Guest Post: If Government Won’t Break Up the Giant Banks, Let’s Do It Ourselves

Preface: As always, my views do not necessarily reflect those of the owner of this site, Yves Smith.

As everyone knows, the economy cannot permanently recover and truly stabilize until the giant banks are broken up. The top independent experts agree that the “too big to fails” are a drain on the economy and put the entire system at risk.

The giant banks aren’t lending much to the people who need it. Fortune pointed out in February that smaller banks are stepping in to fill the lending void left by the giant banks’ current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven’t been able to expand and thrive is that the too-big-to-fails have decreased competition.

Federal Reserve Governor Daniel K. Tarullo said in June:

The importance of traditional financial intermediation services, and hence of the smaller banks that typically specialize in providing those services, tends to increase during times of financial stress. Indeed, the crisis has highlighted the important continuing role of community banks…

For example, while the number of credit unions has declined by 42 percent since 1989, credit union deposits have more than quadrupled, and credit unions have increased their share of national deposits from 4.7 percent to 8.5 percent. In addition, some credit unions have shifted from the traditional membership based on a common interest to membership that encompasses anyone who lives or works within one or more local banking markets. In the last few years, some credit unions have also moved beyond their traditional focus on consumer services to provide services to small businesses, increasing the extent to which they compete with community banks.

But the government – instead of breaking up the giant banks who aren’t lending to the people who need loans – is trying to prop them up using permanent bailouts. See this, this, this and this.

And – instead of separating different business activities (such as depository banking functions and speculative investments) – the government is actually allowing companies to get involved in a wider variety of business activities.

For example, economist Simon Johnson points out that Goldman Sachs recently converted to a “financial holding company”, allowing Goldman to borrow money from the Fed at essentially no cost, and then invest it in any thing it wants. Johnson gives an example: Goldman bought a large share of the stock of a Chinese automaker. If the investment succeeds, Goldman will reap the profits. If it fails, the American taxpayers are on the hook.

And Goldman is apparently profiting from its combination of roles as both an investment brokerage house for other investors and as a large speculative investor itself. Specifically, Goldman apparently delays trades it makes for its clients long enough to use that inside knowledge of who is buying or selling what to make speculative investments for itself , oftentimes taking the exact opposite position for itself and its largest clients as the position it is recommending to its Mom and Pop investor clients.

Why are politicians letting this happen?

Could it be because the giant banks have bought and paid for Congress and the White House? See this, this and this.

We’ll Have to Do It Ourselves

If the government isn’t doing anything to fix this dangerous situation, we’ll have to do it ourselves.

As a start, if Congress won’t reimplement the Glass-Steagall Act (the Depression-era law which previously separated depository functions from speculative investing), let’s manually separate these two types of businesses.


Simple: let’s pull our money out of the too big to fails and put it into small community banks and credit unions.

The giant banks may still make bucketloads of cash on their casino style speculative gambling (for now, at least), but after we’ve moved our deposits to more responsible, smaller banks which don’t gamble as much, then we will have manually separated depository banking functions from the giant banks’ speculative investing.

Get it?

The government isn’t doing the job and fixing the problems which have led to the economic crisis … so we’ll have to do it ourselves.

Note: Some people say that moving our money out of the too big to fails will just mean that the government will give them more bailouts. But this misses 3 points:

  1. If the deposits are withdrawn, the giant banks will only be speculative gamblers, and at least our deposits will be safe and won’t be mixed with their toxic assets
  2. The giant banks and their enablers in Washington will look even worse if they are bailing out companies that are solely and obviously gambling casinos
  3. The head of the International Monetary Fund, Dominique Strauss-Kahn, has warned:

    The public will not bail out the financial services sector for a second time if another global crisis blows up in four or five years time, the managing-director of the International Monetary Fund warned this morning.Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy.

    “Most advanced economies will not accept any more [bailouts]…The political reaction will be very strong, putting some democracies at risk,” he told delegates.

