Your Tax Dollars at Work: Creating Megabanks

It’s now clear that Treasury Secretary Henry Paulson is seeking to use the Big Bailout not only to resolve the credit crunch but also to remake the banking sector of the U.S. economy. Going on the dubious theory that bigger means better and stronger, Paulson is encouraging giant banks to use federal money to take over their smaller counterparts. In an interview with Charlie Rose last night, Paulson said: “There will be some situations where it’s best for the economy and for the banking system for there to be a consolidation.”

The big players are getting the message. The Wall Street Journal and the Washington Post have pointed out that executives at major banks such as J.P. Morgan Chase and BB&T are openly considering using capital infusions from the feds not to make more loans but to purchase competitors.

It’s odd there is not more of an uproar over this development, the way there has been in response to reports that the big banks have been stepping up their federal lobbying activities at the same time they are taking public money.

What Paulson conveniently ignores is that the crisis gripping the country was brought on primarily by major financial institutions through their reckless lending and investing practices. We’ve already had years of consolidation both among commercial banks and between commercial and investment banks, resulting in the likes of Citigroup, with assets of more than $2 trillion. Rather than being rocks of Gibraltar, many of the big boys have been both causes of economic distress and victims of it. Moreover, if the reports of widespread federal fraud investigations are accurate, many executives at the megabanks may soon be too preoccupied with indictments to focus on business.

Instead of creating more Frankenstein-monster megabanks that would be “too big to fail,” we should be considering, as economist Joseph Stiglitz told a House committee yesterday, breaking up the leviathans into smaller institutions that focus on making prudent loans and investments rather than gambling in exotic financial casinos. But that’s not the kind of policy we’re likely to get as long as a veteran Wall Streeter such as Paulson is running the show.