Too big to Fail / by kevin murray

Bank of America, sounds like it really is the 'Bank of America', but alas it is not the federal bank of the United States, but instead a large multi-national banking conglomerate and once a proud member of Dow Jones Industrial Average.   Bank of America was once simply a Los Angeles-based bank, in which the Bank of Italy merged with the Bank of America, while retaining the name of Bank of America (B of A).  Initially, banking laws limited the Bank of America to conducting its business in just the state of California, but when these laws were modified the era of interstate banking commenced and B of A ultimately became a true multi-national bank holding company.


The decisions that allowed companies such as Bank of America to diversify into non-banking industries, such as insurance and brokerage activities, and to be nationwide in reach has had far reaching implications in the United States.   On the beneficial side, it was Bank of America which created the precursor of Visa credit card with their BankAmericard which help to revolutionize the personal credit business throughout the country.  Additionally, having interstate banking allows companies such as B of A to take advantage of economies of scale.  Also, banking conglomerates that can offer to their constituents insurance and brokerage services, allows these bank-holding companies to be all things to all people, by becoming that one-stop shopping place for all of your financial needs.


On the other hand while there are valid reasons why interstate banking should be allowed, there are huge dangers involved that have nationwide implications.  First off, banks that do not have a local footprint in your community have no compulsion to lend money within that community.  Furthermore, the bigger and more powerful an institution is, the more damaging to the country at large, should it fail. 


During the financial crisis of 2008, B of A and Merrill Lynch (a subsidiary of B of A) received $45 billion dollars from the Troubled Asset Relief Program.  This infusion of money into B of A by our government sends a most inappropriate signal to all Americans.  This message is unequivocal and clear, that recklessness in the operation of your business will not be borne by the company at hand, but instead will be borne by the stockholders or the citizens at large.  Consequently, this means that in the good times in which a particular bank-holding conglomerate takes massive risks and succeeds, it will benefit from those times, and when said company makes foolish and imprudent decisions, those mistakes will be backed by the tax-paying citizens of our country in which they will reap no reward, little benefit, and never have the opportunity for the same consideration to be extended to themselves.


Ultimately, what we heard is that companies such as B of A had to be saved by our government, because the consequences of their failure would have been catastrophic to the economy.  Perhaps this is so, perhaps this is not.  What we do know is that any conglomerate which is thereby deemed to be "too big to fail" must divest itself of its subsidiaries and businesses that make the organization too big to begin with.  This has been successfully done before with Standard Oil of New Jersey and with Bell System to name a notable few. 


If we will not compel this divestiture now, after this disastrous financial crisis brought upon us primarily by greed, when will we have the moral courage and fortitude to do so?