Preventing the Next Big Bank Bailout

NOTE: A growing movement is underway to split too big to fail banks into smaller units. Please share this article, explore the degree of interest in this effort, and let me know what you learn. Let’s keep each other informed about ways to contribute to this endeavor.

The nation’s largest banks are crushing the economy and corrupting the government. A recent report from the Federal Reserve Bank of Dallas warned  that our big banks pose “a clear and present danger to the U.S. economy,” have “increased oligopoly power,” and “remain difficult to control because they have the lawyers and the money to resist the pressures of federal regulation.”

Out of more than 7,000 banks, the top seven hold 40 percent of total deposits. The biggest banks  -- Bank of America, Chase, Citigroup, Wells Fargo, Goldman Sachs, Metlife, and Morgan Stanley -- are too big to fail because they loan so much money to each other. They depend on each other to meet their obligations. If one bank can’t, the others may be unable to make their own payments, causing all of them to fall like dominoes. Large investors lose money, businesses and consumers can’t borrow money, and soon the economy completely collapses.

When that threat emerges, taxpayers are forced to save the megabanks. The 2008 bailout authorized the government to use $700 billion to buy or insure shaky bank assets.

In addition, the Federal Reserve has allowed banks to borrow money for next to nothing and then lend the money to the government at a much higher rate, which Fortune magazine contributing editor William D. Cohan has called “an outright and ongoing gift from American taxpayers to Wall Street.”

Confident of a bailout, megabanks speculate about future prices with investments that are highly profitable but very risky. Fox Business Network senior correspondent Charles Gasparino noted:

The reason Too Big To Fail is so dangerous is that it provides a level of comfort to the Wall Street risk takers — enabling them to act like riverboat gamblers and simply bet more and more until the system comes crashing down, as it did four years ago. Why fear, when the taxpayer is on the hook for your losses?

The Economic Price

Jesse Eisinger, who shares a Pulitzer Prize for stories about the economy, wrote in his New York Times column:

The financial industry has strayed far from [helping] companies that want to raise capital so they can sell people things they want. Instead, it is a machine to enrich itself, fleecing customers and widening income inequality. When it goes off the rails, it impoverishes the rest of us. When the crises come, as they inevitably do, banks hold the economy hostage, warning that they will shoot us in the head if we don’t bail them out.

The economy also suffers from subsidizing Wall Street in the following ways:

• Taxpayers’ money can be used more productively to hire public-service workers to meet social and environmental needs.
• Megabanks enable depositors to hide trillions of dollars in secret, tax-free foreign accounts, compelling taxpayers to make up for the tens of billions dollars a year in lost tax revenue.
• The big banks oppose progressive taxation based on ability, requiring middle-income households to pay more. A 5% increase in taxes paid by the top 1%, who take home an average of $2 million before taxes, can generate an additional $150 billion a year, which can be used to boost the economy.
• Governmental support enables big banks to drive commercial banks into bankruptcy by undercutting their interest rates. 
• .The big banks have conspired to move global interest rates up or down for their own benefit, resulting in higher rates for borrowers, including local governments.
• Speculative trading of stocks, bonds, and currencies sucks money out of the productive real economy into the non-productive paper economy.  
• Herd-like enthusiasm leads to unrealistically high prices, or bubbles. Panic sets in when the bubbles burst and speculators rush to get out before others do. 

As MIT economist Simon Johnson concluded, “The real costs of the [2007] crisis — millions of jobs lost, growth derailed, lives disrupted and enormous damage to our public finances.…. The damage will be with us for a long time.”

The Political Price

The extreme concentration of wealth in the hands of seven big banks provides them with enormous power. In 1913, future Supreme Court Justice Louis Brandeis wrote:

The growth of the nation…and all our activities are in the hands of a few men…. The dominant element in our financial oligarchy is the investment banker…. These bankers bestride as masters of America’s business world…. 

We face the same situation today. Legislators, regulators, and administrators know that if they don’t challenge the banks, they may be offered much higher paying jobs when they retire from public service. And banks and their lobbyists influence candidates with campaign donations and gifts. With their near-monopoly, the big banks block legislation and dominate the agencies that regulate them. They are too big to fail, too big to manage, and too big to regulate.

The twelve regional Federal Reserve Banks regulate the commercial banks in their district. Those commercial banks elect a majority of the board of directors for each regional Federal Reserve Bank. In recent weeks, four regional Federal Reserve presidents have expressed concern about how the big banks are hurting local banks.

The power of the megabanks has permitted them to avoid prosecution for crimes that contributed to the 2007 crisis. As director of the Academy Award-winning documentary Inside Job, Charles Ferguson wrote in the New York Times:

The world’s largest financial institutions earned several hundred billion dollars in fake profits. Some of them made billions by using derivatives to bet against the very investments they sold to their customers as safe…. Yet despite substantial evidence of large-scale fraud, nobody has gone to jail, nobody’s compensation has been clawed back, and only a few firms have paid even trivial fines. 

The Way Forward

Sixty percent of Americans support strong Wall Street reform. Growing numbers of top-level bankers, former bankers, economists, and other financial experts urge splitting up banks that are too big to fail. Even Sandy Weill, the former Citigroup chief executive who created the first megabank, said in a CNBC interview:

What we should probably do is go and split up investment banking from [commercial] banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail.

The media are covering the issue extensively. Senators and congresspersons have introduced legislation to limit the size of these financial conglomerates. Calls for breaking up the big banks already receive support across the political spectrum. Progressives United, an advocacy group founded by former Senator Russ Feingold, is circulating an End “Too Big to Fail” petition. Van Jones’ Rebuild the Dream has declared its intention to help make “’too big to fail’ just a memory.” We can strengthen this movement with a diverse, member-controlled grassroots component.

Given the nature of international competition, a movement to break up megabanks must ultimately be global. Citizens in other countries need to push for the same goal, but we can’t wait for them to act. If we are to ride out future financial storms, we must prepare. To do nothing will almost guarantee catastrophe.

The damage inflicted on our people, our economy and our democracy is massive. Government is paralyzed; change must be bottom up. We need to free up funds for public-service jobs, prevent another crisis, fortify our democracy, and reduce the injustice that results when so much money is concentrated in the hands of a tiny minority.

++++++

Wade Lee Hudson has been an activist and community organizer in the San Francisco Bay Area since 1962. Michael Larsen and Leonard Roy Frank helped immensely in writing this article. Rob Waters, David Hartsough, Steven Shults, and Roma Guy helped as well.