Friday, 20 April 2012 11:39

Ending “Too Big to Fail” Gaining Momentum?

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Just two days separated a letter from Matt Taibbi of Rolling Stone magazine and a report from the president of the Dallas Federal Reserve, each remarkably calling for the end of “too big to fail” (TBTF) banks.

Taibbi wrote his letter to Occupy Wall Street (OWS) supporters on March 27, giving a short talk to them about the worst of the banks — the Bank of America — and then handing out copies of it to the demonstrators. In typically lurid prose, Taibbi said that Bank of America has systematically defrauded almost everyone with whom it has a significant business relationship, cheating investors, insurers, homeowners, shareholders, depositors, and the state. It is a giant, raging hurricane of theft and fraud, spinning its way through America and leaving a massive trail of wiped-out retirees and foreclosed-upon families in its wake….

But Bank of America hasn't gone out of business, for the simple reason that our government has decided to make it the poster child for the "Too Big To Fail" concept. Because it is considered a "systemically important institution" whose collapse would have a major, Lehman-Brothers-style impact on the economy, two consecutive presidential administrations have taken extraordinary measures to keep Bank of America in business, despite a staggering recent legacy of corruption schemes.

In addition, Taibbi wrote,

This bank is like the world’s worst teenager, taking your car and running over kittens and fire hydrants on the way to Vegas for the weekend, maxing out your credit cards in the three days you spend at your aunt’s funeral.

He concluded that the only way to solve the Bank of America “TBTF” problem is to let it be subject to free-market forces: “It would be a great sign of America’s return to healthier capitalism is we could allow one of the worst of public-private monsters, Bank of America, to sink or swim on its own, in the free market.”

Scarcely two days later Richard Fisher, president of the Federal Reserve of Dallas, introduced a massive study of “TBTF,” completed by Harvey Rosenblum, head of the bank’s research department. Fisher wrote:

If you are running one of the “too big to fail” banks [i.e., Bank of America, and others], I doubt you are going to like what you read in this annual report….

[These banks] were a primary culprit in magnifying the financial crisis, and their presence continues to play an important role in prolonging our economic malaise….

In my view, downsizing [these] behemoths over time into institutions that can be prudently managed … is the appropriate policy response. Only then can the process of “creative destruction” [of the free market] … work its wonders in the financial sector just as it does elsewhere in our economy.

The TBTF concept allows the federal government, in coordination with the New York Federal Reserve, to decide which banks to rescue with taxpayer bailouts, based upon their “systemic” importance. Like mountain climbers secured by a lifeline, if one climber falls, the others go with him unless the lifeline holds. But this analogy relies on a third party determining which climber to save — such as Bank of America — and which to let fall to his death — like Lehman Brothers. And that decision has become so politicized through graft, insider dealing, and cronyism that it is made not in the interest of serving the public and letting the free market sort out winners and losers, but by "who knows whom." As Sheldon Richman, editor of The Freeman magazine, pointed out:

Like his predecessors, Obama has been a good friend to big companies, especially banks. Take Bank of America. BofA is what you’d expect of a financial institution coddled by government subsidies and privilege: inefficient, corrupt … and a frequent corporate-welfare recipient.  

Solutions to problems like TBTF and its worst example, Bank of America, however, are largely missing. Taibbi wants the free market to operate and clean out the mess at BofA:

In a pure capitalist system, an institution as moronic and corrupt as Bank of America would be swiftly punished by the market — the executives would loot their own firms once [and] then they’d be looking for jobs [elsewhere].

But Taibbi’s plan for how to get there from here is missing. Author Rosenblum is also out of answers:

Concentration in the financial sector is anything but natural. Banks have grown larger in recent years because of artificial advantages, particularly the widespread belief that government will rescue the creditors of the biggest financial institutions. Human weakness will cause occasional market disruptions. Big banks backed by government turn these manageable episodes into catastrophes.

What about Dodd-Frank, the bill explicitly sold as the remedy for TBTF? Says Rosenblum,

The new law leaves the big banks largely intact. TBTF institutions remain a potential danger to the financial system. We can’t be sure that some future government won’t choose the expediency of bailouts over the risk of severe recession or worse. The only viable solution to TBTF lies in reducing concentration in the banking system, thus increasing competition and transparency.

Despite the noise from Taibbi and the sonorous lamentations from Rosenblum, the movement actually to change and improve the system and remove the risks of banks such as BofA appears to be stillborn. Only a major outside crisis that overwhelms the banking system altogether — sufficient to sever even the Fed’s promised lifeline of support — is likely to bring any positive change.

Photo: AP Images

1 comment

  • Comment Link Ken E Wednesday, 02 May 2012 22:42 posted by Ken E

    A local Army Reservist got into the news here in my neck of the woods because of a dispute he had with Bank of America. Seems while he was stationed in Afghanistan he got 2 weeks of leave for some rest and relaxation, and decided to go to Athens, Greece. One night while he was there, he used his Bank of America debit card to buy a few drinks in a certain nightclub. When he returned to Afghanistan and checked his account online, he discovered the nightclub had charged his account 6 times for a total of over $25,000! After much unfruitful deliberation with BofA, this soldier decided to make his protest more public, and began picketing outside a local branch office with a sign that read," A soldier that puts America first should have a bank that puts the soldier first!" A few local news outlets picked up on his story, interviewed him, and even had some local economic crime experts weigh in on his case. Bank of America played things by the book, and refused to reimburse this soldier, stating that his dispute was with the vendor, the nightclub in Greece, with whom he would have to deal with himself.
    Three weeks after the initial news story was reported here, the soldier had a check from Bank of America for the entire amount he was charged by the nightclub! He credited the media coverage for his success in changing BofA's mind, and chose to deposit his money in a local credit union.
    Isn't the level of service you get from the TBTF's just great? (NOT!)
    I am glad BofA changed their mind in the end, but they gave themselves a big black eye public relations-wise here because of their cold-hearted treatment of this soldier. Had I any business with BofA during this time, I think I would have gone in and withdrawn my money with a note attached quoting the soldiers protest sign.

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