Barney Frank takes on Bernie Sanders and the ‘too big to fail’ argument

It’s been a common theme this campaign season: Are our banks still too big to fail? Former treasury official Neel Kashkari and presidential candidate Sen. Bernie Sanders have both shared their concerns with the NewsHour. For another perspective on the argument, Jeffrey Brown talks to Barney Frank, former Democratic congressman and co-author of the regulatory Dodd-Frank bill.

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    Now our conversation series on another economic issue that's been a major theme on the campaign trail this year: Are some banks still too big to fail, and do they pose a risk to the country?

    Jeffrey Brown has our latest interview.


    In our first conversation, we talked with Neel Kashkari, president of the Federal Reserve Bank in Minneapolis. As a Treasury official during the financial crisis, he helped oversee the bailout of the banks. He now argues that the system remains in danger and that giant financial firms should be broken up.

    That's a view being heard on the campaign trail from Senator Bernie Sanders.

    In his interview with Judy yesterday, here's how he described the problem and his plan for it.

    SEN. BERNIE SANDERS (VT-I), Democratic Presidential Candidate: It will be important to point out that three out of the four largest banks in this country today are bigger than they were when we bailed them out because they were too big to fail, that you have the six largest banks in this country that have assets of 58 percent of our GDP.

    I happen the believe that when you have a few financial institutions with unbelievable economic power, with unbelievable financial power, that what we should do is reestablish a modern Glass-Steagall legislation, and what we should do, in fact, is break them up, not only from a risk perspective of not seeing their greed and illegal behavior destroy our economy, as happened eight years ago, but also from creating a competitive financial system, where we don't have so few financial institutions with so much power.


    And we get a response now from one of the leading players in the aftermath of the financial crisis.

    Barney Frank served as a Democratic congressman from Massachusetts from 1981 until his retirement in 2013. As chairman of the House Financial Services Committee, he played a lead role in crafting the Dodd-Frank law, which enacted the most sweeping changes to U.S. financial regulation since the Great Depression.

    Welcome back to you.

    The starting point of the critique we have heard is that the banks are bigger than ever, the potential for another bailout remains strong. Dodd-Frank was a start, but didn't go nearly far enough.

    Do you see a different picture?

    FORMER REP. BARNEY FRANK (D), Massachusetts: Oh, very much so.

    In the first place, both Senator Sanders and Mr. Kashkari continue to evade the biggest question. That is, how big is too big? The crisis which touched off when Lehman Brothers couldn't make its payment, Lehman Brothers was about $650 billion in assets. We have banks four and five times that size

    And the question is, does everybody have to be smaller than Lehman Brothers is today? But that would have consequences. Getting there would be a problem. By the way, it should be very clear, Glass-Steagall doesn't do it. There is a disconnect between Senator Sanders insisting that the banks be broken down to the point where they won't by their own size threaten, if they have too much debt, to undermine it.

    And Glass-Steagall — Glass-Steagall would reduce — it wouldn't do anything to Goldman Sachs and to Morgan Stanley, which are almost Glass-Steagall-ized themselves. But looked at Citicorp, or J.P. Morgan Chase, or Bank of America, Wells Fargo, even if they were subject to Glass-Steagall, they would still be well beyond the size that Lehman Brothers was.

    There is just a disconnect between saying we're going to do Glass-Steagall and getting the banks down to a size where, if there was a complete failure, you would get damaged by it.


    But let me ask you about the too big — the size question, because when I talked to Neel Kashkari, for example, he cited the example of the S&L crisis, where you had maybe 1,000 institutions go under, but the system wasn't at risk.

    So, why not — are you saying that size…


    Excuse me. Did you…



    Go ahead.


    I'm saying size is a factor, but did you ask Mr. Kashkari how big was too big? That's a major factor.

    By the way, it cost us more — the S&L crisis cost the taxpayers more than the TARP did in 2008. So, I don't know why he would cite that. In fact, the failure of a very large number of smaller institutions turned out to be much more expensive to the taxpayers. In fact, as far as the bailout of 2008 was concerned, we made money on that in the money that was extended to financial institutions.

    And, by the way, it wasn't just to big ones then. It was to small ones as well. The only institutions that weren't able to pay us back were the auto companies. And I don't think — I thought it was a good idea to pay them.

    As to size, the question is not just to the size, but what would happen if they couldn't pay their debts. And that's what people ignore. We did two things in the legislation to deal with that. First of all, we made it much, much less likely that they would get so indebted that they couldn't pay them back.

    It's not their overall size. It's the indebtedness that's the threat. You could not now have an AIG, which got itself $170 billion beyond what it could pay off in derivatives, because we do not allow institutions under the law now to get so indebted without the capital to back it up.

    Secondly and most importantly, what we said is this: If a large institution can't pay its debts, it fails. It is not too big to fail. It is put out of business, by law. No federal official can advance any money to pay its debts under the law until it is dissolved.

    What then happens is this: It may be that we would have to borrow from the taxpayers to pay some of the debts, not all, as the previous law required, but if we have to pay some of the debts to prevent the failure of a large institution from having serious economic consequences, the treasury secretary is mandated by law to recover every penny from large — other large financial institutions.

    And, again, it's not the size of the institution, but the size of the unpaid indebtedness. Well, we have dealt with that by reducing the indebtedness and requiring that the institution will be dissolved if it fails.


    What about the argument from Senator Sanders, we just heard it — and I think we should say you're a supporter of Hillary Clinton in the Democratic presidential race — but what about the argument from Senator Sanders on the political issue, the political power of banks who have, as he said — he said six of them have assets totaling 50 percent of the U.S. GDP.

    Is that a problem for our democracy?


    No, I don't think — the problem for our democracy is the one that both Senator Sanders and Hillary Clinton would fix, unlike the Republicans.

    That would be to appoint a Supreme Court justice who would overturn the Citizens United decision, which allows money to go in uninhibited. I will tell you this. In the legislation in 2008 — and people who study this understand it — it was the community banks that had more power than the big banks. We did several things in that bill that favored the small banks other over the bigger banks.

    There is a threat, if they are so indebted, that their debts don't get paid and they solve — they cause an economic crisis. That's the one I believe we have addressed. By the way, once again, with Glass-Steagall — and I would ask you, did you ask either Senator Sanders or Mr. Kashkari how big was too big?

    How can someone claim to be responsibly advocating reducing the size of the institution without ever telling you what size they have to be reduced? That's a fundamental question.



    Well, I can just tell you that…


    I think — yes.


    I will just tell you that Mr. Kashkari said he was going the study it this year. So that's — I did ask.


    Oh. In other words, he came out — that's pretty irresponsible. I think, frankly, Mr. Kashkari is acting still more like the candidate for governor he was in California than a Federal Reserve official.

    And I think the answer is that it might be too small for them to want to stand behind that. But I want to get back to the political point.

    Glass-Steagall, which is Senator Sanders' only remedy, doesn't resolve that problem. People should understand Glass-Steagall doesn't break them into three and four and five pieces. Glass-Steagall says to Citicorp and Bank of America and J.P. Morgan Chase, you cannot have a securities division, as well as a commercial bank decision.

    Now, the Volcker rule already reduces their securities decision. But if you applied Glass-Steagall to those institutions, you wouldn't significantly diminish their size, certainly not below the level that Lehman Brothers was in 2008.


    All right.

    Barney Frank, thank you so much.

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