Economy

6 Financial Monsters That Have Only Gotten Bigger After Destroying the Economy

Too-big-to-fail banks that should have been reined in back in 2008 continue to pose a major threat to the economy.

Before the crash of September 2008—the worst economic downturn in the United States since the 1929 crash that marked the beginning of the Great Depression—most Americans had never heard the term “too big to fail.” But that term became all too familiar when hundreds of billions of dollars were set aside to bail out the nation’s largest financial institutions. And many of the mega-banks that caused the panic of 2008 have become even larger.

In November, Democratic Sen. Elizabeth Warren of Massachusetts warned that “the four biggest banks are 30% larger than they were five years ago” (JPMorgan Chase, Bank of America, Citigroup and Wells Fargo). Warren isn’t the only one who is worried. Many other proponents of financial reform, from economists Dean Baker (co-founder of the Center for Economic and Policy Research), Joseph E. Stiglitz (a professor at Columbia University) and Simon Johnson to politicians like Democratic Florida Rep. Alan Grayson, have been warning Americans about the ongoing threat too-big-to-fail banks pose.

Johnson and Baker have both said one benefit of breaking up mega-banks would be decreasing their political influence, while Stiglitz has warned that mega-banks are “too big to manage and be held accountable” and that the bigger banks are allowed to become, “the greater the threat to our economies and our societies.”

Apologists for the bankster bailouts and the Troubled Assets Relief Program (TARP) like to point out that most of the major recipients of bailout money paid back everything they owed. But economist Robert Reich, former secretary of labor under the Clinton administration, frequently responds that those apologists neglect to mention the long-lasting damage those banks did to the U.S. economy and all of the poverty, unemployment and home foreclosures they caused. Also, in November 2011, Bloomberg News revealed that the Federal Reserve had secretly loaned the U.S.’ largest banks an estimated total of $13 billion (the loans had not been disclosed to Congress, and that information was obtained via the Freedom of Information Act).

Although Federal Reserve officials have said all of that money was repaid, critics of the Fed have said the Fed’s loans were detrimental to the U.S. economy because they encouraged mega-banks to grow even larger and more reckless. Reich has warned that because those banks have grown even bigger than they were half a decade ago, future bailouts could be even more costly. According to Reich: “The danger of an even bigger cost in coming years continues to grow….In fact, now that they know for sure they’ll be bailed out, Wall Street banks—and those who lend to them or invest in them—have every incentive to take even bigger risks.”  

Below are six too-big-to-fail banks that should have been reined in back in 2008, yet continue to pose a major threat to the U.S. economy.

1. Bank of America

Originally Bank of Italy, BofA has been around since 1904. And a company that had about 100 branches in 1926 now has more than 5,300. BofA played Russian roulette with the economy prior to the 2008 crash, robo-signing countless mortgages on expensive homes for low-income people it knew wouldn’t be able to handle them. After the U.S. economy went into cardiac arrest in September 2008, BofA received $45 billion in bailout money. But instead of being reined in, the company was allowed to continue growing.

BofA presently controls a whopping 17% of all home mortgages in the U.S. (almost one in five) and at least 12% of U.S. bank deposits. BofA’s total assets, according to the Comptroller of the Currency (OCC) in Washington, DC, now total $1.4 trillion. The mega-bank’s exposure to derivatives now exceeds $50 trillion (in finance, a derivative is a type of financial contract whose value is derived from an underlying financial instrument). In a scathing article he wrote for Rolling Stone in 2012, journalist Matt Taibbi asserted that with BofA, “the FDIC, and by extension you and me, is now on the hook for as much as $55 trillion in potential losses.”

