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Break up the banks: By the numbers

Any time in the next couple days, the Senate may consider a measure, sponsored by Senators Sherrod Brown, D-Ohio, and Ted Kaufman, D-Delaware, to break up the biggest banks. It’s 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.


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, 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 36.43 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 U.S. 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, 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 benefiting from trillions of dollars in public supports 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 10 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 Secretary 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.