Here’s An Idea – Let’s Make The Banks Responsible

It’s no secret I can’t stand most banks, particularly Bank of America (BAC). The institution is doing its best to get rid of any customer service that ever existed (fewer tellers, pushing clients to online services, etc.) while airing sappy ads about how much they care. Care about what? Their bonuses? Certainly not their customers.

But even with my long-standing grudge against B of A, I’m not joining the chorus calling for greatly increased regulation or busting them up along with the other big banks.

I’ve got a better idea. Hold them responsible for their actions.

In 2008 the financial world was in a tailspin. JPMorgan (JPM), Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) were desperate for capital as short-term lending dried up and the value of their assets fell. The Fed and U.S. Treasury came to their rescue, providing much-needed loans and seemingly unlimited support. The thinking at the time was that such banks were “too big to fail,” meaning that if they went under, they could damage the entire financial system. They had to be saved.

This happened right after the lending giants Fannie Mae and Freddie Mac were taken over – and bailed out – by the U.S. government.

Both are instances of privatized profits and socialized losses. The years of gains earned by these banks and the mortgage companies were paid out in dividends to shareholders as well as salaries and bonuses to staff. When everything went south, shareholders took a hit in their share price and some staff were fired or saw their bonuses cut, but the pain was short-lived. Bank share prices rebounded some, and banks again payed seven figures to some of the same people who oversaw the crisis.

Over at Fannie and Freddie, the story is a little different, and provides a cautionary tale.

These companies were placed in conservatorship by the U.S. Treasury and given $187 billion in loans. In return, the Treasury demanded certain payment terms, which it eventually scrapped and said simply: “Give us all your profits.” Since the crisis, Fannie and Freddie have paid the U.S. Treasury $240 billion.