In other words, the government – fearing revolt – might be more hesitant to give another round of bailouts than people assume.

I’m not looking at this with rose-colored glasses, and I realize that the TBTFs will act like the kid who killed his parents and then cries for pity since he’s an orphan.

But I think that if the government is not doing its job, we should do it ourselves, and that a focused gesture of taking things into our own hands can only help.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


  1. Robespierre

    Not a bad start but I like Karl Denninger better:
    “We can also decide we won’t pay debts that are owed these banks, declaring that we’ll recover our part of the trillions of dollars these institutions stole unilaterally through offsets. Done en-masse there isn’t a thing the banks and credit agencies could do about it, and if done in sufficient numbers as an act of mass protest FICO scores would become meaningless as well.”

    I would, however, think that this “movement” would succeed only if it can hire an army of attorneys to defend the public (the defense the Obama refuses to provide). These attorneys could be paid with a percentage of the money not paid to the banks for example. In a way Americans may form a debtors cartel of sorts. Of course all these ideas are hypothetical and I’m in no way encouraging people to break the law.

    1. anonymous

      I fail to see the benefits implied for the “consumer” of this country from the bailout. I have an uncomplicated home mortgage, of about $220k. I was ready to streamline last february to about 5.1%, when the bank (USBank) told me they thought it would be best to wait and see how they implemented the “Obama” plan. I took their advice. By the time they were able to give me answers they had ensured that I could not refinance at the 5.1%, and all they were willing to offer me is a “deal” where I could forgo 2 payments and they would add them on to the back end of my loan with 2 additional months… and oh, by the way, it will affect your credit as a late payment. Gee, thanks. They took the handout, then implemented as many internal policies and rules as they could get by with to make certain they didn’t have to change anything. I have NEVER been late on a payment, even when I was unemployed for almost a year. It ate up all my savings, and that $200-300 a month difference would be very helpful. If I have never been late on a payment, wouldn’t reducing my payment make me an even more secure investment?
      What gives? I’ll tell you… Obama is as much in the game as anyone else, if not more. Lining the pockets of big wig executives and corporations, just not as overtly as other administrations may have been in the past.

      1. Right time to act

        the back-end deal is something they are pushing a lot lately. I to experienced this and have heard a number of people late last year be told the same thing from their mortgage co.

        I learned one thing from this for sure, never take advice from your mortgage company. They will always guide you down a path that financially benefits them. If you gain, then good for you, but that’s not their intention.

  2. Ronald

    “The giant banks aren’t lending much to the people who need it.”

    ” instead of breaking up the giant banks who aren’t lending to the people who need loans – is trying to prop them up using permanent bailouts.”

    The bailouts were sold to the public on the basis that cheap money and lower lending standards would become the norm once again. Just who are these folks that need a loan but are being ignored by the giant banks? Do you really expect a local community bank to suddenly lower their lending standards and start another round of fog a mirror lending?
    Volcker has presented a series of excellent proposals to deal with the current banking system but neither his nor your idea resolves the on going structural problems facing the economy going forward. Excessive credit creation is not a replacement for productive economic activity.

  3. Wisdom Speaker

    Mr. Washington, here are two more (and, I submit, much stronger) reasons to pull money out of the TBTF banks:

    (1) If you put your money into a bank, you are lending to it. They in turn are doing things with your money, lending it out further. Can anyone in good conscience sleep soundly at night, knowing (or not!) what the TBTF banks are doing? I thought not.

    Put your money where you can be proud of the uses to which it is lent! (This actually applies across the board to all investments.)

    (2) If enough people boycott the TBTF banks, the politicians will notice the shift in the balance of power. The banks may complain, and their money (OUR money!) still talks, but their political power is getting closer to the breaking point. Witness, for instance, Senator Dodd choosing not to run again and be vilified by his own constituents. The more messages get sent to the political leadership by the outraged taxpayers, the quicker things may change. We cannot afford to have another crisis, another bailout, another rushing of 1000 page bills through without giving anyone time to read it, another pseudo-“bipartisan” vote to give handouts to bankers despite 99+% public opposition. And I say pseudo-bipartisan because it’s clear the Squid has control of both parties. The first party to break loose will control the government.

