Size Matters – “Too Big to Fail” Banks Are Bigger Than Ever

Recently, I wrote in this blog about how your friendly neighborhood bank might not be all that friendly these days.  They may not even show up in our neighborhoods anymore either.  Banks have evolved into online behemoths that suck up our cash with impressive efficiency and minimal human interaction.

Banks are no longer about chocolate chip cookies and coffee when you walk in the door Saturday mornings.  Nor are they about the security guard you’ve known for years who opens and closes the door for you.

My wife and I deal with one of the largest banks in the nation.  We handle most of our business online or through an ATM, and find we only need to actually go into our local branch about once a month.  Oddly enough, though it’s technically our neighborhood bank we can’t put a name to anyone who’s ever helped us.  Chocolate chip cookies, coffee, even familiar faces – none of this matters anymore.

I suppose I should feel grateful for some remote banking innovations.  In one phone call recently I was able to have the bank reverse two mysterious online purchases from my checking account that originated in Beijing.   Another time my wife was able to get the bank to void a purchase for eight hundred dollars’ worth of appliances she’d never bought. Somehow someone had managed to hack into our account on two different occasions.

The scary thing about these incidents is, in deftly handling the problem, bank employees told us not to worry; fraudulent purchases like this happen all the time.  Yes, the big banks had our backs, but that was because they presented such a tempting front.

While mega-banks are able to offer their customers a wide array of services, when it comes to criminal activity and corruption it would appear their very size is precisely where their customers’ problems begin.  As former Secretary of Labor, now Professor of Public Policy at the University of California at Berkeley Robert Reich points out:

“Clearly, there’s reason to worry. Back in 2000, before they almost ruined the economy and had to be bailed out, the five biggest banks on Wall Street held 25 percent of the nation’s banking assets. Now they hold more than 45 percent.

Their huge size fuels further growth because they’ll be bailed out if they get into trouble again.  This hidden federal guarantee against failure is estimated be worth over $80 billion a year to the big banks. In effect, it’s a subsidy from the rest of us to the bankers.”

When it comes to banks then, size most certainly does matter.

Beyond banks’ attractiveness as targets, America has had its share of bank failures due to mismanagement and misconduct from within.  One particularly dramatic tale of bank corruption and intrigue occurred with the failure of Franklin National Bank in Long Island, New York in 1974. At that time, it was the twentieth-largest bank in the country, going on to become the largest bank failure to date.

Again, big money proved a natural invitation to big-time thieves—only this time the criminals were running the operation. Through political influence that could be tracked all the way to the White House, Michele Sindona, who had direct ties to the Mafia and the Sicilian Drug Cartel, managed to finagle controlling interest in the Long Island bank.

Once depositors discovered the bank’s mismanagement and fraud, it was pretty much the end (for Sindona as well, who died in prison after drinking a cyanide-laced cup of coffee).  Franklin National Bank’s assets were sold off to European American Bank, which, itself, was later purchased by Citigroup.

Fast-forward to 2015, whereupon Citigroup’s name shows up again as one of five big banks, along with JP Morgan Chase, Barclays, Royal Bank of Scotland and UBS – all charged with criminal antitrust violations for rigging foreign currencies.

It’s difficult to do any kind of personal business in the twenty-first century and not get involved with big banks. But we can strive to give them less of our money. In doing so, we both remove our financial security from the target area for thieves, hackers and terrorists, and we buoy our portfolios with a more valuable asset – physical gold.  A bank gets to play with your dollars in return for extending you a puny rate of interest on your money.  But no one gets to share in the wealth you build up with gold.