Break up the big banks

May 10, 2012

UPDATE: JPMorgan’s surprise announcement late Thursday of a $2 billion trading loss – and the drop in stocks it sparked – is yet another sign of the need for reform.

The numbers are startling. HSBC, the world’s fifth-largest bank, failed to review thousands of internal anti-money-laundering alerts, according to a Reuters investigation published last week.

The bank did not file legally required “suspicious activity reports” to U.S. law enforcement officials. It hired “gullible, poorly trained, and otherwise incompetent personnel” to run its anti-money-laundering effort. Each year, hundreds of billions of dollars flowed through the bank without being properly monitored.

HSBC is not alone. Last month, U.S. regulators accused Citigroup of having major lapses in its anti-money-laundering systems as well. Under an agreement with the Comptroller of the Currency, the agency that regulates national U.S. banks, Citigroup agreed to improve its monitoring operations, but did not pay a monetary penalty or admit any wrongdoing.

For critics of mega-banks, the reports are the latest sign of big banks’ ability to defy regulation, engage in dubious business practices and face few consequences.

In a British court last month, a former Nigerian governor pleaded guilty to pilfering $79 million from state coffers, funneling it offshore and buying six properties in the U.S. and UK. The banks he used to move the illicit money? HSBC, Citibank, Barclays and Schroders.

“Banks get hauled up by the regulators for failing to follow the law, promise to reform, and yet a few years down the line they’re caught doing the same thing,” said Robert Palmer of the anti-corruption group Global Witness. “I think for this to change we need strong penalties for when the banks get things wrong, and in the worst cases, jail time for individual bankers.”

Four current Federal Reserve presidents, meanwhile, are arguing that the Dodd-Frank reforms have not eliminated the “too big to fail” banks, according to a Bloomberg Businessweek article published last month. Despite measures in the legislation banning further bailouts, traders, analysts and bankers simply don’t buy it.

“Markets have come to believe that what the government did in 2008 and 2009 isn’t a one-time deal,” Kevin Warsh, a former member of the Federal Reserve Bank’s Board of Governors, said in a March television interview with Charlie Rose. They think  “that the government will somehow come to the rescue of these big financial firms.”

The result is a half-dozen massive banks that remain so large that their collapse would cripple the U.S. economy and force another government bailout. As a result, the behemoths function as a de facto oligopoly. The sheer size of the banks – and the theoretical government backing that they enjoy – make it impossible for the country’s roughly 20 regional banks and 7,000 community banks to challenge them.

And the country’s biggest banks are getting bigger.

Five U.S. banks – JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs – held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the country’s economy, according to Bloomberg Businessweek. Five years earlier, before the financial crisis, the biggest banks’ holdings amounted to 43 percent of U.S. output. Today, they are roughly twice as large as they were a decade ago relative to the economy.

The four Federal Reserve presidents – Richard Fisher of Dallas, Esther George of Kansas City, Jeffrey Lacker of Richmond and Charles Plosser of Philadelphia – have expressed concern that such a concentration of assets in the banking industry threatens the financial system.

In a scathing essay published in March in the Federal Reserve Bank of Dallas’ 2012 annual report, Harvey Rosenblum, the bank’s head of research, called for the government to break up the country’s largest banks. Rosenblum argued that only smaller banks – not the increased capital requirements, stress tests and other measures in Dodd-Frank – will prevent another crisis.

“A financial system composed of more banks, numerous enough to ensure competition in funding businesses and households but none of them big enough to put the overall economy in jeopardy,” Rosenblum wrote, “will give the United States a better chance of navigating through future financial potholes and precipices.”

The American public, meanwhile, also feels the reforms were not enough. In a Rasmussen poll conducted last month, 48 percent of Americans surveyed said they continue to lack confidence in the stability of the U.S. banking industry. Forty-seven percent said they were somewhat confident in the system.

Who, then, is happy with the state of America’s banks? Apparently, the two men running for president. So far, both Barack Obama and Mitt Romney have steered clear of calls from the left and right to break up the big banks.

“I’m not looking to break apart financial institutions,” Romney told the American Enterprise Institute’s James Pethokoukis, in March.I think what caused the last collapse was a convergence, almost akin to a perfect storm, of many elements in our economy and regulatory structure.”

Obama, meanwhile, argues that the new regulations would force banks into orderly bankruptcy proceedings, not bailouts. But many liberal analysts don’t buy it. They argue that bankers still face too few consequences for bad behavior.

