The Democrats, the Republicans and especially Barack Obama promised that something would be done about the too big to fail banks so that they would never again be a threat to destroy our financial system. Well, those promises have not been kept and the too big to fail banks are now much bigger and much more powerful than ever. The assets of the five biggest U.S. banks were equivalent to about 43 percent of U.S. GDP before the financial crisis.
Today, the assets of the five biggest U.S. banks are equivalent to about 56 percent of U.S. GDP. So if those banks were "too big to fail" before, then what are they now? They continue to gobble up smaller banks at a brisk pace, and they continue to pile up debt and risky investments as if a day of reckoning will never come. But of course a day of reckoning is coming, and when it arrives they will be expecting more bailouts just like they got the last time.
The size of these monolithic financial institutions is truly difficult to comprehend. They completely dominate our financial system and everywhere you look they are constantly absorbing more wealth and more power. The following comes from a recent Bloomberg article....
Five banks - JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc., Wells Fargo & Co. (WFC), 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
Despite all of the talk from the politicians, they just keep getting bigger and bigger and bigger. So why isn't anything ever done? Well, one reason is because these gigantic financial entities funnel huge quantities of cash into political campaigns.
For example, Barack Obama gives nice speeches about the dangers of the too big to fail banks, but he is also more than happy to take their campaign contributions. Goldman Sachs (GS), JPMorgan Chase (JPM) and Citigroup (C) were all ranked among his top 10 donors during the 2008 campaign.
So do you really expect that Barack Obama is going to bite the hands that feed him? Of course he is not going to do that.
The truth is that the Obama administration and the Federal Reserve have done everything they can to make life very comfortable for the big Wall Street banks. During the last financial crisis, the too big to fail banks were absolutely showered with bailouts. Meanwhile, hundreds of small and mid-size banks were allowed to die.
When representatives from those small and mid-size banks contacted the federal government for help, often they were told to try to find a larger bank that would be willing to buy them. Sadly, the last financial crisis simply accelerated the consolidation of the banking industry in the United States that has been going on for several decades.
Today, there are less than half as many banks in the United States as there were back in 1984. So where did all of those banks go? They were either purchased by bigger banks or they were allowed to go out of existence. This banking consolidation trend has allowed the big Wall Street banks to absolutely explode in size.
Back in 1970, the 5 biggest U.S. banks held 17 percent of all U.S. banking industry assets. Today, the 5 biggest U.S. banks hold 52 percent of all U.S. banking industry assets. So where will this end?
That is a good question.
The funny thing is that Federal Reserve Chairman Ben Bernanke and other Fed officials keep giving speeches where they warn of the dangers of having banks that are "too big to fail". For example, during a recent presentation to students at George Washington University, Bernanke made the following statement about the U.S. banking system....
"But clearly, it is something fundamentally wrong with a system in which some companies are 'too big to fail.'"
So does that mean that Bernanke is against the too big to fail banks? Of course not. The truth is that he showered those banks with trillions of dollars in bailout money during the last financial crisis.
Citigroup - $2.513 trillion
Morgan Stanley (MS) - $2.041 trillion
Bank of America - $1.344 trillion
Goldman Sachs - $814 billion
JP Morgan Chase - $391 billion
Bernanke has shown that he is willing to move heaven and earth to protect those big banks. So what did those banks do with all that money?
They certainly didn't lend it to us. Lending to individuals and small businesses by those big banks actually went down immediately after those bailouts. Instead, one thing that those banks did was they started putting massive amounts of money into commodities.
One of those commodities was food. Over the past few years, big Wall Street banks have made huge amounts of money speculating on the price of food. This has caused food prices all over the globe to soar and it has caused tremendous hardship for hundreds of millions of families around the planet. The following is from a recent article in The Independent....
Speculation by large investment banks is driving up food prices for the world's poorest people, tipping millions into hunger and poverty. Investment in food commodities by banks and hedge funds has risen from $65bn to $126bn (£41bn to £79bn) in the past five years, helping to push prices to 30-year highs and causing sharp price fluctuations that have little to do with the actual supply of food, says the United Nations' leading expert on food.
Hedge funds, pension funds and investment banks such as Goldman Sachs, Morgan Stanley and Barclays Capital now dominate the food commodities markets, dwarfing the amount traded by actual food producers and buyers.
Goldman Sachs alone has earned hundreds of millions of dollars in profits from food speculation. Can you imagine what kind of mindset it takes to do this? Can you imagine taking food out of the mouths of hungry families on the other side of the world so that you and your fellow employees can pad your bonus checks?
It really is disgusting. But that is the way the game is played. It is set up so that the big guy will win and the little guy will lose.
The other day I wrote about how this is particularly true when it comes to our system of taxation. Well, since that article I have discovered some new numbers that were just released by Citizens for Tax Justice. Some of the things that they have uncovered are absolutely amazing....
Between 2008 and 2011, Verizon (VZ) made a total profit of $19.8 billion and yet paid an effective tax rate of -3.8%.
Between 2008 and 2011, General Electric (GE) made a total profit of $19.6 billion and yet paid an effective tax rate of -18.9%.
Between 2008 and 2011, Boeing (BA) made a total profit of $14.8 billion and yet paid an effective tax rate of -5.5%.
Between 2008 and 2011, Pacific Gas & Electric made a total profit of $6 billion and yet paid an effective tax rate of -8.4%.
So why should middle class families continue to be suffocated by outrageous tax rates when hugely profitable corporations such as General Electric are able to get away with paying nothing? Our current tax system is an utter abomination and should be completely thrown out.
But as is the case with so many other things, our current system is going to persist because the "big guys" really enjoy the status quo and they are the ones that fund political campaigns. It would be bad enough if the "big guys" were beating us on a level playing field.
But the truth is that the game has been dramatically tilted in their favor and they know that the politicians are going to take care of them whenever they need it. So what is going to happen the next time the too big to fail banks get into trouble?
They will almost certainly get bailed out again.
Unfortunately, the big Wall Street banks continue to treat the financial system as if it was a gigantic casino. The derivatives bubble just continues to grow larger and larger, and it could burst and absolutely devastate the entire global financial system at any time.
According to the New York Times, the too big to fail banks have complete domination over derivatives trading. Every month a secret meeting that includes representatives from JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup is held in New York to coordinate their control over the derivatives marketplace. The following is how the New York Times describes those meetings....
On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable - and controversial - fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.
When the derivatives market fully implodes, there will not be enough money in the world to bail everyone out. According to the Comptroller of the Currency, the too big to fail banks have exposure to derivatives that is absolutely outrageous. Just check out the following numbers....
JPMorgan Chase - $70.1 Trillion
Citibank - $52.1 Trillion
Bank of America - $50.1 Trillion
Goldman Sachs - $44.2 Trillion
So what happens when that house of cards comes crashing down? Well, those big banks will come crying to the federal government again. They will want more bailouts. They will claim that if we don't give them the money that they need that the entire financial system will collapse.
And yes, if several of the too big to fail banks were to collapse all at once the consequences would be almost unimaginable. But of course all of this could have been avoided if we would have made much wiser decisions upstream.
Our financial system is more vulnerable than it ever has been before, and the too big to fail banks just continue to grow. The lessons from the financial crisis of 2008 have gone unheeded, and we are steamrolling toward an even greater crash.
What a mess.