What is their secret?
Posted Oct 18, 2012
The Daily Beast expressed the other day what most of us are coming to feel about the big banks: “You can slam them. You can sue them. You can even try to split them up. But the big banks won’t care.”
On Friday morning, both JPMorgan and Wells Fargo, America’s two most valuable banks, reported record profits, as their mortgage-lending businesses rode the housing recovery to new highs. “The banks that blew the housing market during the bubble now stand to gain the most from its recovery.” (See, “JPMorgan and Wells Fargo Announce Record Profits.”)
Neil Barofsky, the man who ran the Troubled Asset Relief Program, now says that the big banks today are essentially government-sponsored entities — they function outside the market. That means: “TARP only made the problems behind the 2008 crisis worse.”
It may have staved off a financial collapse at the time, but the big banks are even more immune to control as a result. Barofsky added, “it failed to increase lending and preserve home ownership.” Moreover: “Bank executives kept their pay, counterparties and creditors were made whole, and the too-big-to-fail banks were not only kept whole but even made stronger. He added that today they are 20 to 25 percent bigger.” ( See “Market Watch in The Wall Street Journal: “Barofsky: TARP was double-edged sword for banks.”)
It is as if our need for them has become entrenched, like our dependency on oil. We don’t seem to be able to imagine ourselves without their presence. As many feared when they were bailed out, they have now become an established part of government.
Moreover, they have acquired a kind of virtual immunity to prosecution. “On top of the boosted revenue, the bank also quietly put away $684 million in litigation reserves. At the start of this month, New York Attorney General Eric Schneiderman filed suit against JPMorgan, alleging loan fraud at Bear Stearns, the crisis-cratered firm that Dimon purchased with government assistance in 2008. Dimon took an existentialist tone. The suit ‘is going to make it much harder in the future for companies to buy a troubled company … It’s unfortunate. But that’s life.’” As The Daily Beast commented sardonically: “And life’s a lot easier when your bank makes $5.71 billion in three months.”
As for Wells Fargo, adds The Daily Beast: “With all this good news, [they] can afford not to sweat the small stuff: that is, the federal government’s lawsuit, announced this week, claiming that Wells blew hundreds of millions in Federal Housing Administration insurance on bad home loans.
This doesn’t seem to be a mere matter of “moral hazard,” the absence of consequences for irresponsible and reckless behavior. It’s a kind of immortality.
Barofsky concludes that the big banks need to be broken up. “I think they should use a meat cleaver not a scalpel.” But that may no longer be possible.