Don’t Be Fooled: Banks Still Too Big to Fail

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JPMorgan Loss

A JPMorgan office building in New York. (AP Photo/Mark Lennihan)

Analyzing a government report is like eating and digesting a meal — better to take it slowly than gobble quickly and suffer the possible consequences.

Example: last Thursday’s report from the Government Accountability Office (GAO) on whether or not large financial institutions were still perceived as “too big to fail.”

The immediate takeaway by many in the media, government and investment community was that the need for a taxpayer subsidy like the bailouts of 2008  “may have declined or reversed in recent years” and, in the words of Mary J. Miller, the Treasury Department’s under secretary for domestic finance, “We believe these results reflect increased market recognition of what should now be evident – Dodd-Frank ended ‘too big to fail’ as a matter of law.”

But with just a little time to digest the GAO’s findings, much of the response has shifted to, “Not so fast.”

On the day of the report’s release, Senator Sherrod Brown (D-OH), who, with Senator David Vitter (R-LA), requested the GAO analysis and co-sponsors the Terminating Bailouts for Taxpayer Fairness Act, held hearings.  Stanford University economist Anat Admati, a recent guest on Moyers & Company, testified that, “The main problem with the guarantees is they reinforce and create perverse incentives and intensify the conflicts of interest between the banks and the rest of society… Requiring that banks fund themselves so that those who benefit from the upside of risk bear more of its downside brings about more safety and corrects distortions.”

In The New York Times, columnist Gretchen Morgenson writes, “… Six years after the financial crisis, it’s clear that some institutions remain too complex and interconnected to be unwound quickly and efficiently if they get into trouble.

It is also clear that this status confers financial benefits on those institutions. Stated simply, there is an enormous value in a bank’s ability to tap the taxpayer for a bailout rather than being forced to go through bankruptcy.

Morgenson adds, “… Were we to return to panic mode, the value of the implied taxpayer backing would rocket. The threat of high-taxpayer bailouts remains very much with us.”

Financial professionals echo her concern. Camden Fine, president and CEO of the Independent Community Bankers of America, notes in American Banker (not without self-interest) that while the size of big bank subsidies may have “diminished since the crisis… the larger point is that the biggest and riskiest financial firms still have a competitive advantage in the marketplace. They can still access subsidized funding more cheaply than smaller financial firms because creditors believe the government would bail them out in the event of a crisis. No matter how you cut it, a subsidy is a subsidy. And this subsidy is one that puts the American taxpayer on the hook…”

Meanwhile, the largest financial institutions are only getting bigger. According to our analysis of call report data from the Federal Deposit Insurance Corp., since the end of 2009, the assets of the six largest financial institutions have grown each year. Their total assets rose from $6.41 trillion in 2009 to $7.22 trillion in 2014—a total increase of $800 billion. The top six banks are also responsible for more than half of the $2 trillion increase in total U.S. banking assets in the years since 2009.

In those same pages, Mayra Rodriguez Valladares, managing principal at a capital markets and financial regulatory consulting firm, is concerned that there are “signs that banks have failed to learn from the detrimental effects of the global credit crisis and pleas from bank regulators. This year, large banks are loosening their credit underwriting standards and are extending leveraged loans to companies…

Additionally, large banks continue to exhibit incredibly weak operational risk management. Operational risk is the threat of a breach in the day-to-day running of a business because of people, processes, systems, and external events. Since big banks have yet to make ethics a top priority, not a day goes by that one does not see examples of operational risk. Market rate manipulations and incorrect foreclosure procedures continue to plague banks and their reputation.

She concludes, “As the U.S. economy continues to grow and the financial crisis is relegated to the dustbin of history, big banks are taking bigger chances. The challenge for regulators now is to remember that when the party gets going, it is difficult to stop the champagne flowing.”

Gretchen Morgenson’s colleague at the Times, Paul Krugman, has a more positive point of view, while asking the crucial question, “…How do you rescue a banking system without rewarding bad behavior?”

The answer is that the government should seize troubled institutions when it bails them out, so that they can be kept running without rewarding stockholders or bondholders who don’t need rescue. In 2008 and 2009, however, it wasn’t clear that the Treasury Department had the necessary legal authority to do that. So Dodd-Frank filled that gap, giving regulators Ordinary Liquidation Authority, also known as resolution authority, so that in the next crisis we can save ‘systemically important’ banks and other institutions without bailing out the bankers.

The GAO report, he writes, “suggests that reform has done at least part of what it was supposed to do… Wall Street and its allies wouldn’t be screaming so loudly, and spending so much money in an effort to gut [Dodd-Frank], if it weren’t an important step in the right direction.”

Nonetheless, as Senators Brown and Vitter stated, “Today’s report confirms that in times of crisis, the largest megabanks receive an advantage over Main Street financial institutions. Wall Street lobbyists may try to spin that the advantage has lessened. But if the Army Corps of Engineers came out with a study that said a levee system works pretty well when it’s sunny — but couldn’t be trusted in a hurricane — we would take that as evidence we need to act.”

