Break Up the Banks: By the Numbers
On May 7, the US Senate defeated a measure, sponsored by Senators Sherrod
Brown, D-Ohio, and Ted Kaufman, D-Delaware, to break up the biggest banks.
That’s a shame. The Brown/Kaufman amendment would have been a vital step
to strengthening the economy and rescuing our democracy.
It’s past time to break up the big banks. They take on too much risk and
endanger the financial system. They benefit from unfair subsidies and the
assurance that the government will bail them out in times of trouble. They
have far too much political influence and threaten our democracy.
Evidence:
1. 45.23, 16.56, 65.61, 36.42
Industry concentration has soared over the last quarter century. From 1993
to 2009, according to data compiled by Iren Levina, Gerald Epstein, and
James Crotty of the University of Massachusetts at Amherst, the top five
commercial banks went from having 16.56 of total bank assets to 45.23–a
jump of almost three times. The top five investment banks in 2007 had
65.61 percent of overall investment banking revenue, up from 36.42 in
1993.
Thanks to a series of shotgun mergers amidst the worst of the financial
crisis, the top banks actually have a much greater share of banking assets
than they did before the crash.
2. $306 billion
In a completely ad hoc subsidy, the federal government in late 2008 agreed
to provide a guarantee on a $306 billion portfolio of Citigroup’s assets,
covering potential losses by the failing giant.
It is unfathomable that the government would take such action for smaller
firms, and it has not.
3. 97 percent
The top five banks dominate the derivatives trade, accounting for 97
percent of banks’ overall derivative holdings, and approximately 90
percent of the overall financial derivatives market.
It is true, as the financial lobby argues, that derivatives can serve a
useful social purpose in enabling farmers and firms to hedge protect
themselves against unexpected future events. But the concentration in the
financial derivatives trade shows that the vast majority of what is going
on is speculation.
4. $34 billion
That’s the amount of subsidy now claimed by the biggest banks, according
to Dean Baker and Travis McArthur of the Center for Economic and Policy
Research, thanks to their perceived “too-big-to-fail” status. Because
lenders in financial markets believe the US government will bail out the
largest banks if they face failure, they are willing to lend to the giant
banks at rates considerably below that available to smaller banks. That
interest rate differential translates into a $34 billion-a-year benefit
for the biggest banks.
5. 427
That’s the number of subsidiaries that the Government Accounting Office
found in a December 2008 report that Citigroup maintained in jurisdictions
listed as tax havens or financial privacy jurisdictions (including 90 in
the Cayman Islands alone). This was the largest number of any Fortune 100
company.
This is an astounding fact in its own right, but it also illustrates a
more general proposition: The biggest banks are involved in the most
complicated and deceptive accounting maneuvers. This includes the use of
offshore tax havens, off-the-books accounting, and tricks like Lehman’s Repo
105 (scheduled swaps to obscure how much the firm was relying on borrowed
money).
The scale of the biggest banks makes it much more possible to invest in
these kinds of accounting ruses, and the size of their balance sheets
makes it much more possible to obscure where the money (or mispriced
assets) are hidden.
6. $16.9 billion, $26.9 billion, $14.4 billion
Those figures are the amounts paid in compensation and bonuses by Goldman
Sachs, J.P. Morgan and Morgan Stanley in 2009–the same year these firms
benefited from trillions of dollars in public support provided to the
financial sector. The outrage speaks for itself.
In fairness, as a commercial bank conglomerate, J.P. Morgan has more than
200,000 employees, most of whom are not making out like bandits–but a
very substantial portion are.
These firms tout that they have paid back their bank bailout money, but
they continue to benefit from the other massive subsidies being provided
to the financial sector.
7. $28.9 million
At the giant firms, there are rich rewards for success–but failure is
rewarded, too. Between 2000 and 2007, the leaders of ten companies that
collapsed in the financial crisis or survived thanks to government bailout
received an average of $28.9 million a year. That’s 575 times the median
family income in the United States for 2007.
These numbers may understate things. Business Week reports there is
reason to suspect that CEO pay at Lehman Brothers, and possibly other
firms, has systematically been under-reported.
8. 33, 29, 22
Those are the number of lobbyists employed in 2009 with previous federal
government experience by, respectively, Goldman Sachs, Citigroup, and J.P.
Morgan.
The giant financial firms are among the worst exploiters of the revolving
door, showering riches on one-time government employees, who capitalize on
their relationships with former colleagues still in government positions.
Smaller firms can’t hope to match that kind of insider influence.
9. Financial lobbying correlates with recklessness
An intriguing study from the International Monetary Fund has found that
financial firms that do more lobbying are more reckless and engage in
riskier practices. The IMF study does not correlate size with
recklessness, but the bigger firms spend far more on lobbying than smaller
firms.
Concludes the study: “We show that lenders that lobby more intensively on
these specific issues [related to mortgage lending] have (i) more lax
lending standards measured by loan-to-income ratio, (ii) greater tendency
to securitize, and (iii) faster growing mortgage loan portfolios. Ex post,
delinquency rates are higher in areas in which lobbying lenders’ mortgage
lending grew faster, and, during key events of the crisis, these lenders
experienced negative abnormal stock returns. These findings seem to be
consistent with a moral hazard interpretation whereby financial
intermediaries lobby to obtain private benefits, making loans under less
stringent terms.”
10. Robert Rubin, Henry Paulson
The two most prominent Treasury Secretaries in recent decades both stepped
into top government posts after leading Goldman Sachs. Rubin left the
Treasury Department to become an executive at Citigroup.
The result is that people steeped in Wall Street ideology shaped national
economic policy. Not unimportantly, they played key roles in driving
deregulation and in putting in place the Wall Street bailout
(2008-present).
Imagine if, instead of Rubin and Paulson, the Treasury Secretaries during
their tenures had been former community development bankers. History would
be dramatically different. And better.
Senator Chris Dodd, D-Connecticut, has just announced that he has reached
a deal with Senator Richard Shelby, R-Alabama, on a “resolution
authority,” which would have the job of closing down large failing
financial institutions. Senator Dodd says that this authority–combined
with new powers for regulators in extraordinary instances to close large
financial institutions if they pose a “grave threat” to financial
stability–ensures that there will be no taxpayer-funded bailouts in the
future.
The resolution authority is a good thing, but Senator Dodd is mistaken in
saying it is sufficient to prevent future bailouts. In times of crisis,
regulators are still likely to choose bailouts rather than risk starting a
chain reaction of financial institution failures. The only way to avoid
this problem is to shrink the size of the big banks, so their failure does
not threaten the financial system’s stability.
Nor does a resolution authority do anything about the other, ongoing
perils of bank giantism, including the undermining of our democracy.
The Brown-Kaufman break-up-the-banks amendment remains as desperately
needed as ever. Call your senators today to support the amendment to break
up the banks. Go to:
–Robert Weissman