Too-big-to-fail banks getting bigger

FILE - This Oct. 12, 2011 file photo shows a JPMorgan Chase bank building in New York. JPMorgan Chase, the nation's biggest bank, earned more in the first three months of the year than Wall Street analysts were expecting as mortgage lending increased. (AP Photo/Kathy Willens, File)
FILE - This Oct. 12, 2011 file photo shows a JPMorgan Chase bank building in New York. JPMorgan Chase, the nation's biggest bank, earned more in the first three months of the year than Wall Street analysts were expecting as mortgage lending increased. (AP Photo/Kathy Willens, File)
Posted: April 17, 2012

Two years after President Obama vowed to eliminate the danger of financial institutions becoming “too big to fail,” the nation’s largest banks are bigger than they were before the nation’s credit markets seized up and required unprecedented bailouts by the government.

Five banks — JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. — held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to central bankers at the Federal Reserve.

Five years earlier, before the financial crisis, the largest banks’ assets amounted to 43 percent of U.S. 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 in 2008 with the Fed-assisted rescue of Bear Stearns Cos. by JPMorgan and with Citigroup and Bank of America after the Lehman Brothers bankruptcy, the largest in U.S. history.

“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 specter is eroding faith in Obama’s 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.

The industry’s evolution defies the president’s January 2010 call to “prevent the further consolidation of our financial system.” Embracing new limits on banks’ trading operations, Obama said then that taxpayers wouldn’t 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. “It’d 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 said in remarks on Feb. 2 the U.S. financial system is “significantly stronger than it was before the crisis.”

The government’s 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 percent to 39 percent, respondents in a February Pew Research Center poll called the bailouts “wrong” and 68 percent 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, acknowledged public “hostility” toward bankers in a March 30 letter to shareholders, boasted April 13 of a “fortress balance sheet.” Bank of America, which was about 50 percent 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.

“We’re a much stronger company than we were heading into the crisis,” said Jerry Dubrowski, a Bank of America spokesman. 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.

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