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All Da King's Men

Dodd-Frank And "Too Big To Fail"

By David King Published: February 26, 2014

When progressives disagree with what I write, which is often (because I frequently criticize progressive policies, especially in the areas of business and economics, and I'm no fan of Barack Obama), they generally react with a tirade against Fox News, Rush Limbaugh, and the Koch Brothers, as if that unholy trio (in progressive eyes) is somehow directing my words. It's bizarre how often this happens. It's kind of a progressive firewall against actually having to confront unpleasant information they'd rather not think about.

As funny as I find this progressive knee-jerk reaction, especially when I provide links TELLING progressives where my information is coming from (generally not Fox News, and I can't recall ever using Rush or the Kochs as a source), today I'm going to tell progressives what sparked this post, being as concerned for their mental well-being as I am.

I read an unconvincing 2013 article from the liberal magazine, The Nation, titled 'How Wall Street Defanged Dodd-Frank', while I was waiting to see the doctor yesterday. The Nation author didn't have much evidence to prove his premise, beyond observing that the banking industry has lobbyists, and some regulators have met with industry representatives. That was almost a complete lack of proof in my eyes, but I have no doubt it will convince lots of progressives who already inclined to believe it. Then this morning, I was going through my usual assortment of political news aggregator sites (The Hill, Drudge, Politico, HuffPo, to name but a few), and Drudge had a link to a Mercatus Center article called "The Decline Of Small Banks". The idea for this post was born. I decided to check on how well Dodd-Frank had accomplished it's goals.

Let me take you back for a moment to what the leading members of the Democratic party were saying about the Dodd-Frank Financial Reform legislation in 2010 when they passed it along a party-line vote:

"This legislation makes common-sense reforms that end the era of taxpayer bailouts and 'too-big-to-fail' financial firms" - Speaker Of The House, Nancy Pelosi (D-CA)

"Because of this reform, the American people will never again be asked to foot the bill for Wall Street's mistakes. There will be no more taxpayer-funded bailouts, period" - President Obama

"Let me say that again, because it is one of the most important  parts of this bill: No more bailout because no bank is too big too fail" - Senate Majority Leader Harry Reid (D-NV)

Seeing as how ending too-big-to-fail banks and thereby ending taxpayer bailouts was Dodd-Frank's major goal, according to the Democrats who implemented it, how well has Dodd-Frank accomplished these goals ?

Back to Mercatus for the answer:

Since the second quarter of 2010—immediately before the July passage of Dodd-Frank—to the third quarter of 2013, the United States lost 650, or 9.5 percent, of its small banks. Small banks’ share of US banking assets and domestic deposits has decreased 18.6 percent and 9.8 percent, respectively, and the five largest US banks appear to have absorbed much of this market share.

That doesn't sound too good, but we don't want to take the word of just one source. Here's another source, CNN Money, who observes "By Every Measure, The Big Banks Are Bigger":

The six largest banks in the nation now have 67% of all the assets in the U.S. financial system, according to bank research firm SNL Financial. That amounts to $9.6 trillion, up 37% from five years ago. And the big banks seem to be getting better at acquiring assets all the time. The overall growth of assets in the system in the same time is up just 8%...big banks have less competition. Just over 1,400 banks have disappeared in the past five years. About 485 failed. The rest were merged into other banks.

So much for ending too-big-to-fail. Too-big-to-fail has become too-bigger-to-fail. By that measure, Dodd-Frank has been a miserable failure. More and more of the banking industry is being concentrated in fewer and fewer hands. The regulatory burden of Dodd-Frank has been particularly hard on small community banks and credit unions. Their numbers are dwindling.

What this means is, the biggest banker culprits in fomenting the Bush financial crisis and Bush recession, which was created mainly by regulatory changes put in place by the (cover your eyes, progressives) Clinton admistration...those biggest culprits HAVE THRIVED. They haven't been punished by Dodd-Frank. They've been rewarded.

What else would you expect when you put a guy like Barney Frank (D-MA), who was also instrumental in the financial crisis as he let Fannie Mae spin completely out of control on his watch, in charge of "fixing" the problem ? Talk about putting the fox in charge of the henhouse.

Let's turn to derivatives. Derivatives exposure bankrupted Lehman Brothers in 2008. That was the largest bankruptcy ever. Derivatives put a major financial hurt on firms like AIG, Fannie Mae, WaMu, etc., and posed a significant systemic risk to the entire economy. Has that risk been ameliorated with Dodd-Frank ? This is from Forbes:

So, a few years later, now that the dust has settled from the global meltdown crisis, the question remains, “Where do we stand now with derivatives risk?”  Well, I’ve been reading the annual reports of several of the largest U.S. banks (JPMorgan, Citibank, Bank of America, and Goldman Sachs) and I’m sorry to report that these institutions are still chock-full of derivatives...According to the same source, the total notional amount of derivatives held by U.S. commercial banks and savings associations, as of 12/31/12, was a staggering $223 trillion, while the four largest U.S. banks shown above hold 93% of these contracts.  To put these overwhelming numbers into perspective, the U.S. economy only generates about $15.5 trillion in gross national product per annum; so, we’re talking over 14 years’ worth of GNP tied up in notional derivatives exposure, with the four main banks soaking up over 13 years’ worth of the total.  In terms of product type, 80% of the total notional derivatives exposure is in interest rate swap contracts.

Here's source number two on derivatives. This is from Bloomberg:

Bond investors’ purchases of derivatives averaged the most in five years in 2013 as they sought ways to both amplify bets and hedge against rising yields as the Federal Reserve slows its unprecedented stimulus.

The net amount of trades on the three most-active credit-default swap indexes tied to investment-grade companies jumped to a weekly average of $117.3 billion in 2013, the highest in data going back to 2008.

Has the derivatives risk evaporated ? Not even close.

Now for the surreal kicker, the sledgehammer to the head.

In December 2013, Treasury Secretary Jack Lew, an Obama appointee, declared that the battle to end too-big-to-fail banks has been largely won. I kid you not. What are they smoking in this administration ?

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