The Strange Bedfellows of #EndingTBTF

WASHINGTON — Politicians and pundits representing the left and the right largely agree that despite various reforms put in place during the past decade, the biggest U.S. banks are still "too big to fail."

In many ways, that view echoes the anti-establishment sentiment seen in the surprisingly successful insurgent presidential candidacies of Donald Trump and Bernie Sanders. Those who have faith that the system works see the Dodd-Frank Act as a success while those who are alienated from politics-as-usual feel differently.

"If you feel like the regulators largely do a pretty good job, then Dodd-Frank makes a lot of sense," said Mark Calabria, director of financial regulation studies at the Cato Institute. "That kind of distrust of the status quo, that kind of distrust of the policymakers that are there is certainly common and is almost a defining characteristic of both progressives and libertarians."

That critical view of "too big to fail" is hardly relegated to the fringes of either party. Exit polling after New York's primary election April 19 found that 63% of Democrats and 49% of Republican voters thought that Wall Street hurts the economy more than it helps, according to The Wall Street Journal. And that sentiment is not new or held by New Yorkers alone — a poll from January 2015 by a group called the Progressive Change Institute found that 55% of respondents favored breaking up "financial institutions that are deemed 'too big to fail.' "

It is also shared by top leaders from both political parties. Progressive heroes like Sen. Elizabeth Warren, D-Mass., owe much of their political clout to the issue, while Sanders has made it a critical part of his campaign against the establishment candidate and presumptive nominee Hillary Clinton.

On the other end of the spectrum are conservative stalwarts, including Senate Banking Committee Chairman Richard Shelby and House Financial Services Committee Chairman Jeb Hensarling, both of whom have argued that institutions remain "too big to fail." Hensarling has vowed to introduce an alternative to Dodd-Frank this session.

Karen Shaw Petrou, managing partner of Federal Financial Analytics, said the unity on the single issue resembles the early-20th-century coalition of progressivism of Theodore Roosevelt and the prairie populism of William Jennings Bryan — a mutual distrust of the moneyed class and the system in which they operate.

"The populist coalition — progressives on the one side and tea party people on the other — they agree with each other on one really important thing: 'too big to fail,' " Petrou said. "It's one of the reasons why the TBTF arguments are so persistent, and ultimately so meaningful."

Advocates for the post-crisis reforms similarly find themselves in uncomfortable company. In March President Obama denounced the widespread "cynicism" that no meaningful reforms have been achieved since the crisis, and Federal Reserve Chair Janet Yellen touted the "quantum leap" that regulators have taken in issues like capital and resolvability.

In that way, they agree with the big banks themselves, which have come to Dodd-Frank's defense, arguing that the industry is more resilient than before the crisis and that Titles I and II of the law give regulators ample authority to either restructure banks to resolve them if they do get into trouble.

Greg Baer, president of the Clearing House Association, which represents many of the largest U.S. banks, said that the decision by the Fed and the Federal Deposit Insurance Corp. to fail many of the largest banks' living wills this month is a demonstration that it's credible to believe the biggest banks could eventually be successfully resolved through the bankruptcy process once flaws with their plans are addressed. In the unlikely event that couldn't happen, regulators still have orderly liquidation authority to help unwind a megabank.

"We will effectively have a double-hulled tanker against any potential failure in the future," Baer said. "Those real-world developments are very difficult to reconcile with some of the rhetoric."

While there is clearly an agreement by a wide variety of policymakers that "too big to fail" exists, the political solutions that stem from that assumption vary drastically.

It's into these waters that Neel Kashkari, the newly appointed head of the Federal Reserve Bank of Minneapolis, has chosen to wade. He turned heads in February by concluding in his first public speech that "too big to fail" lives on and that policymakers should either break up the biggest banks or restructure them.

But he has also set out an ambitious agenda to attempt to find a consensus solution to the problem. As part of that, the Minneapolis Fed is holding a yearlong series of symposia — touted under the Twitter hashtag #EndingTBTF — to examine the issue and deliver conclusions by the end of the year. The first meeting was held April 4, with the next scheduled for May 16.

