Break up the big banks

We all know what happened four years ago, when it became painfully obvious that America’s largest banks and investment firms had indulged in an orgy of wild betting on sliced-and-diced unsecured subprime mortgages and, suddenly leveraged beyond any ability to cover their losses, were on the verge of collapse. Because these financial behemoths were “too big to fail” without taking the rest of the economy down with them—with consequences too dire even to imagine—taxpayers had to bail them out.

With that, the United States entered its worst recession since the Great Depression. More than 8 million people lost their jobs, the housing market crashed and burned, millions lost their homes to foreclosure, other homeowners lost as much as 40 percent of their equity, tax-starved states began to shred the social safety net and cut spending to the bone, and unemployment soared.

There was a lot of angry talk about coming down hard on the banks, but by the time the Dodd-Frank reform bill got through Congress, past the army of deep-pocketed Wall Street lobbyists working to derail it, it had been diluted down significantly, and the banks happily went back to their old, corrupt ways.

This July, for example, we discovered that the global bank HSBC has been used by Mexican drug cartels to get cash back into the United States, by Saudi Arabian banks with terrorist ties needing access to dollars, and by Iranians seeking to circumvent UN sanctions.

Then, in July, we learned of the Libor scandal, in which officials at Barclays and, allegedly, other banks including JPMorgan Chase, Bank of America and Citigroup were colluding to manipulate interest rates and then betting against them—the ultimate in insider trading, in this case involving trillions of customers’ dollars.

Later that month, the Los Angeles Times reported that the California Independent System Operator, a state-managed nonprofit that runs 80 percent of the state’s electrical transmission system, had charged JPMorgan Chase with illegally gaming the California energy market for its own profit and at a cost to consumers of at least $100 million and perhaps $200 million or more.

This is the same JPMorgan Chase that in May was reported to have lost as much as $6 billion of customers’ money making bad bets on credit derivatives. Since then, the bank has lost another $20 billion in shareholder value as its stock price has plummeted.

What (or who) will it take to convince Congress that Wall Street desperately needs reform, even restructuring? How about Sandy Weill, the man who pretty much created the “too big to fail” phenomenon?

It was Weill, then head of Citibank, who was behind its merger with Travelers and Salomon Brothers to create Citigroup, the first great TBTF outfit—and one that ended up taking $45 billion in TARP money. It was the Citigroup merger, remember, that pushed Congress into abolishing Glass-Steagall, the 1933 bill prohibiting commercial banks (like Citibank) from acting like investment banks (like Salomon Brothers) and using customers’ savings to engage in the kind of high-risk betting that led to Wall Street’s crash.

Now Weill is calling for TBTF banks to be broken up. “I’m suggesting,” he said during a recent live interview on CNBC, “that they be broken up so that the taxpayer will never be at risk. … What we should probably do is split up investment banking from banking.”

It was a shocking comment, given the source, but it was exactly what reformers, including Rep. Barney Frank, co-author of Dodd-Frank, have been saying for years: Banks should not be able to make risky bets with customers’ savings funds, and no bank should be too big to fail. If Sandy Weill, of all people, understands this, Congress should as well.