'Too big to fail' and getting bigger | StarTribune.com
'Too big to fail' and getting bigger
- Article by: DAVID J. LYNCH , Bloomberg News
- Updated: April 16, 2012 - 9:36 PM
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BigTwo years after President Obama vowed to eliminate the danger of financial institutions becoming "too big to fail," the nation's largest banks are bigger than they were before the nation's credit markets seized up and required unprecedented bailouts by the government.
Five banks -- J.P. Morgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. -- held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to central bankers at the Federal Reserve.
Five years earlier, before the financial crisis, the largest banks' assets amounted to 43 percent of U.S. output. The Big Five today are about twice as large as they were a decade ago relative to the economy, sparking concern that trouble at a major bank would rock the financial system and force the government to step in as it did in 2008 with the Fed-assisted rescue of Bear Stearns Cos. by J.P. Morgan and with Citigroup and Bank of America after the Lehman Brothers bankruptcy, the largest in U.S. history.
"Market participants believe that nothing has changed, that too-big-to-fail is fully intact," said Gary Stern, former president of the Federal Reserve Bank of Minneapolis.
Eroding faith
That specter is eroding faith in Obama's pledge that taxpayer-funded bailouts are a thing of the past. It is also exposing him to criticism from Federal Reserve officials, Republicans and Occupy Wall Street supporters, who see the concentration of bank power as a threat to economic stability.
As weaker firms collapsed or were acquired, a handful of financial giants emerged from the crisis. Since then, J.P. Morgan, Goldman Sachs and Wells Fargo have continued to grow internally and through acquisitions from European banks, reeling from government austerity measures related to the rising cost of public debt in Greece, Spain, Portugal, Ireland and Italy.
The industry's evolution defies the president's January 2010 call to "prevent the further consolidation of our financial system."
Simon Johnson, a former chief economist of the International Monetary Fund, blames a "lack of leadership at Treasury and the White House" for the failure to fulfill that promise. "It'd be safer to break them up," he said.
The Obama administration rejects the criticism, citing new safeguards to head off further turmoil in the banking system. Treasury Secretary Timothy Geithner said in remarks on Feb. 2 the U.S. financial system is "significantly stronger than it was before the crisis." He credits new regulations, including tougher capital and liquidity requirements that limit risk-taking by the biggest banks, authority to take over failing big institutions and prohibitions on the largest banks acquiring competitors.
The government's financial system rescue, beginning with the 2008 Troubled Asset Relief Program, angered millions of taxpayers and helped give rise to the Tea Party movement. Banks and bailouts remain unpopular: By a margin of 52 percent to 39 percent, respondents in a February Pew Research Center poll called the bailouts "wrong" and 68 percent said banks have a mostly negative impact on the country.
Riding out turbulence
The banks say they have increased their capital backstops in response to regulators' demands, making them better able to ride out unexpected turbulence. J.P. Morgan, whose chief executive officer, Jamie Dimon, acknowledged public "hostility" toward bankers in a March 30 letter to shareholders, boasted April 13 of a "fortress balance sheet." Bank of America, which was about 50 percent larger at the end of 2011 than five years earlier, says it has boosted capital and liquidity while increasing to 29 months the amount of time the bank could operate without external funding.
Today's 6,291 commercial banks are less than half the number that existed in 1984, according to the Federal Deposit Insurance Corp. The trend intensified during the crisis as J.P. Morgan acquired Bear Stearns and Washington Mutual, Bank of America bought Merrill Lynch and Wells Fargo took over Wachovia in deals encouraged by the government.
"One of the bad outcomes, the adverse outcomes of the crisis, was the mergers that were of necessity undertaken when large banks were at risk," said Donald Kohn, vice chairman of the Federal Reserve from 2006 to 2010. "Some of the biggest banks got a lot bigger and the market got more concentrated."
In recent weeks, at least four current Fed presidents --Esther George of Kansas City, Charles Plosser of Philadelphia, Jeffrey Lacker of Richmond and Richard Fisher of Dallas -- have voiced similar worries about the risk of a renewed crisis. Five" banks now hold assets equal to 56 percent of the U.S. economy.
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