Tuesday, May 15, 2012

Biggest American Banks Are Too Big

JP Morgan's $2 Billion Loss Shows The Need to Break Up the Big Banks

David Rohde filed a Reuters report about the biggest banks.  This story was picked up May 11th by The Atlantic. He notes:

  • JPMorgan’s $2 billion trading loss is not alone among problems with big banks.
  • HSBC failed to review thousands of internal alerts about money laundering. Required suspicious activity reports were not filed with American law enforcement agencies. It put the worst people it could find in charge of the monitoring of money laundering.
  • Citigroup has also been accused of lax efforts against money laundering. The bank agreed with the Comnptroller of the Currency to improve the monitoring, but no monetary penalty was paid nor did Citgroup admit to wrongdoing.
  • Last month, a former Nigerian governor pleaded guilty to stealing $79 million in government money and funneling it offshore to buy American and British property. The banks used were HSBC, Citibank, Barclays and Shroeders.
  • Bloomberg Businessweek reported last month that four Federal Reserve presidents argue that Dodd-Frank reforms do not end the "too big to fail" status of large banks. There are measures in the law banning future bailouts, but "traders, analysts and bankers simply don’t buy it."
  • The biggest US banks are getting bigger. Bloomberg Businessweek reported that five American banks (JPMorgan, Chase, Bank of America, Citigroup, Wells Fargo as well as Goldman Sachs) held $8.5 trillion in assets at the close of 2011, 56 percent of the nation’s economy. But five years earlier, prior to the financial meltdown, they held 43 percent of U.S. output. Today those big banks are twice as large as a decade ago relative to the economy.

"The four Federal Reserve presidents -- Richard Fisher of Dallas, Esther George of Kansas City, Jeffrey Lacker of Richmond and Charles Plosser of Philadelphia -- have expressed concern that such a concentration of assets in the banking industry threatens the financial system.

"In a scathing essay published in March in the Federal Reserve Bank of Dallas' 2012 annual report, Harvey Rosenblum, the bank's head of research, called for the government to break up the country's largest banks. Rosenblum argued that only smaller banks - not the increased capital requirements, stress tests and other measures in Dodd-Frank - will prevent another crisis."

  • Rosenblum wrote that more banks, enough to ensure competition but small enough not to endanger the overal economy, ""will give the United States a better chance of navigating through future financial potholes and precipices."
  • The public is uneasy about the existing reforms. Last month a Rasmussen poll showed 48 percent of Americans lack confidence in banking stability, with 47 percent "somewhat confident" in the system.
  • Both presidential candidates have avoided calls to break up the big banks. Romney has said, "I am not looking to break apart financial institutions." Obama states the new regulations would force banks into orderly bankruptcy proceedings, but under his administration, federal fraud prosecutions in the finance area have dropped to 20-year lows, as Peter Boyer and James Schwizer wrote last week in The Daily Beast. Prosecutions are down 39 percent from 2003.
Summarized from The Atlantic at:


The article also appeared on Reuters.com, an Atlantic partner site.

David Rohde is a columnist for Reuters, two-time winner of the Pulitzer Prize, and a former reporter for The New York Times.

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From the Blog Author:  "Oops!"

After The Atlantic picked up this news, JPMorganChase revised the derivatives loss upward to $3 billion.

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