Inside Financial Services

Elizabeth Warren Sure Does Hate Big Banks

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Elizabeth Warren delivered a speech in Washington last week that she titled “The Unfinished Business of Financial Reform.” The woman just won’t let up! Not surprisingly (to me, anyway) the speech was larded with factual inaccuracies, exaggerations, and straw men. Here are few examples of what I’m talking about, followed by correctives by me:

Warren:  The financial reforms that followed the Great Depression, such as Glass-Steagall and the creation of the S.E.C. and FDIC, were so successful that for over 50 years “there wasn’t a single serious financial crisis.”

TKB: Wrong. The economy has endured a series of financial crises more or less regularly since the end of the Depression, caused by overlending on everything from commercial real estate to energy production. Perhaps the most severe of these occurred in the 1980s, when the big banks thought it would be a good idea to lend as much money as they could to the governments of what were then called “less developed countries.” After Argentina defaulted on its debt, lenders then went through years of LDC loan restructurings that might have rendered several large banks insolvent. But bank regulators and accountants turned a blind eye to the loan problems and didn’t require that banks, many of which didn’t have enough capital to absorb the losses, to build adequate loss reserves.

This pattern of restructuring and reserve avoidance (despite an active secondary market for the loans which valued them at 50 cents on the dollar) continued until the second quarter of 1987, when Citicorp became the first large bank to announce it was establishing a large reserve and would report a quarterly loss as a result.

All the other large banks followed except Bank of America, which added a smaller reserve on account of  its low capital. Following that reserve addition, BofA ended up with a common equity to asset ratio of just 2.1%!  That would be unthinkable today.

Banks’ LDC loan exposure was a true financial crisis, but it didn’t translate into a total meltdown because the U.S. economy was growing strongly, a bull market in both the stock and bond markets had begun, and investors’ and regulators’ views on capital adequacy was decidedly different from today. Even so, LDC debt problems lingered for years and weren’t resolved for good until the issuance of Brady bonds in 1989. So, yes, serious financial crises happened before the subprime mess.

Warren:  Regarding the financial meltdown of 2008, “the moral of this story is simply, without basic government regulation, financial markets don’t work.”

TKB: Hang on. A moment ago, Warren was singing the praises of the post-Depression banking reforms the government put in place. Now she seems to be denying they exist. In any event, if Warren believes “basic government regulations” weren’t in place in the runup to the housing bust and resulting recession, she’s hallucinating. In the 30-plus years since the LDC loan crisis, bank regulation has become steadily more rigorous as a slew of new rules, notably the Basel capital standards, were adopted.

Warren:  “Rules are not the enemy of markets.  Rules are a necessary ingredient for healthy markets.”

TKB:  Warren knows perfectly well (I hope) that the meltdown wasn’t caused by a lack of rules governing big banks. One can debate what the rules should have been or how they were enforced, but the quantity of rules on the big banks was not an issue.

Warren:  “[Republicans] are trying to hamstring the CFPB by slashing its funding, reducing its jurisdictions, and restricting its enforcement authority – steps that would undermine the market by taking financial cops off the beat.”

TKB: This is a typical hysterical, Warren-style straw man. The Republicans, sensibly, simply want to reform the CFPB to make it more like other regulators. In particular, the agency should be governed by a multi-person commission rather than a single unfireable individual and be funded via Congressional appropriation rather than having access to an automatic money spigot at the Fed. But come on, Senator. That would “take financial cops off the beat?” Reform is not the same thing as repeal.

Warren: “The market is now thick with loose underwriting standards, predatory and discriminatory lending practices, and increasing repossessions.”

TKB:  If Warren is right and all this bad stuff is happening, then what are the S.E.C., the FDIC the CFPB, the OCC, the FSOC, the FTC, and the Fed all doing to protect consumers? Warren is a Senator. She should hold hearings, and summon the heads of those agencies to explain publicly why they are in such clear dereliction of their duty. Alternatively, maybe all the bad loan practices that Warren says are so rife aren’t really occurring nearly as frequently as she supposes.

Warren:  “In 2012, the London Whale blew a $6 billion hole in JPMorgan’s balance sheet.”

TKB: Again with the London Whale.  JPMorgan lost $6 billion on the trade. Despite that loss, the company still earned $5 billion the quarter it recognized the loss, and posted record earnings for the year. Also, math: JPMorgan has a $2.6 trillion balance sheet. Six billion dollars comes to 0.2% of that. A hole that is not.

Warren: “There are two structural ways to do [fix too-big-to-fail]. We can cap the size of the biggest financial institutions . . . and we can adopt a 21st Century Glass- Steagall Act.”

TKB:  I have written numerous times about why it’s important that the financial system should include large banks to provide global financial services to large U.S. (and international) companies.  However, I’m struck by Warren’s confusion over why she wants to break up the biggest banks.  Is it because they’re simply too big? If so, what should the size limit be, and why? Or is it because they’re too complex?  Warren doesn’t say. It’s as if she just thinks that big banks are bad, and that’s that.

Warren:  “After the crisis, there was near-universal agreement that big banks needed to be more capitalized and less levered–but our tax code pushes these banks in the opposite direction.”

