The Hill: Too Big to Fail Means Too Small to Matter

Sep 24, 2009
In The News

Op-Ed
Last week marked the one-year anniversary of the collapse of Lehman Brothers and the beginning of Washington’s unprecedented intervention in our financial markets. Since then, the federal government has spent $180 billion bailing out insurance giant AIG, followed by government-imposed takeovers and mergers of some of our country’s largest banks and financial institutions, the controversial $700 billion bank bailout plan, and the $81 billion bailout of Detroit automakers. This means, within the last year, the federal government has spent almost $1 trillion of American taxpayers’ money bailing out those large financial institutions on Wall Street who made irresponsible choices, claiming these companies pose a systemic risk and are “too big to fail.”
Yet, rather than taking steps to ensure that “too big to fail” companies no longer posed such a massive risk to our financial system, the Obama administration has actually taken steps to make these companies even larger. After the Treasury Department strong-armed Bank of America into purchasing Merrill Lynch, and JP Morgan Chase into purchasing Bear Stearns, these two “superbanks” now hold more than $2 of every $10 deposited.  And, combined, four of the largest financial institutions in the country — Bank of America, JP Morgan Chase, Wells Fargo, and Citigroup — issue one of every two mortgages and two of every three credit cards in this country.
Then came the $700 billion bailout. Rather than spending the money to purchase illiquid assets in an effort to free up credit and restore liquidity in the market as we were told, the Treasury Department used much of the first $350 billion allotted to bail out the largest financial institutions on the East and West coasts. And for the smaller banks that were also suffering from the credit crunch that was caused by many of those same financial institutions the Treasury bailed out? They were left to fend for themselves or to fail.
As these massive financial conglomerates — propped up by billions of federal dollars — grow larger, the uneven playing field that already exists between large and small banks continues to expand.
To begin with, community banks were held responsible for the risky mistakes made on Wall Street by the Federal Deposit Insurance Company. As banks began to fail, the FDIC coffers began to clear. An emergency fee was assessed on all banks — even those who had very little to do with the current financial crisis and who have continued to serve their communities well through these troubled times.
And the FDIC announced earlier this month that it would substantially increase the fees banks pay to insure their holdings.  While large financial institutions are more able to cushion the blow of these higher fees — especially since many are still operating on billions of dollars from the federal government — small, community banks will have a much more difficult time paying these new assessments.
In yet another move that will disproportionately harm small banks, House Financial Services Committee Chairman Barney Frank (D-Mass.) and President Obama recently announced their intentions to create the Consumer Financial Protection Agency. Don’t let this name mislead you. This dangerous piece of legislation will actually do more harm to consumers than good. The additional bureaucratic red tape, fees, and government intervention this agency will create will do nothing but decrease the availability of credit and increase the cost of goods and services. This agency will excessively burden local banks, which will have a much more difficult time than large financial institutions with handling the additional costs and regulations that will come with this new agency.
With all these additional fees and costs, community banks could be forced to raise the fees they charge their customers. This not only punishes their loyal customers; it can also make the banks less competitive within our financial system and could potentially drive some out of business all together.
I guess the Obama administration’s policy of “too big to fail” really means “too small to matter.”
If there is one thing my constituents made clear to me at the 18 town hall meetings I held during the month of August, it was this: Americans are tired of bailing out Wall Street.  As a senior member of the House Financial Services Committee, I will continue to encourage President Obama and Chairman Frank to reconsider their approach to reforming our financial system. I do not deny that some changes within our system are necessary. However, when considering how best to approach reform, we must not sacrifice the health of our small institutions that did not cause the current crisis and are critical to our country’s economic recovery.

Lucas is a senior member of the House Financial Services Committee.

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