On Thursday, GAO’s long-awaited report on the extent to which big banks enjoy a TBTF subsidy was finally released (see Client Report TBTF18), followed immediately by a poorly-attended, but emotional hearing of the Senate Banking Financial Institutions Subcommittee (see Client Report TBTF19). As detailed in these reports, GAO managed to make no one happy despite the 42 models it deployed to answer the subsidy question. By focusing only on putative funding-cost advantages – and not the other benefits that the initial instructions to GAO could have added to its calculations – Congress’s green eye-shades found that the subsidy, clearly evident before and during the crisis, had largely disappeared but could well come back in any future crises. From this, industry groups – backed by Treasury – concluded that TBTF is no more, but Sens. Brown (D-OH), Vitter (R-LA), and others countered that it’s just as bad as before and that big banks need a massive break-up. We can’t settle this debate here, although we sought last week to inform it with a new study on the quantitative costs of the new regulatory framework. We can, however, advise on what we think GAO’s study and the response to it mean for forthcoming regulatory and Congressional action….

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