TKB:  Come on, Senator!  You must know that the largest banks have significantly higher capital ratios today than they did before the crisis. If you don’t know this, you really need to learn a lot more about the industry you’ve made a career of berating. And if you do know and are intentionally misleading to score political points, then you ought to be ashamed of yourself!

Elizabeth Warren is no banking expert, but she’s an absolute pro at anti-bank demagoguery. It wouldn’t be too much, I don’t think, for someone in the mainstream media to point out her lies, exaggerations, and falsehoods. Sadly, I’m not holding my breath.

What do you think? Let me know!

9 Responses to “Elizabeth Warren Sure Does Hate Big Banks”

  1. Patrick Mulqueeney

    Tom, Great article and analysis of Elizabeth Warren’s demagoguery !
    Too bad some responsible journalists don’t pick up on your reporting and
    develop it for the MSM. Perhaps the WSJ or IBD will do so. PMM

  2. WallStreetCritic

    Elizabeth Warren is simply using the same tactics as the financial industry uses. Lies and deceit.

    • ringleader

      And that makes what she is doing right? She affect many mid and small size community banks that have nothing to do with what Wall Street does. She doesn’t separate the wheat from the chaff, she just throws the baby out with the bath water. That’s what makes her so dangerous. All the regulations are actually causing smaller banks to combine and get bigger, eventually creating more of the types of banks she actually hates. She should think more about that and distinguish which types she is railing against.

    • Sidrah

      ###Unfortunately I don’t think she will clinch the SenateThe pebolrm I have with her well-meaning message on bullying is that I can’t help but discount any opinion expressed by someone with political ambition ~ when push comes to shove politicians leave the high ground & head for the votes###Now comes the Hippy side of my character:Regarding the Two-Income Trap [which I have read about, but not read] I think another reason people get mired in the quicksand of debt is an unwillingness to recognise the absurdity of acquiring stuff’. Every $1 spent on buying useless stuff’ is an extra $1 of stuff’ to protect & worry about. It costs you TIME [& often your freedom of choice] to earn that dollar. That $1 could have bought you freedom if you had used it right [by investing it rather than spending it] or you could have chosen to have taken the TIME instead & used the TIME to learn something, love someone, go for a walk, read a book or have an extra 10 minutes sleep. Do something you bloody wall enjoy doing !###

  3. Jerry Plant

    Warren is another ideologue who is simply promoting more government control over the banking system to accomplish her desire to influence bank operations to a point where they are fulfilling her ideological objectives. She is very typical of the left and will use any means she can to promote her ideology, just as Saul Alinsky supported to bring unfavorable positions into favor. Lies, distortions, exaggerations, etc. are among the tools used by the ideologues. Read Saul Alinsky’s 12 rules for implementing change. Warren fits the mold perfectly. A very simply change in the banking reserve requirements to increase capital required for high risk assets was enough to bring about necessary change in the banking system and cause risk to be properly covered by adequate capital levels. New rules beyond that were not necessary.

  4. etoleary


    Bank regulation is a given. The question is how enlightened will it be?

    Dodd-Frank was enacted in 2010 the same month that the President’s commission on the causes of the financial panic of 2008 held its FIRST meeting. So the Act itself is vindictive in its tone and effect and this is why the industry doesn’t like it and never will. And let’s not forget that the behaviors of the banks, especially the largest ones, were truly reprehensible as confirmed by the hundreds of billions of dollars in fines, settlements and legal costs paid in 2014.

    Historically, the commotions and crises that have befallen the banks since the Great Depression have been almost exclusively credit oriented compounded by liquidity and capital adequacy inadequacies. What’s different now is that large risks also exist other than in the loan book of these huge banks. So the situation today is not neatly comparable to the 80 year history that Sen. Warren cites.

    Let’s acknowledge collectively what the risks are and where they are on bank balance sheets and get over the other stuff that only further harms our reputations and drains our energies.

    Sen. Warren has her political objectives. Unfortunately we have furnished her large amounts of material to use back against us.

  5. CommunityBanker

    Big Banks love regulation, all oligopolies do. It keeps competition out and with the help of the government, a small cadre of banks can in essence control the entire national deposit base. Their problem is after wink-wink “complaining” about the regulation for years, the regulators could now actually target just the Big Banks (unlike in actuality anything in Dodd-Frank). Now they have an actual basis for real complaint. However, after conspiring with regulators for so long, now its tough to complain. Too bad for them.

  6. Loanman63

    She is a populist and is pandering to the media with very little fact checking and an ignorance of banking history which isn’t great since the early 70’s. Great suggestion that she should hold hearings and bring in the heads of all the ABC government agencies and show us all, the voters, the proof that big banks and all banks are bad. It is not the banks that are bothersome to me, but , the federal government policies dreamed up by the staff bureaucrats and politicians that have to much time on their hands. They have no idea how economic policies and government programs work, should work, aren’t measured and monitored and have a time period to work as intended or die. Furthermore no programs are started with a clear goal in mind, and where is the accountability?

  7. Kellen

    Mr. President. Just because you got to your poitsion/wealth/power by others making it happen , doesn’t mean the rest of us didn’t work hard and sacrifice to get where we are!

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