This is part 2 of a 3 part series on the breaking up of the big banks and what it’s implications and effect might be

As President Clinton mentioned in his speech at the DNC, there might be some good to come from breaking up the big banks into smaller S&L and commercial banks as well as regional banks thus spreading the ability to do business with a greater number of financial institutions would mean less risk across the board. I sought out experts and if you hit part 1 yesterday, you heard half of a podcast. Today is part 2 which is a question and answer session with Andrew Schrage, co-owner of Money Crashers Personal Finance.

Andrew Schrage

When we had a chance to talk to Andrew Schrage, we explained what the premise of this series was and also shared the Dallas Fed essay on breaking up the “TBTF” (too big to fail) banks who unfortunately– size had nothing to do with their crashes and losses, but due to other issues. Here’s what Schrage had to say when we sent our many questions to him!

1) Given that President Clinton brought up this subject at the DNC during his speech, it seems that nothing has been mentioned about it– as in IGNORED. Why would both parties do that?

Although Paul Ryan has made comments about breaking up the big banks, it seems to be rhetoric and nothing more. Mitt Romney has remained largely mum on the topic, possibly due to the fact that the five biggest banks have contributed nearly $2.5 million to his presidential campaign. As a matter of fact, he has said in the past that he thinks that Dodd-Frank has “gone too far” and plans to replace it. I assume that the Democrats haven’t chimed in on the matter either because of the upcoming election.

2) Since the Dallas Fed suggests doing the very same thing– and that’s almost antithetical to what the FED currently is.. isn’t that rather ironic that they are suggesting this.

It is ironic. However, although the argument put forth by the Dallas Fed is a compelling one, it fails to take into account several items. For instance, are the big banks truly too big to fail? We really never got a chance to find this out, since they were all bought out or bailed out during the financial meltdown. The one bank that was allowed to fail, Lehman Brothers, did not take down any other financial institutions. Some say that “too big to fail” (TBTF) is nothing more than a theory put forth by government regulators. The Dallas Fed fails to mention anything about the huge cost or even the complexity of breaking up the banks.

3) Most people would agree between Wall Street and the players at the Big Banks, they were the people behind the economic meltdown and despite all their “apologies”, not much has changed. The foreclosure rate has slowed, but the economy is still “sluggish” (to put it mildly) and even Fed Chairman Bernanke is concerned.
Wouldn’t changing the financial structure of the banks — splitting the investments (formerly known as the S&L) and the commercial (banks)– be a great way to streamline the process of mortgages and jumpstart some new business growth?

Following the Volcker Rule prohibiting banks from participating in proprietary trading, it would in fact be a great way to spur the economy. However there is one large obstacle standing in the way of that ever happening: the lobbying efforts on the part of the big banks. They spent roughly $50 million in 2011– and unfortunately– big money speaks quite loudly.

4) People are very disappointed in the banks about 3 (or more) things: mortgages, re-fis and dealing with underwater properties due to A) bad loans or B) the bottom fell out of their real estate market. Since the banks were supposed to HELP those with underwater loans, pretty much that hasn’t happened.
Re-fis seem to be harder to get unless you have lots of equity, lots of cash for points and fees and don’t really need a refi.
Mortgages are hard to get — even for short sale or foreclosed properties — and it’s requirement of at least 25% down and stellar credit and no black marks –still make getting a mortgage a trial by fire. Is that an accurate assessment and why haven’t the banks come through with their promises to streamline things and also repay the bail-out bucks they got — (they have the profit!) –the way the auto industry has.
What would be the impact of leaving the banking structure the way it is? What about breaking it up as it used to be into S&L and banks.

Actually many of the big banks have eased their lending practices regarding mortgages, but the average consumer just isn’t aware of it. Leaving the banking structure the way it is currently will ultimately lead to more of the same things that brought about the financial crisis. There are already examples – e.g., JP Morgan’s recent trading loss that some have estimated to be as high as $9 billion for proof that the banks have not learned much from their past mistakes. If the big banks were broken up, consumers would no longer have to be worried about the possibility of a large bank failing.

The banking sector has actually done a pretty good job of paying back the bailout money. They received nearly $260 billion and have paid all of that back with a modest amount of interest.

5) Would a break-up of the banks at this point in time- in this economic bumpy road– be helpful to the average consumer? Would it help the economic condition for business and consumers both or just one or the other?