  4. b.

    The problem is that this blighted nation is all talk and no action. Half of the citizens cannot be bothered to vote, and a vast majority would never put its money where its mouths are. Hence, any practical proposal that effects actual change will get “No Comments”.

  5. W.C. Varones

    I agree with Robespierre. Stop paying your credit cards and then settle with the scumbags for pennies on the dollar.

    Also, send their credit card offer postage paid reply envelopes back to them full of gravel.

  6. John in Paris

    Actually if GS is delaying customer trades and front running them, I don’t see how you can call this a “speculative investment”. It is simply dirty pool.

  7. Cullpepper

    I’m all for it, but how do I stop getting taxed, which is then used to bail out these same banks?

    This doesn’t seem like a real work-around to me, as long as the gov’t can run the deficit as large as they like.

  8. pangloss

    There’s only one way this will get resolved. The country is now supporting two parasitic sectors: FIRE and national/homeland security. The two have coexisted so far, but the weakened host can no longer support both species of parasite without collapse. So one sector will have to assert dominance to get the diminishing trickle of blood from the national turnip. My guess is we’ll go Russia’s way: the security sector has superior coercive know-how. It can use the executive’s emergency powers to intimidate or liquidate the financial oligarchs. This will happen independent of party politics, taking the same course whether the figurehead is GOP or Dem. So relax, for a while the pendulum was swinging toward debt peonage as the dominant mode of social control, but soon we’ll all be kept in line with tasers and surveillance instead.

  9. Ina Pickle

    I think that it works precisely because it is not terribly effective against the banks: in a real market, having no customers willing to deal with a bank any more should have an impact on its practices. It won’t. I think that will be interesting to see – evidence that the “bank” portion of the business, like Meredith Whitney keeps saying, is dead and buried as far as profits to the TBTFs are concerned.

    Second, I agree that it sends a message about people willing to vote against politicians owned by the TBTFs. If you go through the annoyance of changing all your ETFs, you are quite likely to be willing to show up at your polling place on the same issue for less annoyance and a lower cost.

    As far as using a local bank is concerned, that is something we should all be doing anyway. When was the last time you saw a local little league team with BOA on their shirts? Spend your money where you live, and where it will get recycled into your community.

  10. Moopheus

    In addition, one could take the further step of holding some of your funds completely outside of the banking system as cash.

    I agree that moving money is a good start. It’s not an ideal solution to the overall structural problems, but on the other hand, it’s clear that no solution is coming from Wall Street, and no solution is coming from Washington. So we have to do it.

    But to be effective, I think you have to go further–you really have to pull out from all the ways these guys make money. Stop using your credit cards. Stop making contributions to your 401K. Stop buying stocks, bonds, or any other investment thing. Drain as much funding from Wall Street as possible.

  11. Clampit

    The only relation I have left with a dino-bank is my credit card. I pay the entire balance monthly and take full advantage of the mileage and buyers insurance perks. I know banks don’t like customers like me, but is there still marginal revenue here or is the couple percent retailers pay actually not enough to cover services provided?

    Just curious, as I’m about to switch this to a local bank as well…

  12. K Ackermann

    All bank bonuses should be placed into an account that doesn’t pay out until the unemployment rate stays at 5% or under for one year.

    In the meantime, loan that money to small businesses. It will help them get their bonuses faster.

    Now… go off, and make it happen.

  13. Dave of Maryland

    Closing accounts with TBTF banks & opening them with mom & pop savings & loans is a non-starter. Waste of time.

