Time to break up the big banks?

"Too big to fail, too big to jail." For far too long, that's been the government's attitude toward Wall Street banks. Regulators refuse to hold banks accountable both out of fear of Wall Street's political clout and also a misplaced perception that real enforcement might hurt the economy, even though a lack of enforcement recently wrecked it. But things are changing.

“Too big to fail, too big to jail.” For far too long, that’s been the government’s attitude toward Wall Street banks. Regulators refuse to hold banks accountable both out of fear of Wall Street’s political clout and also a misplaced perception that real enforcement might hurt the economy, even though a lack of enforcement recently wrecked it. But things are changing.

Consider that Attorney General Eric Holder said during recent testimony that Wall Street banks are not only still too big to fail, they’re too big to prosecute: “If we do bring a criminal charge — it will have a negative impact on the national economy, perhaps even the world economy.” That’s been the prevailing wisdom, such as it is, among many, but not all, regulators.

However, recent scandals like the “London Whale” incident have helped shift the dialogue so that now there’s finally serious momentum building around the idea of breaking up the big banks.Two weeks ago the U.S. Senate’s Permanent Subcommittee on Investigations held hearings based on its well-documented and strongly bi-partisan staff report on JPMorgan Chase’s multi-billion dollar “London Whale” betting losses (the pdf report and exhibits are linked at top left of the hearing page).

Then, last Friday, the U.S. Senate voted 99-0 to eliminate billions of dollars in taxpayer subsidies to the biggest banks. The vote also followed two other events: first, the release of a Bloomberg News calculation based on an International Monetary Fund paper that the subsidy accruing to the 10 biggest banks amounted to $83 billion/year and that startling admission in testimony from Attorney General Eric Holder that Wall Street banks are not only still too big to fail, they’re too big to jail.

Of course, the big banks are pushing back in the media with a lot of bluster, but momentum against them and mobilization toward greater curbs on their size and risky activities is growing. In Thursday’s New York Times, MIT Professor Simon Johnson, former IMF chief economist, headlines his regular column this way: “The Debate on Bank Size Is Over.” He goes on to say:

“While bank lobbyists and some commentators are suddenly taken with the idea that an active debate is under way about whether to limit bank size in the United States, they are wrong. The debate is over; the decision to cap the size of the largest banks has been made. All that remains is to work out the details.”

In the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress took several PIRG-backed steps to control risk, but did not directly either break up the banks or cap their size.

  • The Congress enacted the Volcker rule, intended as a behavioral constraint on risky betting practices. But the rule has not yet been finalized by regulators, due to (guess what?) industry lobbying.
  • The Congress established a Financial Stability Oversight Council. Among its other powers, FSOC is defining a set of certain large, complex financial firms as “systemically important financial institutions.”  SIFIs are subject to additional oversight, including special shutdown (liquidation) authority.
  • That authority requires the big firms to prepare “Living Will” procedures to make it easier to shut them down in the event of a collapse, rather than propping them up, as taxpayers were forced to do in 2008.
  • The act also mandated a number of other requirements, including increased capital standards to reduce risky leverage and ensure that banks had more of their own “skin in the game.”

But these and other reforms haven’t yet been fully implemented and face massive pushback from the big banks. Incredibly, the big banks are still getting bigger. However, momentum is growing on both sides of the political aisle. Senator Carl Levin (MI), chair of the Permanent Subcommittee, had John McCain (AZ) alongside him for the JPMorgan Chase hearings. Here is just some of what Senator McCain had to say about Chase’s use of depositor funds for casino betting:

“This case represents another shameful demonstration of a bank engaged in wildly risky behavior. The “London Whale” incident matters to the federal government because the traders at JPMorgan were making risky bets using excess deposits, portions of which were federally insured. These excess deposits should have been used to provide loans for main-street businesses. Instead, JPMorgan used the money to bet on catastrophic risk.”

Meanwhile, another two Senators working together on reforms, Sherrod Brown (OH) and David Vitter (LA), are also ideologically miles apart on most issues, but not when it comes to bank size. It was their amendment that passed the normally divisive Senate 99-0. Even though it is largely symbolic in effect, its passage adds impetus to the more comprehensive Brown-Vitter push to break up the big banks.

In November, former Kansas City Federal Reserve Bank President Thomas Hoenig was confirmed as vice-chairman of the FDIC. At a Joint Economic Committee Hearing several years ago, I could hardly separate his views apart from those of the other two witnesses, Simon Johnson and Nobel Laureate Joe Stiglitz. Meanwhile, Dallas Fed President Richard Fisher marched into the Conservative Political Action Committee conference this month to reiterate the gist of his previous papers:

“Implicit government policy has made the megabank institutions exempt from the normal processes of bankruptcy and creative destruction,” he said. “Without fear of failure, these banks and their counterparties can take excessive risks.”

Small banks on Main Street have also ramped up their efforts to roll back the big banks, as Independent Community Bankers Association president Cam Fine explained on his blog this week.

More and more regulators and members of Congress are recognizing the need to reduce the risk posed by big banks. Of course, the big Wall Street banks are doubling their own lobbying, public relations and campaign contribution efforts against implementing Dodd-Frank reforms and against the anticipated Brown-Vitter and similar breakup and reform proposals.

Nevertheless, while Congress is still split on a partisan basis over powers of the CFPB and confirming CFPB director Richard Cordray, there are new opportunities to move forward on protecting taxpayers, depositors and the economy from the risky practices of the biggest banks. They should not be above the law. They should not be too  big to fail. They should not be recipients of taxpayer subsidies.


Ed Mierzwinski

Senior Director, Federal Consumer Program, PIRG

Ed oversees U.S. PIRG’s federal consumer program, helping to lead national efforts to improve consumer credit reporting laws, identity theft protections, product safety regulations and more. Ed is co-founder and continuing leader of the coalition, Americans For Financial Reform, which fought for the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including as its centerpiece the Consumer Financial Protection Bureau. He was awarded the Consumer Federation of America's Esther Peterson Consumer Service Award in 2006, Privacy International's Brandeis Award in 2003, and numerous annual "Top Lobbyist" awards from The Hill and other outlets. Ed lives in Virginia, and on weekends he enjoys biking with friends on the many local bicycle trails.