Too Big to Fail, Too Big to Exist
As America takes stock of Wall Street 10 years after it crashed the economy, one glaring fact flashes red and demands reform: The megabanks remain too big.
On Oct. 3, 2008, Congress approved the largest bailout in the history of any country. Politicians in Washington did so because financial policy experts convinced them that some of these banks were too big to fail.
The bankruptcy of Lehman Brothers, which had about $600 billion in assets, sent tsunamis through the economy – roiling money market funds that held Lehman debt, freezing short-term credit to Main Street businesses and precipitating a collapse of asset value assignments at the likes of JPMorgan, Goldman Sachs, Bank of America, Wells Fargo, Citigroup and Morgan Stanley.
With the likely failures of these institutions staring them in the face, Congress surrendered to the logic of too-big-to-fail and passed the bailout.
Perversely, in addition to bailing them out, regulators arranged mergers between teetering banks greased with government subsidies in an attempt to stabilize them. They married Bear Stearns and Washington Mutual to JPMorgan. They joined Merrill Lynch to Bank of America. They matched Wachovia to Wells Fargo. Now, 10 years later, these banks remain not only too big to fail, but larger than when we bailed them out.
Enter a new bill proposed by U.S. Sen. Bernie Sanders (I-Vt.). He has concluded that if these financial institutions are too big to fail, then they’re too big to exist, and he just introduced legislation to break them up.
His bill would limit the size of a financial institution to 3 percent of Gross Domestic Product, which today means around $580 billion.
Lehman was larger than this, so his bill would have cut it down to size. Today, JPMorgan, Citigroup, Bank of America and Wells Fargo each list around $2 trillion in assets.
Under Sanders’ bill, megabanks would be afforded two years to conform to the size limit. The Federal Reserve would oversee bank restructuring and report to Congress annually on compliance with the law.
When banks are too big to fail, American taxpayers essentially serve as their guarantor of solvency. That alone breeds a moral hazard. Bankers internalize this backstop and take outsized risks, knowing they have a taxpayer-funded safety net.
Even in placid times, a $2 trillion bank threatens the economy. Wells Fargo’s incessant misconduct provides staccato evidence that it’s too big to manage. JPMorgan, once considered the best managed bank in the nation, suffered a $6 billion loss from a few derivatives traders in London.
Moreover, the banks also are too big to jail. All the megabanks engaged in misconduct both before the crash and after, such as through money laundering violations. But these banks have escaped judicial accountability. No senior banker has faced prison time and no megabank has forfeited its license (or deposit insurance) following an acknowledgment of widespread misconduct.
These banks also are way too big in the political arena. In addition to their legions of lobbyists and corrupting campaign contributions, their envoys populate key regulatory positions. Their financial tethers to business, customers and even universities strangle legitimate discourse about how to shape policy. JPMorgan CEO Jamie Dimon, for example, is leading a fight to limit the right of shareholders to raise issues at the companies where they invest.
These banks simply loom too large in our economy. As any flight across our nation reveals, this is a country of vast agriculture. There is no question about the primacy of food to our collective vitality, and farm income stands at the sizable figure of about $66 billion. But the income of just one megabank, JPMorgan, is $24 billion. There is something fundamentally wrong with our economy when it is more profitable to feed off people than to feed people.
Public Citizen is pleased to have worked with Sanders on his important legislation. Passing the “Too Big to Fail, Too Big to Exist” Act must be a priority.
Image courtesy: Michael Fleshman (CC BY-SA 2.0)