Three Reasons Why “Too-Big-to-Fail” Banks Need to Be Broken Up


There are three big reasons that indicate that breaking down some of the largest banks would be a step in the right direction.

Too Big, Too Risky

In 1999, President Bill Clinton passed the Gramm-Leach-Bliley Act, which allowed the integration of basic banking activities with investment banking. At that time, the Glass-Steagall Act (established in 1933 in response to the Great Depression) had already been repealed as a result of lobbying efforts by some of the biggest banks. These lobbying efforts had significantly increased from the 1970s, and the bill to repeal the Glass-Steagall Act was passed in the 1980s.

On March 27, 2008, in his speech at the Cooper Union, then-presidential candidate Barack Obama said, “A regulatory structure set up for banks in the 1930s needed to change. But by the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework…. Unfortunately, instead of establishing a 21st-century regulatory framework, we simply dismantled the old one, thereby encouraging a winner-take-all, anything-goes environment that helped foster devastating dislocations in our economy.”

Critics of the Glass-Steagall Act were of the opinion that the act could not have prevented the financial collapse in 2008, since the “real” offenders of the financial crisis were not the banks, but non-banks like Bear Stearns and Lehman Brothers, which had “bank-like” qualities. Supporters of the Glass-Steagall Act say that if the act had stayed in its place, banks wouldn’t be permitted to indulge in speculative trading in the shadow of traditional banks and such loans would not have been made.

Prof. Robert Reich, who was US secretary of labor under President Clinton, has argued that the non-banks received funding from big banks through such means as mortgages and letters of credit. Reich maintained that if the Glass-Steagall Act had been in effect, then the big banks could not have given funding to non-banks. He further adds that it might have prevented the crash. The quick rise of shadow banks (firms with bank-like activities) gave way to risky activities and could have been regulated only if the Glass-Steagall Act were not repealed.

Too Big, Too Powerful

Lobbyists legally tend to influence a decision-making body for their own special interests through campaign finance. Some of the biggest banks have been associated with large political donations and campaign donations. A study, titled “A Fistful of Dollars: Lobbying and the Financial Crisis,” published in 2011 by the National Bureau of Economic Research, reports that “the political influence of the financial industry played a role in the accumulation of risks, and hence, contributed to the financial crisis.” An example cited by the report shows that Citigroup had spent $3 million on lobbying against the Predatory Lending Consumer Protection Act of 2001 that never became a law. Citigroup received $45 billion worth of bailout funds.

Huge lobbying efforts come easily to big banks due to a large capital base, which can potentially influence the process of the financial regulatory system. The implications of lobbying efforts on financial regulation can be huge, and lobbying has influenced laws like the Glass-Steagall Act and slowed the process of the Dodd-Frank Wall Street Reform and Consumer Protection Act. An apt example of huge lobbying efforts was the repeal of Glass-Steagall that was backed by a $300 million lobbying effort. After the 2008 crisis, strong lobbying efforts were made to slow down the passage of the Dodd-Frank bill. The Nation reported that more than $1 billion was spent on lobbying against the Dodd-Frank bill.

A letter released in November 2015 by Sen. Elizabeth Warren (D-Massachusetts) and Rep. Elijah E. Cummings (D-Maryland) revealed that portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act were repealed in 2014. This repeal allows FDIC-insured banks to hold $10 trillion in “risky swap trades.”

According to the Center for Responsive Politics, the securities and investment industry spent nearly $74 million on lobbying in the first three-quarters of 2014. In 2013, The Nation reported that as many as 3,000 lobbyists were sent in “hopes of killing off pieces of the proposed bill” (now known as the Dodd-Frank Act). In the 2013-14 election cycle, Wall Street banks and financial interests had reportedly spent more than $1.2 billion to influence decision-making in Washington, according toAmericans for Financial Reform.

Too Big to Jail

A report released by Elizabeth Warren in 2015 shows how “federal regulators regularly let big corporations and their highly paid executives off the hook when they break the law.” Some of the many banking scandals, including many G-SIBs (global systemically important banks) have dated back to the subprime mortgage crisis. According to Reuters, a state and a federal working group has reached settlements with four major financial institutions since 2012: JPMorgan Chase ($13 billion), Bank of America ($16.6 billion), Citibank ($7 billion) and Morgan Stanley ($3.2 billion). Because big banks have complicated banking structures and are interconnected with risky activities, their exposure to multibillion-dollar scandals is not a surprise. According to a report by Labaton Sucharow LLP, one-third of bank employees with less than 20 years in the industry are willing to engage in “insider trading to make $10 million, if there was no chance of being arrested.”

The sizes of some of the largest banks are so huge that they surpass the GDPs of certain countries, and convictions for such crimes are numbered. Since the banks are huge, it is difficult and complicated to retrace the origin of banking crimes. With billions being lost in scandals, the ones found guilty pay huge fines to settle the charges against them, with very few convicted. Typically, following such settlements, the bank executives at high positions step down. On April 11, 2016, the US Department of Justice, along with federal and state partners, announced a $5.06 billion settlement with Goldman Sachs related to its role in the “packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) between 2005 and 2007.”

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