The Megabank Cycle: Too big to manage / too big to fail / too big to jail. Repeat.

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Too big to manage leads to too big to fail, which leads to too big to jail, which leads back to too big to manage...

Here's how the cycle works:

1. Too Big to Manage

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The megabanks have grown tremendously over the past two decades, making it harder than ever for them to properly manage all their various international pieces.

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Not only have the banks themselves grown too big to manage, but their trading activity has as well, increasing the likelihood of unpredictable losses.

The riskiest bets Wall Street banks make have boring, impenetrable names like credit default swaps, synthetic credit derivatives, mortgage-back securities. All of these bets are types of derivatives, and the financial crisis of 2008 occurred largely because these particular derivatives bets went bad.

And yet the worldwide derivatives market continues to explode, from under $100 trillion in notional value in 2000 to over $700 trillion in 2011.

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What's more, nearly half of the worldwide derivatives exposure is centered in the United States, and 95% of the total U.S. derivatives exposure comes from 5 megabanks.

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To illustrate just how lethal derivatives can be: Last year JPMorgan Chase unexpectedly lost $6 billion on a bad derivatives trade, the 4th largest single recorded loss in history. This loss occurred after the most recent round of financial reforms, proving that the megabanks haven't completely protected the financial system from the dangers that brought it to its knees in 2008.

It's no wonder Warren Buffet famously said that derivatives were "weapons of financial destruction."

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In sum, if a series of large losses were to occur simultaneously (as happened in 2008), then we'd be back to bailing out the megabanks again.

Which leads us to:

2. Too Big to Fail

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In 2008, the megabanks received enormous bailouts and loans from the Fed partly because they were designated as "too big to fail."

The problem is, the megabanks are still "too big to fail."

We've compiled a lengthy list of pundits and experts who agree with us. Here are 5 of the quotes: 


Simon Johnson, economics professor at MIT: "The structural problems are worse. Their size, incentives—none of that has changed."

Michael Lewis, author of Moneyball, Liar's Poker, The Blind Side: "I look at the financial system as it is now, and it feels like it's built on sand. We did not cure the problem of too big to fail. Institutions have gotten bigger."

Gretchen Morgenson, financial editor NYTimes: “Big banks are bigger than ever, and they exert enormous power over regulators and lawmakers. Increasingly, smaller institutions can’t compete.”

William Dudley, NY Fed Chair: "We are a long way from the desired situation in which large complex firms could be allowed to go bankrupt without major disruptions to the financial system and large costs to society."

Anat Admati, economics professor at Stanford: “We're not safer and there's still a lot of systemic risks in large banks and in the financial sector overall."


The full list of quotes in conjunction with the other pages on our site lay out a firm case that the megabanks are still "too big to fail."

This leads us to our last point: not only are megabanks so large that they touch every aspect of our lives and so toxic that they could potentially bring down the entire economy again, they are so powerful that they can just about get away with anything.

 

3. Too Big to Jail

When a megabank becomes "too big to fail," it seems that their employees can commit crime without having to face prosecution. This, perhaps more than anything else, proves the immediate threat these institutions represent to our entire financial system. The bolder they get with their crimes, the more likely it is they will do something that will unsettle their precarious financial positions and weaken the global economy. 

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Nowhere was this injustice illustrated more clearly than in the lack of prosecution for employees at HSBC who helped drug cartels launder billions in drug money.

According US Assistant Attorney General Lanny Breuer, certain employees at HSBC allowed the cartels to "sometimes deposit hundreds of thousands of dollars in cash, in a single day, into a single account, using boxes designed to fit the precise dimensions of the teller windows."

And yet none of the employees with direct oversight on this were even tried, much less imprisioned, for behavior that would get the average citizen thrown in jail.

The list of megabank scandals has been piling up over the past four years, from drug laundering to racism, from rate manipulation to shady deals. Here's our growing list of megabank scandals:

Why don't guilty employees at the megabanks go to jail for illicit activity, the same as any other citizen would?

Part of the reason is that, again, the megabanks are "too big to fail," but another reason is that they have very close ties to Washington.

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Look who's on the list: Eric Holder and Lanny Breuer, two former long-time employees at Covington—a law firm that specializes in defending Wall Street clients. Why should we expect that lawyers who spent their lives defending Wall Street clients in court would suddenly turn around and fight them boldly? We shouldn't.

Indeed, prosecutions for financial fraud are now at record lows, even while the scandals in the megabanks are widespread and immense.

So the megabanks are clearly "too big to jail"—and we have a system rife with injustice.

 

Conclusion

The problem with the megabanks is that they're locked in a destructive cycle of being too big to manage, too big to fail, and too big to jail. They continue to have unpredictable, catastrophic losses. The losses lead inevitably to declarations of "too big to fail" (and bailouts). Being "too big to fail" means that the megabanks can't be prosecuted without endangering the entire economy (or so they say), which makes the megabanks even bigger—and, again (back to the start!), too big to manage. 

Therefore:

If you want to help end "too big to fail," if you opposed the megabank bailouts, if you're tired of megabanks getting away with crime, if you recognize that these institutions have become too big to manage, if you want to ensure that we never repeat the vast injustice at play in the 2008 crisis, then switch your bank.


You might be thinking, "Yes, okay, Wall Street makes the economy dangerous. But there are plenty of things that make the economy dangerous—more than I could ever effectively boycott."

If so, see why switching is still the best choice for you. Also see our FAQ page, which addresses this point.

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