Today, the biggest of those banks are even bigger.
The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.
J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.
Now, if you understand the dynamics that lead to the creation of financial institutions that became too big to fail, then none of this is any surprise. So, first here are the three main dynamics that lead to too big to fail.
1) Bank Deregulation
This bill passed in 1999. Essentially the bill broke down the proverbial wall between a commercial bank and an investment bank. As such, there was no longer a separation. The example I use is that Merrill Lynch and Paine Webber were now able to provide checking accounts. Even today, Etrade has checking accounts. This is the mundane and reasonable part of the bill. The more sophisticated part was that bank could get into investing. Banks could get into loan securitization. All sorts of financial business could be done by the exact same institution. This lead to the second dynamic.
2) Merger Mania
Mergers aren't new. I am not saying that the last ten years were the first time that banks merged. There were two differences. First, with bank deregulation, it was no longer bank merger but financial services mergers. Citigroup wouldn't have happened before 1999. That's because many of the financial services that Citigroup engaged in wouldn't have been legally done together before 1999. On top of this, with any good economy, there often follows more merger activities. That's because businesses see many more opportunities during booms. So, we had more mergers. On top of this, we had more sophisticated mergers. These created super financial services firms like Citigroup and AIG.
3) Unimaginative Regulators
If you've read my work frequently, you know I'm no fan of regulations or regulators. One area where this is different is in the case of monopolistic behavior. I believe that Sherman isn't used nearly enough to break up monopolies. In the case of financial mergers, what we had was something similar to emerging monopolies. Instead, we had regulators that couldn't imagine what the failure of newly merged companies could do. Citigroup does insurance, mortgages, investments and banking. It's failure would spread through the financial system. The regulators also were asleep when it came to what AIG was doing in credit default swaps and the risk this was causing to everything else. The regulators simply didn't have the imagination of what the brave new world of bank deregulation and mergers could do to the market.
So, with those three things in place, everyone said no more. Yet, nothing much has changed and in fact the crisis, and government's response, have only made things worse. Just think about what has happened. Almost no financial institution has failed. Any "failed" institution was immediately bought out usually with the government's help. When Washington Mutual failed, it was immediately bought out by Chase. When Merrill Lynch failed, it was immediately bought out by Bank of America. Most financial institutions of any size are immediately swooped up by financial institutions of even bigger size.
Well, Chase was big enough before. What do you think happens when you add WAMU and all its bank accounts? Now, Chase owns one in ten deposit dollars. Bank of America was already massive and now they have Merrill Lynch and all its financial dealings. In other words, these institutions were already too big to fail. They were to big too fail because they did everything and massive institutions merged with each other. Yet, knowing all this, the government not only looked the other way but even at times encouraged more of this behavior. There was a time when Bank of America was just a bank. They're know a financial services institution, and a goliath one at that. It's so in part because the government pressured it to buy Merrill Lynch rather than have Merrill fail and be broken up.
Yes, in a perfect world, these companies would fail break up and be sold for parts. As such, new smaller companies would be created. No more would you have golaiths. In this climate, the regulators are frightened of what might happen if a goliath were to fail and be forced into bankruptcy. As such, they rush to get another goliath to buy before that can happen. Of course, by doing so, they create an even bigger company. So, no one should be surprised that too big to fail is even bigger.