Why Support the Brown-Vitter Act?

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Simon Johnson Wall Street

As we’ve covered before, Senators Sherrod Brown and David Vitter have cosponsored a bill to end “too big to fail.” Here’s why it’s worth supporting:

You know how most banks require customers to put money down before they’ll lend them money? It’s only logical: banks want a buffer in case the loan goes bad, and so the banks (if they’re smart) will require customers to pay a hearty portion, say 20%, of the loan upfront to be safe.

What’s irritating is that the Wall Street banks don’t want the same standard for themselves when they borrow money. Most Wall Street banks, in fact, only put down about 3% of their own money when they borrow. This means that a loss of just 3% will wipe out the bank’s own money (technically called “equity”).

That leads to bankruptcy and demands for bailouts, and that is exactly what happened on Wall Street in 2008. Since the Wall Street banks had so little equity, so little of their own money involved when they borrowed, a downturn of only 3% completely wiped many of them out. You know what’s sort of insane? By international accounting standards the Wall Street banks still only have about 3% of their own money involved when they borrow today (see footnote).

The Brown-Vitter Act, then, says enough is enough. It says that the six Wall Street banks have to raise their equity to 15% so that in event that a downturn occurs the bank will have to foot the bill with their own money instead of relying on the taxpayer. In other words, the likelihood of a bailout will diminish considerably.

It should go without saying that Wall Street hates this bill and is already fighting hard to stop it. It also should go without saying that the bill is only fair, after all, since the banks require the same thing when customers borrow from them.

We just joined hundreds of people in signing this petition to support the Brown-Vitter Act, and we think you should too.

Footnote: Look at the International Financial Report Standards (IFRP) column in yellow here (pdf), which shows that most banks only had about 3% down as of fourth quarter 2012.

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  1. [...] and we called for the same things when we say we should break up the banks, reform derivatives, and raise equity levels. These are three relatively simple reforms that would go a long way to making the financial system [...]

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