Why we should break up the megabanks (#OWS)
Today is May Day, and my Occupy group and I are planning to join in the actions all over the city this afternoon. At 2:00 I’m going to be at Cooper Square, where Free University is holding a bunch of teach-ins, and I’m giving one entitled “Why we should break up the megabanks.” I wanted to get my notes for the talk down in writing beforehand here.
The basic reasons to break up the megabanks are these:
- They hold too much power.
- They cost too much.
- They get away with too much.
- They make things worse.
Each requires explanation.
Megabanks hold too much power
When Paulson went to Congress to argue for the bailout in 2008, he told them that the consequences of not acting would be a total collapse of the financial system and the economy. He scared Congress and the American people to such an extent that the banks managed to receive $700 billion with no strings attached. Even though half of that enormous pile of money was supposed to go to help homeowners threatened with foreclosures, almost none of it did, because the banks found other things to do with it.
The power of megabanks doesn’t only exert itself through the threat of annihilation, though. It also flows through lobbyists who water down Dodd-Frank (or really any policy that banks don’t like) and through “the revolving door,” the men and women who work for Treasury, the White House, and regulators about half the time and sit in positions of power in the megabanks the other half of their time, gaining influence and money and retiring super rich.
It is unreasonable to expect to compete with this kind of insularity and influence of the megabanks.
They cost too much
The bailout didn’t work and it’s still going on. And we certainly didn’t “make money” on it, compared to what the government could have expected if we had invested differently.
But honestly it’s too narrow to think about money alone, because what we really need to consider is risk. And there we’ve lost a lot: when we bailed them out, we took on the risk of the megabanks, and we have simply done nothing to return it. Ultimately the only way to get rid of that costly risk is to break them up once and for all to a size that they can reasonably and obviously be expected to fail.
Make no mistake about it: risk is valuable. It may not be quantifiable at a moment of time, but over time it becomes quite valuable and quantifiable indeed, in various ways.
One way is to think about borrowing costs and long-term default probabilities, and there the estimates have varied but we’ve seen numbers such as $83 billion per year modeled. Few people dispute that it’s the right order of magnitude.
They get away with too much
There doesn’t seem to be a limit to what the megabanks can get away with, which we’ve seen with HSBC’s money laundering from terrorists and drug cartels, we’ve seen with Jamie Dimon and Ina Drew lying to Congress about fucking with their risk models, we’ve seen with countless fraudulent and racist practices with mortgages and foreclosures and foreclosure reviews, not to mention setting up customers to fail in deals made to go bad, screwing municipalities and people with outrageous fees, shaving money off of retirement savings, and manipulating any and all markets and rates that they can to increase their bonuses.
The idea of a financial sector is to grease the wheels of commerce, to create a machine that allows the economy to work. But in our case we have a machine that’s taken over the economy instead.
They make things worse
Ultimately the best reason to break them up right now, the sooner the better, is that the incentives are bad and getting worse. Now that they live in a officially protected zone, there is even less reason for them then there used to be to rein in risky practices. There is less reason for them to worry about punishments, since the SEC’s habit of letting people off without jailtime, meaningful penalties, or even admitting wrongdoing has codified the lack of repercussions for bad behavior.
If we use recent history as a guide, the best job in finance you can have right now is inside a big bank, protected from the law, rather than working at a hedge fund where you can be nabbed for insider trading and publicly displayed as an example of the SEC’s new “toughness.”
What we need to worry about now is how bad the next crash is going to be. Let’s break up the megabanks now to mitigate that coming disaster.