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WP: Banks 'Too Big to Fail' Have Grown Even Bigger


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One year later since the economy exploded, has anything really changed?


Banks 'Too Big to Fail' Have Grown Even Bigger

Behemoths Born of the Bailout Reduce Consumer Choice, Tempt Corporate Moral Hazard

By David Cho

Washington Post Staff Writer

Friday, August 28, 2009

When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation's leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.

Today, the biggest of those banks are even bigger.

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.

J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.

A year after the near-collapse of the financial system last September, the federal response has redefined how Americans get mortgages, student loans and other kinds of credit and has made a national spectacle of executive pay. But no consequence of the crisis alarms top regulators more than having banks that were already too big to fail grow even larger and more interconnected.

"It is at the top of the list of things that need to be fixed," said Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. "It fed the crisis, and it has gotten worse because of the crisis."

Regulators' concerns are twofold: that consumers will wind up with fewer choices for services and that big banks will assume they always have the government's backing if things go wrong. That presumed guarantee means large companies could return to the risky behavior that led to the crisis if they figure federal officials will clean up their mess.

This problem, known as "moral hazard," is partly why government officials are keeping a tight rein on bailed-out banks -- monitoring executive pay, reviewing sales of major divisions -- and it is driving the Obama administration's efforts to create a new regulatory system to prevent another crisis. That plan would impose higher capital standards on large institutions and empower the government to take over a wide range of troubled financial firms to wind down their businesses in an orderly way.

"The dominant public policy imperative motivating reform is to address the moral hazard risk created by what we did, what we had to do in the crisis to save the economy," Treasury Secretary Timothy F. Geithner said in an interview.

The worry for consumers is that the bailouts skewed the financial industry in favor of the big and powerful. Fresh data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors assume these large companies are not at risk of failing. That imbalance could eventually squeeze out smaller competitors. Already, consumers are seeing fewer choices and higher prices for financial services, some senior government officials warn.

Those mergers were largely the government's making. Regulators pushed failing mortgage lenders and Wall Street firms into the arms of even bigger banks and handed out billions of dollars to ensure that the deals would go through. They say they reluctantly arranged the marriages. Their aim was to dull the shock caused by collapses and prevent confidence in the U.S. financial system from crumbling.

Officials waived long-standing regulations to make the deals work. J.P. Morgan Chase, Bank of America and Wells Fargo were each allowed to hold more than 10 percent of the nation's deposits despite a rule barring such a practice. In several metropolitan regions, these banks were permitted to take market share beyond what the Department of Justice's antitrust guidelines typically allow, Federal Reserve documents show.

"There's been a significant consolidation among the big banks, and it's kind of hollowing out the banking system," said Mark Zandi, chief economist of Moody's Economy.com. "You'll be left with very large institutions and small ones that fill in the cracks. But it'll be difficult for the mid-tier institutions to thrive."

"The oligopoly has tightened," he added.

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To expect the government to succeed, you'd have to believe.

They got a team together (that didn't cause the problem)

They brainstormed the problem and came up with possible solutions.

Implemented the short-term and long-term solutions with a project plan in mind.

Have been re-convening on a regular basis to ensure the plan is being followed or needs to be changed to meet the new challenges.

Have alerts in place to ensure certain checkpoints will send out an alarm that will be investigated.


The same ole people covering their asses so they don't get fired.

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Just wait till these same people start screaming bloody socialist murder when the govt tries to regulate these banks better or break them up.

How much you want to bet the government doesn't try and break up these banks or do anything to directly introduce more private competition into the industry?

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How much you want to bet the government doesn't try and break up these banks or do anything to directly introduce more private competition into the industry?

Ding. Goldman Sachs owns this administration and has wormed its way into all levels of the federal gov't.

You think they will allow the banks to be broken up? :hysterical:

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Just wait till these same people start screaming bloody socialist murder when the govt tries to regulate these banks better or break them up.
How much you want to bet the government doesn't try and break up these banks or do anything to directly introduce more private competition into the industry?

Oh, I think that the paranoid part of me has decided that, frankly, these banks are more powerful than our government. And know it. (As are some other industries, as well.)

I think we've passed the point where the government has the power to break up some of these structures. (Or at least, the political power.)

I'm thinking that if this administration attempts to seriously break up these monsters, then the banks will tank the economy (I think they have that power), and we'll have a Republican administration who'll not only permit big banks, but subsidize them.

But that's just me being paranoid.

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Uhhh, just keep in mind who signed TARP before you go slinging.

Why?...I opposed it then as well

W and O both pushed it and earned points from those that really control money.

We are gonna be paying back these favors for a long time.

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thank you bush bailout or obama stima?

IMO, blaming either (or even both) is downright idiotic.

Those measures, IMO, are the reason we aren't going to be having bread lines for the next few years.

Analogy: Two years ago, I quit my job so that I could wait on my Mother (who's crippled with Arthritis and has Alzheimers and some paranoia) full time.

It's been really hard, in ways that I didn't expect. (I expected that it would be hard for me to clean her up after she wets herself. But that really isn't a problem. What really hurts, to me, are things like her introducing me to people in restaurants, as "my son, Don". (Don is my father's name.)) I haven't been to the movies in three years, because I can't leave her alone. I can't watch television. (I don't know why, but it upsets her for some reason.) My Father is starving to death because he's stopped eating, in a nursing home less than two miles away, and I can't go see him because Mom doesn't want to go, and I can't leave her alone.

However, I'm absolutely convinced that Mom really only has two paths in life. Either I sit here and wait on her, (and ignore all of the things she does that are hurting me and herself), or I can initiate a chain of events where the only possible outcome is for her to be involuntarily committed to a nursing home, where she will fight against everything the staff tries to do to her, and will beg me daily to take her home, and where she will likely die a few months later in a manner similar to what my Dad is doing, only a lot less peaceful.

And given that, as I see it, those are the only two possible futures (Mom will not permit any other option), it frankly becomes real easy for me to pick one.

You might not like the things that have been done about this crisis. (I really don't myself.)

But given that the alternative is a worldwide depression, possibly on a scale greater than the Great Depression, then deficit-funded bailouts and political-laden stimulus packages look positively rosy.

And by a similar reasoning, dumping the worst banks onto the asset sheets of the biggest banks (and throwing freshly-printed cash at the biggest banks) were the only way to prevent disaster.

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Disaster now or later with interest...pick your poison.

Depends on whether we try/are able to fix the problem during the time we've bought.

(You're right. Doesn't look likely, to me, either. Y'all think the health care industry fights dirty against the government getting uppity?)

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Countries that stimulated their economy are coming out now...

Countries that did not stimulate their economy are coming out now...

The implication of your post is clear: the economy would have recovered regardless of any government measures. To which I reply:

(1) Virtually every government in the 1st world spent boatloads of cash to stimulate their respective economies. That include most of Far East Asia and Europe. So, what "countries that did not stimulate their economy are coming out now?"

(2) Many people on the right believed that the stimulus spending would wreck the economy and fail to stimulate the economy. They predicted gloom and doom and economic collapse. Once the economy started showing signs of life, they repeated "dead cat bounce." Now the refrain is changing to, "well it would have happened anyway." Way to stick to your story guys.

(3) Are you really arguing that the stimulus spending and bailouts were ineffective (i.e., they failed to stimulate the economy)?

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