"Too Big to Fail" Should Mean Too Big To Exist

Fearing a systemic financial failure last year, the federal government pumped hundreds of billions into the US banking system.

America's biggest banks were deemed "too big to fail" and were buoyed with taxpayer dollars, even though the bankers had taken brazen risks that landed them in trouble in the first place.

The primacy of moral hazard was utterly ignored by our alleged government leaders.

Instead, the biggest, most irresponsible, most reckless banks were allowed to get even bigger.

According to a story in last Friday's Washington Post. JP Morgan Chase, Bank of America (partly government-owned due to the crisis) and Wells Fargo each now hold more than $1 of every $10 on deposit in this country.

This means that just three behemoth financial institutions now hold an aggregate of 30% of all US bank deposits.

What's more, according to federal data, those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards.

That clout and market share give them distinct advantages over their competitors.

New data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors falsely assume these large institutions have less risk of failing.

Large banks with more than $100 billion in assets are borrowing at interest rates 0.34 percentage points lower than the rest of the industry. Back in 2007, that advantage was only 0.08 percentage points, according to the FDIC. Such differences can cause huge variance in borrowing costs given the massive amount of money that flows through banks.

Does all of this sound like a dangerous monopoly to you? Does it seem that our once sacred anti-trust laws (the ones our government so famously used to break up the monopolistic giant Standard Oil) are plainly being violated?

If you said yes, we're in agreement.

The government is responsible for the arranged marriages of B of A / Merrill Lynch, JP Morgan Chase / Washington Mutual, and Wells Fargo / Wachovia. Most outrageously, the government also provided extraordinarily bountiful dowries too boot, amounting to billions of taxpayer dollars.

And it did all of this despite a blatant violation of existing US law.

JP Morgan Chase, B of A, and Wells Fargo were each allowed to hold more than 10 percent of the nation's deposits despite a rule barring just such a practice. Federal Reserve documents show that in several metropolitan regions, these banks were permitted to take market share beyond what the Department of Justice's antitrust guidelines typically allow.

It makes you wonder; what's the point of these laws?

Last October, when the Fed was arranging the merger of Wells Fargo and Wachovia, it identified seven metropolitan regions in which the combined company would either exceed the Justice Department's antitrust guidelines or hold more than a third of an area's deposits. Yet the merger was allowed to proceed anyway.

"There's been a significant consolidation among the big banks, and it's kind of hollowing out the banking system," said Mark Zandi, chief economist of Moody's Economy.com. "You'll be left with very large institutions and small ones that fill in the cracks. But it'll be difficult for the mid-tier institutions to thrive."

"The oligopoly has tightened," he added.

Hooray for capitalism. Hooray for the rule of law.