On their 10Q call yesterday JP Morgan announced a surprise $2 billion in losses related to a hedge they had made which backfired on them. The loss sent a shiver down the spine of Wall Street and likely the political world too, as it triggering fears of bank meltdowns and more taxpayer bailouts in turn.
The whip-smart Jim Pethokoukis of the American Enterprise Institute tweeted this morning, “Boy if Romney wanted to outflank Obama and call to break up the banks, he now has the opportunity thanks to JP Morgan.“
It’s not as crazy an idea as it sounds.
Even though it is very tricky for conservatives to bring themselves to set hard regulations on the financial industry, it was precisely the successive bailouts during the financial crisis that sparked the Tea Party reaction against Obama.
Conservatives hate the idea that the largest Wall Street firms have an implicit bailout. It gives those banks an unfair advantage over smaller competitors, and creates tremendous moral hazard. Many of them have been pointing out that during Obama’s time in office the Too Big Too Fail banks have only gotten bigger. More and more it is the government that is allocating credit to borrowers, and the market is just one instrument for doing it.
So here is where Romney’s big opportunity comes in: Call out Obama for letting the problem get worse, pin him with the ‘friend of Wall Street’ label, and propose a something to end Too Big To Fail.
One of his rivals, Jon Huntsman, already outlined a bold plan to end the “doom loop” of implicit bailouts that encourage the big banks to take absurd risks. And we said at the time it was something both the Tea Party and Occupy Wall Street could like.
Here’s the outline:
- Set a hard cap on bank size based on assets as a percentage of GDP. (This cap would be on total bank size, not using any of the illusory “risk-weights” currently central to thinking about bank accounting… )
- Impose a similar cap on leverage—total borrowing—by any individual bank, relative to GDP.
- Impose a fee on banks whose size exceeds a certain percentage of GDP to cover the cost they would impose on taxpayers in a bailout, thus eliminating the implicit subsidy of their too-big-to- fail status.
- In addition, focus on establishing an FDIC insurance premium that better reflects the riskiness of banks’ portfolios.
- Strengthen capital requirements, moving far beyond what is envisioned in the current Basel Accord.
As the team that drew up this policy said at the time, hedge funds and private equity groups fail and go out of business all the time and no one notices, because the government has encouraged them to become to large they present a systemic threat to the economy.
And Pethokoukis has just outlined a speech that Romney could use, when delivering on a policy like this.
I believe that too-big-to-fail banks are too-dangerous-to-permit. As Mervyn King, head of the Bank of England, once said, “If some banks are thought to be too big to fail, then … they are too big.” I favour an international accord that would break up these mega-institutions into more manageable size. And as president, I will order my Treasury to immediately begin negotiations to that end.
But, Pethokoukis suspects Romney wouldn’t even touch an idea like this. We’ve put in calls to the Romney campaign to find out more of what he thinks of Too Big To Fail Institutions and will let you know what they say.
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