Brown-Vitter Bill: Time to Break Up the 6 Megabanks and Restore Some Market Sanity


If you buy a house with a down payment of 10% getting a loan for the other 90%, and the price of the house falls 11%, you're in trouble. However, if you were to buy a house with a 15% down payment, and the price falls 11%, you may not be the happiest camper, but you're a lot better off than the first guy. Okay, now apply this same logic to banks.

Say an investment bank is in the same situation: they pay 10% down on some promising investment, and get a loan for the other 90%. Once the price falls 11% on that investment, the bank is screwed; the market price is less than what the bank owes on that investment. In a nutshell, this is what happened in the 2008 crisis that predicated the U.S. government's "bailout": the banks were all screwed, so they needed someone to buy their now "toxic" investments. 

As an aside, "toxic" investments or assets are nothing more than a euphemism for banks being stupid with other people's money. They usually get away with it too. 

A new bill proposed by senators Sherrod Brown (D-Ohio) and David Vitters (R-La.) calls for mega-banks to operate along guidelines that would buffer the chances of this type of crisis coming back for another round. The proposal mandates a 15% capital requirement would essentially make it harder for banks to "fail," thereby reducing the risk that taxpayers will have to cover ill-advised investments like they did in 2008.

The critical factor in their bill is what's called the "capital requirement" that would make banks use at least 15% equity to finance their investments. In typical power politics fashion, Goldman Sachs rolled out a research report of their own, "Brown-Vitter bill: The impact of potential new capital rules." In an attempt to smear the bill by showing it would hurt banks' abilities to lend (which drives investment, a key component of our economic health), the investment bank powerhouse committed the fallacy of terminology tactics.

In short, GS argues the capital requirement would decrease lending because it would require banks to "hold" more capital. The fact of the matter is that no, the bill has no new requirements regarding assets. The new "capital requirement" simply states that mega-banks should make a higher down payment on their investments (or, in jargon, banks should use a higher percentage of equity to fund their purchases instead of using debt.)

The Brown-Vitters bill is not part of some "socialist," or "anti-capitalist" agenda: its a stab at decreasing the chances of a financial disaster like 2008 from reoccurring. 

After all, what happened to that American competitiveness? Why is it that six banks (Goldman Sachs, Morgan Stanley, JP Morgan Chase, Citigroup, Bank of America, and Wells Fargo) control assets equivalent to 60% of America's gross national product? What happened to "free markets," where businesses were judged based on the products and prices they put out? Why is it that the biggest champions of "free market principles" rely on fixing the free market to maintain their market share? 

Brown and Vitters plan to continue their fight against the power of the mega-banks. Their bill is hardly political and includes common sense approaches to inhibiting financial crises. America is being pushed, no, bullied into a corner by the golden hands reigning over the U.S.

"Did the founders give any type of warning about this?" questions the casual observer, "they always seemed sort of smart." Yes, sir casual observer, they did.

"I believe that banking institutions are more dangerous to our liberties than standing armies." - Thomas Jefferson.