Too-Big-To-Fail Is Back on Senate Agenda With ‘Megabank’ Hearing

Senator Sherrod Brown
Senator Sherrod Brown, a Democrat from Ohio. Photographer: Brendan Hoffman/Bloomberg

Too-big-to-fail banks are back on the U.S. Senate’s agenda.

Senator Sherrod Brown, an Ohio Democrat who co-wrote a proposal last year to limit the size of banks, plans to hold a hearing today on “new oversight authority to shield Main Street from Wall Street megabank risk,” according to a statement from his office. Former Federal Deposit Insurance Corp. Chairman Sheila Bair, who has said that governments around the world are propping up a bloated financial system, will be a witness.

Last year’s Dodd-Frank Act gave the FDIC authority to close large failing financial firms, and Federal Reserve officials say new rules will force the biggest banks to boost capital, making failure less likely.

“For too long, Wall Street has been permitted to operate in the dark, putting our economy at risk and leaving taxpayers on the hook,” Brown said yesterday in an e-mailed statement.

The hearing will be held by the Senate Subcommittee on Financial Institutions and Consumer Protection, which Brown heads. Other witnesses include Phillip Swagel, a former assistant secretary at the U.S. Treasury Department who’s now a professor at the University of Maryland, and Simon Johnson, a former chief economist at the International Monetary Fund, according to Brown’s office.

Brown said the Fed failed to answer questions he posed in August about Berkshire Hathaway Inc.’s $5 billion investment in Charlotte, North Carolina-based Bank of America Corp. The Fed responded last week, saying it couldn’t provide “confidential supervisory information,” according to Brown.

‘Financial Stability’

Regulators typically withhold details on bank exams and emergency loans, saying such disclosures may increase the risk of bank runs.

More disclosure about the supervision of banks would be “in the interest of protecting financial stability,” Brown said in the statement. “Inconsistent capital planning has plagued bank regulators in the past.”

Barbara Hagenbaugh, a Fed spokeswoman, didn’t return phone and e-mail messages left after regular business hours yesterday.

Brown, 59, cited a Bloomberg Markets magazine article last week detailing how the largest U.S. banks benefited from $1.2 trillion of secret Fed loans. Last week, U.S. Representative Elijah Cummings of Maryland cited the article when calling for Fed Chairman Ben S. Bernanke to testify about the central bank’s lending programs. Cummings is the top Democrat on the House Oversight and Government Reform Committee.

Biggest Banks

Morgan Stanley, Citigroup Inc. and Bank of America got almost $300 billion of secret Fed loans, based on their combined peak borrowings. Bloomberg News calculated those numbers based on an examination of 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions.

Bernanke yesterday released a staff memo asserting that the loans weren’t secret because the existence and overall size of the lending programs were made public. Terms of the loans and the names of the borrowers weren’t disclosed until the Fed was forced to release them by Dodd-Frank and court orders upholding Freedom of Information Act requests from Bloomberg News.

In April 2010, Brown co-sponsored a measure with then-Senator Ted Kaufman, a Delaware Democrat, that would have forced the six biggest U.S. banks to shrink. The Obama administration opposed the legislation. Treasury Secretary Timothy F. Geithner and White House economic adviser Lawrence H. Summers visited lawmakers to urge its defeat, according to Kaufman. The so-called Brown-Kaufman amendment failed, with 60 senators voting against it.

“Senator Brown still believes Brown-Kaufman provided important tools to prevent ‘too-big-to-fail,’” Meghan Dubyak, a spokeswoman for Brown, said in an e-mail. “He is examining a variety of ways to address ‘too-big-to-fail’ and expects to make his proposals public soon.”

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