An analysis by researchers at Syracuse University found that under the Obama administration federal financial-fraud prosecutions have dropped to 20-year lows, Peter Boyer and James Schweizer wrote in The Daily Beast last week. Prosecutions are down 39 percent from 2003, when executives at Enron and WorldCom were convicted in high-profile cases.

Today, the number of financial-fraud cases is at one-third the level it was during the Clinton administration. (Obama administration officials argue that the number would be higher if new categories of crimes were counted.)

“Casting Romney as a plutocrat will be easy enough,” Boyer and Schweizer wrote. “But the president’s claim as avenging populist may prove trickier, given his own deeply complicated, even conflicted, relationship with Big Finance.”

The skepticism from the right and left is justified. Our largest banks remain “too big to fail,” defy regulation and have paid too small a price for a financial crisis that decimated the middle class. The U.S.’s big banks should be broken up. Smaller banks will be easier to regulate – and foster more competition.

PHOTO: Protesters move along Tryon Street to Bank of America Stadium after the Bank of America annual shareholders meeting in Charlotte, North Carolina, May 9, 2012. REUTERS/Jason E. Miczek


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[…] that ain’t me saying this! Its a very serious and documented article from Reuters which you should read carefully. Based on the article’s arguments maybe one would have to […]

Posted by Break up the big banks « Proeconomia | Report as abusive

If you don’t like what big banks or the Fed did, then why are you in them. I moved my money to a credit union where the Fed has no control. As an added bonus, I actually get paid interest on my savings. Funny how those OWS kids were smarter than the rest of us.

Posted by minipaws | Report as abusive

It isn’t just banks, the hiring of incompetents is rampant wherever government regulations are involved, and Republicans are in charge. It’s a tactic that they believe will absolve them of guilt, except for improper oversight and they can always plead that ‘some things will slip through’ while their attention is on other matters. Only by giving serious jail time and/or serious fines to upper management is the practice going to stop.

Posted by lhathaway | Report as abusive

Reinstate the Glass-Steagall Act. That alone would force the largest banks to split off the retail deposit side from the investment banking side. Just because the bankers would prefer to take market risk with federally insured deposits does not make it a good idea for society. Trust is the key factor in banking and very few informed people trust day traders. Allowing an investment bank to fail would have consequences, however it should not put any personal checking/savings accounts in jeopardy. Saving a failing retail deposit bank to protect federally insured accounts might cover up some incompetence, but it should not create moral hazard in the equities markets.

The Volcker rule leaves far too much grey area to be effective. The financial system needs simpler rules and legislation with stronger enforcement for white-collar crime. The SEC needs to start putting guilty executives in jail and ending their careers at public companies. Settling for a financial slap on the wrist and no admission of guilt is obviously not cutting it.

We can rant about undue influence of Wall Street in Congress as much as we like. Nothing will change until people start complaining to law makers and voting for better government. The long term senator from Indiana, Richard Lugar was not able to overcome having voted for the bailouts. Maybe there is hope.

Posted by alignedinterest | Report as abusive

Same as minipaws…

Posted by GA_Chris | Report as abusive

Same as mini paws, as well… but my wife hasn’t moved her banking business to a credit union yet despite my occasional prodding.

She has it in her head that it would be such a bother to change automatic deposits and automatic payments.

It’s really not much trouble; it only takes a few minutes and the happy feeling I got when I knew that Wells Fargo would never get another nickel of my money was definitely worth it.

Posted by breezinthru | Report as abusive

Credit Unions are certainly not immune to incompetent bank style management errors. Very large credit unions have failed due to hiring former bank employees in top management positions. A ploy common before the crash of 2007 — take a Credit Union private, convert it to a bank, grant management excessive compensation and cash out. The credit union members get next to nothing. This happened dozens of times during the Bush administration.

Crooks are crooks are crooks! They are not crooks because they are too closely regulated. They are not crooks because the Federal Reserve is involved. Like Willy Sutton, they rob banks and credit unions because that is where the money is. And they do not go to jail because they make “campaign contributions” (American language for “bribes”).

Posted by usagadfly | Report as abusive

Reinstate Glasg-Steagall, only sensible option!

Posted by mbrmark | Report as abusive

I also moved my money out of Wells Fargo and into one of our local community banks. Their policies are much more consumer friendly. Likewise it was a great feeling to divorce myself from that mega bank.

Posted by lhollo | Report as abusive

Quote: For critics of mega-banks, the reports are the latest sign of big banks’ ability to defy regulation, engage in dubious business practices and face few consequences.

These same criteria apply equally to large pharmaceutical companies, agri-business, energy companies, and probably others besides. Can we break these up too?

