Too-big-to-fail banks get bigger, Obama in a spot

Written by Bloomberg | Updated: Apr 17 2012, 07:51am hrs
Top five banks held $8.5 trillion in assets at the end of 2011, equal to 56% of US economy

Two years after President Barack Obama vowed to eliminate the danger of financial institutions becoming too big to fail, the nations largest banks are bigger than they were before the credit crisis.

Five 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% of the US economy, according to the Federal Reserve.

Five years earlier, before the financial crisis, the largest banks assets amounted to 43% of US output. The Big Five today are about twice as large as they were a decade ago relative to the economy, sparking concern that trouble at a major bank would rock the financial system and force the government to step in as it did during the 2008 crunch.

Market participants believe that nothing has changed, that too-big-to-fail is fully intact, said Gary Stern, former president of the Federal Reserve Bank of Minneapolis.

That spectre is eroding faith in Obamas pledge that taxpayer-funded bailouts are a thing of the past. It is also exposing him to criticism from Federal Reserve officials, Republicans and Occupy Wall Street supporters, who see the concentration of bank power as a threat to economic stability.

As weaker firms collapsed or were acquired, a handful of financial giants emerged from the crisis and have thrived. Since then, JPMorgan, Goldman Sachs and Wells Fargo have continued to swell, if less dramatically, thanks to internal growth and acquisitions from European banks shedding assets amid the euro crisis.

The industrys evolution defies the presidents January 2010 call to prevent the further consolidation of our financial system. Embracing new limits on banks trading operations, Obama said then that taxpayers wouldnt be well served by a financial system that comprises just a few massive firms.

Simon Johnson, a former chief economist of the International Monetary Fund, blames a lack of leadership at Treasury and the White House for the failure to fulfill that promise. Itd be safer to break them up, he said.

The Obama administration rejects the criticism, citing new safeguards to head off further turmoil in the banking system. Treasury Secretary Timothy Geithner says the US financial system is significantly stronger than it was before the crisis. He credits a flurry of new regulations, including tougher capital and liquidity requirements that limit risk-taking by the biggest banks, authority to take over failing big institutions, and prohibitions on the largest banks acquiring competitors.

The governments financial system rescue, beginning with the 2008 Troubled Asset Relief Program, angered millions of taxpayers and helped give rise to the Tea Party movement. Banks and bailouts remain unpopular: By a margin of 52% to 39%, respondents in a February Pew Research Center poll called the bailouts wrong and 68% said banks have a mostly negative impact on the country.

The banks say they have increased their capital backstops in response to regulators demands, making them better able to ride out unexpected turbulence. JPMorgan, whose chief executive officer, Jamie Dimon, earlier this month acknowledged public hostility toward bankers, boasts of a fortress balance sheet. Bank of America, which was about 50% larger at the end of 2011 than five years earlier, says it has boosted capital and liquidity while increasing to 29 months the amount of time the bank could operate without external funding.

Were a much stronger company than we were heading into the crisis, said Jerry Dubrowski, a Bank of America pokesman. The bank says it plans to shrink by year-end to $1.75 trillion in risk-weighted assets, a measure regulators use to calculate how much capital individual banks must hold.