The Lesson of JP Morgan's $2 Billion Loss: Break Up the Big Banks

The news is astonishing. And yet, it changes nothing. The most important banks are still too big to fail, and still, they fall short with astonishing regularity.

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The reports are startlingly familiar. Late Thursday, JPMorgan CEO Jamie Dimon announced a surprise $2 billion trading loss and stocks swooned. Dimon insisted, though, that there was no need for a Volcker Rule that would ban big banks from risky trading.

Last week, a Reuters investigation revealed that HSBC, the world's fifth-largest bank, failed to review thousands of internal anti-money-laundering alerts. The bank did not file legally required "suspicious activity reports" to U.S. law enforcement officials. It hired "gullible, poorly trained, and otherwise incompetent personnel" to run its anti-money-laundering effort. Each year, hundreds of billions of dollars flowed through the bank without being properly monitored.

Last month, U.S. regulators accused Citigroup of having major lapses in its anti-money-laundering systems as well. Under an agreement with the Comptroller of the Currency, the agency that regulates national U.S. banks, Citigroup agreed to improve its monitoring operations, but did not pay a monetary penalty or admit any wrongdoing.

For critics of mega-banks, the reports are the latest sign of big banks' ability to defy regulation, engage in dubious business practices and face few consequences.

In a British court last month, a former Nigerian governor pleaded guilty to pilfering $79 million from state coffers, funneling it offshore and buying six properties in the U.S. and UK. The banks he used to move the illicit money? HSBC, Citibank, Barclays and Schroders.

"Banks get hauled up by the regulators for failing to follow the law, promise to reform, and yet a few years down the line they're caught doing the same thing," said Robert Palmer of the anti-corruption group Global Witness. "I think for this to change we need strong penalties for when the banks get things wrong, and in the worst cases, jail time for individual bankers."

Four current Federal Reserve presidents, meanwhile, are arguing that the Dodd-Frank reforms have not eliminated the "too big to fail" banks, according to a Bloomberg Businessweek article published last month. Despite measures in the legislation banning further bailouts, traders, analysts and bankers simply don't buy it.

"Markets have come to believe that what the government did in 2008 and 2009 isn't a one-time deal," Kevin Warsh, a former member of the Federal Reserve Bank's Board of Governors, said in a March television interview with Charlie Rose. They think "that the government will somehow come to the rescue of these big financial firms."

The result is a half-dozen massive banks that remain so large that their collapse would cripple the U.S. economy and force another government bailout. As a result, the behemoths function as a de facto oligopoly. The sheer size of the banks - and the theoretical government backing that they enjoy - make it impossible for the country's roughly 20 regional banks and 7,000 community banks to challenge them.


The country's biggest banks are getting bigger.

Five U.S. banks - JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs - held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the country's economy, according to Bloomberg Businessweek. Five years earlier, before the financial crisis, the biggest banks' holdings amounted to 43 percent of U.S. output. Today, they are roughly twice as large as they were a decade ago relative to the economy.

The four Federal Reserve presidents -- Richard Fisher of Dallas, Esther George of Kansas City, Jeffrey Lacker of Richmond and Charles Plosser of Philadelphia -- have expressed concern that such a concentration of assets in the banking industry threatens the financial system.

In a scathing essay published in March in the Federal Reserve Bank of Dallas' 2012 annual report, Harvey Rosenblum, the bank's head of research, called for the government to break up the country's largest banks. Rosenblum argued that only smaller banks - not the increased capital requirements, stress tests and other measures in Dodd-Frank - will prevent another crisis.

"A financial system composed of more banks, numerous enough to ensure competition in funding businesses and households but none of them big enough to put the overall economy in jeopardy," Rosenblum wrote, "will give the United States a better chance of navigating through future financial potholes and precipices."

The American public, meanwhile, also feels the reforms were not enough. In a Rasmussen poll conducted last month, 48 percent of Americans surveyed said they continue to lack confidence in the stability of the U.S. banking industry. Forty-seven percent said they were somewhat confident in the system.


Who, then, is happy with the state of America's banks? Apparently, the two men running for president. So far, both Barack Obama and Mitt Romney have steered clear of calls from the left and right to break up the big banks.

"I'm not looking to break apart financial institutions," Romney told the American Enterprise Institute's James Pethokoukis, in March. "I think what caused the last collapse was a convergence, almost akin to a perfect storm, of many elements in our economy and regulatory structure."

Obama, meanwhile, argues that the new regulations would force banks into orderly bankruptcy proceedings, not bailouts. But many liberal analysts don't buy it. They argue that bankers still face too few consequences for bad behavior.

An analysis by researchers at Syracuse University found that under the Obama administration federal financial-fraud prosecutions have dropped to 20-year lows, Peter Boyer and James Schweizer wrote in The Daily Beast last week. Prosecutions are down 39 percent from 2003, when executives at Enron and WorldCom were convicted in high-profile cases.

Today, the number of financial-fraud cases is at one-third the level it was during the Clinton administration. (Obama administration officials argue that the number would be higher if new categories of crimes were counted.)

"Casting Romney as a plutocrat will be easy enough," Boyer and Schweizer wrote. "But the president's claim as avenging populist may prove trickier, given his own deeply complicated, even conflicted, relationship with Big Finance."

The skepticism from the right and left is justified. Our largest banks remain "too big to fail," defy regulation and have paid too small a price for a financial crisis that decimated the middle class. The U.S.'s big banks should be broken up. Smaller banks will be easier to regulate - and foster more competition.

This article also appeared on, an Atlantic partner site.