Michael Winship is the Emmy Award-winning senior writer of Moyers & Company and, and a senior writing fellow at the policy and advocacy group Demos.
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  • Thaddeus Kozubal

    Dodd-Frank act has only been written to 25% of its intended strength because congress is allowing/depending on the banking system to write the rest of the law. It’s another case of the wolf guarding the hen house. That’s why the big banks continue to grow. Whether you see it or not, there is growth in the high interest loans such “payday loans,” “auto title loans,” and now “vehicle purchase loans.” I see that the vehicle purchase loans will be the next category to be bundled into Investment vehicles, sold on the derivatives market, become the next disaster since the big banks and Wall street have not forgotten how to make them just as useless. And, home mortgage bombs are still out there doing damage. I’ve lost 2 neighbors in the last week, and I can only attribute these to predatory home mortgage loans. Where is the real impact of the Dodd-Frank bill? I have yet to see it.

  • Anonymous

    Sen Elizabeth Warren seems to be the only politician who wants to see some payback. I hope she’s not holding her breath waiting.

  • Anonymous

    I do hope, ninvestor, you’re not financially advising anyone other than yourself.

  • JonThomas

    The effect on the nation was more than ‘profit’ generated by any restitution to the treasury.

    Due directly to the actions and practices of the banks in question, the loss to the wealth and security of individual Americans was immense!

    Too bad your comment skipped over the recognition of that aspect of the banks’ failures. Sadly, your continued posting of ideological dogma, and your refusal to change your view when proven wrong, makes your participation irrelevant.

  • Anonymous

    The whole stupid u.s.a. will find out when the whole american economy just falls flat on to the ground just after the last ceo grabs ‘his’ share of whats left of what the american taxpayer contributed(by force) to this next bailout.

    What is so frustrating is that in a normal and functioning economy, if this happened it would be seen as treason to this country by financial terrorists, yet with the top 85 wealthy ‘beyond belief’ traitors to this country, it is just like business as usual and that is no surprise since bailouts have for several decades, been business as usual for the uber-rich.

    Also of note, is the total lack of any law enforcement stepping up to the plate to do what is expected of law enforcement. Of course, the reason for that is these uber-rich have enough money to sink the whole economy and then blame it on congress not bailing them out. Ask Mexico, South Korea, Indonesia about what happened to them few decades ago.

    It will happen one day but that day is still far off and the ceo’s and uber-rich will have their next financial terrorist attack already planned and ready for implementation.

    Quite possibly, the only way to stop this is to make that ‘proxy’ called MONEY worthless. Or the people find a way to rise up and stop these monetary shenanigans.

  • John Jarred

    Failure to find value in the patrons who were deliberately victimized by the banking and insurance industries only fosters an impending retaliation. Protection from government and the wealthy will eventually erode having dire consequences for all sides. We are witnessing times of social decay, where professional, let alone personal, morality and virtue in society’s ethical imperatives have been abandoned. Set aside personal biases, compensate those who suffered, and hope that the victimized are forgiving. John Jarred

  • ccrider27

    Prior to her appointment to the Treasury Dept. by Obama, Mary J. Miller spent 28 years working for T. Rowe Price. Another Wall Street insider appointed by Obama, applauded on her website by Elizabeth Warren.


  • NotARedneck

    What feeble justification for widespread corruption and greed that brought the economy to its knees and had world wide negative repercussions that are still a long way from being overcome.

    A proper response to this would have tens of thousands of wall street and bankster criminals still doing hard time for their corrupt practices. Until this happens, these scum will continue to put our way of life at extreme risk.

  • JonThomas

    Instead of your unqualified comments, here you can find the actual numbers from the latest census release…

    Those numbers are a few years old so here’s an article which exposes the spin behind your comments…

    Notice that the truth behind the headline is that the majority of Americans are being left behind. The gains are being felt in affluent households, but not the middle class.

    Further, to seriously expose your faulty reasoning, had the banks not played fast and loose, the average American would never had to loose anything, no one would have had to regain any wealth or financial standing, and the entire world would have not had to go through any of the trouble these banks caused!

    While white shirts sat behind desks, I was personally present at the actual foreclosures upon the homes of hundreds of average citizens affected by those banks.

    While those white shirted paper-pushers, and ideological apologists sat behind desks and played games with numbers, I had to look many of those people in the eye as I and the Sheriffs of many communities knocked on doors and put personal belongings out on the street. Now, go take your ideological spin and go hide under your rock!

    The actions of those big banks disrupted families, and ruined many lives. All because of people who sit and play with numbers and profits, and have no concept of the effects upon real people.

    Divorces happen. Suicide happens. Stress and sickness happen… all because of a few percentage points of short-term profit from someone sitting hundreds, thousands of miles away.

    I have no good words to say to you…