In 1911, Standard Oil underwent what many of today’s conservatives would decry as government and judicial overreach; the petroleum giant — 41 years old and originally from Cleveland — was taken apart by the U.S. Supreme Court. More than a century later, Ohio Sen. Sherrod Brown, a fairly liberal Democrat, is teaming up with Sen. David Vitter, a very conservative Republican from Louisiana, to give a similar treatment to the Wall Street companies that have grown to a size now colloquially known as “too big to fail.”
Brown has repeatedly referenced the United States’ experience with Standard Oil in his push for stricter regulations. By now, congressional listeners are familiar with Brown’s references to both the former oil company and John Sherman, who represented Ohio in the U.S. Senate from 1861 to 1877 and 1881 to 1897 and is best known for his work on his self-named Sherman Antitrust Act — the anti-monopoly law that was used by the Supreme Court to split up Standard Oil.
In his arguments, Brown draws parallels between Wall Street and the defunct Standard Oil: strangled competition, extreme power over economies and massive influence over the U.S. government. Brown says the historical example provides a clear path for dealing with the financial juggernauts of today — whose problems helped cause the 2008 financial crisis and pushed the federal government into passing the Troubled Asset Relief Program, the $700 billion bailout program, to save the troubled institutions.
“Wall Street megabanks are so large that should they fail, they could take the rest of the economy with them,” Brown said in congressional testimony on Feb. 28. “Instead of failure, however, taxpayers are likely, if this were to happen, to be asked again to cover their losses (and) bail them out as we did five years ago. This is a disastrous outcome because it transfers wealth from the rest of the economy into these megabanks, it suspends the rules of capitalism (and) it perpetuates the moral hazard that comes from saving risk-takers from the consequences of their behavior.”
Brown’s arguments have been spurred by comments from U.S. Attorney General Eric Holder, who told Congress on March 6, “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”
For Brown and other opponents of big banks, Holder’s comments show “too big to fail” also stands for “too big to jail.”
Not everyone is convinced. Many see the massive Wall Street companies as America’s investment engines, which drive the economy during both highs and lows. They argue the banks can be properly regulated without resorting to breaking them up.
Brown’s legislation hasn’t been introduced in the latest session of Congress yet, but Lauren Kulik, a spokesperson for Brown, says the new proposal will be much like his 2012 proposal — The Safe, Accountable, Fair and Efficient (SAFE) Banking Act, which imposed strict limits on banks and their holdings. The SAFE Act would have “reduce(d) this concentration of financial power by shrinking these megabanks to a manageable size so that they can fail without threatening the health of the financial sector or entire U.S. economy,” according to Brown’s staff.
“Wall Street megabanks and 19th century trusts like Standard Oil both combine concentrated wealth with concentrated political power,” Brown said in a statement emailed to CityBeat on March 8.
“In 1995, the six biggest U.S. banks (Bank of America, J.P. Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) had combined assets equal to 18 percent of GDP. Today, they are about 63 percent of GDP.”
The complaints are similar to the arguments leveled by opponents of Standard Oil in the early 19th century. Back then, Sherman, who represented Ohio in the U.S. Senate at the time, said, “I do not wish to single out the Standard Oil Company. … Still, they are controlling and can control the market so absolutely as they choose to do it; it is a question of their will. The point for us to consider is whether, on the whole, it is safe in this country to leave the production of property, the transportation of our whole country, to depend on the will of a few men sitting at their council board in the city of New York, for there the whole machine is operated.”
For his current proposal, Brown is putting a much larger emphasis on bipartisan support from Vitter and former Utah Gov. Jon Huntsman, a Republican.
“People see more and more evidence that Wall Street megabanks are too big to manage and too complex to regulate,” Brown said in a statement. “While we came up short in 2010, I am talking to several of my Republican colleagues about taking various actions to address ‘Too Big to Fail.’ Some of my colleagues who voted against us at the time have told me that they would vote with us today.”
A paper released in February by Hamilton Place Strategies (HPS), a Washington, D.C.-based consulting firm with strong ties to large financial institutions and former President George W. Bush, argued that breaking up the big banks would “not provide the safety of the global financial sector and would reduce U.S. influence over the financial sector globally.” The paper argues U.S. banks are already smaller and safer than their global competitors, and the five biggest Canadian, Chinese and European banks are bigger than the five largest U.S. banks, relative to each country’s GDP.