    GS & their ilk will go where the money is. Doesn’t make any difference where that may be. Local banks? No problem! GS sends out a fleet of salesmen to the local rubes with too-good-to-be-true offers. Custom tailored. And suckers them, just like Madoff suckered his clients. A fool and his money…

    I would argue the opposite. Move your money TO BoA, Wells, Citi, et al. They’re backed by the full faith & credit of the US Treasury. Soon to loose it’s AAA status, but hey, even so, they’re still the only game in town.

    1. George Washington Post author

      USA Today pointed out in August 2008:

      Credit unions are regulated by the National Credit Union Administration, or NCUA, or by state agencies. The NCUA oversees the safety and soundness of all credit unions…

      What about your asset protection? Credit unions are backed by the NCUA, through the NCU Share Insurance Fund, which is backed by the U.S. government. Individual accounts are backed up to $100,000, with additional coverage up to $250,000 for certain retirement accounts. Joint accounts may qualify for coverage of up to $200,000.

        1. Dave of Maryland

          And what have guarantees by regulatory bodies been worth? The FDIC is near bust. Why? Because the individual banks were scammed. Are there rules that would prohibit S&Ls from being scammed? Sure. Can the regulators be compromised? Can the underlying laws be rewritten? He who has the gold rules. Do we live in a free country, or what?

          All of this avoids the real problems: One, How to get rid of the bankers once & for all. Two, How to get a responsible government that will do that.

          Which means we have a government problem, not a “banking problem”. GS & Wall Street & the corporations are doing what they will always do. What they were intended to do. Make money any way they can.

          We have a government problem, and it’s clear that elections will not fix it. We need a more fundamental fix. Forty years ago there were calls for a Constitutional Convention. Which would be a fundamental reworking of basic rules. But, 40 years ago, there were also thousands of protesters in the streets.

          Shifting money from one cubbyhole to another is no solution, because cubbyholes aren’t the problem. Refusal to pay taxes gets you to the heart of the matter.

  14. KayBee

    From Time Magazine (January 13, 2010)
    “In the next week or so, Goldman and other large financial firms will hand out an estimated $140 billion in 2009 bonuses. Goldman alone is expected to enrich its employees by $18 billion.”

    Read more:,8599,1953136,00.html?xid=rss-topstories#ixzz0cXlPyKaJ

    This just infuriates me! These people have ruined people’s lives, people’s life savings, zapped entire 401Ks. Why are trying to DESTROY us! And they have not an ounce of compassion. I’m here busting my ass trying to keep a roof over my head. Sometimes I think, why am I working so fucking hard, I got robbed anyway!

    I am very angry. Families are in the streets, spouses who have lost EVERYTHING murdering their entire families because they don’t see a way out. Yet Congress REFUSES to regulate these vampires. These people should get NOTHING but orange jumpsuits and flip flops. I’m shaking with anger right now.

  15. Doc Holiday

    Let’s pull our money out of the too big to fails and put it into small community banks and credit unions.

    I agree 100% and this was a great post! Thank you!!! I also think people need to be looking at the corporations they support and question if they should continue as is, or look at ways to find alternatives to insane global fascism!

  16. FrankT,

    Someone should post a list of community banks and credit unions. I still deal with the TBTF bastards for convenience, but I have about 700K in their money market funds — eatrning very little. I would like to move it to some small institutions provided they are FDIC omsured and pay me a little more than the vampire banks are offering. Someone needs to put up a list (we could even buy their stock as well in the case of small banks).

    1. Moopheus

      That’s right–that money goes straight into wall street funds, and you lose virtually all control over what happens to it. It’s theirs to play with as they see fit.

  17. joe

    The tax payers essentially own the banks, because we bought them on the cheap when they were about to fail. Why not just tax ALL the profits away so they can’t afford big paychecks and let all the good talent go somewhere else and start new banks or work at hedge funds? then we would see if these bankers can really support all these big paychecks when competition has been thinned out…..