The nation’s top four banks have approximately $6 trillion in assets, and according to Dodd-Frank, the cutoff point for a TBTF bank is $50 billion in assets. Therefore, these four banks would have to be broken down into 120 separate institutions. This would be a mammoth task, likely to take years to complete. I see no true benefit for either the average consumer or businesses. While breaking up the big banks sounds good on paper, I think it would be devastating to our economy.

6) Aren’t the big banks more in violation of the Taft-Hartley Act in terms of monopoly of the sector? Hasn’t there been some collusion there?

The Taft Hartley Act has more to do with labor unions than monopolies, and since Amalgamated Bank is one of the only banks associated with unions, there really aren’t any violations to speak of. But that’s not to say that the big banks haven’t been guilty of collusion. In the recent LIBOR scandal, that’s exactly what they did to manipulate interest rates.

7) If this is not a good idea for this economy at this time: explain the rationale for that reasoning, particularly since one branch of the Fed feels it is a wise thing to do –a branch that is typically pretty conservative.

Breaking up the big banks would be far too disruptive to an already fragile economy. It seems that no one has even thought of the cost involved by taking such a drastic step. Businesses and even individuals may find themselves with no access to larger lines of credit, and if the nation’s five biggest banks were broken up, they could no longer offer many of their current services as smaller banks, which could result in higher unemployment.

8) For small and medium businesses who are having difficulty getting lines of credit, wouldn’t a bank break-up also help them or would it hurt them (in terms of getting credit cards for growth and purchases of basic merchandise)?

I see no benefit for small and medium-sized businesses. As a matter of fact, it could very well make getting lines of credit more difficult.

9) For the average consumer, the credit card APR is rather high for an economy that is so sluggish. What would justify that? What about the consumer who wants to buy a car but has difficulty because of the banks – clearly it’s not because of the automotive industry.

Because the big banks don’t really care about the average consumer, they’re going to make their money one way or another. With the recent credit card legislation, they’re looking for any way to recoup lost revenues – high APRs is one way to do that.
On the other hand, many auto dealers are offering 0% APR for car loans. If stellar credit is required, consumers can only do their best to improve their credit score.

10) What about college loans and repayment? How has this big bank situation affected this sector and would a breakup harm or help this situation particularly in light of dramatic increases in tuition and fees for higher education.?

The big banks have been slowly getting out of the student loan industry, as the federal government has assumed a larger role. A big bank breakup may make private loans for college students for available and more affordable.

11) What about consumers and CDs? Interest rates for savings are ridiculously low yet the banks who are cash-rich aren’t willing to be competitive and increase the interest rates unless you invest a tremendous amount of money.
These same banks are the ones that caused people to lose those same type of investments with their melt-down and haven’t repaid anyone their losses yet they want consumers–and particularly retirees– to ” take it in the shorts” if you will with these miniscule interest rates.

CD and savings account interest rates are low, and this is tied to the Federal Reserve keeping lending rates incredibly low. This was done to try to spur the economy, which collapsed largely in part because of the big banks. Until the economy comes back around, these yields will remain low, so it makes it difficult to earn money on your savings accounts and CDs. The big banks are not going to raise the interest rates they offer above the interest they make from lending money. It just isn’t going to happen.

12) Is this a partisan issue or can there be some meeting of the minds? Does this have to come from the voters to demand that Congress do something or can the Executive branch do something about this?

The executive branch certainly has the ability to do this, but whether they will remains to be seen. While it is not assured that either party would ever actually act on breaking up the big banks, the first thing you would need is for one party, either the Democrats or Republicans, to control the White House and both houses of Congress. Once partisanship comes into play, the chance of any real negotiation goes out the window.

13) Is big business and their playing fast and loose in the meltdown still the main reason we are still in this sluggish situation because they are still playing fast and loose but keeping it more undercover?

Big banks have not inherently changed much of anything. See the massive trading loss by JP Morgan over the summer as evidence.

14) For those who lost 50% or more of their retirement or investments, what are they to do if things remain the same? What would be the benefit for anyone in any of these questions if we broke the banks into smaller entities, more regional commercial banks, S&L’s and diffused the risk of the “too big to fail banks” who have already failed once from failing again.

There are many who lost at least half of their retirement portfolios as a result of the financial meltdown. And with Bernanke’s pledge to keep interest rates low until at least 2015, returns are likely to remain stagnant going forward.

Thank you to Andrew Schrage, co-owner of Money Crashers Personal Finance. Schrage graduated from Brown University with a degree in Economics.

Thanks to Chris Abraham for allowing me to run this series on his blog. www.marketingconversation.com Stevie Wilson,
LA-Story.com