About Ken Tumin

Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Should the Megabanks Be Broken Up?


The debate over breaking up the too-big-to-fail (TBTF) banks has been going on for awhile. A recent opinion piece by George Will in the Washington Post makes the case once again why it's "Time to break up the big banks". Thanks to DA member cumulus who posted on this in the forum.

The article mentioned an interesting fact about the four biggest U.S. banks (JPMorgan Chase, Bank of America, Citigroup and Wells Fargo). In 2011, they held 40 percent of all federally insured deposits. As the article mentioned, "there is a silent subsidy - an unfair competitive advantage relative to community banks - inherent in being deemed by the government, implicitly but clearly, too big to fail."

The megabank deposits continue to grow as their deposit rates sink. You have to wonder how much of this deposit growth is due to their TBTF status. Depositors are more willing to accept low rates when they don't have to worry about the safety of their money. This is especially the case for large deposits that go over the FDIC insurance limits.

To confirm the deposit growth, I reviewed the 2012 Q4 earnings reports of the four megabanks. Below are excerpts from the reports:

  • Chase: "Consumer & Business Banking average deposits up 10%" (source)
  • Citibank: "Citigroup Deposits of $931 Billion Grew 7% Versus Prior Year Period" (source)
  • Wells Fargo: "Total average core checking and savings deposits up $72.0 billion from fourth quarter 2011" (source)
  • Bank of America: "Total Average Deposit Balances up $28 Billion, or 11 Percent (Annualized) From Prior Quarter" (source)

I also took a look at their deposit rates. Here are their 12-month CD rates of the four megabanks as of 2/11/2013. Note, rates may vary based on location:

As you can see, even the special CD rates are low. As a comparison for 1-year CD rates, you can get 1.25% APY at PenFed and 1.05% APY at Nationwide Bank (and several other internet banks).

Attempts to Downsize the Megabanks

There have been attempts in Congress to downside the megabanks. George Will's column mentions Senator Sherrod Brown's SAFE Banking Act and links to this article from Senator Brown. Here's an excerpt summarizing the Act:

It would prevent any one bank from controlling more than 10 percent of federally insured deposits or assuming more than 10 percent of the U.S. financial sector’s liability. Under the bill, no bank could grow to more than 2 percent of the nation’s gross domestic product – with these limits reevaluated as the economy grows.

In 2010, the SAFE Banking Act was voted down on the Senate floor by a vote of 61 to 33. It was opposed by the White House and by most Republicans. According to Senator Brown:

Not only did Treasury oppose it, but they proudly opposed it. If the Treasury had spoken out for it we could have gotten very close to winning.

Last year, Senator Brown reintroduced the SAFE Banking Act. We'll see if the Treasury Department with a new Secretary will be more receptive. With strong opposition from Wall Street, it seems unlikely.

Poll: Should the Big Banks Be Broken Up?

I haven't seen the arguments from the Treasury against breaking up the big banks. I've heard some argue that it would put the large U.S. banks at a disadvantage to the foreign big banks. There sure seems a lot more reasons to support the break-up. So this poll may be one-sided. Perhaps, some readers will have reasons to be against a break-up of the big banks.

Related Posts

  |     |   Comment #1
 Should Big Banks Be Broken Up? Yes -- or Maybe

Let deposit-taking institutions stick to the roles they had during the days of Glass-Steagall, Weill argued. "Have banks [act as] deposit takers; have banks make loans and real estate loans. Have banks do something that's not going to risk taxpayer dollars, that's not going to be too big to fail.

  |     |   Comment #2
the gov't wants to break up the mega banks because their beauacratic complexity stiffes creativity.  for this reason, they are angering the upper class by failing to create enough exotic financial products that the rich can exploit for huge monetary gain.
  |     |   Comment #3
Most of the readers probably have never seen an account ledger of a big bank.
I had an opportunity to look through one recently at B of A.
There are over 600,000 entries per month of all kinds of expenses, trading, overnight sweeps to treasury, loan payments, late payments, missed payments, deposits, withdrawals, ATMs, credit, debit, advances and list never ended since new entries were popping up every second while I was looking at the screen.

That was the general ledger at only one branch of B of A. Now multiply that by thousands upon thousands of branches world wide and then add the proprietary transactions of their investing units that is never reported on this ledger, you can only grasp a small part of what is involved in such bank being regulated. It will be impossible to get the real picture of the health of the bank.
FDIC and SEC rely on the sole reporting by the bank to be accurate, because to audit such records will be humanly impossible to follow and there are more complex formulae involved than the regulatory agency can ever imagine.

