Jon Huntsman’s op-ed on financial reform in Wednesday’s Wall Street Journal is bookended by some Republican boilerplate on rolling back Democrat’s 2010 overhaul, but there’s some interesting stuff in there. Here’s the crux of his concern about the financial sector:
More than three years after the crisis and the accompanying bailouts, the six largest American financial institutions are significantly bigger than they were before the crisis, having been encouraged to snap up Bear Stearns and other competitors at bargain prices. These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose.
Size isn’t necessarily the most important factor in financial risk–relatively large Canadian banks weathered the 2008 crisis quite well because they had a lot of capital in reserve–but it’s a valid issue and one that Dodd-Frank didn’t really address head-on. It’s also a concern typically voiced by liberals who feel Obama’s bank reforms weren’t onerous enough. Suffice it to say, it’s unusual to hear a Republican presidential candidate write approvingly of some European countries’ move toward “more sweeping regulatory curbs than any yet proposed here.”
So, how does Huntsman propose to deal with Too Big to Fail? He presents a menu of options, including two big policies from across the pond: The UK’s plan to segregate commercial deposit banking from investment banking–it’s known there as “ring-fencing” but is frequently referred to by the name of the now defunct Glass-Steagall Act in the U.S.–and Switzerland’s strict capital requirements, which are not so unlike the ones that saved Canada’s bacon in ’08. While re-instating Glass-Steagall is probably not the regulatory panacea some claim it to be, it’s quite popular in some political circles. For instance, it’s item #1 on many Occupy Wall Streeters’ list of demands, and it has long-standing appeal on the fringes. (Think Paulites and Larouchies.)
Capital requirements are a much less sexy issue, and there’s less space between Huntsman and the White House than he implies. Treasury Secretary Tim Geithner once said his three top priorities for financial reform were “capital, capital, capital.” Stricter requirements didn’t come out of Dodd-Frank, but the Obama administration has been pursuing them at the international level and new rules are expected to be adopted in November. In pointing to Switzerland, Huntsman is highlighting national-level requirements that differ from the global reforms coordinated in the Basel accords.
Huntsman also floats a few tax proposals: ending the deduction for bank’s debt payments in order to disincentivize highly leveraged firms and a fee on a few particularly huge banks. If the latter idea sounds familiar, it’s because it’s very similar to the “Financial Crisis Responsibility Fee” Obama has been calling for over the past two years. Obama’s would tax banks with more than $50 billion in assets, while Huntsman’s would fall on banks with assets surpassing “a certain percentage of GDP”–a different accounting method, but not a fundamental departure from the notion that a few enormous firms should essentially pay a small insurance premium for their potentially catastrophic size. And because Huntsman’s presumably wouldn’t operate under the pretense that it’s only there to repay the 2008 bank bailout, it would be a permanent brake on bank size rather than Obama’s ten-year plan. (It should be noted that Obama’s bank tax already failed to advance in a Democratic Senate.)
It’s a peculiar mix of ideas. All the Dodd-Frank skepticism you’d expect from someone gunning for Obama’s job is there–Huntsman would nix the Consumer Finance Protection Bureau and seems convinced that the resolution authority, a new power for the FDIC to seize and liquidate failing firms, isn’t workable. And at the same time, there’s a populist Occupy Wall Street undercurrent to the policy nuts and bolts–Tax the big banks, break them up, no more bailouts!–and plenty of overlap with what Obama’s already done. Of course, Huntsman’s not going to be his party’s nominee. But with the drums circles pounding in Zuccotti Park, Elizabeth Warren hurling rocks in Massachusetts and a former private equity firm founder front-running in the Republican primary, David Plouffe is probably right when he says that Wall Street will be “one of the central elements of the campaign.” I hope the Journal keeps getting candidates to write about the regulation side of things.