GWEN IFILL: Now: dealing with the problem of too-big-to-fail banks. President Obama has proposed that large commercial banks should be banned from engaging in certain kinds of speculative trading that could benefit the banks themselves.
Former Federal Reserve Chairman Paul Volcker is credited with pushing that plan. And, today, he told the Senate Banking Committee why the government should only rescue commercial banks that steer clear of risky trading.
Here's a bit of the case he made.
PAUL VOLCKER, chairman, President's Economic Advisory Board: Commercial banking is a risky business.
Now, the question is whether you want to, in effect, provide a subsidy or provide protection when they're lending to small business, when they're lending to medium-sized business, when they're lending to homeowners, when they're transferring money around the country. Those are important continuing functions of a commercial bank, in my view.
And I do think it's deserving of some public support. I do not think speculative activity falls in that range. They're not lending to your constituents. They're out making money for themselves and making money with big bonuses. And why do we want to protect that activity?
JIM LEHRER: Now we get another perspective on the big banks, as seen by one of the leading CEOs from that industry.
"NewsHour" economics correspondent Paul Solman has the latest in his series of stories and conversations on the future of Wall Street. It's part of his ongoing reporting on Making Sense of financial news.
PAUL SOLMAN: The Bank of New York, founded in 1784, making it the country's oldest, its Constitution written by Alexander Hamilton, its shares in 1792 the first to be traded on the New York Stock Exchange.
Several centuries later, its merger with Pittsburgh's Mellon Bank in 2007 made it the world's largest firm managing assets for clients and returned it to prominence as one of America's 15 biggest banks, qualifying it just a year later for $3 billion in Troubled Asset Relief Program, TARP, funds. It has since paid back the Treasury, with interest.
Nova Scotia-born Robert Kelly, now 55, is the bank's CEO, after a career spent mostly at Toronto Dominion Bank. He reportedly turned down the CEO job of Bank of America last month.
Robert Kelly, welcome.
ROBERT KELLY, chief executive officer, BNY Mellon: Thank you very much, Paul. And welcome to our bank.
PAUL SOLMAN: So, first, the president's proposal to tax the banks to get the money back from TARP.
ROBERT KELLY: Yes, one of my worries would be that, would a -- for the less healthy banks who are still trying to rebuild capital and profitability, will they reduce lending because of this, because of this tax?
Will they reduce the number of people they employ to help their bottom line? Will they try to pass the costs on to customers? It doesn't feel constructive to me in many ways.
PAUL SOLMAN: What about the proposal to separate trading for your own account, like a hedge fund, from the deposit-taking function of a bank, that you can't do both?
ROBERT KELLY: I don't think propriety trading was the essential big problem we had with the economy. Our root causes were, the banks didn't have enough liquidity. And I actually think having a limited number of really big financial institutions in this country is a good thing.
Firstly, many businesses in the nation need really sophisticated, complicated products for them to be more successful.
PAUL SOLMAN: Give me an example.
ROBERT KELLY: Many of them, say, want to raise money in China to be able to be more successful over the long term. Wouldn't you rather that business go to American banks than to foreign banks?
Many of big, big international corporations based here in the United States want to move money around the world very easily and simply. And you can't do that with small banks. You need big, successful, sophisticated, profitable banks with lots of capital.
PAUL SOLMAN: Economies of scale, are there really economies of scale?
ROBERT KELLY: There are huge economies of scale in retail banking, because you can take, whether it's a branch network of 10 branches or 1,000 branches, it basically takes the same sort of computer systems and accounting and human resources infrastructure to run a big system as a little system. And it doesn't add risk to the system. It actually reduces risk, because you're diversified across a lot more geography.
PAUL SOLMAN: The scholar Simon Johnson, formerly with the IMF, MIT now, Peterson Institute: "No study can find economies of scale above $100 billion. On this, the experts agree," he writes.
Why not cap the size of any bank at say 1 percent of GDP?
ROBERT KELLY: Well, these are economists vs. people who actually run businesses.
PAUL SOLMAN: But you come from a biased point of view. I mean Bank of New York and Mellon merged just a few years ago. You're obliged to say that.
ROBERT KELLY: Well, to some degree, that's true. But, however, I will also tell you another reality. And that is, if Bank of New York and Mellon were separate during this downturn, we would have been in a lot worse shape than we were ultimately.
PAUL SOLMAN: We, the country, or we, the banks?
ROBERT KELLY: The bank and the country.