Present and future projections are just an estimate of the complex curve that can be seen on the screen, but never real snap shot at what point you can take the reading, because the goal post moves every second up or down on the screen. Interpolation of the results brings more questions than answers of the bank’s health for a profit of a future date that is also assumed and never fixed.

To manipulate those results are easy, just enter few incomes and delay the entries of the expenses for few seconds and make a printout at that point, the bank health is above average, reverse the entries and delay the income, the results are opposite and the bank looks like is failing.

So, the government can make as many rules as they want, it can not be followed, since the big banks can make and manipulate anything they want to satisfy those imaginary regulations.
  |     |   Comment #4
Be careful what you wish for. Every time the government tries to fix something, it usually makes it worse.
  |     |   Comment #6
Absolutely break up the mega banks. It would be the best thing we could possibly do. And, make the issuance of derivatives illegal.
  |     |   Comment #7
Wanderer-Why? For being too successful? Ummm......You know we already have many regulations in place to prevent unfair competition, monopolies,etc.....In fact.....We already have an entire government agency devoted to regulating banks and commerce in general(actually more than one).  And yet your answer is just to break them up?  Seems a bit simplistic, doesn't it? Especially given the abundance of government regulation already in place. You think we need more?  I'm not saying big banks did not do some bad things......but they also do many good things. And where were these government agencies when the banks got in trouble. Why didn't they catch it??? That's what they are there for. Maybe that's what we should break up.......all this overlap of government. Sure....we need some regulation. But we don't need more.
  |     |   Comment #8
>Should the megabanks be broken up?

Uh... is Pope Catholic?
  |     |   Comment #11
Anonymous 7,

You ask why break up the mega banks?  I'll tell you. First of all, a free market cannot exist so long as a small group of players have oligopoly power.Therefore, we cannot have a libertarian economy so long as the mega banks are allowed to exist.

Furthermore, banks that are "too big to fail" are "too big to exist". They are NOT "successful" at all. They are all wards of the state. They are a dismal failure. Every single mega bank would be insolvent, if not for being bailed out by the government and the quasi-governmental Federal Reserve. There was, of course, the over TARP, and, then, after TARP, there were trillions worth of zero percent "loans" that are really gifts (because they are endlessly renewable at nearly no interest) from the Fed. And, then, there was QE1, which was essentially designed to reflate what were worthless mortgage backed bond assets held by these banks. And, now we have QE3, which is a second attempt to do the same thing, to a lesser degree, once their values began to fall deeply again. All these QEs will continue until those mega-banks and their undue political power manages to unload worthless assets on the public balance sheet at par.

Bottom line, every one of the megabanks is a dismal failure, not a success. They exist because taxpayers paid their bills. Savers are now being forced to pay their bills with the low rates on deposits, which allows them to feign solvency. But, eventually, all of us will pay their bills with the devaluation of the US dollar, once the existing monetary inflation, caused by trying to save them, converts to price inflation. The 374% latent inflation is going to hit us like a ton of bricks, as soon as the velocity of money gets back to normal. This is all because of the mega-banks and their greed and toxic issuance of trillions worth of fraudulent derivatives that they could never actually pay off on their own, if contingencies that trigger them ever happen.

  |     |   Comment #12
Directed to Anonymous @ #5,7,9,10

Must this blog always degenerate into the usual rant against "liberals" on your part?  Jeepers, just let it go for once, please. We get it already. Thanks. Besides Rep. Ron Paul even advocates the breaking-up of the TBTF banks. Yup, now there's a real commie liberal for you.
  |     |   Comment #13
Interesting, Wanderer. You make good points. But should we not also have some anger toward the government???  Why did the government allow them to get away with this???  The FDIC does nothing but regulate banks. Where were they? Where is the anger at them? Plus there are probably a dozen other agencies that have overlap regulation. Where were they?? I hear you......you get no arguement with me on most of your points. I just don't have any faith that government is an answer to anything. The government makes billions off the banks....not to mention from our taxes. You speak of taxpayers paying for banks? Well.....taxpayers are also paying billions to support half of our society. bit of a different issue of course.....but the point remains. Banks are not the only thing getting charity from taxpayers. Well.....you make good points my friend. I respect you.
  |     |   Comment #14


Dear Mr Tumin,

There seems to be no law against becoming too big.  If any bank (big or small) has broken any laws, then DOJ and whole lot of other regulator are welcome to bring about the necessary enforcement.

Penalizing success, be it big bank, big telecom, big software, big oil, or big pharma is not the American way, because we make and follow the laws.

