Robert Reich: Why we should break up the banks

The JPMorgan Chase building (L) in midtown Manhattan.

OK, here's my prediction for this year's biggest bipartisan economic initiative: This is the year we break up Wall Street's biggest banks.

Why do I think so? First, they're far bigger than they were four years ago when they were considered 'too big to fail'. The five largest banks now have almost 44 percent of all U.S. bank deposits. That's up from 37 percent in 2007, just before the crash. A decade ago they had just 28 percent of deposits.

The biggest banks keep getting bigger because they can borrow more cheaply than smaller banks. That's because investors believe the government will bail them out if they get into trouble.

So it's dawning on many that there's no alternative to limiting their size and breaking up the biggest. A few months ago, Dan Tarullo, a Fed governor who specializes in bank regulation, proposed capping the size of the banks' balance sheets.

Some former titans of Wall Street are saying much the same thing. Even Sandy Weill, who created Citigroup, the nation's second-largest bank, is proposing the biggest banks be broken up.

The new Congress may be supportive of the idea. The chairman of the House Financial Services Committee, Texas Republican Jeb Hensarling, has been a strong ally of small banks in their push to rein in their bigger rivals, and has expressed concern about the largest banks being too big to fail. It's not irrelevant that the Dallas branch of the Federal Reserve Board, in Hensarling's home district, has also proposed breaking up the biggest banks.

Meanwhile, over in the Senate, Ohio Democratic Senator Sherrod Brown, is a strong advocate for breaking up the big banks and is now on the Senate Finance Committee. And Elizabeth Warren, scourge of Wall Street, will sit on the Senate Banking Committee.

In other words, the timing is right. The oven is ready. All we need is another multi-billion-dollar banking loss -- like JPMorgan Chase's last year -- and the biggest banks are cooked.

About the author

Robert Reich is chancellor's professor of public policy at the University of California, Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton.
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yeah, we should, but it's not that easy. we need them

I'm not an expert in the devilish details of the big banks, but it seems like the financial crisis problem wasn't that they were too big, the problem was they were/are too interconnected. The banks have all put themselves into one basket. The news about the financial crisis was always "if one falls, they all fall." So the first step I would do (or what our leaders should do) is to break up the interconnectedness. If you're a big bank, nothing on your books should be directly tied to another big bank. No loans, no derivative, no investment, nothing. When one of the other big banks fails, it sends no shockwaves to the other big players, and they can carve up the corpse of the one who failed.
If we felt that the banks were still too big tax them at a progressive rate. Don't have the tax be on their profits either, have it be on their "bigness". Create a tax curve such that most of the big banks would want to reduce in size by about %25 to become comfortably profitable again. Breaking them up intentionally would be a one time deal, and they'd just all merge back together in a few years.

Everything our government seems to be doing, is helping these TBTF banks actually get larger. In many ways, the compliance burden that is being loaded up, actually favors them over the smaller to midsize banks which can not afford the ever increasing costs of trying to stay up with the newest burden being heaped on.

FATCA, the BIGGEST story in international tax in the last 12 months, or the WORSE legislation most Americans have never heard of, is a case in point. It has become so burdensome, that it may be one of the straws that limits competition as only the TBTF banks have the army of software engineers and can afford the BIG Accounting firm consulting fees for the global search for all U.S. Persons residing around the globe.

Market Place still hasn't recognized the import of what is happening, and thus no stories. This just adds to the TBTF phenomena. We create thousands of regulations with their encyclopedia of instructions and complexity to take the place of simple solutions like breaking them up and putting back the walls between commercial and investment banking. And each new regulation, counter intuitively, actually increases the risk to the tax payer of another bailout of a TBTF bank as the smaller competition can not keep up.

Oh, btw, NPR did run one just the other day, but FATCA was only a sliver of the discussion. The story all came from the perspective of the Compliance Complex which makes big money in fees and solutions for compliance. There was no discussion of the unintended consequences and the collateral damage from one good intention gone mad with complexity.

Havens Are Turning Hellish For Tax Avoiders


I'm amazed more people haven't been talking about bailed-out banks (and other corporate TARP-ies) in the post-election climate.

Banks have only continued to grow and are every bit as big and reckless (and audacious) as before. We haven't reverted erstwhile "investment" banks back to their non-commercial-bank status either.

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