Posted by ActionDan | Report as abusive

Alignedinterest, I am all for restoring the Glass-Steagall Act which was enacted to protect depositors moneys from being used to invest in risky investments. However, that will not happen as long as the “Too Big to Fail” banks control Congress. The only way to get any meaningful legislation from Congress is to change the makeup of Congress. Before we (the voter) can change Congress, we must become better educated and dedicated to the ideal that we want a Congress that represents the majority of American people.

Three good books every voter should read are: Winner Take All Politics: How Washington Made the Rich Richer and Turned It’s Back on the Middle Class by Jacob Hacker and Paul Pierson, Throw Them All Out by Peter Schweizer, and Greedy Bastards by Dylan Ratigan. These books will open your eyes to the real corruption of and in Congress.

Congress (with the help of the voter) has set themselves up as the PERMANENT POLITICAL PARTY. They believe they are the “elite” class and are “entitled to special privileges and are “above the law(s)” that govern the rest of us. They no longer answer to the average American voter because they buy our votes with slick advertising paid for by big banks and big business. In essence they have sold their vote to these same big banks and big business that buy OUR vote. It is time the voter gets smarter.

We (the voter) need to resolve that we will vote EVERY incumbent Congressperson out of office when they come up for reelection. Yes, EVERY SINGLE ONE OF THEM!!! This past Congress has shown that they no longer have the interests of the American people in mind, so why should they deserve our vote? THROW THEM ALL OUT!

But it is not enough to send new Congresspeople to office if they are not going to represent the majority of the voters. So we need to send each new Congressperson to Washington with OUR agenda, not the empty promises that every candidate believes they must make to get out vote. And we must be watchful of their voting record and their financial dealing while they are in Congress. Maybe we will actually find some who are worthy of a second term. Lord knows that none of those there now are. And as it becomes harder for big banks and big business to buy OUR vote, it will become less cost effective for them to buy Congresspeople. Then maybe they will get back to investing in the economy of America.

Posted by wayneonly | Report as abusive

I say let the speculators speculate… just not with our money. If a bank wants to play fast and loose with investor’s money they should be allowed to. But that means they cannot be “too big to fail”. They can’t even be banks.

Banks are a utility and should be regulated like one. Investment houses should be more lightly regulated but be allowed to fail without government intervention. Those investment houses who became banks during the financial crisis in order to receive government protection from insolvency should lose the protection afforded them as banks if they continue to speculate with depositor(and government)money.

Glass Steagall was timely then and seems oddly prescient now. Bring it back.

Posted by BobinBudapest | Report as abusive

We need regulations on banks not in our private life do not let republicons regulate equal marriage or Medicare or epanything that is good for us

Posted by Peluche47 | Report as abusive

HI Everybody.
I really don’t want to sound simple minded but jail would be a start for some CEO/Directors etc.
We find ourselves in the hands of massively overpaid, most of the time incompetent people. They tell us that they need to be paid so much because they are dealing with things which we can’t understand. Then it turns out that they also don’t understand what they are doing, send the bank busted, ask for money to save it, and in the worst case scenario (for them) they say I’m sorry, resign and go to enjoy the money they earned/stole (trust me you won’t see them queuing for jobs/food) . NO RESPONSIBILITY.
As for the size of the banks and other entities it is only a sign of the fact that we are ruled by the 1%. 1% of people or corporations. INSANITY.
We need to spread the wealth. This is the only solution.
I don’t want to see CEO on food stamps but it should be unacceptable that the CEO of Goldensach is paid $16.2 million dollars per year in a time when people are losing the houses and can’t get to the end of the month. Where is the logic or moral base for this?
We must change. I could go on and on and on…:-)
This is only one of the problem that the western world, and the all world, are facing in this historic time.
But for now I wish you all a very good day. Ciao :-)

Posted by anissimene | Report as abusive

Not so fast.

Think about this for a moment. The US Treasury sell bonds. Lots of bonds and in huge amounts. Anyone know who buys those bonds.
A private investor can’t buy the bonds from the Treasury. You have to be authorized with enough money to buy 5 or 6 billion dollars of bonds. The big nasty bad National banks buy the bonds. They can sell them to investors.

So if we downsize the too big to fail banks who will the US Treasury sell the bonds to, let me guess, the national bank of Podunk Arkansas.

That is why they don’t break up the big banks. The government needs someone to buy the bonds. It’s also the main reason why the GS, JP Morgan’s and others usually get their way.

The US government can’t survive with huge banks.

Posted by JLWest | Report as abusive