Standing up to Too Big to Fail
Richard Fisher, president of the Federal Reserve Bank of Dallas, tells Euromoney why no bank is too big to fail and why Texas has much to teach the rest of the US economy
Richard Fisher prefers government to be minimal. “If you look down there, that’s the pavilion my family has given to the city in honour of my wife Nancy,” he says pointing down from the 14th floor of the Federal Reserve Bank of Dallas to a building in the park below. “That structure next to it,” he says, moving his finger, “is the Muse family theatre. Then, that building there, that’s the Meyerson Symphony Hall given by Ross Perot. And the building behind it is the Wyly family theatre. We are a city of private money here in Dallas,” he says, and his point is made. Fisher, who has been president of the Federal Reserve Bank of Dallas since 2005, made no bones about his feelings regarding minimal government during the credit crisis. No bank, in his opinion, should be bailed out by taxpayer money, no matter its size.
In 2008 the Dallas Fed began beating the drum against too big to fail, and Fisher has tirelessly advocated rejection of TBTF in speeches, presentations and reports ever since. In the Dallas Fed’s 2012 annual report, Fisher wrote that Dodd-Frank had “codified, rather than eradicated, the large banks’ TBTF status” and included six essays on why TBTF had to end and a Q&A with Fisher himself on the topic – included because of public demand and enquiry.
What Fisher proposes in the Q&A and report is simple, he says – unlike Dodd-Frank. “They did what they could in the crucible of a crisis, but over 9,000 pages of regulation are too much. And now there is more concentrated power in fewer hands than before the crisis. Our proposal is so simple. We’re not suggesting the complex bank holding companies should necessarily be broken up.”
Rather, the Dallas Fed, led by Fisher, is proposing three changes. “That deposit insurance provided to bank holding companies is provided only to the commercial banking entity; that access to the Fed discount window is open only to the commercial banking entity; and that any transaction with any other part of the bank holding company be accompanied with a clear agreement between counterparties that it will never, ever be bailed out by government or the taxpayers.”
He elaborates on this in his Q&A: “Depository institutions should have everything on their balance sheet so investors can appropriately gauge operations. Nontraditional banking and intermediation should be clearly separated so that there is no implicit subsidy. Any transaction with the holding company or shadow banking affiliates should be at arm’s length from the commercial banking institution. With proper transparency, the equity and debt providers will consider appropriate risks, funding costs will adjust and market discipline with help rein in excesses.”
Fisher says that it is not hard to find agreement from either political side that TBTF is an issue.
“No one wants to defend the powerful banks,” he says, although the Democrats are requiring a little more persuasion. It’s interesting given that Fisher has a Democrat party past. He was an assistant to the secretary of the Treasury during Jimmy Carter’s administration, was a Texas Democratic nominee for a US Senate seat in 1994 and served as deputy US trade representative for president Bill Clinton. He will not, though, discuss his politics in the context of the Dallas Fed. “I am totally non-partisan in my role here,” he says.
So does he think his proposals will get through? “There is noise of a Glass-Steagall 2.0 that is fashioned on what we suggested, and I think in October the argument on this will become more active. There is political momentum for sure, although some worry about getting it wrong.” But Fisher also knows how politics and business work. “The large financial companies and their proxies are spending millions of dollars to buy congressmen and congresswomen and protect their interests. You can quote me on that. We will see how that plays out.”
As part of his lobbying against TBTF, Fisher has also become the voice of the nation’s community banks and has become something of a hero among them. Five of the six essays in the annual report gave reasons why smaller banks have to be supported. They are the key to stability; in times of crisis they continue to lend, unlike their larger peers, yet are being squeezed out by the cost of doing business, the reports argue.
“It is the small banks who serve the small business that grow the economy and that buy the local state bonds,” Fisher says. “Yet the interest margins for these community and small retail banks have been hit hard by zero interest rates; they feel the playing field has been tilted to the large institutions and the money centres.” He expects that playing field to even out, although further consolidation is inevitable. “There won’t be heavy concentration though – no one wants that. We will still have several thousand banks in the US.”