2. Goldman Sachs

In April 2012, Bloomberg Businessweek’s website posted a chart showing how much the U.S.’ five largest banks—JP Morgan Chase, Bank of America, Wells Fargo, Goldman Sachs and Citigroup—had grown in terms of the country’s GDP (gross domestic product). In 2006, the five of them together, according to Businessweek, comprised 43% of the country’s GDP; in 2011 they comprised 56% of American GDP. Goldman Sachs, the smallest of that “big five,” is a veteran of the financial world and was founded in 1869 by financier Marcus Goldman and his son-in-law Samuel Sachs. But Goldman Sachs is not only much larger than it was during the 19th century, it is much larger than it was in 2008, when it received $10 billion in bailout money.

For all of 2007, Goldman Sachs reported net revenues of $46 billion. But Goldman Sachs’ commercial bank unit now oversees about $113 billion (according to the OCC), while its exposure to derivatives (which tycoon Warren Buffet famously describes as “financial weapons of mass destruction”) now exceeds $44 trillion (according to Business Insider). Taibbi has accurately characterized Goldman Sachs as “a company that in a pure, free capitalist system would definitely have been bust in 2008 had it not leeched parasitically off the taxpayer.”

3. JPMorgan Chase

JPMorgan Chase is a name that didn’t exist prior to 2000, when J.P. Morgan & Co. (founded in 1871) merged with Chase Manhattan Bank (which had been formed in 1955, when Chase National Bank merged with the Manhattan Company, an institution that started in 1799). In 2011, JPMorgan Chase surpassed BofA as the U.S.’ largest financial institution. JPMorgan Chase has been a major recipient of corporate welfare: the company received $25 billion in bailout money in October 2008, and in 2012, Bloomberg News estimated that JPMorgan Chase had been receiving government subsidies worth about $14 billion a year (a figure partially based on research by the International Monetary Fund). JPMorgan Chase now has $2.4 trillion in assets (according to its own website), which is 12% of the size of England’s economy. If a behemoth of that size runs into problems, the results could be disastrous not only for the U.S., but around the world. 

JPMorgan Chase was inundated with bad publicity last year. In October 2013, the mega-bank was the subject of a probe by the Commodity Futures Trading Commission (CFTC) and agreed to pay a $100 million fine for recklessly distorting prices during a series of London trades. Less than a month earlier, the Securities and Exchange Commission accused JPMorgan traders of fraudulently overvaluing investments and concealing hundreds of millions of dollars in trading losses; JPMorgan Chase agreed to pay a $200 million fine. Between probes by the SEC, the Federal Reserve, the U.K. Financial Conduct Authority and the Office of the Comptroller of the Currency, JPMorgan Chase faced $920 million in penalties in September 2013. But despite all those fines, JPMorgan Chase’s board recently voted to give CEO Jamie Dimon a 74% pay raise.

4. Wells Fargo

When CoreStates Bank (previously Philadelphia National Bank) merged with First Union Bank in 1998, many CoreStates customers in and around Philadelphia (where CoreStates had its headquarters) were apprehensive about becoming part of the much larger mega-bank that resulted from the merger. It was the largest merger in commercial banking that had taken place in the U.S. up to that point, but ironically, many of those CoreStates customers—assuming they didn’t take their money elsewhere—eventually became part of a much larger mega-bank than the one created in 1998. First Union merged with Wachovia Bank in 2001, and when Wachovia suffered major problems in 2008, Wells Fargo acquired it.

Wells Fargo was already gigantic during the 2008 crash, when it should have been broken up into at least 20 or 25 smaller banks as Michael Moore and others have recommended. But instead, Wells Fargo received $25 billion in bailout money and kept growing. Wachovia was a huge acquisition for Wells Fargo, and other acquisitions followed (including Merlin Securities and the Rock Creek Group in 2012). The Los Angeles Times has reported that Wells Fargo went from having $609 billion in assets before 2008 to $1.4 trillion in assets in late 2013 (its exposure to derivatives, according to Business Insider, is over $3 trillion). If Wells Fargo received $25 billion in bailout money not long before its acquisition of Wachovia, one can only imagine how much more expensive a bailout for Wells Fargo would be now.

