'Too Big to Fail' Banks are Bigger Than Ever, Creating Even More Risk

In 2008, the U.S. government threw enormous sums of money at big banks and insurance companies, with the hope of propping them up and preventing a systemic failure. A domino effect of collapsing big banks was feared.

The term “too big to fail” became a part of our national lexicon. Many economists and politicians feared that if the financial sector were to go under, the broader economy would collapse along with it.

Fast forward to today, and the biggest banks in the U.S. are bigger than ever, creating even greater systemic risk to the financial sector and our economy.

That's probably not the outcome most people expected.

During — or in the aftermath of — the 2008 financial crisis, there were a host of Big Bank mergers.

Bank of America bought Merrill Lynch and Countrywide Financial.

JPMorgan Chase absorbed Bear Stearns and Washington Mutual.

Wells Fargo took over Wachovia.

There were also hundreds of community and regional banks that went bankrupt, and those were consolidated with other community or regional banks.

At the end of 2007, there were 8,534 banks in the U.S. However, as of July 9, 2015, there were only 6,369 insured banking institutions, according to the FDIC.

That means there are 2,165 fewer banks than just eight years ago, a massive 25 percent decline.

However, the focus here is on the scale and magnitude of the biggest U.S. banks.

The Big Bank mergers were merely representative of years of consolidation, which culminated with the repeal of Glass-Steagall in 1999. That allowed the merger of commercial and investment banks, which had been illegal since the 1933.

As a consequence, the five biggest U.S. banks now control nearly half of the industry's $15 trillion in assets.

Those banks — JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and US Bancorp — collectively held $6.8 trillion in assets as of Sept. 30, 2014.

JPMorgan holds just over $2 trillion in assets, or 13.1% of the industry’s total, followed by BofA at $1.5 trillion (9.9%), Wells Fargo just under $1.5 trillion (9.7%) and Citi at $1.4 trillion (9%), before a substantial dropoff to US Bank at $387 billion (2.5%).

Such concentration of banking assets is dangerous for our economy and raises the systemic threat to our banking sector during the next, and inevitable, crisis.

In 1990, the five biggest U.S. banks held less than 10% of industry assets.

Clearly, there has been a long, orchestrated march toward ever fewer and ever larger banks, with enormous financial and political power.

So much power and clout in the hands of so few is plainly dangerous, anti-competitve, and against the best interests of our nation.

Taxpayers are always on the hook for the failures of private banks. Profits are privatized, while losses are socialized.

If you're looking for some good news, there's this: The Federal Reserve established rules, which took effect this year, that will allegedly prohibit bank mergers that result in a combined company’s liabilities exceeding 10% of the industry’s total.

The rule was mandated by the 2010 Dodd-Frank financial law.

JPMorgan Chase is presently the only U.S. bank with assets in excess of 10%. Ostensibly, the banking giant will be prohibited from merging with another large financial firm, except in certain circumstances, such as another financial crisis.

However, that means we can expect JPMorgan Chase to continue its growth through additional mergers during the next, inevitable crisis.

BofA, Wells Fargo and Citi are all approaching the 10% threshold as well.

The Big Banks are very calculated. They understand how critical they are to the U.S. financial system, and the broader economy. They are betting — as they did in the lead up to the 2008 financial crisis — that the government won't let them fail, but will instead bail them out with taxpayer money, no matter how grotesque their misdeeds or how ill-advised their bets.

Big Banks are dangerous to our democracy. They have drowned out the voices of 99% of Americans, turned government into a feeding trough for the financial elite, and turned economic growth into debt.

The Big Banks are able to undermine our democracy because they have co-opted our government. Former Wall St. executives fill the ranks of the government's regulating agencies, which means those agencies are largely neutered.

We've all heard about the revolving door between Wall St. and Washington.

The power of the Big Banks comes from what else? Money.

The nation's top commercial banks (i.e., Wall St. banks) spent $61 million on lobbying in each of the last four years.

As a whole, the securities and investment sector has spent a whopping $1.24 billion on lobbying since 1998. They've gotten a lot for their money.

A 2013 research paper, “Corporate Lobbying, Political Connections, and the Bailout of Banks,” by Creighton Associate Professor of Economics Diana Thomas, found the following:

• Campaign contributions and lobbying influence the voting behavior of politicians.
• Campaign contributions and lobbying have a positive effect on wealth for the shareholders of the companies that spend.
• Businesses that pay lobbyists before committing fraud are 38% less likely to get caught; even when they get caught they are able to evade detection almost 4 months longer than those that do not pay for lobbying.
• Firms with political connections are more likely to receive government bailouts in times of economic distress.

Our government is bought, and our alleged representatives don't really represent us; they represent Wall St. and the other Big Banks.

Such is the sad state of our republic. Our financial system and our economy are imperiled by the power, wealth and influence of the Big Banks, and that affects every single one of us.

The steady pattern of banking consolidation, and the huge increase in concentrated assets, has made the banking system less stable, which has made the U.S. more vulnerable to the next shock.

That event is just a matter of time.

Just like the last time — and every other time — the taxpayers will once again be forced to bail out the banks, which puts all of us at risk. Our whole economy is at risk.

That's not how a free market is supposed to operate.