Your Truly,
  |     |   Comment #15


Dear Wanderer,

It is true that big banks were bailed out.  But it is also true that WaMu, Countrywide, Wachovia were  forced to become part of already big bank by none other than our beloved government in the dark of the night!

One cannot have it both ways.  First save the system by taking over likes of Wamu, Countrywide and Wachovia and now that you have saved the system by becomeing bigger, we will break you up as you grew way too big because of "save". :-)

Yours Truly,
  |     |   Comment #17


Dear Wanderer (anonymous) - #11,

You are right ... Taxpayers did indeed pay some of the banks.  Question is why?  Was it the self-interest that motivated this payment or was it charity?

Same question can be asked about the Auto Bail-out.  Did the government do this out of self-interest to save massive tax-payers' jobs or was it because they wanted the Auto companies to become big/bigger?  All are retorical questions and you know the answers. Such bail-out actions are done to avoid massive disruptions alone. 

And then there is Solindra that folded and a few lost their jobs.  Government did not step-in, as it was easy to determine that allowing Solindra to fails will not casue massive disruption.

Yours Truly,
  |     |   Comment #18

Special anti-trust laws must be created, above and beyond the ones that already exist, in order to break up the mega-banks. I do not agree that it was necessary to save them, nor that saving them will help anyone but the executives of those same banks. They should have been allowed to fail, because, in saving them, we have doomed the Federal Reserve itself to insolvency as soon as the velocity of money returns to normal, rates rise, and the toxic assets it bought from the mega-banks decline precipitously in value. The Fed does not mark to market, but the market will surely know it is insolvent, and its creative accounting will not matter.

There was a unique opportunity to allow the free market to destroy the mega-banks, and it should have been taken. I admit that a lot of pain would have occurred, and money would have had to be printed to repay some depositors who would have withdrawn their funds. But, most funds would have stayed where they are, upon nationalization of the mega-banks under the FDIC, and subsequent selling off of their assets in peices. Guaranteed by the government, there would have been no bank runs or panic.

The difference would have been that the toxic derivatives, that the greed of mega-bank executives fraudulently issued and could not possibly back up, once they triggered, would have gone bad. The derivative counter-parties, who are essentially Keynes' "rentiers" would have lost a staggering hundreds of billions or trillions of dollars of fictional wealth, but the ring-fenced commercial banks as well as their depositors would have been fine.

The mega-banks were NOT saved as a result of our governmental concern. They were saved because they have too much political power. They especially have clout at the Federal Reserve, which mostly does their bidding. Fed mandarins filter back and forth between extremely well paid jobs and consulting gigs at the mega-banks and positions at the Federal Reserve. The entire system is corrupt, and if it were allowed to fail, the USA would have endured a period of serious pain, as it did in 1907.

But, remember, the Panic of 1907 was completely over by 1908. In contrast, the organization of the Fed, and the resulting reign of economic "terror" by the big banks that created it, began in 1914. Instability, in the form of huge depressions and booms, never known before under the gold standard, have happened. The situation has become markedly worse in recent years, as the mega-banks facilitated deficit spending in America and Europe. If not for the mega-bank bailout, many nations, including the USA would be in a full recovery by now. Instead, we have ultra-rich wholly incompetent mega bank current and former executives (who actually ought to be bankrupt according to free market principles), we have zombie banks, and we are on our way to a stagflationary or hyperinflationary collapse once latent inflation converts to price inflation and higher interest rates.

In short, I cannot think of anything more effective to restore American prosperity than to put the mega banks out of business. They and their executives are too big, too politically powerful, corrupt and toxic to be allowed to continue existing. They have corrupted almost every organ of economic governance in our government by installing their own people everywhere. These banks must be broken up. Breaking them up would be bad for their highest level overpaid top executives, but good for middle level executives who would have a chance at top positions at the new organizations, and especially good for shareholders who would reap huge additional value. But, more than anything else, breaking them up would be very good for America and its suffering taxpayers and dollar users.
  |     |   Comment #19
As to the auto companies, I have a philosophical aversion to all bailouts. However, there was more reason to bail them out than the mega-banks. The auto makers are part of the industrial base of the USA, which is already hollowed out, and like the rest of us, the auto companies were essentially victims of mega-banker greed and irresponsible derivative issuance. The triggering of those derivatives imploded the world economy, which was not any wrongdoing on the part of auto makers. It was inevitable that the automakers would recover as soon as the disruption ended, and the disruption would be over, now, if not for bailout of the mega-bankers, and the damage to public finances, all over the world, that this caused.
  |     |   Comment #20


Dear Wanderer,

>> I cannot think of anything more effective to restore American prosperity
>> than to put the mega banks out of business.

