Time to Break Up Zombie Bank of America?
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“If Bank of America were to fail, any attempt at the orderly liquidation process in the Wall Street Reform law might not work, basically because the institution is too large, too complex, and because it has branches in too many foreign countries,” Arkush argued.
Lawrence Baxter, a former Wachovia Bank executive and a professor at Duke Law School, said on the conference call, “This petition is very important as a step in testing whether the machinery provided by the Dodd-Frank act for preventing another meltdown has any substance.”
That's important because in many cases, regulators and the Obama administration have moved to prop up the big banks rather than dismantle them—not only with the defeat of the Brown-Kaufman proposal but other moves by the Fed to help the banks stay afloat any way possible.
Arthur Willmarth, a George Washington University law professor also on Public Citizen's conference call, used as an example a recent move by Bank of America to shift potentially toxic derivatives from one of its subsidiaries to another. Backed up by the Fed, the bank moved the risky financial instruments from its investment banking arm, Merrill Lynch, to its deposit banking arm—which is insured by the taxpayers through the FDIC. That means that if the assets go bad, like so many of the “toxic assets” during the earlier financial crisis did, taxpayers are on the hook for another big bailout. As William K. Black wrote, this move was essentially “transforming (ala Ireland) a private debt into a public debt.”
Economists love to talk about “moral hazard”--the idea that someone will take more risks if they know they are less likely to face the consequences of those risks. But as Salon contributor David Sirota wrote back in 2009, “[A]s evidenced by trillions of dollars in public loans, guarantees and subsidies given to speculators to cover their massive losses, leaders in both political parties have no interest in preventing financial moral hazard — despite stern press releases insisting the contrary. By rewarding rather than punishing Wall Street for losing irresponsibly risky bets and by holding out the promise of similar bailout rewards in the future, politicians have incentivized even more irresponsible risk-taking for years to come.”
As Obama took the stage for his State of the Union speech this week, it was clear that the financial crisis was still on his mind as well as the minds of people around the country, still dealing with the fallout from foreclosures and the disappearance of their wealth. If, as David Dayen at FireDogLake noted, the Administration and regulators want to prove that they're on the side of the people and not the banks, the Public Citizen petition provides them an excellent opportunity to do just that.
Of course, Obama's still planning on accepting his party's nomination for reelection at Charlotte, North Carolina's Bank of America stadium, and he's still counting on cash from the big banks in order to propel him to that reelection. The following year will more likely see him trying to strike a balance between appearing tough on the banks and not actually driving them completely into the arms of his GOP rival, whomever that may be.
Still, the good news, William K. Black argued, is that if regulators choose to act on Public Citizen's petition, “We can deal with [the big banks], we can shrink them to a size they no longer pose a systemic risk, and in doing so we will actually make them more efficient, not less efficient.”
Sarah Jaffe is an associate editor at AlterNet, a rabblerouser and frequent Twitterer. You can follow her at @seasonothebitch.