How is it that the large banks are still profitable and growing after the financial crisis of 2007-08? How were they able to pay off all their federal debt and still manage to post financial gains? According to Simon John and James Kwak, authors of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown the answer is real simple; the system is stacked for large banks. This Washington-Wall Street relationship has allowed banks to receive special rates by the Feds allowing them to benefit from billions of profits instead of turning around and making that money available for borrowers for a significant premium.
In July of 2011, Democrats in Congress passed the Dodd-Frank reform bill that will impose limits on how big banks can actually grow. They put in place regulation on derivatives and a customer protection that would prevent fraud tactics that some of these big banks like Goldman Sachs is currently getting investigated for. They also plan on closely monitoring these companies to hopefully cut down on the risky, high leveraged transactions.
Kwak and Johnson argue that government regulation needs to find a way to break up the banks that are “Too Big to Fail.” Specifically, they should reform the finance system now, to put in place a modern analog to the banking regulations of the 1930s that protected the financial system for over fifty years. In other words, they should break up the banks that have majority control over our financial systems and are basically holding our economy hostage. Moreover, if there are no banks that are too big to fail, then there will be no unspoken subsidies favoring some banks as opposed to others; creditors will do their part in ensuring that banks do not take too much risk, and banks that do fail will have to be bailed out the tax payers’ expense; ultimately, leveling the playing field, which will make the financial system better able to withstand the next crisis ahead.
According to William R. Gruver, Author of OPM Addition, Another way to handle this situation would be to restrict Wallstreet to private ownership so that the patners who take the risk are held liable for their actions and the risk tolerance will follow accordingly. He mentions in a private partnership, partners faced unlimited personal liability when determining which investment they were going to make. Therefore, a partner is solely liable for all of his actions. When deciding to go public, their attitudes changed because there was limited liability. So if they (the owners) made a bad investment, they would only be liable to pay “partnership” money, not their entire savings account.