I can ... and that will be to bring unemployment down to 7% ... 6% ... 5% ... 4%.


>> They and their executives are too big, too politically powerful, corrupt
>> and toxic to be allowed to continue existing.

I agree about too big and powerful.  Not with currupt and toxic.  If they indeed are involved in corruption, then the DOJ is welcome to act.  (In robo-signing the corrupt were punished.)  DOJ can let loose their procsecutors and bring about necessary actions.  I firmly believe in 'innocent until proven guilty'.

>> Special anti-trust laws must be created, above and beyond the ones
>> that already exist, in order to break up the mega-banks.

This is something that I can agree to.  If we are able to create new tailor-made laws to target the big banks, then be it.  It remains to be seen what sort of targetted bill can pass both the house and senate which the President will sign.  More importantly when, if ever this will happen. (BTW this may  put us on the slippery slope .... What industry will come next? ... Who will get into the target zone next?)

Yours Truly,
  |     |   Comment #21


Dear Wandere,

If the government gets into the business of breaking-up the business, then I'm afraid we will lose something important - business friendly environment. We will create toxic environment in the USA where the business cannot grow.  I suspect such a thing actually will be very counter-productive and will in fact ruin America, rather than help it flourish.  The big and successful will always wonder if they will be next.  Apple? Caterpiller? Boeing? ... Who's next?

Yours Truly,
  |     |   Comment #22
If Apple, Caterpillar, Boeing or any other major firm managed to single-handedly destroy the world economy, special laws controlling their activities would also be needed. Mega bankers do not operate in a free market, but, rather, with government facilitation. They co-opt governments through creating central banks upon which governments become dependent. Then, they install Trojan horse operatives everywhere. Mega-banking is a special case, and the mega-bankers need to be dealt with differently than normal bankes, and differently from other industries.

You say, for example, that the robo-signing was prosecuted. But, was it? Not that I can see. Can you name even one individual mega-banker executive who went to jail, or will go to jail? No? That's because, none have or will. The only prosecution was against the hapless and innocent mega-bank shareholders, who did nothing more wrong than own shares of stock. They will pay the fines and penalties, as well as any judgments for money damages. The bank executives, who caused all the problems will not be prosecuted. Can you imagine CFTC Chairman Gary Gensler, for example, authorizing the prosecution of his friends back at Goldman Sachs? Not a chance. Did you watch the TV special where the former US Attorney admitted that he would not prosecute executives at certain
"too big to fail" firms because of the "systemic effect" he believed might occur.
  |     |   Comment #23
I love the way the gov't manipulates the masses.

Break up banks all you want.  It's a good sound bite, one that the ignorant will certainly fall for.  but the "break up" won't do anything meaningful, since all the greed will still be able to hide behind the one thing that stays intact: political connections.

just be realistic. you can run banking scams from banks of virtually any size as long as politicians relax/ignore rules & protect you from the consequences of your crimes.
  |     |   Comment #24

“It is important to understand fraud mechanisms. Economists and lawyers receive no training in fraud. As a result, economists grossly underestimate its prevalence and impact, and prosecutors have exceptional difficulties finding it, even without the political pressure that comes from politicians who owe their elections in part to campaign contributions from people like Charles Keating, who made millions of dollars in campaign contributions and received help worth billions in delaying the inevitable collapse from his fraudulent business practices.”
- William K. Black. Who listed a number of lessons we should have learned from the S&L Crisis that have not been translated into effective governmental action and have contributed substantially to the current Great Recession and international economic instability

  |     |   Comment #25


Dear Wanderer,

I think now we are getting closer to the root-cause of this.

No firm single-handedly managed to destroy the world economy.  Did a firm create toxic mortgages by itself?  ... No.  It takes two to tango.  One greedy banker is not enough to create a toxic subprime loan.  It takes an irrsponsible American on the other side to accept one.  And it takes a firm like S&P to call a bundle of such mortages as investment grade, and it takes whole lot of other investors to buy such bundles.

Can we break up S&P (Mc-Graw Hill)?  It's no bank.  ... so we procsecute it ...

Can we do something about the irreponsible Americans who borrowed beyond their means? ... Don't think so ...

Can we do soemthing about the overseers who were supposed to look after our Financial System?

It is the mess that we have created collectively, so targetting the big banks alone ought not to be the way to go.  (Are we by chance going after the big banks because they have the deepest of the pockets?)

Last but not the least, voters - us!  Did we not create this system over years and decades?  Were we short-shighted not to realize the flaws while we were at it?  Are we shirking from taking the join ownership of this system?

