Six years ago, it seemed as though the financial system of the United States might melt down. In March of 2008, prodded by federal regulators, J.P. Morgan J.P. Morgan Chase Chase absorbed Bear Stearns. In September, JPM also took over Washington Mutual. This proved insufficient to avert the crisis. In September, also with the encouragement of the feds, Bank of America +2.03% (BAC) purchased Merrill Lynch. Nevertheless, Lehman Brothers failed a day later and the great financial crisis kicked into high gear.
The powers that be–Congress, the president, the Federal Reserve Board, the secretary of the treasury, et al.–were flying by the seat of their pants, desperately cobbling together a rescue package to bailout the financial system that seemed on the verge of collapse. They made things up as they went along, sometimes implementing measures for which there was dubious legislated authority. They just did what they felt they had to do to keep our debt-laden, highly leveraged financial system going.
Free-market economists had solid economic theories for why the feds should not have intervened, but from the feds’ point of view, inaction was inconceivable. The fact of the matter is that Big Government and Big Finance are like conjoined twins, dependent on each other. Regardless of what the consequences of a financial meltdown would have been on Main Street, if too many of the giant Wall Street financial institutions had ceased to function normally, the world’s largest financial entity–our federal government–faced the possibility of becoming insolvent. Without a functioning financial infrastructure, the market for Uncle Sam’s trillions of dollars of debt might have frozen up. Nobody in official Washington wanted to find out what the world would look like if Uncle Sam’s financial operations blew up.
To avoid being caught unprepared for a future financial crisis, Congress passed the Dodd-Frank law in 2010. This act codified and formalized federal bailouts for financial institutions deemed “systemically important.” Thus the acronym “SIFI” entered our vocabulary. Dodd-Frank conferred de jure status on what had been de facto, ad hoc rules hastily improvised to deal with the 2008 mess.
To the consternation of millions of Americans–most vocally, various tea party groups on the right and Occupy Wall Street on the left–the powers that be appeared to enrich the biggest of the big financial institutions. JP Morgan Chase’s acquisition of Bear Stearns was partially financed with funds supplied by the Federal Reserve. Billions of taxpayer dollars were paid to Bank of America’s Merrill Lynch division via AIG. At the time, it looked like the two financial behemoths had received a multi-billion-dollar windfall.
Today, with the benefit of hindsight, we can see that whatever “gifts” the feds gave to the big banks, there were heavy strings attached. It now appears that the feds will claw back much, if not all, or even more, of those billions. Last year, the Obama administration extracted $13,000,000 in penalties from JPM, mostly for things done at Bear Stearns and WaMu before they were acquired. Writing on BloombergView.com last month, Matt Levine reported that over the last four years, Bank of America has paid the federal government $68 billion spread over 17 different fines and “settlements”—many of them for actions taken by Countrywide Financial before Bank of America purchased it.
In short, it seems clear that the SIFI designation is very lucrative—at least, for Uncle Sam. It would be interesting to have an investigative reporter trace the path of those billions of dollars of federal fines and “settlements.” Do SIFI settlements go straight to the US treasury, thereby reimbursing the American taxpayer?
Should we feel sorry for the shareholders of JPM and BAC? After all, the government is siphoning billions of dollars from their accounts. Actually, their investments are doing quite well. JPM’s stock hardly blinked after last year’s $13 billion hit, and is up by approximately 50 percent in the last two years. In spite of its serial losses to the feds, BAC is up between 15 percent and 20 percent over the last two years. Apparently, the benefits of being a SIFI outweigh the costs. Just as the “Greenspan put” once propped up the stock market, being designated as a SIFI, with the federal government essentially guaranteeing the firms’ ongoing viability, has resulted in SIFIs being perceived (at least, so far) as very safe, profitable investments.
Are there any losers in what appears to be a win-win arrangement for Uncle Sam and the SIFIs? Here we venture into the realm of Bastiat’s “things that are not seen.” A number of smaller banks have ceased to exist because of the costly regulatory regime imposed by Dodd-Frank. In the process, one wonders what small businesses were still-born because they didn’t receive needed loans. Looking ahead, one wonders how the reduction in the number of financial firms will affect us. Will the benefits of economies of scale be greater than the lost innovation that new players in an industry often provide? As I wrote last week, if we ultimately have credit centralized in the hands of the state, our society as a whole will be poorer. In the short run, though, the good times are rolling for Uncle Sam and his SIFIs.
The Moral Liberal Contributing Editor, Mark Hendrickson, is Adjunct Professor of Economics at Grove City College, where he has taught since 2004. He is also a Fellow for Economic and Social Policy with The Center for Vision & Values, for which he writes regular commentaries. He is a contributing editor of The St. Croix Review, sits on the Council of Scholars of the Commonwealth Foundation, and writes the “No Panaceas” column in the Op/Ed section of Forbes.com. Mark’s published books include: America’s March Toward Communism (1987); The Morality of Capitalism (editor, 1992); Famous But Nameless: Inspiration and Lessons from the Bible’s Anonymous Characters (2011); and God and Man on Wall Street: The Conscience of Capitalism (with Craig Columbus, 2012). Mark Hendrickson’s Archives at The Moral Liberal.