Time to Do Something About 'Too-Big-to-Fail' Banks

A Wall Street Journal survey this week found that a majority of economists back the idea of Federal Reserve Chairman Ben Bernanke sticking around for another term. Their support hinges on the belief that Bernanke averted a larger economic catastrophe with his actions last fall.

Indeed, last month, Bernanke extolled the Fed's aptitude in handling the financial crisis during a town-hall meeting with PBS' Jim Lehrer, claiming that the Fed had no choice but to save the banks in the manner it employed.

He avoided pointing out the $8 trillion in subsidies and guarantees the Fed bestowed on the industry to keep it functioning. And he neglected to mention that before and during this financial crisis, the Fed blessed big-time mergers that consolidated financial control into the banks our government now deems "too big to fail." Greater concentration in fewer, bigger banks means consumers have less choice, and taxpayers have more risk.

Meanwhile, the nation's antitrust czar, Christine Varney, has been addressing antitrust-violation complaints for a variety of industries -- railroad, pharmaceutical, telecommunications, technology and even dairy. But not the banking sector.

This is a colossal oversight; a poor decision by Google won't bring down the economy. Quite the opposite is true of the risk-laden, federally subsidized megabanks.

According to FDIC data, banking concentration has increased substantially this decade. In 2000, the nation's top five banks had a 25 percent share of all commercial bank deposits and a 29 percent share of total assets. Early this year it was nearly 50 percent and 40 percent.

Those numbers, while alarming, don't hit up against antitrust barriers. "Banks may not be too big by traditional antitrust laws, but the failure of one could bring down the economy. So we need to bring about much stricter antitrust standards than we would for say, ballpoint pen manufacturers," says law professor Robert Lande, co-founder of the American Antitrust Institute.

The FDIC established that no bank could hold more than 10 percent of total deposits in the country. But after the Fed blessed more mergers last fall, the nation's three largest banks - Bank of America, JP Morgan Chase and Wells Fargo - are now at or above that limit. So far there have been no consequences for the breach.

According to Gary Dymski, a professor of economics at the University of California in Sacramento, "The danger going forward is that the very largest banks, which have taken on virtually all the off-balance-sheet risks, regard the recent bailout and its aftermath as giving them a green light to resume business as usual."

In the wake of the Great Depression, the 1933 Glass-Steagall Act was passed to separate commercial banks, which deal with the public, from investment banks, whose profits come from speculation. The idea was to keep the public and government safe from speculators. But, the 1999 Gramm-Leach-Bliley Act repealed Glass-Steagall, permitting commercial banks to buy investment banks and insurance companies, and leading to mega mergers from the late 1990s through 2006. The leading financial firms created during that period have received the most in federal bailout money.

Although no one in Washington likes being held captive by entities that are "too big to fail," neither has anyone openly pushed to do something about it. The Fed's track record is to approve big banks becoming bigger. The antitrust czar doesn't have the power to question Wall Street's moves. And there is no congressional movement - nor any on the part of Treasury Secretary Timothy Geithner or President Barack Obama -- to render banks smaller.

Congress must summon the guts to reinstate Glass-Steagall. A new version of this act could ensure that commercial banks that serve the public remain focused on consumer-oriented business, and prevent investment banks from using federal capital to speculate. We must also reform century-old antitrust laws to reflect the outsize danger of banks failing, and ratchet down their concentration.

Because when big banks fail, it's the public who pays.