Law Profs Letter Supporting SAFE Banking Act

Many law professors support legislation capping the size of US banks, though the Senate voted a version of the proposal down yesterday, 61-33.   

Supporters include the following scholars, who joined me overnight in signing the open letter appearing below, urging Congress to support this proposal (despite the initial vote against it). 

Other law professors who’d like to express support are welcome to do so in comments to this post or by email to me.

Shawn Bayern, Assistant Professor of Law, Florida State University

Lawrence A. Cunningham, Henry St. George Tucker III Research Professor of Law, The George Washington University

David Singh Grewal, Society of Fellows, Harvard University*

Lawrence Lessig, Professor of Law, Harvard University

Frank Pasquale, Loftus Professor of Law, Seton Hall University

Lawrence E. Mitchell, Theodore Rinehart Professor of Business Law, The George Washington University

Jedediah Purdy, Professor of Law, Duke University

Heidi Mandanis Schooner, Professor of Law, The Catholic University of America

 Zephyr Teachout, Associate Professor of Law, Fordham University

 Arthur E. Wilmarth, Jr., Professor of Law, The George Washington University

Reviving the SAFE Banking Act: An Open Letter

Please allow us to add our professional opinion in support of reviving some version of the SAFE Banking Act, sponsored by Senators Sherrod Brown (Ohio) and Ted Kaufman (Delaware), initially voted down 61-33 yesterday. We thus humbly join distinguished luminaries in public financial policy including two former Federal Reserve chairs, two current Federal Reserve presidents, and the head of the Bank of England. The idea’s intellectual and policy defenses are stated in one of the best books on the financial crisis and reform, Thirteen Bankers, by MIT Professor Simon Johnson and Yale Law School researcher James Kwak.

As summarized on the attached page, the country now has ten banking firms that together command some $10 trillion in assets, roughly equal to nearly 75% of the country’s gross domestic product. Using a cap relating firm size measured by liabilities to GDP, the proposal would divide those into a total of 36 or so. Each would still command some $285 billion in assets apiece on average; that is larger than the next largest bank is now. Firms would remain sufficiently large to deliver requisite economies of scale and meet corporate and personal finance needs.

That division would eliminate the continuing threat to the US economic and political systems posed by banks deemed so big that government lavishes trillions in aid to avoid letting them fail—at incalculably magnified cost to ordinary citizens and the real economy. It is by far the cleanest and most reliable solution to the manifest havoc massive banks wreak, not addressable by even the most valiant technocratic adjustments for better regulation or capital requirements.

The division idea is not as radical as it is controversial, due to foes of ex ante legal constraints on private power, especially from within the industry. Passage of the legislation would only mean substantially a return to the scale and distribution of the US banking system as of the mid-1990s, when no bank commanded assets exceeding more than a few percent of GDP. In important part, the conglomerate mergers of the past two decades that caused this massive concentration of power would be reversed.

If so, expect greater competition, with benefits to consumers, savers and investors; more careful risk management by banks and their lenders, given that they’d no longer enjoy a government guarantee against failure; and generally a less unbalanced economic and political environment in the country that massive bank scale has consolidated. In short, Brown-Kaufman combines popular appeal to voters with sound public policy logic.


Existing Concentration and Potential Competition in US Banking Industry

Listed below are the largest banks in the United States, measured by assets, according to Federal Reserve data as of December 31, 2009. It notes which would likely need to be divided if law capped bank size, under some version of the SAFE Banking Act. For the largest four, listed are some names of previously-independent agglomerated firms that a division could rejuvenate.

