Bank of America, Citigroup may face restrictions after crisis

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: The biggest US banks may face the threat of lower profits or pressure to break up under greater regulation following the financial crisis. Federal Reserve officials have made tackling the issue of firms that are too big to fail a priority. Options may include banning or restricting activities that could threaten the stability of the financial system, analysts said.

“Rates of return are going to be smaller,” said Vincent Reinhart, a former director of the Fed’s monetary-affairs division who is now resident scholar at the American Enterprise Institute in Washington. “That will be the quid-pro-quo for having the government safety net.” The goal would be to avoid the type of government rescues mounted last year that have put taxpayers at risk of hundreds of billions of dollars of losses. The interventions have increased the risk of future crises because companies have come to rely on official lifelines, current and former policy makers said.

As the firms most exposed to the mortgage collapse failed during the 17-month crisis, some of the biggest players expanded. Bank of America Corp. acquired home-loan-financer Countrywide Financial Corp. and broker Merrill Lynch & Co., and JPMorgan Chase & Co. took on Bear Stearns Cos. and Washington Mutual Inc. Meanwhile, Citigroup Inc. was forced to absorb off-balance sheet units it had created to invest in complex securities.

“We are certainly more vulnerable” because of the size and interconnectedness of today’s banking structure, said Harvey Goldschmid, a former commissioner at the Securities and Exchange Commission. With the failure of investors “to discipline and hold companies accountable, we’d better figure out what kind of government oversight or other techniques will work,” said Goldschmid, who is now a Columbia Law School professor in New York.