TARP: A Not-so-done Deal. It’s Financial Reform Time

Yesterday, 10 US banks and mortgage firms agreed to pay $8.5 billion to settle complaints of wrongful foreclosures. Federal regulators undertook an extensive review process of  homeowner foreclosure files as required under an enforcement action filed during 2011. According to terms of the agreement the banks – which include several of the nation’s largest financial institutions such as Citigroup, JP Morgan Chase, Bank of America and Wells Fargo – will end up paying individual homeowners anywhere from several hundred dollars to $125,000 once it has been determined that those individuals were wrongly foreclosed upon.

It has been several years since the nation’s economy slipped and slid into a near abyss. While the $8.5 billion mentioned above is no small sum of money it’s still a drop in the bucket to compensate American tax payers for the multiple years worth of harm done to the nation’s and the global economy. The wrongful foreclosure issues clearly illustrates that banks are still behaving badly.

The Treasury Department announced that the Troubled Assets Relief Program (TARP) that gifted Wall Street $700 billion in 2008 is now complete. That comes as a relief to many people as it appears that yet another troubled chapter in the book of America’s financial history has drawn to a successful conclusion. But when an official from the Treasury Department announced that the  financial crisis has resulted in a net gain for taxpayers because of the profit realised by TARP, a significant point was lost. Yes, the financial industry was saved from collapse. No, the nation didn’t  experience an updated version of the Great Depression. And yes, the profit is expected to be approximately $60 billion. Thankfully. But the problem lies in what we don’t seem to want to discuss –  the fact that the Treasury Department doesn’t present to us which is that the very same large banks that walked in the past to financial ruin are even larger than they were when they were bailed out.

In 2009 the top five banks’ share of deposits was approximately 37%; today, as though we’ve learned nothing, that amount is nearly 44%.  Information provided by the New Rules Project’s Community Banking Initiative reveals that in 1994 the share of domestic deposits held by the top five banks was 13%. The lack of stiff penalties and an environment that makes mergers and acquisitions relatively easier allows for decreased competition, fewer small community based banks, and the lingering problem of badly behaved big banks that keep getting bigger.

Isn’t it time –  actually aren’t we long overdue – to revisit reinstating the Glass-Steagall Act? That’s right, separate commercial banking activities from investment activities and divide these big financial houses. The end of TARP should not open the door to a sense of complacency. Some of us have not forgotten that in October 2011 the Securities and Exchange Commission for $285 million in a mortgage bonds fraud case. Nor have we forgotten that JP Morgan Chase suffered $2 billion in trading losses – by initial estimates - at the hands of a rogue trader during May 2012. Last year’s LIBOR scandal,  that incident was particularly notable given that JP Morgan Chase’s CEO is a fabled Wall Street risk manager – yet he couldn’t foresee the level of mayhem and damage caused by traders who see no incentive to rein themselves in. And why should they if punishment is rarely forthcoming?

Hopefully with a new Congress in place, and senators such as newly elected consumer advocate Elizabeth Warren on the Senate Banking Committee, we can finally arrive at a sensible place: one in which our legislators face the fact that too big to fail has always meant too big to manage and far too big to succeed.

But hey… no pressure… it’s not like our nation’s economy and financial stability depend on it.