On this day five years ago, Secretary of the Treasury Henry Paulson officially unveiled the $700 billion Troubled Asset Relief Program (TARP). The program, originally intended to purchase toxic assets from banks, was initially used to inject capital into nine big financial institutions -- Bank of America, Citigroup, JP Morgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, Merrill Lynch, BNY Mellon, and State Street. Ultimately, over 700 financial institutions would receive assistance. While TARP became the most renowned of the government's financial bailout programs, it was only one of more than two dozen programs under which the taxpayers committed trillions of dollars to rescue the financial system and individual banks.
While American families and the nation's economy are still wrestling with the fallout of the financial crisis, Wall Street has bounced back quickly from the debacle of 2008. By 2010, just two years after the near collapse of the financial sector, the 10 biggest U.S. banks were earning more than $62 billion in annual profits, and compensation at publicly traded Wall Street firms reached a record $135 billion. By 2011, the 10 biggest U.S. banks controlled 77 percent of the nation's banking assets. The top five banks -- JP Morgan Chase, Citigroup, Bank of America, Goldman Sachs, and Morgan Stanley -- held 95 percent of the $304 trillion in derivative contracts held by U.S. bank holding companies.
Following up on my posts of these past two weeks, here is the fifth post in a series about five critical must do's to prevent another crisis and to remake our financial system and economy to serve all Americans, not just powerful. Also, below is another short summary of daily events of the financial meltdown of 2008, drawn from the timeline on the website of the Financial Crisis Inquiry Commission.
Must Do #1 - Break Up the Big Banks
Little, if anything, has changed on Wall Street in the five years since the crash of 2008. Profits have rebounded. Compensation has hit record highs. Reform has been stymied at every turn. And, there are fewer, bigger banks controlling more of the country's banking assets than when our nation was forced to rescue financial institutions that were deemed too big too fail.
Real reform of our financial system, and thus greater stability for our economy, cannot and will not occur unless action is taken to break up the country's biggest banks and thereby break the stranglehold that they now hold on our financial system, our economy, and our democracy.
Simply stated, the megabanks are too big to fail, too big to manage, too big to regulate, and too big for a truly competitive marketplace. In their fierce, unyielding resistance to reform and their unrestrained use of their enormous political power in pursuit of their self-interest, they have also proven that they are too big for a healthy democracy.
The substantive arguments for restructuring of the biggest banks are clear. Notwithstanding claims to the contrary, the stability of our financial system would be greatly at risk if one or more of the nation's systemically important financial institutions were to fail. The concentration of banking assets in a few, large financial institutions warps the marketplace -- leading Richard Fisher, the president and CEO of the Federal Reserve Bank of Dallas, to call the continued existence of too big to fail banks "a perversion of capitalism." The cost of financial intermediation has risen over the last 30 years despite claims that scale and innovation would bring savings to businesses and consumers. And the list goes on. No wonder that a growing chorus of voices -- from former FDIC head Sheila Bair to former Citigroup CEO John Reed to Fisher and others -- have called for breaking up the big banks.
But it is perhaps the banks' own conduct since the crisis that makes the most compelling case for restructuring. Since the meltdown of 2008, the biggest banks have demonstrated their absolute unwillingness to change and have used every resource at their disposal to thwart reform. In the last two years alone, securities and investment firms have spent over $200 million on federal lobbying -- and that's on top of hundreds of millions of dollars in campaign contributions - fighting new rules in Congress, then at regulatory bodies, and then in the courts if all else fails.
Sadly, the banks' counteroffensive has paid off. As of July 2013, only 39.7 percent of the rules required under the Dodd-Frank financial reform law enacted in 2010 had been put in place. Of the rules whose deadlines for enactment have passed, only 38.4 percent have been enacted.
It is clear that the status quo cannot prevail. For the safety and security of our financial system and for the health of our economy, the big bank oligopoly must now go the way of the trusts that were dismantled at the turn of the last century.
Must Do #2 - Enforce the Law (posted 9/16/2013)
Must Do #3 - Tougher, Simpler Capital Requirements for Banks (posted 9/13/13)
Must Do #4 - To Reform Compensation, Shareholders Unite! (posted 9/12/13)
Must Do #5 - A Federal Reserve Chair Who Will Protect the Public Interest, Not Wall Street (posted 9/9/13)
5 Years Ago Today in the Financial Crisis
On Friday, September 19, 2008:
- Treasury Secretary Henry Paulson officially unveils the proposed Troubled Asset Relief Program (TARP), which would commit up to700 billion from the government to buy "toxic" assets from banks. The program requires approval from Congress.
- The Federal Reserve announces the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility.
- The Securities and Exchange Commission bans short selling on 799 financial stocks.
- The Dow Jones rose by 368 points (3.35%) and the S&P 500 climbed 48 points (4.03%).
Phil Angelides
Chairman, Financial Crisis Inquiry Commission, 2009 - 2011