Senate Ends "Too Big to Fail," But Big Banks Aren't Going Away


In a rare bipartisan victory, the Senate voted 99-0 on a measure to end "Too Big To Fail" subsidies for banks with more than $500 billion in assets. After the 2008 financial meltdown, the only complaint one could offer is that the move came too late. Since the collapse, there has surprisingly been nothing done to curb banks from their gargantuan reign; a terrific Forbes commentary notes, "The global derivatives market is now 30% larger than it was in 2008, and that much more dangerous."

You'd think a liberal executive would be chomping at the bit to tear down the banks that launched the 2008 crisis, but you'd be dead wrong. Dodd-Frank, the latest piece of regulatory legislation enacted under the Obama administration, does nothing to curb financial frenzy. Instead, Republican Senators David Vitters, who introduced the measure, and Rand Paul have been the ones to call out the banks. Is there any chance we'll be seeing big banks go away soon? Sadly the answer is a big fat no.

Dodd-Frank is a joke of a "regulatory measure" but don't take my word for it: the Milken Institute reports that large U.S. banks still hide over $5 trillion in derivative trading, meaning they don't have to report it on their balance sheets. If 'derivative trading' is confusing to you, don't worry. Its confusing for legislators too. In fact, its so confusing that the only people that understand how the system works are the people working for the banks. Its why Dodd-Frank is worth as much as Thursday's New York Times

Further, the extremely risky derivative trading isn't even beneficial to the real economy. Regarding the Fed's role in all this, Steve Denning writes, "Chairman Bernanke is thus very conscious that the Fed’s strategy of shoveling money into the banking system has yet to have much positive effect the real economy. The banks are better off. The big firms’ profits are up. The top executives are sitting pretty. But the real economy in which most people work is still struggling." For more, look here.

To exacerbate the issue, Sen. Vitters argued "that the Dodd-Frank financial reform law didn't do enough to keep large banks in check. They say that if banks are still ‘Too Big To Fail,’ they have an unfair advantage and are able to borrow more money since lenders believe they would be bailed out if a risky investment fails."

So the banks are soaking in green while the Fed continues feeding them via rock bottom interest rates. The single-most reason nothing substantive will prevent banks from potentially launching another crisis is simple: they are making way too much money. Numbers so big their just laughable. $5 trillion in hidden derivative trading? It is quite literally unfathomable for most of us. What's worse, everybody whose somebody is in on it. 

Dani Rodrick, a professor from the Harvard Kennedy School of Government, authored a humbling piece about the real movers and shakers in the world. His argument goes a little something like this: until the elites (political and economic, primarily) are convinced shutting down big banks is in their best interest, nothings going to happen. 

So for now, I offer no great news about the wonderful and necessary restoration of the middle class. We've finally seen the Senate come together on an issue, which may be cause for celebration. Hopefully more will follow Rand Paul's uncharacteristically populist footsteps moving forward. But until then, the banks got it made (and they know it).