Maybe this whale is bigger than too big to fail

Darrell Delamaide, USA TODAY | USATODAY

Editor's note: This marks the debut of a weekly column on business regulation by Darrell Delamaide, a long-time business journalist in Washington, D.C.

WASHINGTON — Too big to fail is back, big time.

The debate about whether banks were so big the government could never allow them to fail had subsided amid the fiscal squabbling in Congress. But it came roaring back in late February when Sen. Elizabeth Warren, D-Mass., cited a Bloomberg estimate that the 10 biggest U.S. banks save $83 billion a year in funding costs because of the market's perception they are too big to fail.

It gained further momentum when Attorney General Eric Holder acknowledged he was afraid to prosecute big banks for fear he would bring down the financial system. Banks, it seems, are not only too big to fail, but too big to jail.

It reached a breaking point when a 300-page congressional report documented the deceit and hubris of JPMorgan Chase in connection with its "London Whale" derivatives trades, which led to losses of at least $6 billion after the bank ignored its internal rules limiting risk.

In a Washington that rarely agrees on anything, too big to fail — now with its own acronym, TBTF — has become the bipartisan issue par excellence.

How bipartisan? One of the last actions in the U.S. Senate before the two-week Easter recess was a unanimous vote calling for an end to those implicit TBTF subsidies. You could hardly get that kind of support for apple pie.

Two senators on opposite ends of the political spectrum — liberal Democrat Sherrod Brown of Ohio and conservative Republican David Vitter of Louisiana — sponsored that resolution and plan to introduce legislation this month to curb bank size.

A top official of the Federal Reserve — the nation's central bank, which normally remains studiously non-political — addressed the Conservative Political Action Conference last month in Washington, urging the restructuring of big bank holding companies so that their individual banking operations become "too small to save."

Ironically, it was Richard Fisher, president of the Federal Reserve Bank of Dallas and a former Democratic candidate for Senate in Texas, who took the CPAC podium normally reserved for conservative Republicans such as Sens. Rand Paul of Kentucky and Marco Rubio of Florida.

Does all this mean that tomorrow, newly installed Treasury Secretary Jack Lew will have the Financial Stability Oversight Council created by the Dodd-Frank financial reform act use its authority to force JPMorgan or other big banks to divest assets and break up into smaller pieces?

Almost certainly not. What it does mean, however, is that the balance has tipped from giving the benefit of the doubt to JPMorgan CEO Jamie Dimon and putting the burden of proof on him and his peers to demonstrate that they are following the letter — and the spirit — of Dodd-Frank.

After last month's report from the Permanent Subcommittee on Investigations claimed JPMorgan officials "mischaracterized high-risk trading," "hid massive losses," "disregarded risk," and "dodged" regulatory oversight in connection with the London Whale trades, it will no longer be possible for Dimon to use his bluster or charm to wave away reservations about his bank or the other giant institutions.

The resurgence of concern about TBTF means that the proposed Brown-Vitter bill — which will encourage big banks to downsize by imposing extra capital requirements — will be politically difficult to stop.

It means that the patchwork of federal bank regulators will have to work harder at finalizing the rules on derivatives and speculative trading called for by Dodd-Frank to limit risk.

It means that the political backlash against the banks may have finally reached sufficient strength to overcome the army of lobbyists, the stream of political contributions, the "regulatory capture" from the revolving door between Washington and Wall Street to finally enable effective action against an industry gone rogue.

And it means that if there is another disastrous loss or misstep by one of these banks — even if we're lucky, and it doesn't result in financial meltdown or a government bailout — it will lead to a more direct intervention by the government to limit bank size.

In short, we still have a problem with too big to fail, and we won't solve it overnight. But at least now we're talking about it again, and no longer ignoring the whale in the room.

Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington, D.C., for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others. He is the author of four books, including the financial thriller Gold.