Anyways ... the bottom line is make the necessary laws thoughfully, rather than by some knee-jerk reaction and enforce them.  (And remmeber innocent until proven guilty.)

Yours Truly,
  |     |   Comment #26
here's how the US economy works:

the banks create & implement scams that eventually get too risky and cause calamity.  once the fallout goes viral, the gov't steps in and passes laws that stop the scams from continuing in the short term.  banks play fairly for a few years, while working hard on the next wave of gimmicks.  once the public "forgets" the recent past, banks quietly lobby the gov't to relax the regulatory climate.  then the scams start all over again. 

the gov't just gives you people a little breather here & there.  but, fundamentally, nothing changes.

  |     |   Comment #27
Of course the big banks should be broken up.  Why should there even be a question.  there should be no such thing as too big to fail.
  |     |   Comment #28
Not sure I want to debate this, but having 4 banks control almost half the deposits in the US is anti-competitive and quasi-monopolistic. Our free market system only works if there is fair competition, which is why we have anti-trust laws. I am very pro-business and politically conservative, but I do agree that govt must enforce our anti-trust laws. Without adequate competition, prices will rise and service will suffer if a particular industry is controlled by very few players. This was true for the oil industry in the early 20th Century and it was equally true for the telecom industry 30 years ago. It is also why i oppose the impending merger of American and US Air.
  |     |   Comment #29
What about GM, Obama saved the bigest auto company on earth with taxpayer money at a big loss. Where is the outcry about it, oh, yes, they are unionized, I forgot.
  |     |   Comment #30
Dear Anonymous - #29, Monday, February 11, 2013 - 9:55 PM

Didn't realize GM was a "Megabank". Besides, it was Bush’s decision to use $17.6 billion in TARP money in December 2008 to keep General Motors and Chrysler afloat.
  |     |   Comment #31
To Anonymous - #30.
TARP money were not for GM they were for GMAC the financial unit of GM.
Second, Bush offered GM a low interest loan not a bail out.
I know this for fact., Obama baled out the union at GM with taxpayer money and gave the union 55% controlling stake at GM and wiped out my 8000 shares down to $0.00 and the taxpayer loss is in billions.
  |     |   Comment #32

Re: Anonymous - #31, Tuesday, February 12, 2013 - 11:05 AM

“At the end of 2008, General Motors and Chrysler were bleeding billions of dollars a month, and nobody in the private sector wanted to lend to them. Even the supposedly liberal Brookings Institution put out a report saying they should be allowed to go bust, with their factories and machinery being sold off to the highest bidder. Today, things look very different. A few weeks ago, General Motors reported that it made $7.6 billion in profit last year. Even Chrysler, which is now controlled by Fiat, made money in 2011. On December 19, 2008, a week after Republicans in the Senate had killed a bailout bill proposed by Democrats, saying it didn’t impose big enough wage cuts on the U.A.W., Bush unilaterally agreed to lend $17.4 billion of taxpayers’ money to General Motors and Chrysler, of which $13.4 billion was to be extended immediately. He had to twist the law to get the money. Deprived of congressional funding, he diverted cash from the loathed TARP program, which Congress had already passed, but which was supposed to be restricted to rescuing the banks. After taking office six weeks later, Obama put together an auto task force that extended tens of billions more in emergency financing to Detroit over the ensuing months, and also did what appears to have been a pretty good job in restructuring G.M. and selling Chrysler to Fiat."

Read more: http://www.newyorker.com/online/blogs/johncassidy/2012/03/an-inconvenient-truth-it-was-george-w-bush-who-bailed-out-the-auto-makers.html#ixzz2KiyesN3j

  |     |   Comment #33
Anonymous - #32, GM will fail in couple more years, uaw can not run a company and deal itself raises forever. The retirement obligations will pull the whole company into the pits. Bush made tarp money for GMAC but Obama extended to the whole company and added 10s of billions more for the rescue of the uaw.
  |     |   Comment #34
Re: Anonymous - #33, Tuesday, February 12, 2013 - 10:55 PM

You must not read the news very much (or choose to ignore it):




GM’s U.S. Sales Increase 16 Percent in January

Fri, Feb 1 2013

DETROIT – General Motors Co. (NYSE: GM) announced today that it sold 194,699 vehicles in the United States in January, up 16 percent compared with a year ago. Retail sales were up 24 percent. Fleet sales were down 2 percent.

“The year is off to a very good start for General Motors,” said Kurt McNeil, vice president of U.S. sales operations. “There’s a sense of optimism among our dealers that only comes when you pair a growing economy with great new products."


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