The too-big-to-fail Wall Street megabanks recently were anointed as being too big to jail by the nation’s top lawyer, despite reports of alleged fraudulent acts committed by executives. His pronouncement has ignited a backlash from smaller financial institutions.
“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that, if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy — perhaps even the world economy,” U.S. Attorney General Eric Holder said last month.
“I think that is a function of the fact that some of these institutions have become too large,” he added.
As expected, many have interpreted Holder’s remarks as giving these super large banks a sort of blanket immunity through the remainder of the Obama administration, which has been criticized for not issuing criminal indictments.
His comments followed reports on CBS’s “60 Minutes” and PBS’s “Frontline” that strongly alleged fraud was committed through robo-signings and other actions that likely violated federal regulations and the banks’ own policies, during the run-up to the market collapse that cost investors an estimated $16 trillion and sent the world’s economy into recession.
“The remarks from Attorney General Eric Holder confirm that too-big-to-fail financial institutions operate above the law. Holder’s statement that federal law-enforcement officials have hesitated to prosecute Wall Street firms because of their size and interconnectedness shows that these institutions receive favorable treatment, not only economically but in our justice system, as well,” said Camden Fine, president and CEO of the Independent Community Bankers of America, in a press release.
ICBA represents nearly 7,000 community banks in the nation. The Michigan Association of Community Bankers is aligned with ICBA.
“Not only have these institutions received billions of dollars in taxpayer support because of the systemic risks they pose, they are also apparently immune from criminal prosecution. Meanwhile, community banks have been left to pick up the pieces under the weight of crushing laws and regulations enacted to halt Wall Street’s unscrupulous behavior,” said Fine.
Fine was referring, of course, to the Troubled Asset Relief Program the Bush administration began in October 2008. Although $700 billion was authorized through the program, $418 billion was actually dispersed. Bank of America and Citigroup received $45 billion each.
As of the end of last year, the U.S. Treasury Department reported $405 billion had been paid back, making the TARP program 97 percent whole.
Still, days after Holder made his comments, a U.S. Senate subcommittee headed by Sen. Carl Levin, D-Michigan, issued a 301-page report that accused JP Morgan Chase, the nation’s largest bank, of ignoring growing risks, manipulating documents and hiding trading losses from investors and regulators.
Levin said the investigation chronicled many failures by the bank’s executives, some of which were “serious and egregious.” Levin also said JP Morgan Chase, which received $25 billion in TARP funds, “hid losses, dodged oversight and misinformed the public.”
Reportedly, these losses topped $6 billion, with some of the lost money coming from depositors and not just from investment accounts.
“This failure of oversight and risk management is yet another example of the moral hazard and reckless risk-taking that results when financial institutions are so large and complex that they enjoy an explicit government guarantee against failure,” said Bill Loving, ICBA chairman, in a joint release with Fine.
Taxpayer dollars not only went into TARP, but also vanished when the market fell. The city of Grand Rapids lost about $200 million in its pension funds following the near-complete market crash in 2008. That year the city’s police and fire pension fund was 111 percent funded. It was 96 percent funded at the end of 2009, according to a city report. The city’s general retirement fund was 106 percent funded prior to the meltdown. After fiscal 2009, it was 97 percent funded.
Kent County lost about $150 million from its pension fund, which was funded at 105 percent in 2008. At the end of 2010, according to a 2012 county financial overview report, it was funded at 97 percent.
Senators Sherrod Brown, D-Ohio, and David Vitter, R-La., are working together on a bill to break up the megabanks.
“The nation’s financial institutions should be required to operate on a level playing field,” said Loving and Fine in their release. “Too-big-to-fail and too-big-to-jail financial giants should be downsized and split up to reduce systemic risks, restore accountability in our financial system, and provide for a safer and more economically sound financial system.”