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Uncle Sam Needs YOU for a Bailout: 6 Reasons Another Big Banking Crisis Is Coming Our Way

Rampant financial crime and poor regulation can only mean another blowup, and guess who will be holding the bag?

Surprise, surprise! Last week, the Justice Department announced it wasn’t going to prosecute Goldman Sachs or its employees for its shady activities during the mortgage crisis. The same day, Goldman disclosed in a regulatory filing that the Securities and Exchange Commission (SEC) had dropped an investigation into a troubled $1.3 billion residential mortgage-backed securities deal launched in 2006.

Time is running out for prosecutors to file cases against big banks for activities that triggered the 2007-2009 financial crisis, since statutes of limitations set deadlines for launching prosecutions for fraud and other financial crimes. If prosecutors don’t start lawsuits before these deadlines expire, the big banks will, once again, have got off scot-free.

Failure to pursue banks, culpable management and employees for their complicity in causing the financial crisis is one of six bad policies that ensure we’re likely to see another bust-up of a big U.S. bank -- sooner rather than later.

Who’s going to pay the price for such a failure?  We will, of course. Uncle Sam’s policy of allowing banks to get too big to fail means we’ll all be left holding the bag when that collapse occurs — and another banking bailout is necessary.

1. Too big to fail

Thirty years of financial deregulation have seen unprecedented concentration of the financial sector. Before, financial firms were limited both in where they could do business and the types of business they could do. This prevented a big banking blowup in the U.S. for more than 50 years.

Banks used to be limited to owning branches within individual states.  When a bank got into trouble—and some did -- losses stayed confined. Regulators such as the Federal Deposit Insurance Corporation (FDIC) could clean up the mess and preserve depositors’ assets, without unduly burdening taxpayers. But after changes culminating in the Riegle-Neal Interstate Banking and Branching Efficiency Act in 1994, those restrictions vanished.

So some banks got steadily bigger, while the overall number shrank.  From 1990 to 2011, the number of commercial banks halved, from about 12,000 to 6,000, according to the St. Louis Federal Reserve Bank.

Once upon a time, the 1933 Glass-Steagall Act limited banks to either commercial or investment banking functions. Brokerage activities were restricted, and the operations of insurance firms constrained. Problems in one area of financial activity didn’t spread to another. Bankers could not speculate with small depositors’ money. Banks competed with each other, which led to better lending terms. And they didn’t get too big, so when they screwed up, they paid the price. They failed.

In the 1980s, financial institutions claimed that Glass-Steagall and other restrictions prevented U.S. banks from competing head-to-head with foreign banks. They lobbied hard and regulators began to allow the restrictions slowly to erode.

Financiers like Sanford Weill, the head of the Traveler’s Group, couldn’t wait for U.S. laws to change. In 1998, he masterminded the takeover of Citicorp, a merger which combined commercial banking, investment banking, and insurance functions in one firm in a way that was technically illegal. But the merged company got a grace period—during which Weill deployed formidable lobbying muscle to dismantle Glass-Steagall. It worked. In 1999, Congress passed the Financial Services Modernization Act of 1999 and finally buried Glass-Steagall.

Last month, Weill gave an astounding interview to CNBC in which he admitted that “What we should probably do, is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not gonna risk the taxpayer dollars, that’s not gonna be too big to fail.”