The Private Equity for Families Blog

Kashkari and Dimon Debate Too Big To Fail

I was inspired by another archived podcast I heard on Planet Money about former Goldman Sachs partner Neel Kashkari. As interim Assistant Secretary of the Treasury For Financial Stability, Mr. Kashkari is best known for overseeing the TARP program in 2008 and 2009 under his former boss, Hank Paulson. Mr. Kashkari is now President of the Minneapolis Federal Reserve. Neel grew up in Stow Ohio and attended Western Reserve Academy in Hudson. According to Wikipedia, Neel’s grades were not good enough to apply to top tier universities. He made up for that later by attending the Wharton School of the University of Pennsylvania.

We all owe Neel a debt of gratitude. He correctly surmised in 2008 that the US Banking system would fail if TARP funds were not administered to replace worthless residential mortgages (a gift from Barney Frank and Fannie Mae) with liquid treasury securities. He oversaw the process by which the banking system was recapitalized and determined which banks got relief and how much. He was close enough to the potential meltdown to understand the real pressure points of the banking system.

Kashkari and Dimon Disagree

Recently, Mr. Kashkari challenged Jamie Dimon about his assertion that “Too Big to Fail” restrictions were curtailing loan growth at JP Morgan Chase. While Mr. Dimon may be right about bank balance sheets improving under Dodd-Frank, he has a hard time explaining why he has used billions of bank capital for stock buybacks instead of loans. According to Charley Crowley and our friends at Boenning & Scattergood, a well-regarded investment banking firm serving the middle market financial services industry, there has been meaningful balance sheet progress under Dodd-Frank with tangible capital as a percentage of total assets moving from a low of 4.28% in 2008 to 8.50% in 2016. This is as high as I ever remember.

However, Mr. Crowley also sees an unintended consequence of Dodd-Frank being forced small bank consolidation. The little guys simply cannot meet the regulatory hurdles of a 22,000-page attempt to legislate good banking processes. Mr. Crowley explains it as follows:

“One unintended consequence of Dodd-Frank and other aspects of the regulatory pendulum swinging is that consolidation has been very active, and the too-big-to-fail issue has certainly not gone away. Twenty years ago, the top 10 banks controlled an aggregate of 23.6% of the nation’s deposits.  According to the most recent data, it is now 52.9%. Community banks (generally speaking) had virtually nothing to do with the financial and real estate crisis, and yet they have been paying a heavy toll in terms of increased regulatory costs and the presence of ever-stronger competitors.”

Kashkari- 70% Chance of Bank Failure This Century

Neel Kashkari is even more adamant about” Too Big to Fail”. In a recent interview on Fox, he told its viewers that the only way to insure bank safety and soundness is doubling the minimum equity capitalization of large banks. He confirms Mr. Crowley’s belief that a strong banking system is challenged by the consolidation of the smallest banks and the concentration of depositors. His bottom line is “Too Big To Fail” has not been solved. Mr. Kaskari initiated his message for an impressive story on Planet Money in its podcast on May 26, 2016. Mr. Kashkari claims he is not angling for Janet Yellen’s job, but each of his impassioned “Too Big To Fail” speeches have a familiar populist twang. He is channeling the same anger that pogoed Trump to the White House. With Neel’s rising popularity, can we expect Trump is going to dump Janet Yellen and bring in the son of immigrants and a fellow refugee from the fly over zone as the next chairman of the Federal Reserve?

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records Founder and chairman of CapitalWorks, he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CapitalWorks or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.

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