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In a provocative story in last month’s Atlantic former IMF official Simon Johnson suggests that large financial institutions now control this country much like the infamous oligarchs control the former Soviet Union. Johnson marshals an impressive array of evidence to bolster his case, but curiously he leaves out what may be the single most important fact that will either make or break his thesis.
That fact is that for almost a year three banks–Bank of America, Wells Fargo and J.P. Morgan– have blatantly violated the 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act which states:
The Board may not approve an application pursuant to paragraph (1)(A) if the applicant (including all insured depository institutions which are affiliates of the applicant)controls, or upon consummation of the acquisition for which such application is filed would control, more than 10 percent of the total amount of deposits of insured depository institutions in the United States.
As usual while liberal bloggers can’t seem to write enough about the wars in Iraq and Afghanistan, they may be ignoring another troubling issue.
That three banks should control close to 40% 0f the money in this country conjures up visions of J.P. Morgan, the banker who actually bailed out the Unites States Treasury, and Jay Gould, who almost succeeded in cornering the gold market during the Gilded Age. Only the current situation is worse because evidence suggests these financial institutions broke the law using bailout funds provided by a Republican President and a Democratic Congress.
This mess was then dumped on the table of incoming President Barack Obama where it sits today, its foul odor polluting the new administration’s attempts to deal with the financial crisis. The violators stand as the first key test of this administration’s ethical foundations. As Senator Sam Ervin used to say during the Watergate hearings, “Are we a nation of laws?”
Complicating this case is the government’s collusion in the expansion. If hauled into court, the banks could all claim that the government’ not only tacitly approved their expansion but also aided and abetted it. It was not just the Bush people who stand guilty of helping these three banks break the law, Congress appropriated the bailout money knowing which banks would probably receive it and what would be the consequences.
A Familiar Ring
All this should have a vaguely familiar ring, for it is a virtual replay of the circumstances that brought about the repeal of the Glass-Steagall Banking Act. Only for that one we had a Democratic President and a Republican Congress. The trigger for the repeal of Glass-Steagall came from another violation of the law, this one by Citigroup. Its mergers and acquisitions blatantly broke the sixty-year-old law that prohibited banks from engaging in the stock market.
Like the current three lawbreakers, Citi’s in-your-face move said to the President and Congress, either enforce the law or repeal it. With the support of Republican Congressional leader Phil Gramm and Democratic Treasury Secretary Robert Rubin, Citi head Sandy Weill received just what he asked for–the end of Glass-Steagall. In return the American people received the current financial crisis.
The Consequences of Modifying Riegle-Neal
The repeal of Glass-Steagall laid the groundwork for the present violation of Riegle-Neal. For with the restraints removed by the repeal of Glass-Steagall it was all but inevitable that at some point one or more of the banks would increase their market share to the point of breaking the law. Now Washington is buzzing with talk that Riegle-Neal will suffer the same fate as Glass- Steagall, only instead of repealing the law Congress and the Administration will raise the ceiling on market control to fifteen percent or even more.
This would permit four banks to control a majority of the financial market of this country just as the oligarchs run things in the former Soviet Union. Whether we will end up with dead bodies lying in the street and the massive corruption that now characterizes Vladimir Lenin’s former communist regime remains an open question.
The results for the average American, just as for the average Russian, will not e good. Just as the lack of prosecution of the Russian oligarchs has sent a message that these crooks are above the law, any modification or repeal of Riegle-Neal will send a similar message to Americans.
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