Fisher, and indeed Texas in general, he points out, is a supporter of the smaller business – which is somewhat surprising given the association of Texas with large oil corporations. “We do not like concentrated power,” he emphasizes several times. “What we do like is amazing people leading their own businesses.” He points to one local Dallas success story as an example. “Allie Beth Allman and her firm made more than $1 billion in home real estate sales in Dallas last year. She put up a billboard: ‘One woman, one office, one billion’. This is great. She’s not running a corporation. She’s doing great in her small business.”
Fisher has been outspoken about how US small business will be the engine of growth and needs to be encouraged. The week of the interview, he had once more been vocal in his disagreement with the US government’s handling of economic policy. “As you know I don’t have a high regard for people in Congress as they have not served their country well,” he says. Speaking at a conference of the National Association of State Retirement Administrators (“only in August would this speech have been picked up,” Fisher jokes), he argued that the government was preventing US businesses from being “let out of the starting gate”. Fisher says: “By that I mean that we have companies, public and private, that have made themselves very lean. They have grown their top lines and worked out their margins through becoming more productive using tech and IT, and by cutting costs. They are like thoroughbred horses ready to go and we have a real chance to win here. Europe is a mess and China doesn’t have the talent we have.” And he knows China. He was part of the negotiations (“albeit as a kid”) with Deng Xiaoping in Beijing in 1979 that settled disputes holding back US–China commercial interaction and then, under president Clinton, helped negotiate China’s admission to the World Trade Organization. He points to the internet and the development of fracking (“by George Mitchell, a Texan!”) as examples of where the US wins in terms of intellectual drive.
But the uncertainty of the government with regards to how it will navigate fiscal policy is preventing businesses from letting loose, Fisher believes. “What will taxes look like? What will spending patterns be? What will regulation look like and cost? No one knows,” he says. “That uncertainty of five years with no budget agreed is the equivalent of fiscal deflation. Companies are just sitting and waiting to see what will come out of Washington instead of going out and hiring to the desired degree. The Mexican government is better operated on fiscal policy.” Fisher knows Mexico inside and out. Texas has a border of more than 3,000 miles with Mexico and benefits from its economic boom. Also, Fisher grew up in Mexico when his parents, an Australian father and South African mother, moved there from California when he was a child. “Mexico has a balanced-budget rule. Its percentage of debt to GDP is minimal. They get things done. And they have an independent central bank that is truly independent. Structurally the country has challenges, but not fiscally.”
So who does Fisher think he will be working with when Ben Bernanke leaves as Fed chairman? He won’t comment. “Who knows who it will be? I’m not commenting on this. I’d be happy to work with whoever replaces him.”
With Fisher’s own role at the Federal Reserve nearing its end (he will leave in 2015), he has become an increasing advocate for Texas – holding it up as a place that supports business. “Texas does not dictate to you how to do business,” he says. “We are supportive of helping you create jobs. And companies and people are moving here because of that. We are not going to raise taxes on you. We will help you set up here straightaway. We have some legislation certainly, but government is not invasive here. Nor is it evasive.” Legislation during the savings and loans crisis of the 1980s helped Texas through the last credit crisis. In Texas it is not permitted to take out a loan for more than 80% of the value of a property, so the state largely avoided the sub-prime fallout.
Fisher weighs in on the Texas versus California debate that Texas governor Rick Perry is annoying Californians with. “California is being choked to death by regulation and is a welfare state,” Fisher says. “People criticize Texas for not providing enough social services, but we say: ‘If you want social services, go to the other 49 states. We don’t want that here’.”
But at least Fisher concedes that Texas is not without its challenges and that investment is required. “Water is a big issue and if we are not careful about investing now, then down the road we will have to pay for it with taxes. Transportation is also something we need to invest in. And education. Education is not as bad here as people say it is, but our universities should be higher-ranking.”
Fisher says he feels proud of his accomplishments in what will have been a 10-year tenure at the Dallas Fed. “It will be time for something new,” he says. “But I am pleased with my time here. I did what I was asked to do.” Fisher says he was asked to brand the Dallas Fed and his outspoken views about TBTF have certainly put it on the map. And he was asked to upgrade the research produced by the Dallas Fed. “I am proud now of our research,” he says. “Since 2004 our manufacturing outlook survey has had the highest correlation with the ISM for the nation and our Trimmed Mean inflation calculation is now widely cited. And we have built the best research centre for understanding how globalization impacts monetary policymaking. I feel like my service is almost done.”
So will Fisher move into local politics when his time is up? “Not a chance,” he says.