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Home Publications Blogs Beat the Press We Actually Don't Have to Live With the Big Banks

We Actually Don't Have to Live With the Big Banks

Saturday, 14 December 2013 06:41

Floyd Norris has a good discussion of the continuing hostility toward the big banks, pointing out that it has a real basis in their behavior. However, toward the ends it includes the strange line:

"We have the giant banks and must live with them."

Actually, we don't have to live with the big banks. The Justice Department could pursue anti-trust actions to break them up, the Financial Stability Oversight Council could act to break them up, or Congress could pass new legislation. There is no obvious reason that we need keep the big banks if there was enough political support for downsizing them.

Norris also makes the comment:

"That no top bankers went to jail may be proper — it is not a crime to make stupid mistakes, and much of what happened in the years before the financial crisis was more foolish than venal."

It is almost certainly true that the bankers were foolish and failed to recognize the housing bubble, but that does not mean that they were not also venal. It is likely that Kenneth Lay and other top executives at Enron really believed in their business model, but that didn't mean that they were not also committing a wide variety of crimes to keep the company going.

In the case of the banks, while they may have thought that ever rising house prices would make all mortgages good mortgages, this doesn't mean that they didn't knowingly pass along fraudulent mortgages in mortgage backed securities and misrepresent their quality to buyers. These acts are crimes, even if the banks may have thought they would have no consequence since the growth of the housing bubble would have ensured that any losses were minimal.

Comments (2)Add Comment
written by Dryly 41, December 14, 2013 8:36
Banks provided funding to mortgage brokers like Ameriquest, New Century as well as banks like
countrywide and a lot of others to get as many mortgages as possible to bundle into collateralized debt obligations to sell to "sophisticated" buyers. This was greatly aided by paying rating agencies like Standard & Poor's, Moody's and Fitch to get AAA ratings for the cdo's.

These groups of people did not suddenly forget how to make a legitimate mortgage arrangement. NINJA loans were popular, no income, no job, no assets. Mr. Potter would not make these mortgages but neither would George Bailey because they held their mortgages. All participants, the mortgage brokers and appraisers, ratings agencies and banks made a ton of money. All knew what they were doing.

It would seem this would be perfect for the Racketeer Influenced Corrupt Organization Act.

Got jobs?
written by crosspalms, December 16, 2013 2:11
It may not be a crime to make stupid mistakes, but at many companies it would be a firing offense. Perhaps the banks didn't actually consider risky/dishonest behavior in pursuit of profit to be a stupid mistake. Or perhaps they don't know how to clean house. Or both.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.