In a statement, Brown said the numbers are misleading: “U.S. megabanks are actually larger than they appear because the United States and Europe are on different accounting systems that changes the way that derivatives exposures are calculated. Tom Hoenig has done groundbreaking work showing that the six largest U.S. banks are almost $4 trillion larger under international accounting standards. Instead of being 63 percent of GDP, they are actually about 102 percent of GDP — making JPMorgan, Bank of America and Citi(group) the three largest banks in the world.”
The HPS paper also argues the big banks enable a competitive edge by providing big loans that are particularly necessary in a massive global economy with large multinational corporations. If the United States did break up the big banks, HPS says the country would be left at a disadvantage without solving any perceived problem: “In the event of a break-up, the global competitive landscape will rebalance in favor of foreign banks and the shadow banking sector.”
In a statement, Brown said big banks have historically avoided big loans: “When the nation’s biggest bank made the largest loan in history in 2011 — a $20-billion loan to AT&T to take over T-Mobile — it shared that loan with 11 other banks because $20 billion was equivalent to about 17 percent of the bank’s Tier One Capital. The losses from that loan alone would have lowered the bank’s leverage ratio by a full percentage point. That’s too much exposure for a bank to have to a single company. Multi-billion dollar international manufacturers also tell me that they spread their billion-dollar lines of credit among 25 banks because they don’t want too much exposure to just one bank.”
The conclusions in the HPS paper conflict with an analysis from Andy Haldane, an executive director at the Bank of England. In a speech at the Institute of Economic Affairs, Haldane said the Bank of England’s research found bigger banks do not necessarily lead to bigger loans or results: “There is no longer evidence of economies of scale at bank sizes above $100 billion. If anything, there is now evidence of diseconomies (that) rise with bank size, consistent with big banks becoming ‘too big to manage.’ ”
He also said the United States has seen “the most dramatic upwards shift” in bank size between 1990 and 2007, although other countries had higher starting points: “For other countries, there is a less dramatic rise in concentration but from a much higher starting point, with the top three banks accounting for between two-thirds and three-quarters of assets in the U.K., Switzerland and Germany.”
Many of these arguments again harken back to the history of Standard Oil. At the time, supporters of Standard Oil argued that the oil giant’s size was necessary to support massive production capabilities that were needed to meet an equally massive consumption demand. Obviously, the Supreme Court disagreed, and it ultimately dissolved the oil company.
Still, the Supreme Court’s break-up of Standard Oil wasn’t meant to prove that large companies or monopolies are inherently bad. The Supreme Court ruling established the Rule of Reason, which says abusive actions that restrain trade or hold down other economic entities are bad, but just being a big company or holding a monopoly is not enough to be considered illegal or otherwise wrong. In other words, circumstances matter more than a company’s classification or size, according to the 1911 ruling.
Sen. Rob Portman, Ohio’s junior senator, agrees with Brown that “too big to fail” is a problem, but he says the circumstances surrounding the banks are the real issue, not the size of the banks.
“We need clear, robust capital standards to ensure that large financial institutions have a solid cushion to absorb unexpected losses, rather than resort to taxpayer bailouts,” Caitlin Dunn, Portman’s spokesperson, wrote in an email to CityBeat.
When asked directly whether Portman supports a break-up of the big banks, Dunn wrote, “He thinks we should look to address and limit systemic risk through other means, including strong capital standards.”
Portman also argues that the federal government’s latest regulations have made the problem of “too big to fail” worse.
“Sen. Portman thinks we have had enough taxpayer bailouts, and the Dodd-Frank Act actually perpetuates, rather than solves, the problem of ‘too big to fail,’ ” wrote Dunn. “The bill empowers regulators to label certain financial firms as ‘systemically important,’ triggering not only new supervision but also the appearance of government backing. Financial institutions with that kind of implicit government guarantee may be more prone to take on excessive risk and may also get an unfair advantage over smaller, community banks.”
Brown says his proposal is necessary to get to the root of the problem and create a safer, stronger economy. “That will mean more jobs, more protection for taxpayers, better competition for community and regional banks, and more credit for consumers and small businesses,” he said in a statement. ©