Too Big to Fail Accounting Explained

By Joseph Lawler on 11.11.11 @ 5:26PM

Jon Huntsman got a chance to elaborate on his anti-big bank message during the CNBC debate:



Uploaded by ThinkProgress6 on Nov 10, 2011

Transcript:

With respect to the banks that are too big to fail, you know today we've got, as I mentioned earlier, six institutions that are equal to 60, 65 percent of our GDP, $9.4 trillion. They have an implied guarantee by the taxpayers that they will be protected. That's not fair, that's not right for the taxpayers.

HARWOOD: So you break them up?

HUNTSMAN: I say we need to right-size them. I say, in the 1990s, you had Goldman Sachs, for example. That was $200 billion in size. By 2008, it had grown to $1.1 trillion in size. Was that good for the people of this country, or --

HARWOOD: Well, how would you accomplish that? How would you right-size that?

(CROSSTALK)

HUNTSMAN: I think we ought to set up some sort of fund. I think we ought to charge some sort of fee from the banks that mitigates the risk that otherwise the taxpayers are carrying. There has got to be something that takes the risk from the taxpayers off the table so that these institutions don't go forward with this implied assumption that we're going to bail them out at the end of the day. That's not right, and it's not fair for the taxpayers of this country.

Huntsman has drawn some favorable attention for his populist proposals on the problem of too big to fail banks. He wants to implement a size tax on banks, in order to disincentize banks from growing beyond a certain point and to recompense taxpayers for, unwillingly, assuming the risk of bailing them out. Such a tax, though, would only work against the incentives created by the Dodd-Frank financial regulation bill, which actually subsidizes banks that are too big to fail.

Dodd-Frank mandates that regulators label any bank with over $50 billion in assets as "systemically important financial institutions" and regulate it more tightly. In other words, those banks are acknowledged by the government as too big to fail. The bill is also supposed to include mechanisms to ensure that such companies don't receive bailouts, but those measures are based on regulators' discretion and thus will probably fail when push comes to shove. The result is systemically imprtant financial institutions enjoy an implicit subsidy: the market will perceive them as backed by the government even if the feds don't say as much, meaning they will be able to raise debt and capital more cheaply than smaller banks will. In other words, the banks have the same advantages that Fannie Mae and Freddie Mac did before the financial crisis.

So if Huntsman wants to penalize banks that are too big to fail, the first step is getting rid of the implicit subsidy provided to them by the government through Dodd-Frank.

Huntsman has acknowledged the problem posed by Dodd-Frank in other venues. Ideas for solving the problem of too big to fail are well and good, but they are merely academic without addressing the distortions created by Dodd-Frank. Hopefully the Republican candidates will get as much time to talk about Dodd-Frank in future debates as they do, for instance, Obamacare.