  18. michael

    I had been digging for a few months, to find a local small bank. But it had to be in better shape than the TBTFs, for not jumping from the frying pan into the fire. And now 2 weeks after I figured how helps me finding one, they assist to put up this easy to use site! 8-)

    So I’ve switched, now I’m with a good rated local bank.
    Fees are the same or less than with big C, including ATM fee refunds, only the occasional wire transfer is a bit more expensive.
    And just as much FDIC insured, for what it’s worth.

  19. Doc Holiday

    Great job here by people showing ways to find new banks! This is the power of the web and it would be great to see Yves and other bloggers keep this thinking on page one. We all need to scare the shit out of wallstreet!

    As I recall, with great dis-satisfaction, a lot of little people with pennies elected Obama, so it makes sense that these same people can bring wall street down( if they put their minds to into real change that you can see)!

  20. killben

    While I agree that moving your money out is one good way … it could take time …

    The fastest way is Walking away from underwater home enmasse. All people who are underwater should walk away from their home. This would simply break the TBTF Banks’ back and more importantly it would be difficult for the Fed and Treasury to come to their rescues. No bailout will work when there is A DELUGE OF JINGLE MAIL.


    Then let us sit back and watch these TBTF Banks become TBTR (Too Big To Rise) Banks and that will be a great sight to behold!!

  21. Mary

    How about a call for citizens to learn about money management-through and through. Money management is a lifelong process and all too often the media (in all its forms) suggests that “little people” can’t understand money management and investing. That these things are complicated and should be left to professionals. Totally false. To make one’s own decisions about about one’s own money requires sixth grade math skills. It does not require algebra, calculus, or any advanced math. It does require a desire to be involved in one’s own financial interests and to be willing to learn (forever).

    To switch to a “local” bank isn’t enough. Making financial and investing decisions all on one’s own throughout life are far more important.

  22. Theta

    Maybe someone can help me with this. At first blush I am totally for pulling all of your money out of big banks, cutting off 401k funding, no stocks, etc. BUT I’ve seen a number of articles talking about the current run up in the stock market as being fueled by the hedge funds and pension funds and bailout dollars. Even if, say, 60% of people managed to pull their money out of the banks, what would that accomplish? The money sloshing around the system is still there, and that’s where the banks are getting their fantastic returns. Being undercapitalized never stopped them before, and as long as I pay taxes I contribute to the system.

    Another option is for everyone to default on credit cards and all bank loans, but the endgame of that is going through bankruptcy and having your assets confiscated to pay off your debt. Seems like, at best, just handing over everything you own to the banks and, at worst, causing enough of a backlog in bankrupcy courts that the banks have time and statistics to justify further bailouts and stricter bankrupcy legislation.

    I don’t like to be cynical, but it seems to me that we’re stuck until the parasite overgorges itself and pops.

    1. Moopheus

      Here’s what it comes down to: you can choose to participate in a corrupt system, or you can opt out. Don’t kid yourself: tehy still need you and your dollars, and want you to feel small and insignifant so you continue to play the game.

  23. asphalt_jesus

    TBTF institutions make more money on internal investment operations than they do on plain-vanilla lending. Shareholders will not accept lower returns on their investment. Period. Therefore, no amount of demanding or wishing will increase their lending operations.

    Take your money out of the TBTF institutions. Go ahead. It’s business as usual anyway for them because they aren’t using your FDIC insured funds to generate their reported returns. Plain-vanilla banking operations are essentially there to up-sell you into their investment operations.

    While some satisfaction may come from switching, a better example of an action designed to penalize the TBTF institutions would be to limit their access to cash by forbidding your 401k operator from investing in TBTF institutional products and services. To turn this action into more than a pogrom is an ethical standard an institution must pass. In exchange for the lower returns that come with following an ethical standard, more customers.

    I enjoy these topics. Switching to a local institution will not address anything.

  24. Wendell MacKenzie

    If GS is frontrunning trades and screwing the average joe investor, then the regulatory bodies should encourage the developers of the IT systems that enable this activity to go states evidence and provide immunity from prosecution if they spill the beans on what they know and can prove.

    Enough of the corruption already!

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