndrome, but no such luck. In fact, the battle over GSE reform will ensure debate on TBTF and, perhaps, even action early in this Congress on it.

What’s the link between TBTF and the GSEs? On Tuesday, Secretary Geithner refuted GOP calls for full-bore GSE privatization in part by arguing that this wouldn’t take the government out of the backstop business. He pointed not only to a continuing role for FHA as a source of taxpayer risk, but also to the implicit guarantee he said still stands behind U.S. banks. He didn’t name names, but stood by this assertion under repeated questioning from Republican FinServ Members, with one making an effort at drawing Treasury out on the seeming contradiction between its stand on GSE reform and assertions that Dodd-Frank does what’s needed to curb TBTF. Mr. Geithner didn’t go for it, but Republicans won’t forget his assertion that taxpayers still stand behind big banks.

While TBTF was principally a backdrop for Treasury’s testimony last week, it was center stage at Friday’s Congressional Oversight Panel session. Distinguished economists like Nobel Prize winner Joseph Stiglitz on the left and Allan Meltzer from the right spoke eloquently and, indeed, emotionally about TBTF, agreeing that TBTF stands untouched by Dodd-Frank. Despite strong differences on other topics, they stood united in calls to break up big banks and, along the way, hike capital, ban certain business lines and take other trims to TBTF. Mr. Meltzer argued that “the Secretary of the Treasury is often the person who favors TBTF” – echoes of the Tuesday hearing? – pushing for a statutory requirement that capital rise in tandem with asset size so that the biggest banks bear so crushing a capital burden that they break themselves apart. Another witness, MIT’s Simon Johnson, argued that banks are now not just TBTF in their own right, but have grown so huge that the U.S. economy could go the way of Ireland’s as banks regain post-crisis hegemony and overtake a manageable share of total national assets. All of this is premised on the consensus view that Dodd-Frank did little to curb TBTF, laying the groundwork for another crisis unless reforms are rapidly implemented.

In the near term, the only venue we see for legislative action on TBTF comes in tandem with the GSE legislation. Republicans pushing for privatization will, egged on by Treasury, almost surely add a TBTF kill-clause to the GSE privatization package. This won’t move fast and its fate is uncertain, but more talk of TBTF as THTK will have immediate impact. As all the Dodd-Frank rules get written and the U.S. turns to implementing Basel III standards in areas like “bail-in debt,” the heat is on for standards far more stringent than those that big banks already think are too tough

 

 

.