Let the Big Banks Fail

Senator Richard Shelby thinks that the Treasury’s handling of TARP sparked the financial panic.
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TRANSCRIPT

Question: What are your objections to the Consumer Financial Protection Agency, and what is your plan to reduce the problem of Too Big To Fail?

Richard Shelby:  I will first try to address the consumer financial regulatory body.  We’re all consumer.  I’m a consumer and everybody in America is a consumer, so fundamentally I’m not opposed to creating a consumer protection division of a Prudential Bank regulator.  I think we should, but I am opposed to creating it outside the Prudential regulator because the number one issue with banks and it is a consumer issue, is the safety and soundness of banks.  Today we have a lot of banks that are still sick or in trouble and there will be a lot of bank failures in the year 2010, so the first order of business is a sound banking system that one can take your deposits that you can sleep at night with and feel good about that will be able to make you loans and so forth, but at the same time being a consumer I think that they should look at some of the consumer aspects of the banking system and I believe the Prudential regulator, that is the regulator that deals with safety and soundness is the proper one to do that. 

Question: How did Treasury’s handling of TARP spark the financial panic?

Richard Shelby:  Well I think if you look back at the Troubled Asset Relief Program, TARP I opposed that from the beginning.  Financial institutions were not too big to fail, that although they were big we should have let them fail and we would have been better off.  It would have been a lot more efficient.  It would have not been without pain, but we would be a lot ahead of the game today than we are, so my trouble with Treasury then and the Federal Reserve was the intervention there.  I think we could have done better.  We could have done it different ways, but only history will tell that and I would contend that nothing is too big to fail. 

Question: Are you more or less confident in recent months in administration officials?

Richard Shelby:  I think it’s mixed.  I think as far as our banking system is concerned the Federal Deposit Insurance Corporation headed by Sheila Bair, I think that the FDIC has been on top of things.  They’ve closed down a lot of banks, which they have to do.  As a regulator they probably mixed like everybody else.  I think the worst regulation by any agency was the Federal Reserve over the bank holding companies.  Most of those banks, not all, most of those banks were the troubled banks and the ones that caused the most heartburn. 

Question: What did you do as Senate Banking Committee Chair to curtail poor practices that led to the crisis?

Richard Shelby:  Well first of all I was the leader in trying to make sure that Fannie and Freddie did not fail and did not cost the taxpayers a lot of money.  Mixed up in all the financial crisis was the role that Fannie and Freddie played, also the rating agencies, Moody’s, S&P, Fitch, rating instruments that is securities, investment grade, triple A grade and all this when in reality they weren’t.  I was the one that authored the legislation to bring competition and give the FCC, which they have now, more power to deal with the people who rate credit, we call the rating agencies. 

Question: What do you expect to happen with Fannie Mae and Freddie Mac?

Richard Shelby:  I would hope they would be privatized as soon as possible.  Right now in early 2010 Fannie Mae and Freddie Mac are probably the only people that are really buying mortgages to a great extent in the secondary market, so they’re the game in town, but on the other hand when we create a hybrid vehicles like we call them government sponsored enterprises, GSE, we’re waiting for trouble in my judgment and I saw that coming five years before.  I was hoping that we could privatize them totally, make sure that they were strong and make them work in the market without any implicit guarantee by the taxpayers.  That didn’t work out, so now the taxpayers own, for the most part, Freddie and Fannie. What the debt is going to be at the end of the day we don’t know yet. 

Recorded on January 22, 2010