Washington, D.C. – Dennis Kelleher, Co-Founder, President, and CEO of Better Markets, issued the following statement in response to the Federal Reserve Board and OCC decision to allow Morgan Stanley’s foreign broker-dealer to operate under its national bank and expose the FDIC’s Deposit Insurance Fund to losses:
“While we might disagree with the banking agencies’ actions, they are not usually worthy of condemnation. However, Federal Reserve Board’s divided vote—an unprecedented 4-3 split on a regulatory matter—to permit Morgan Stanley’s European investment bank to operate under its U.S. national bank is worthy of condemnation. This is especially true given the Vice Chair for Supervision’s inaccurate, incomplete, and misleading statements in defense of the indefensible. Apparently, one of Wall Street’s best friends in Washington—Vice Chair for Supervision Bowman—can’t defend her action unless she omits material information.
“This action is meritless, unprecedented, dangerous, and only serves the interests of Wall Street’s six megabanks, especially because the others will undoubtedly seek and likely receive similar approval. It is also yet more proof that this administration’s phony ‘America First’ claims are just empty rhetoric meant to deceive the American people. Time and again, the Trump administration recklessly prioritizes Wall Street’s high-risk activities and profits over Main Street Americans’ concerns, but this action is extreme even by that low standard: it is forcing U.S. taxpayers to subsidize foreign banking activities and even bail them out.
“Vice Chair for Supervision Bowman was the only member of the Fed Board supporting this reckless action who issued a public statement in defense of the decision, but it was incomplete and misleading if not false. She asserted ‘For as long as these foreign activities have been permitted, no U.S. bank has suffered material financial losses arising out of these overseas activities’. That is inaccurate at best: the Vice Chair for Supervision and her handpicked Wall Street staff failed to mention JPMorgan’s London Whale trading loss, where an OCC-supervised insured national bank suffered massive trading losses (over $6 billion) out of its London operations. That episode is a stark reminder of exactly the risks that arise when complex trading activities are conducted by or closely tied to banks insured by the FDIC and backed by U.S. taxpayers. The silence of Chair Powell and Governors Waller and Miran in even attempting to defend this action is telling.
“The silence from the FDIC—which exists to administer and protect the Deposit Insurance Fund—will now face a significant increased risk from this decision which effectively imports foreign banking activities’ risks to the Fund and U.S. taxpayers. This is a dereliction of duty.
“The Federal Reserve has already granted Morgan Stanley and other megabanks this type of exemption before—during the 2008 financial crisis—when risky trading bets experienced massive losses under severe stress and the industry required extraordinary government support to survive. At that time, the Fed specifically granted Morgan Stanley’s insured bank special approval to acquire a wide range of assets from affiliates, including loans and securities, as part of its emergency conversion into a bank holding company. That exemption was arguably defensible due to the unprecedented market turmoil. Granting another exemption today—nearly two decades later and outside of a systemic crisis—raises serious concerns about whether these critical safeguards are becoming routine tools of regulatory favors to Wall Street’s megabanks rather than strict limits designed to protect the public.
“This is all made worse by the Trump Administration handing Morgan Stanley a disproportionate and dangerous level of deregulation in the past year. This includes reducing in its leverage ratio requirement for its national bank from 6 percent to 3.5 percent (nearly $8 billion of capital) and materially reducing its stress capital buffer requirement. The untold secret here is that this action—permitting Morgan Stanley’s European investment bank to operate under its U.S. national bank—would not likely even have made economic sense for the bank without those unjustified deregulatory giveaways.”
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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.
