It seems the too-big-to-fail crowd has found an unapologetic advocate in John Dugan, the comptroller of the currency and the very regulator whose job it was to prevent the banks from getting into this much trouble in the first place.
Dugan took up the big banks' cudgel last month at a meeting of the board of the Federal Deposit Insurance Corp., where he serves as a director. The FDIC is the government agency that insures bank deposits, and because of the recent rash of bank failures, expected to deplete its reserve fund by the end of the year. To replenish the fund, FDIC Chairwoman Sheila Bair persuaded a majority of the directors to approve a special assessment to be levied on all the banks to raise $6 billion now, with perhaps $6 billion more by year's end.
But Dugan would have none of it. What particularly irked the comptroller was that under a new formula proposed by Bair, more of the burden for supporting the FDIC fund will be shifted from community and regional banks to the biggest banks.
"The overwhelming share of increased actual and projected costs for the fund have been caused by actual and projected failures of smaller banks, not larger ones," Dugan wrote in a rare public dissent.
Inconveniently for Dugan, his dissent was lodged on the very day that the FDIC took over Florida's giant BankUnited, at an expected cost of $5.3 billion, equal to the cost of all 30-odd small bank failures so far this year. And last year the FDIC's $11 billion rescue of IndyMac accounted for over half of the $17.9 billion losses in 2008.
But what's particularly absurd about Dugan's argument is that it ignores the reason there haven't been more failures of big banks — namely that these banks were prevented from failing by a Treasury and Federal Reserve wielding sums of money so large that they dwarf anything the FDIC might spend cleaning up after smaller banks.
Given this history, it requires a particularly warped sense of justice to complain about how unfairly the big banks are now being treated. It also gives a pretty good indication of how thoroughly the thinking of the nation's top bank supervisor has been co-opted by the very institutions he is supposed to regulate.
Instead of setting strict limits and standards for bank behavior — and enforcing them, if necessary, with public cease-and-desist orders — regulators bought into the fantasy that there was no amount of risk that couldn't be dealt with by having more capital or better "risk management."
Even today, Dugan remains in denial about his agency's role in the financial debacle. He was skeptical about the bank stress tests and disclosure of the results. He continues to celebrate the fact that national banks have had fewer failures than banks regulated by other agencies, as if Citigroup and Wachovia and Bank of America are somehow great success stories. And he seems to have forgotten that, even after the crisis hit, he continued to push for international rules that would allow big banks to hold less capital and take on more leverage.
There's no mystery why John Dugan is still running interference for big banks he is supposed to regulate. The mystery is why he is still comptroller of the currency.