They’re Back – 
Run For Your Lives!

What do you think our leaders would do when confronted by the imminent collapse of a sector of our economy whose assets are equal to 56% of our GDP? Given what they did in 2008 –properly we think– we can safely assume they would prop up the institutions at risk. Are you surprised that five of the banks we rescued in 2008 now have assets equal to 56% of our GDP*? In 2006 -before the collapse- these same five banks’ combined assets equaled 47% of our GDP*.

Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, and Wells Fargo, five of the players whose reckless actions drove the world economy off the cliff, are lined up to do it again. Their assets grew more than 40% from 2006 through 2011*. Why? That’s no mystery, the banks know and investors know that if there’s another collapse we will bail the Zombies out again. With the taxpayers on the hook, big banks are gambling with the same risky stuff that led to the 2008 collapse –derivatives, swaps etc., the stuff the bankers refer to as “crap.”

If it goes all wrong, the bankers and their investors have the taxpayers ready to bail them out again. Where else would investors put their bucks, high returns no risk? Published reports say all three rating services along with a covey of regional Federal Reserve presidents, see a bailout for the Zombie Banks down the road. Meanwhile, your neighborhood community bank –the bank down the street on the corner– doesn’t have an investment (AKA gambling hall) division; putting them at a distinct disadvantage in finding investors and customers.

We know how to solve this problem, been there, done that. Eighty years ago when the wheels fell off our economy our nation faced the same dilemma. They busted up the big banks and made them choose the sector of the banking world in which they wanted to operate. The Glass-Steagall Act separated investment banks from the regular commercial banks that we ordinary folk deal with.

During the 1990s’ deregulation frenzy the investment banks –Goldman Sachs in particular– pressed hard to break down this wall. In 1999 they succeeded Glass-Steagall was repealed. Then they convinced the Congress to exempt them from the gambling laws and they were off to the races. Take any risk, bet on any crazy thing, as long as you could call it an investment – it is legal. Within a few years they distorted the derivative and commodity markets turning them into Zombie bank gambling halls. Here’s the catch. They know they can’t lose. They know the suckers (AKA customers) take the losses. Worse comes to worse the taxpayers will be stuck with the mess. The bankers and investors will be just fine.

We all know what happened in the decade following the repeal of Glass-Steagall. We had to bail the banks out and now they are fine; back doing the exact same things that drove us off the cliff. Meanwhile the rest of America –and the world– is working its way out the hole they left us in. They are not doing anything illegal; however, ethically it stinks. It’s time to break up the Zombie banks and put them back in their cages, investment banks on one side of the business and commercial banks on the other. If not, we’ll be bailing them out again. They are counting on it

 *Bloomberg 04.19.12