We hear financial experts — past and present members of the Federal Reserve, even Allan Greenspan — calling for breakup of the big banks that gave us the Great Meltdown. If we rid ourselves of banks-too-big-to-fail, we won’t have banks-too-big-to-fail to bail out again, they argue with impeccable logic. But we don’t hear Congress heeding that congenial advice.
Maybe Congress can’t see the individual trees for the mega-forest, i.e, the individual banks taken over by each bank too-big-to fail. Those megabanks liken themselves to Walmart or Apple Computer — giants that grew entirely on their own from a single seed like a giant oak.To separate a bank too-big-to-fail into parts, they aver, would be as futile as tearing limbs off Walmart and expecting them to survive.
If Congress took only a cursory look it would see that the banks too-big-to-fail are not clusters of limbs growing from a trunk that nurtured them but only groups of formerly independent banks that functioned quite all on their own before taken over. Better, in fact. Why else would banks too-big-to-fail want them?
The second greatest irony is that taxpayers had to pay billions to rescue those formerly successful banks after their acquisitors became too-big-to-fail only by having acquired them. The greatest irony is that the Great Meltdown itself is the product of the megabanks’ frantic efforts — creation, sale, and insuring of subprime mortgages — to crawl out of the vicious whirlpool they created by grabbing those banks.
For decades we’ve heard the story of how giant acquisitors create that whirlpool by inflating their stock value with earnings of acquired companies and thereby produce more paper wealth to takeover even more corporations. When the music stops, they must start selling off those companies in a desperate effort to show earnings, until only their skeletons remain. The stories are legion: LTV’s purchase at devastating cost and then sale of Jones & Laughlin Steel, ITT’s selling off Sheraton Hotels and Hartford Fire Ins. Co. More recently, Time Warner’s selling off AOL, Mercedes Benz’s jettisoning of Chrysler in return for zero after expenses.
Compelled by market forces to dismantle their collapsing structures, some of those corporations became viable enterprises. But banks too-big-to-fail — exempted from bankruptcy — are immune to those forces, we know so well. And remaining intact after devastating the economy by obscuring their failed takeover structures with schemes enabling sellers to be buyers and buyers sellers, i.e., subprime mortgages, they are as free under the Dodd-Frank Act as ever to invent more such bombs for continuing the cover-up.
We had been rid of seller-buyer-rolled-into-one schemes for decades. In 1909, Louis Brandeis (before being appointed to the Supreme Court) described them in Other Peoples’ Money and How the Bankers Use It: Commercial bankers, sitting on boards of railroads and steel companies, set the prices of assets their investment banks purchased from those very corporations. Seller and buyer both they were. When the economy tanked in the 1930s, Congress finally took Brandeis’ advice and outlawed commercial bank — investment bank combinations. Its action, the Glass-Steagall Act, thus prevented seller and buyer from being the same bank.
The act was so successful over the years in eliminating that conflict of interest, it created a problem. A problem for Chase Manhattan and J.P. Morgan Co., already the mega combinations of formerly independent banks. And for their brethren combinations, Citicorp and Travelers Group. Of course those combinations wanted to combine. But they faced the Glass-Steagall Act’s safeguard against seller-buyer unions restraining unions of commercial banks with investment banks.
Those combinations of takeovers combined nevertheless, forming JP Morgan-Chase and Citigroup (each bailed out with $45 billion of taxpayers’ money a few years later). Congress hurried to destroy the act retroactively for them, assuring that seller-buyer-all-in-one was a danger for the 1930s, not the 1990s. Destruction of that bridge from the 19th Century into the 20th Century was itself a bridge into the 21st Century, Congress said. The scientific eye of the Securities and Exchange Commission, not walls separating banks, would stringently protect us, it reasoned. Too bad Congress didn’t know the SEC was in the process of refusing to look at overwhelming evidence of Bernie Madoff’s Ponzi Scheme, allowing that scheme had wipe out billions of investors’ savings.
Erection of walls between commercial banks and investment banks prevented them from being sellers and buyers both, proving Brandeis right. Destruction of the walls proved him right again: Only months after the repeal, banks too-big-to-fail sought funds for obscuring failure of the very takeover strategies that made them too big. They resorted to creating subprime mortgages. They sold them to their investment arms. The rest is history. Should it continue, or should we let the trees stand independently again?