Kashkari — one of the architects of the Bush administration's plan to bail out the biggest banks during the crisis — has cast himself as an honest broker in the debate, one who is able to talk to each side.

"I don't see this as a partisan issue," Kashkari said in a Feb. 17 interview with Reuters. "I do think there are people on both sides of the aisle who care about this issue and think we should take stronger action. It wasn't a political statement. It was a statement about economic risks."

(Kashkari declined through a spokesman to be interviewed for this article.)

Whether Kashkari can fill that role remains to be seen. Banks have been predictably scathing in their criticism of #EndingTBTF and have effectively boycotted it, though Kashkari has insisted they have a standing invitation to participate. The April 4 symposium included voices sympathetic to the banks and/or skeptical of the call to radically restructure them, though none either directly or indirectly represented them.

That might hurt Kashkari's ability to forge a consensus.

"To the extent that you come in as the organizer with a view … you suffer from a scenario like the situation here, when people on the other side, the bank groups, don't show up," said George Madison, former general counsel for the Treasury Department in the Obama administration and now a partner at Sidley Austin LLP. "But sometimes that happens when the other side believes they are in a no-win situation and their views won't be heard."

Baer said the problem with the inquiry is that it rests upon a presumption that banks don't agree with — namely that the biggest banks are still "too big to fail."  

"My principal concern with the effort is that it starts with premise that 'too big to fail' still exists, and that's not a premise that I agree with," Baer said. "These issues are certainly important and worth debating, and I think one of the key questions is not being debated but rather is being assumed."

Dennis Kelleher, who heads the reform group Better Markets, said that Kashkari has already had an impact on the debate no matter what results from his symposia.

"Neel Kashkari, in my view, has done a great public service by raising the two key issues: Is 'too big to fail' ended … and if not, what do we as a society want to do about that?" Kelleher said. "Irrespective of what the outcome is, he has already achieved much of what he was looking to do."

Experts are divided about where this political dynamic into which #EndingTBTF has tapped will lead regulatory policy down the road.

Madison said part of the problem is that the legislative solutions put forth by both Wall Street hawks like Warren and anti-Dodd-Frank Republicans like Hensarling are both backward-facing. Warren's fixation on a reinstatement of the 1930s-era Glass-Steagall Act is no more progressive than Hensarling's stated goal of erasing Dodd-Frank from existence, he said.

Warren "thinks that the banks' business model is a broken model," Madison said. "The world isn't there. In my view, the financial innovation and the complexity of the world and global business has moved beyond that. So I think it's unlikely that that is going to do anything other than to go back to the future, in the same way that Hensarling is kind of going back to the future in another direction."

Calabria said that there are some specific policy areas where right and left have effectively joined forces to realize changes — particularly in the case of the combined efforts of Warren and Sen. David Vitter, R-La., to put tighter limits on the Fed's emergency lending rule, which the central bank finalized last November. Both sides have also decried the lack of prosecutions stemming from the financial crisis.

But in general, the policy solutions put forth by the right and the left cancel each other out. Either side will probably accept the status quo indefinitely if the alternative is what the other suggests.

"There is enough of a majority that hates anybody else's alternative, even if there is a majority that hates the status quo," Calabria said. "We will have a compromised, muddled financial regulatory system for probably as long as I'm alive. It will take a big shock."

Petrou, meanwhile, says that the political pressure is not being entirely held in check. The regulatory decisions that have emerged from financial regulators since 2013 or 2014 have been steadily moving toward a regime that emphasizes higher capital and supervision, particularly for the global systemically important banks, and that is having a "slow poisoning" effect on those firms. Any slip, even a mild one, could cause public sentiment to erupt.    

"The U.S. G-SIBs are walking on glass," Petrou said. "If any one of them made a major mistake — they wouldn't have to blow up, they just have to have an earnings surprise or something — you would see, especially if it's at a period of broader economic stress, the breadth and depth of the coalition would lead to something really foolish and fast."