Use antitrust policy to break up mammoth banks
from Dean Baker
This week the nation’s chief law enforcement officer told a Senate committee that he was concerned that prosecutions of large banks could endanger the country’s financial system. As a result, the Justice Department may not prosecute cases against these banks that it would bring against ordinary citizens or smaller banks.
The immediate issue at hand was the decision not to prosecute the bank HSBC because of its involvement in laundering money for Mexican drug gangs. Just to be clear, these drug gangs were not just people that sold drugs to willing buyers, they also engage in kidnapping, murder, torture, and a variety of other criminal activities. Attorney General Eric Holder told the Senate Judiciary Committee that big banks may be able to share the profits with such outfits with impunity because prosecuting them could lead to financial instability.
There are two possible stories here. In one case the concern about financial instability is nonsense but is being used to protect powerful financial interests. The second possibility is that the Justice Department really is concerned that its prosecutions of big banks could bring down the financial system.
The first possibility is quite plausible. When Enron was about to collapse in 2002, former Treasury Secretary Robert Rubin, who was at the time a top Citigroup executive, called a former aide at Treasury. He asked him to intervene with the bond rating agencies to get them to delay downgrading Enron’s debt. Citigroup owned several hundred million dollars in Enron debt at the time.
The Treasury official refused. When the matter became public, Robert Rubin claimed that he was concerned about instability in financial markets. It is entirely possible that the reluctance to prosecute big banks represents the same sort of fear of financial instability as motivated Robert Rubin. In other words, it’s a hoax.
But let’s say that we really do have to worry that prosecuting the criminal activities of Bank of America or J.P. Morgan really would sink the economy. How can we justify allowing such dangerous behemoths to exist? The country ostensibly has an antitrust policy to prevent corporations from becoming this powerful.
In principle we would use antitrust law to break up a phone company because it was charging us $10 a month too much on our cable. How could we not use antitrust policy to break up a bank whose size allows it to profit from dealing with murder rings with impunity?
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Real-World Economics Review Blog 
A question of similar importance is to ask how a society (particularly any making claims of equality, democracy, justice…) can long exist in which the rules are so obviously only applied to a majority of its members with little power… while those with sufficient influence operate with impunity.
Yes, and use RICO laws for most of the heads of these corporations in every industries as well as offshore tax dodges.
What is left out of this discourse is that these banks are to big to be managed. Jamie Dimon is supposed to be a great manager. Yet one of his subordinates managed to lose 8 billion dollars with dicey decisions. How many of the sad mortgage stories are really about different bank departments unable to communicate. I once started getting bills from Wells Fargo with whom I had no business. But they had been paying into some escrow account. After lots of communication of the sort “what are you talking about. I have no business connection with you.”, After increasing stridency from the bank and the adding of interest, I checked with my county tax agency. They had been routinely sending back all the checks Wells Fargo sent since they had no place put them. . Yet the office that was dunning me didn’t even know that another office was getting the money back. I”ll bet there were thousands like me.
Either banks have to be really small and constrained to a very narrow range of activities to limit systemic effects, or their banking balance sheets have to be separated from the operating company and effectively turned into funds. The break-up approach seems to go against the tendency to consolidate, and may require rather a lot of market design for such a forest of small banks to be workable. I’d be more hopeful about turning banks into funds so they can no longer hold the economy hostage, but it would be a momentous change. Effectively M1 would no longer be guarateed in value. It would fall when a crash occurs, but you could fire or arrest the managers and keep the fund.