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Two Toms, one view?

Continuing debate over “too big to fail”

Two Toms, one view?

Perhaps some of you regularly read hedge fund manager Tom Brown’s frequent columns on banking subjects. His comments—always lively and feisty—treat with a variety of subjects. This week it was regulation, regulators, and Too Big To Fail.

Tom versus Tom

I met Tom when I was president of First Security’s NM affiliate bank and I have always respected his skills as a banking analyst. The other day he expressed very skeptical views of some aspects of FDIC Vice-Chairman Tom Hoenig’s public statements on bank supervision in a blog called, “Crazy Talk From the FDIC’s Hoenig.”

Hoenig was for many years an officer of the Federal Reserve Bank of Kansas City and retired four years ago after several years’ tenure as its president. In that capacity he was a rotating voting member of the Federal Reserve’s Open Market Committee. Some may recall that he made news several times in recent years for his disagreement with the duration of the Fed’s program of Quantitative Easing.

More recently Hoenig has been in the public view with his strong positions on the adequacy of bank capital, especially for the systemically important segment of industry, those with total assets of $50 billion or more.

Hoenig believes that capital is and should be the primary buffer against loss and a major weapon in the fight to eliminate possible tax payer support of TBTF banks.

Another important facet of Tom Hoenig’s thinking is that the business models of the largest banks are extremely complex. He believes that they should be simplified in an effort to reduce risks in the banking system.

Tom Brown expressed in his recent piece his strongly felt opinion that Hoenig is a fan of heavy-handed regulation by the federal banking supervisors. I happen to disagree with that assessment of Hoenig’s views, but readers should make up their own minds on the subject. For Tom Brown’s views, see his recent column.

Hoenig on TBTF

Tom Hoenig is a leading advocate of eliminating government supports and implicit and explicit subsidies of the industry that have produced taxpayer exposure to the risk of having to bail out “SIFIs”—Systemically Important Financial institutions.

When Glass-Steagall restrictions came down in 1999, the banking industry entered an age of “light touch” regulation. Banks and bank holding companies thereafter had far fewer limitations on what businesses they could engage in and operate as principals.

The repeal of Glass-Steagall threw open the doors to complexity of the industry and to enormous expansion of the sheer size of institutions by virtue of the lack of restrictions on permissible activities. It should be pointed out that the expansion in asset size of the largest banks in recent years was a combination of both internal and external growth.

New lines of business were added to the mix of banking business models. Recall that the precipitating event for the Gramm-Leach-Bliley Act (the Glass-Steagall replacement) was to permit the merger of Citicorp and Travelers Insurance.

Obviously, we’re moving in the wrong direction on ameliorating taxpayer exposure to the costs of bailing out TBTF institutions—if for no other reason than size itself. Dodd-Frank is, in the opinion of most bankers, a seriously flawed response to the banking crisis of the last few years. Congress passed the law in haste and designed it as much as punishment for banking behaviors of the very largest banks as to reform the system.

One of the core risk issues addressed by Dodd-Frank was the elimination of derivative trading by banks for their own accounts. That particular section of the Act was supposed to take effect in January of this year. In mid-December 2014 during congressional negotiations over a bill to fund the federal government, the very largest banks successfully lobbied for the elimination of this prohibition.

Derivative trading is a prime example of the “complexity” of banks that Tom Hoenig is getting at—and it’s still there.

It was also the trigger for fiery speech by Sen. Elizabeth Warren (D-MA) on the floor of the Senate protesting the legislative maneuver that preserved derivatives trading. (I blogged about this in “Dodd-Frank takes hit, but Warren slugs Citi,” last December.)  

Jami Dimon’s declaration

During the last few days, I read Jamie Dimon’s letter to the JPMorgan Chase stockholders in the company’s 2014 Annual Report. It went on for 38 pages and was a consummate public relations job of favorable spin—that is what CEO letters to stockholders typically are, these days.  

But Dimon also perhaps unwittingly exposed the complexity of the bank’s business: Any enterprise whose balance sheet foots in the trillions of dollars is not a simple one.

I’m not sure if Tom Brown is seriously advocating for less regulation of the very largest banking enterprises in the United States, as his column seems to suggest. How many of us think that these banks necessarily have the best interests of the public in a top-of-mind sense in all they do? 

I certainly don’t and I don’t mean this in any mean-spirited way. Banks have constituencies too and the general public is only one of many. Some of these important constituencies at any point in time may be in conflict with another. That’s also a way of looking at the complexity that Tom Hoenig seems to be talking about.

That business today is complicated I think we can all agree. Technology expands our reach and enhances our individual productivity. But it brings complexity in what seems like a geometric progression.

When people call for “simplification” so often what seems to happen is that issues become trivialized. We live in a communications world of sound bites and 140-character exchanges.

Precious little gets communicated in this sort of environment. It’s the equivalent of “talking” in digital grunts.

Let’s weigh the concepts

It seems like a reasonable proposition that we simplify regulation of banks. But looking at the record, it’s no less sensible to consider the simplification of the banks themselves.

Many seem to agree, including Tom Brown, that jettisoning Glass-Steagall was mistaken. Yet its restoration would in fact force banks out of many businesses that they are now in and accomplish the very simplification advocated by Tom Hoenig.

This is a worthy subject of discussion. Unfortunately we never really got to brass tacks in the political environment in which Dodd-Frank was crafted. Maybe it’s time to try it again and push from two directions—the simplification of regulation and the simplification of the biggest banks’ business models as a key strategy to mitigate risk.

Ed O’Leary

Banking Exchange Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent nearly 50 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. His last job before retiring was as the CEO of a regional bank headquartered in Alburquerque, N.M. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses. You can e-mail him at [email protected]. O'Leary's website can be found at

In mid-2016 O'Leary's "Talking Credit" blog received a bronze excellence award for the Northeastern Region from the American Society of Business Publication Editors.

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