5. Citigroup

One of the cardinal rules of free enterprise is that capitalism works best when there is a great deal of competition, but the banking field has become increasingly anti-competition. In 2011, BofA announced it would begin charging a new $5-per-month fee for using debit cards, and the outcry was so vehement the bank ended up backing down from that idea. BofA apologists argued that if consumers didn’t like the fee, they could simply bank elsewhere. But as Lynn Stuart Parramore pointed out in 2011, the problem with that argument is that consumers have fewer and fewer options when it comes to banking. The more mega-banks are allowed to swallow up everything in sight and minimize the competition, the fewer options there are for consumers—and the more mega-banks can get away with abusing their customers. Parramore noted that in the 1930s, an important element of the New Deal was protecting smaller banks and making sure they could remain competitive, but that hasn’t happened in the current economic crisis.  

In the banking field, there has been a lot less competition and a lot more consolidation since the crash of 2008. More than 1,400 banks have disappeared in the last five years: roughly 485 of them failed, while others merged with other banks. As the number of small banks has plummeted, Citigroup has continued its expansion. The name Citigroup came about in 1998, when Citicorp merged with Travelers Group. Citigroup, like other mega-banks, ran into trouble in 2008 thanks, in part, to its heavy exposure to subprime mortgages. Citigroup ended up receiving $45 billion in bailout money. Initially, Citigroup “only” received $25 billion, but the company was in such bad shape that two months later another $20 billion was added. Instead of being reduced in size, however, Citigroup’s too-big-to-fail status grew. Citigroup’s total assets now exceed $1.3 trillion, and its exposure to derivatives is roughly $58 trillion.

6. Morgan Stanley

In 1999, many American politicians, both Republicans and Democrats, forgot the lessons of the Great Depression when they supported the disastrous repeal of the Glass-Steagall Act of 1933, which mandated the separation of commercial and investment banking and was designed to prevent a repeat of the crash of 1929. Glass-Steagall served the U.S. well for many years: although there some tough recessions along the way (including the early 1980s and early 1990s), none were as catastrophic or cut as deep as the meltdown of September 2008. 

A Wall Street giant that came about as a direct result of Glass-Steagall was Morgan Stanley, which was founded by Henry S. Morgan (J.P. Morgan’s grandson), Harold Stanley and others in 1935 during President Franklin Delano Roosevelt’s first term. Thanks to Glass-Steagall, J.P. Morgan & Co. could no longer be involved in both commercial and investment banking—it had to pick one or the another—and when J.P. Morgan & Co. chose commercial banking, a new and separate company called Morgan Stanley was created for investment banking. But with the repeal of Glass-Steagall 64 years later, Morgan Stanley was no longer bound by the rules that had caused it to come into existence in the first place. Along with other Wall Street giants, Morgan Stanley was bailed out in 2008 (when it received $10 billion in TARP money). The too-big-to-fail status of Morgan Stanley (which acquired Smith Barney in 2009) has continued, and its net assets climbed to $832 billion in 2013. Morgan Stanley’s exposure to derivatives is around $1.7 trillion.

In 2011, the Federal Reserve Bank of Dallas released its annual report, titled “Choosing the Road to Prosperity: Why We Must End Too Big to Fail Now.” Richard W. Fisher, president of the Dallas Fed, called for a drastic downsizing of the megabanks and argued that not doing so would eventually result in more taxpayer-funded bailouts.

Fisher isn’t alone in that assertion. But reforming the U.S.’ dysfunctional banking system will take a lot of work. The Glass-Steagall Act needs to be reinstated and vigorously enforced with a strict separation of commercial and investment banking. Mega-banks in their present size should cease to exist, resulting in an abundance of smaller, more manageable regional and local banks—and the number of bank mergers needs to be seriously limited. But given the enormous power banking lobbyists exert on Capitol Hill, accomplishing those things will be difficult. As long as the mega-banks are allowed to continue growing, the U.S. economy will continue to be imperiled.