PAUL SOLMAN: You did lose a billion-and-a-quarter dollars in 2008 on your trading, your proprietary trading, right?
ROBERT KELLY: Not proprietary trading. Our business is a very simple model. It's asset management and securities processing. Securities processing is the majority of our company. And it tends to have a lot of cash that's very sticky with it. And, so, we tend to generate...
PAUL SOLMAN: Sticky meaning?
ROBERT KELLY: Sticky meaning a lot of clients give us deposits, and it tends to stay with our company for quite a while.
We have to do something with those deposits. And you could buy treasuries that are essentially riskless, or you could buy very high-quality securities, for example. The equities are fairly risky, so we don't buy stocks. But we do buy bonds.
And we AAA-rated bonds, which turned -- which turned which turned out to be not AAA. If we want to be kind about it, perhaps they were CCC.
PAUL SOLMAN: But doesn't it make sense, as public policy, to protect an institution like yours -- and you call yourself a critical infrastructure company to the world economy -- from buying mortgage-backed securities?
ROBERT KELLY: Well, I really want to protect our company, too. And so does our board of directors. And our shareholders want us to do that. Our regulators also want us to do that.
PAUL SOLMAN: What's the rationale for a bank being so big that it would have to be bailed out by the U.S. government?
ROBERT KELLY: No bank should be too big to fail. That is my view and that is our industry's view. Capitalism works. Darwinism works.
PAUL SOLMAN: But banks were bailed out. Banks were deemed too big to fail, and they were in fact bailed out.
ROBERT KELLY: But they shouldn't be in the future.
So, let's talk about that. The worst ones are now gone. If you think about the mortgage providers, like Countrywide and WaMu, and the investment banks that just weren't up to the reality of a really tough recession, whether it be Bear Stearns or Merrill Lynch or Lehman Brothers, the worst-run institutions are gone.
PAUL SOLMAN: But people would dispute that. Many banks -- I don't need to name them for you -- were on the brink or perceived to be on the brink. Government stepped in and saved them.
ROBERT KELLY: Right.
So, going forward, in my view and in our view, no company should be too big to fail. So, what that means is, you should allow them to fail. And the question is, how do you do it without it impacting the rest of the banks in this country, as well as create a global financial crisis?
PAUL SOLMAN: Well, that's where we were the last time around.
ROBERT KELLY: Exactly.
So, what has to be done now is, what we need is, we need a windup authority, so we don't have something like Lehman.
PAUL SOLMAN: But, right now, isn't your bank, Bank of New York Mellon, too big to fail?
ROBERT KELLY: No.
PAUL SOLMAN: Would the government really allow a company which is, in your own words, critical to the infrastructure of the country to fail?
ROBERT KELLY: If that ever occurred, which would be extremely unlikely, in the stockholders' view, as well as the debt-holders' view, because we're strong -- viewed as the strongest bank in the nation, what they could do is, they could come in, take us over, and just continue to run us or wind us down.
And my expectation is they could do it at zero cost to the nation.
PAUL SOLMAN: Are you saying no banks out there are too big to fail?
ROBERT KELLY: I would say no, if you get the right systems in place, more capital, more liquidity, better regulation, windup authority.
PAUL SOLMAN: Yes, but, right now, we don't have those things. Right now, there are no banks in America that are too big to fail?
ROBERT KELLY: There are several banks that are problematic still in the nation. And that is solvable.
PAUL SOLMAN: You understand that people are furious at the banks?
ROBERT KELLY: Mm-hmm, yes.
PAUL SOLMAN: Do you understand why?
ROBERT KELLY: I think so. I'm a pretty good listener. And I have had lots of opportunity over the last couple of years.
A lot of people get it, that it wasn't just about banks and it was also about government and individuals and other things like that. But we're taking our brunt of it. And we should. And you know what? I don't think that anger is going to dissipate, go down until the unemployment rate starts going down in this country.
But I must say, banks create a lot of value. You think about how much simpler and easier it is for you to do banking versus 10 or 20 years ago, in that you can get access to your money through debit cards, through credit cards, through the Internet, through any means that you could think of.
And you can do it anywhere in the world. And you can travel around the world and do your banking anywhere today. You could not have done that 10 years ago. Is that a more efficient, better system for the nation? Yes, it is.
PAUL SOLMAN: What is the most important lesson you learned from the crisis?
ROBERT KELLY: Is really understand the risks you're taking.
PAUL SOLMAN: Robert Kelly, thank you very much.
ROBERT KELLY: It's my pleasure. Thank you very much.