Former Goldman exec wants to downsize big banks

As presidential candidates debate Wall Street regulation, an argument against big banks arose from an unlikely source. Former Goldman Sachs executive Neel Kashkari asserts banks that are “too big to fail” remain a serious threat to financial stability and must be dismantled. Now president of the Minneapolis Federal Reserve, he discusses the problem and his proposed solution with Jeffrey Brown.

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    Now to another reignited debate, this one about the role and size of the country's big banks, Wall Street, and accountability.

    It's been playing out periodically in the presidential campaign, and is once again a subject of attention and debate in the world of finance.

    Tonight, we start a series of occasional conversations on the subject.

    Jeffrey Brown has our first.


    Last week came a strong argument that — quote — "The biggest banks continue to pose a significant, ongoing risk to our economy."

    And it came from an unusual source.

    Neel Kashkari is a former investment banker. He started his career at Goldman Sachs, then joined the Bush Treasury Department in 2006, later serving as a key player in the government's response to the financial crisis as administrator of the TARP program, which helped bail out the big banks.

    In 2014, he ran for governor of California as a Republican, losing to incumbent Jerry Brown. He's now president of the Federal Reserve Bank of Minneapolis, and joins us now.

    And welcome to you.

    So, still too big to fail, you're saying. This is in spite of Dodd-Frank, in spite of all we have seen. You are suggesting a crisis could still happen and big banks would still need bailing out?

    NEEL KASHKARI, President, Federal Reserve Bank of Minneapolis: Yes. Unfortunately, that's true.

    Dodd-Frank has made a lot of progress. The banks are stronger. They have more capital, so they can withstand bad things happening. But if something — if a big shock were to hit the U.S. economy, I'm afraid that the taxpayers would likely still have to step in and bail out the banks.

    In my view, based on my experience during the crisis, we have not yet solved the too-big-to-fail problem. And we do need to.


    And so things like the stress test, you have already had some people push back at your critique, stress test and others things. You're just — you don't think those are strong enough; you don't trust them?


    Well, here's the thing.

    The crisis in 2008 was so devastating for the U.S. economy, millions of jobs were lost, tens of trillions of dollars of wealth was destroyed by that terrible crisis. I think we all agree that we never want to have that happen again.

    But we need to be able to allow banks to run into trouble without bringing down the whole U.S. economy. If you remember the tech bubble in the 1990s, it was a big boom and then it crashed. That was painful for Silicon Valley, but it didn't risk the whole U.S. economy.

    We need to make sure our financial system is that strong, so that it can withstand the shock without hurting the rest of us.


    Just to be clear, how serious or how dire is the situation? Is the financial system at risk now? Is that what you are suggesting?


    No, I think the financial system is strong right now. But the key is, now is the time, when it's strong, for us to make these big transformational changes, so that 10 years from now or 20 or 30 years from now, we don't have another crisis.

    You know, as a society, we tend to repeat the same mistakes. A lot of mistakes that led to the Great Depression, we repeated in 2000 — in the 2000s, leading to the great crash. And so we need to make sure that we make the changes now, so that 20 or 30 years from now, we're not back in the same situation.


    So, in the options that you laid out in a speech last week, option number one was break — was the straightforward break up the big banks.

    So, how would you do that? How do you decide what is big? And why, for example, would 10 moderate-sized banks be less dangerous than five big ones?



    Well, what we're doing in Minneapolis is, we're bringing experts together from around the country who have different proposals for how to solve too big to fail. So, we haven't picked which one we think is best yet. We want to bring the experts in, analyze their proposals, and come out with our recommendations at the end of the year.

    But look at the — in the 1980s, roughly 1,000 Savings & Loans failed in the S&L crisis. Again, that was devastating for those communities and for those banks, but it didn't risk an entire nationwide economic collapse. So, there is a precedent of having smaller banks, they might make similar mistakes without bringing down the whole economy.

    We want to analyze these objectively and figure out what's the right solution and how do we go forward.


    As you know, a number of bankers in the past and even after you gave your talk, they have said that bigger is in some ways better, right, that they can offer more services, that if U.S. banks were not allowed to be so big, international banks, China and elsewhere, would swoop in and take the business.


    Well, you know, if other countries want to take huge risks with their financial systems, we can't stop them. My view is, we should do what's right for the United States, come up with one set of rules for any bank that wants to do business here, and then enforce those rules evenly.

    And, hopefully, we can lead the rest of the world to follow our path, follow our example. We need to address this. It's not only American banks that are too big to fail. As you indicated, there are some banks outside the U.S. too. But it's time for us to show leadership on this issue.


    I read your speech. You did not suggest or propose bringing back Glass-Steagall. I wonder why not. Why not go farther to once again separate commercial banking from investment banking?


    You know, I don't have a strong opposition to bringing back Glass-Steagall.

    I just know, based on the crisis that we just went through, it really wasn't the combination of investment banking and commercial banking that triggered that crisis. It was the fact that a lot of banks made a lot of bad loans. It was plain vanilla lending that went off course.

    And so we need to make sure our banking system and non-banks, our insurance companies, et cetera, that they are all safe and secure and that they can't risk bringing down the whole U.S. economy.

    As you know, in 2008, AIG, one of the largest insurance companies, that became a systemic risk that almost brought us down, and it required a taxpayer bailout. I think we all agree we never want to do that again.

    So, I'm proposing, let's take action now to make sure we're never in that situation.


    And let me just ask you, when you made this speech and got a lot of attention last week, a lot of the focus was on the messenger, an unlikely messenger, a lot of people thought, a former banker now telling us the banks are too big, a former regulator telling us that essentially regulators are not able, even now, to act in a way that still might hurt the economy, still might have to bail out the banks.

    A reformed — a reform person, what — how do you describe yourself? How are we to see this?


    Well, I am an experienced person.

    I was a strong free market ideologue going into Washington. Then we all lived through the terrible economic crisis. And I think I learned humility about markets can make mistakes. Regulators are not omniscient.

    I asked people, I said, did you predict that the price of oil would drop from $150 to $30? I didn't see it. There are a lot of things that can happen in the world economy that we're not going to be able to predict. So, we need to make sure that our financial system is robust, so that if those things happen, the system can be strong and not require taxpayer bailouts, and not cause devastation to the American people.


    Neel Kashkari, thank you so much.


    Thanks for having me.

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