Breaking Up Bank of America
Report on NOW DC Social Forum Workshop
By Mike Sheffer
In 1933, in order to regulate the financial speculation that led to the Great Depression, Congress passed three pieces of legislation:
They created the Securities and Exchange Commission (regulating trading on Wall Street and exempting investment banks from receiving government-backed protection), the Federal Deposit Insurance Corporation (insuring deposits in commercial lending banks), and the Glass-Steagall Act, most often used to refer to four provisions of the Banking Act of 1933 that limited commercial bank securities activities and affiliations between commercial banks and securities firms.
Starting in the early 1960s federal banking regulators interpreted these provisions to permit commercial banks, and especially commercial bank affiliates, to engage in an expanding list and volume of securities activities. By the time the affiliation restrictions in the Glass-Steagall Act were repealed through the Gramm-Leach-Bliley Act in 1999 (under the stewardship of Clinton), Glass-Steagall was already “dead.”
Most notably, Citibank's 1998 affiliation with Salomon Smith Barney and Travelers Insurance (thereby forming Citigroup), one of the largest US securities firms was permitted – and granted an exemption – under the Federal Reserve Board’s then existing interpretation of the Glass-Steagall Act. In addition, when Long-Term Portfolio, a speculative hedge fund that utilized absolute-return trading strategies (such as fixed-income arbitrage) failed in the late 1990s, a bailout by other financial institutions was accomplished under the supervision of the NY Fed., thereby establishing a precedent .
In the 1980's there were approximately 35-40 banks combining commercial and investment banks. By 2009 there were four.
The concept of “Too Big to Fail” was created and extended as policy by Presidents Bill Clinton, George W. Bush and Barak Obama. The advantages for the bank are, with only three competitors, they have established monopoly power. There is no proof of actual collusion, but there is a strong correlation between their activities. In addition, TBTF has led to such special treatment as the bailouts, special treatment regarding taxation and accounting practices, special access to the Fed.'s overnight lending, etc. It brings them an estimated 25% advantage over smaller banks. With that advantage they can afford to pay their shareholders more, thus bringing more shareholders and boosting their share price; they can afford to pay exorbitant salaries and bonuses; and it affords them nearly unlimited power to lobby and influence political campaigns – especially with the passage of Citizens United. (See Matt Taibi for full reports on the seriousness of BOA's activities: http://www.readersupportednews.org/opinion2/279-82/10838-fighting-bank-of-america)
When they created such exotic financial instruments in the early 2000s as mortgage-backed securities, sovereign debt funds, credit default swaps (which led to the exposure – and need for a bailout – of the insurance company AIG when they couldn't cover their losses) and the like, they thought they would go on forever.
The recent settlement between the banks and states for $25 billion resolved potential lawsuits – and indemnified the banks against any future lawsuits – regarding wrongful foreclosures accomplished through robo-signing. The settlement required the banks to pay just $2,000 per individual affected by such practices. These practices have resulted in no one going to jail because there have been no investigations into the practices. Thus, TBTF results in a policy of the banks also being “Too Big to Prosecute.”
These policies amount to corporate welfare. The market only works when there is true transparency and accountability. But these large banking firms get away with not being transparent or accountable. An economist commented that capitalism without failure is akin to religion without sin. And on this both true conservatives and progressives can agree.
Many saw this near-collapse of the global financial system coming, which was based on the housing bubble they created – Sheila Bair, head of the FDIC, etc.
Why focus on BOA? They have $2.1 trillion in assets. They have 2,000 subsidiaries, most of which are not on their balance sheets, and which means that regulators have an impossible task in monitoring their activities. (Another example of these huge mergers is the purchase of Countrywide Realtors by Merrill Lynch. This happened in 2008 when the mortgage market was melting down.) All of this reckless behavior was done knowing full well that whatever their losses might be, they were sure to be bailed out by the government.
An NYU study concluded that BOA was the most at-risk bank. The share price in December 2011 was down to $5 per share after trading before the meltdown somewhere around $60 per share. The current price is now around $9 per share, which allows the CEO to argue that he has improved the balance sheet, thus justifying an increase in salary from $1.2 million to $7.5 million. (In 2011 the stock price increased by one cent.) BOA evaluates itself at twice the market price – $20 per share (price to book accounting.) They engage in such practices, when convenient, as transferring trillions in assets into federally-insured accounts -- with the approval of the Fed.
BOA's investments are so intertwined with the whole financial system, and its failure would be so catastrophic, that they are in fact TBTF. Were BOA to fail, their shareholders and their lenders would lose big. Affected banks would be too scared to loan any money with terrible consequences for the economy – and the citizenry. And yet, when Lehman Brothers failed in 2008, they were 3.5 times larger than BOA is now. The only viable solution is to break BOA up.
Public Citizen petitioned federal regulators to break up BOA and were denied. Their suggestions are to go back to Congress and seek legislation restricting the size of BOA to x% of GDP and restricting their activities per a program similar to Glass-Steagall, which would allow them to continue to loan money and to accept commercial deposits. It would prevent them from engaging in risky investments and complicated derivatives. There is an on-line petition at citizen.org to break up the bank. Further, during the meltdown in 2008-9, we nationalized GM to allow them to recover, which worked out very well for the company and the economy (they repaid the bailout funds they received at a net profit to the government.)
In addition, Public Citizen suggested the need to just share the facts and spread the word. The shareholders meeting is in Charlotte NC on May 9. Such organizations as the Push Back Network, the Rainforest Action Network and women.org have taken on the fight. In addition, they suggest letters to the editor, leafletting BOA branches, and coming up with other imaginative ideas and strategies. They also suggest pressuring Congress to pass a Financial Transaction Tax. (Another NOW DC meeting was held on this subject. A report on it is coming soon.)
Mike Sheffer has been involved in the Occupation of Freedom Plaza since it began last October. He currently works in the Rainer House a co-operative of occupiers.
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