A. The Largest Four (to be divided into a total of about 21)

1. Bank of America ($2.2 trillion; 16% GDP) [Barnett Bank, Boatmen’s Bancshares, FleetBoston, Montgomery Securities, NationsBank, Robertson Stephens, Security Pacific (plus Merrill Lynch from this period’s crisis]

2. JP Morgan Chase ($2 trillion; 14% GDP) [Bank One, Chase Manhattan, Chemical Bank, First Chicago, Hambrecht & Quist, Manufacturer’s Hanover (plus Bear Stearns and Washington Mutual from this period’s crisis)]

3. Citigroup ($1.85 trillion; 13% GDP) [Commercial Credit, Primerica, Travelers, Salomon Brothers]

4. Wells Fargo ($1.24 trillion; 9% GDP)) [CoreStates, First Interstate, First Union, Norwest (plus Wachovia from this period’s crisis)]

B. Tier Two: The Next Largest (to be divided into a total of about 9)

5. Goldman Sachs ($850 billion; 6% GDP)

6. Morgan Stanley ($771 billion; 5% GDP)

7. MetLife ($771 billion; 5% GDP)

C. Tier Three (to be divided into a total of about 6)

8. HSBC ($391 billion)

9. Tannus ($369 billion)

10. Barclays ($365 billion)

D. The Next Ten Massive Banks (not needing to be divided)

11. US Bancorp ($281 billion)

12. PNC ($269 billion)

13. BONY/Mellon ($212 billion)

14. Suntrust ($174 billion)

15. GMAC ($172 billion)

16. Capital One ($169 billion)

17. BB&T ($165 billion)

18. State Street ($156 billion)

19. Citizens ($148 billion)

20. TD Bank ($145 billion)

*Grewal will join the Yale Law faculty in 2011.

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5 Responses

  1. Classic response from the left – beat up on players like JP Morgan and continue to write a blank check for Fannie and Freddie.

    sorry, but I simply cannot conceive that a move this drastic is at all well thought out and fully vetted…well except to the extent that this would also be a jobs bill for lawyers.

    Full disclosure: I own shares of JPM but I’ve never even thought of buying into Fannie/Freddie.

  2. Frank Pasquale says:

    Conservatarian–there is a strong conservative/libertarian case to be made for breaking up the banks. See, for instance, this article by Arnold Kling:

    “Big banks are bad for free markets. Far from being engines of free enterprise, they are conducive to what might be called “crony capitalism,” “corporatism,” or, in Jonah Goldberg’s provocative phrase, “liberal fascism.””

    And check out some of the blurbs for “13 Bankers”–Sen. Bunning, Niall Ferguson, and other conservatives have found Johnson & Kwak’s work compelling.

    This issue scrambles conventional political alliances.

  3. Aacan says:

    I read your response with interest….derisively but at least I took the time to read it. Because of the sheer brilliance of the response…it had to be brilliant because I could not grasp the link between bank reform as suggested and Freddie Mac/Fannie Mae…naturally I needed to learn more about the responder. In clicking the “View my complete profile link” on your blogger site I got nothing. Does this represent who you really are? Are you so proud of your credentials that you choose not to post them because it could impact the confidence of this esteemed group of economists?

  4. Aacan says:

    My earlier message is intended for the Maryland Conservatarian, whatever conservatarian means.

  5. Professor – I’ve read Kling’s article (no surprise that I subscribe to NR) and certainly have no inherent love for big banks; there is a guilty pleasure of sorts of watching Obama bite the Goldman hand that (significantly) fed him. However, as even Kling’s article refers to, the biggest outlays have gone for Fannie , Freddie, AIG and the auto companies. The size of JP Morgan is not the problem. Further, the present size of some of these banks is at least partially related to acquisitions done at the feds request – JPM taking on Bears and BofA taking on Merril. And then there is the technical matter of actually valuing the bank assets. Would this create the perverse incentive to understate assets? Sorry, I continue to believe that linking the size of a bank to overall GDP is not something we should rush into.

    And even assume retroactive application of SAFE Bank to 2008…and I think we still have the Lehman mess.

    As to “crony capitalism”, again who’s to argue? But this will always be a problem as long as government is such a significant player in the economy – as a tax, spend and regulatory force. A poster corporation for this is GE and their incessant pushing of “alternative” fuel credits and subsidies. I will gladly link arms to fight such unnatural couplings.