What Weill Missed Over the Past 3 Years
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July 26, 2012
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What Weil l Missed Over the Past Three YearsByTonyFratto,(202)822-1205,[email protected]
Yesterday,IaddressedthepoliticalnatureofSandyWeillsargumentandwhyhis
conclusionsarewrong.Inadditiontohispoliticalargument,Weillalsotriedto
makeasystemicsafetyandsoundnessargument.LostinWeillspoliticalandpublicrelationsjustificationforareturntoGlass-Steagallisthefactthatthesystemisfar
saferthantheoneheseemstobeconcernedabout.ImnofanoftheDodd-Frankact
Iwouldhavepreferredafarlessconfusingandprescriptivereformofourfinancial
system.ThelawmakesitmoredifficultforU.S.firmstoservecustomersand
competeglobally.However,theresnoquestionthatDodd-Frank,howeverflawed,iscontributingtoamoresafeandsoundbankingsystem.
Weillcitedtheneedformorecapitalandlessleverage.Generally,everyoneagrees,
andinfact,sincetheendofthecrisistheentirefinancialsectorhasincreasedcapital
andliquiditylevels.AshighlightedintheHamiltonFinancialIndex,theTier1
CommonCapitalRisk-BasedRatioforcommercialbanksisatanall-timehighand
hasrisen38percentsincethecrisis(Exhibit1).
Exhibit!1 !TIER 1 COMMON CAPITAL LEVELS HIT ANOTHERALL-TIME HIGH IN THE FIRST QUARTER OF 2012!
Source: FDIC, SNL Financial!
1.0!0.8!0.6!0.4!2!
14!
12!
10!
Tier1CommonCap
ital($T)
1.4!
0!Tier
1Com
mon
Risk
-Base
dRa
tio
(%)
8!
6!
1.2!
Q112
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
Tier 1 Common Capital ($T)!Tier 1 Common Risk-Based Ratio (%)!
Tier 1 Common Capital and Tier 1 Common Risk-Based
Ratio for U.S. Banks!Tier 1 Common Capital
Ratio has risen 38%
since 2007 to an all-
time high.!
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Thefourlargestbankshaveincreasedthisratiobythesameamount.Atthesame
time,theyveincreasedthequalityoftheircapital,astheircommonequitytoassetsratiosareatnewall-timehighs.
SoasmorepeopleinWashingtonclamorforhighercapitallevels,remember,banks
notonlyhavemorecapitalalready,butbetterqualitycapitalthaneverbefore.
Similarly,forallthepresstheVolckerRulereceives,bankshavealreadydismantled
andsoldvirtuallyallbutthebarestabilitytomakemarketsforclients.Proprietary
tradingatbankshaslargelygoneaway,reducingso-calledspeculation.Personally,I
wouldprefertorepealtheVolckerRuleitremainsasolutioninsearchofa
problem,butthereformisworkinginwaysSandyWeillwouldseeminglyapprove.
Finally,WeillscallforareturntoGlass-Steagallwasspicedwiththecommon
concernthatweshouldneveragainbailoutbanks.WeilliseitherunfamiliarwithDodd-Franksactualprovisionsorhassimplychosentojointhecollectionofeternaldisbelievers.IfbybailoutsWeillisreferringtothegovernmentsresponsetothe
financialcrisisin2008-2009,thenheshouldbepleased.Isupportedthatgovernmentresponse.Icontinuetosupportitandwouldsupportitagain.But
thatsnottheresponseyoullfindinDodd-Frank.Instead,thelawsResolution
Authorityonlyallowsthegovernmenttowinddownnotpreservefailedfinancial
institutions.Intheeventoffailure,itguaranteesthatbondholderswilltakelosses
andshareholderswillbewipedout.
ThepastthreeyearshaveseensignificantchangesthatWeillandotherscontinueto
ignore.Rather,theyflackanoldrulethatwouldnothavepreventedthefinancialcrisis.Thefinancialcrisisactuallyshowedthatdiversifiedbanksweresaferthanthe
simplercommercialandinvestmentbanks.AndasaresultofDodd-Frank,banks
havemaderealandsignificantreforms.Goingbacktoananachronisticlawwillonly
hobblebothourbanksabilitiestocompeteintheglobalmarketandtheabilityof
ourregulatorstoregulatetheglobalfinancialsector.
WhenGlass-Steagallwasbeingrepealedinthelate1990s,economistMichaelK.
Evans,thenoftheKellogSchoolofManagementatNorthwesternUniversity,wrotehowtheAsianfinancialcrisispresentedtheU.S.financialsectorwithaunique
opportunitytoparticipatefullyinthese[global]marketsandthatthefinancial
servicesfirmsthattookadvantageofthesituationthenwouldhavean
insurmountableleadformanyyears.
RepealingGlass-Steagallhelpedenableourbankstoexpandtheirservicesand
geographiestobestserveU.S.clientsglobalneeds.Now,inthewakeofourown
financialcrisis,aglobalizingeconomywithlargebanksthroughoutEurope,Asiaand
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therestoftheworld,dowewanttohinderthecompetitiveadvantageofU.S.firms
andreducethereachofourregulators?
TonyFrattoisaManagingPartneratHamiltonPlaceStrategies,formerAssistantSecretaryattheU.S.TreasuryDepartment,andaformerWhiteHouseofficial.Heisalsoanon-aircontributorforCNBC.
