Ohio Sen. Sherrod Brown (D) took the Senate floor today to argue against Wall Street mega-banks that have been deemed “too big to fail” and thus receive the implicit backing of the federal government, arguing that lawmakers should act immediately to break up the big banks that now have assets worth more than three-fifths of the American economy.

Wall Street banks sparked the financial crisis in 2008 and were rescued by the federal government. Congress passed the Dodd-Frank Wall Street Reform Act in 2010, but many of its rules have yet to take effect and banks are even bigger today than they were before the crisis. They are also just as scandalous, as financial institutions have faced lawsuits over mortgage and foreclosure fraud, money laundering, interest rate-rigging, and other practices. That, Brown said Thursday, should drive lawmakers to learn from past mistakes and break up the big banks to protect the health of the American economy:

BROWN: In the last five years alone we have seen faulty mortgage-related securities; foreclosure fraud; big losses from risky trading; money laundering; and Libor rate rigging. [...]

How many more scandals will it take before we acknowledge that we can’t rely on regulators to prevent subprime lending, dangerous derivatives, risky proprietary trading, and even fraud and manipulation?

Wall Street has been allowed to run wild for years. We simply cannot wait any longer for regulators to act. These institutions are too big to manage, they are too big to regulate, and they are surely still too big to fail.

Watch it:

Two decades ago, the six largest Wall Street banks held assets worth just 16 percent of the American economy, Brown said. They now hold assets worth more than 60 percent of the total economy:

Brown has emerged as a leading critic of Too Big To Fail in the Senate, and his efforts have attracted bipartisan support. Louisiana Sen. David Vitter (R) joined Brown’s call for action on the Senate floor today, and Iowa Sen. Chuck Grassley (R) has ripped big banks for holding a “get out of jail free card” and, with Brown, has urged the Department of Justice to prosecute large banks for fraudulent practices.

London became one of the globe’s primary financial hubs partly through its so-called “light touch” regulatory approach — effectively trusting some of the world’s largest and most powerful banking enterprises to manage their own affairs without much government intervention. As a result, the U.K. central bank alternately ignored the burgeoning business of LIBOR-rigging and actively colluded in it at some level, advising banks to raise or lower their estimates in order to create an illusion of stability in the system.

For those not versed in the acronym-littered world of international lending, LIBOR stands for the “London Inter-Bank Offered Rate.” It represents the interest rate banks pay to borrow from each other for a short-term period in ten different currencies and 15 separate durations.

The strange bit comes in during the creation and publication of the rate — a survey of various banks’ estimates of the rate they think they would pay to borrow, for instance, 10 million yen for a one-week period. Those estimates are aggregated, the lowest and highest are knocked out, and the rest are averaged and published each day by the British Bankers’ Association, a private trade organization.

It wouldn’t take a financial mastermind to see how traders could abuse this system. The LIBOR represents a benchmark for derivatives and securities with a nominal value of $350 trillion or more. Skewing the rate by a single point could generate hundreds of thousands of dollars in paper profits, as Bloomberg News showed last week:

There were no rules at RBS and other banks prohibiting derivatives traders, who stood to benefit from where Libor was set, from submitting the rate — a flaw exploited by some traders to boost their bonuses.

The next morning, RBS said it would have to pay 0.97 percent to borrow in yen for three months, up from 0.94 percent the previous day. The Edinburgh-based bank was the only one of 16 surveyed to raise its submission that day, inflating that day’s rate by one-fifth of a basis point, or 0.002 percent. On a $50 billion portfolio of interest-rate swaps, RBS could have gained as much as $250,000.

Of course, it’s not as if the banks are getting away scot-free — Barclays Bank coughed up more than $400 million in fines last summer for its part in the scam, Swiss giant UBS paid over $1.5 billion to regulators on both sides of the Atlantic, and RBS will probably pay close to $800 million in settlements, Reuters reports.

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Our guest blogger is Daniel Pereira, Managing Editor at Brafton Inc.

Citigroup CEO Vikram Pandit was pushed out the door of his company in October after overseeing a precipitous decline in his bank’s value. Overall, Citigroup lost nearly 90 percent of its stock price during Pandit’s tenure. But that won’t stop Pandit from walking off with $6.7 million for his last year on the job:

Citigroup said Friday that the former CEO, who resigned last month in a management shakeup, will receive an “incentive award” of $6.7 million for his work at the bank this year. Former president and chief operating officer John Havens, who stepped down along with Pandit, is getting $6.8 million, according to a filing with the Securities and Exchange Commission.

The two men will also continue collecting deferred cash and stock compensation from last year, awards valued at $8.8 million for Pandit and $8.7 million for Havens.

The company suffered a profit loss of 88 percent during the third quarter, when Pandit supposedly earned his “incentive award.” During his time at Citi, Pandit made some $260 million in total compensation, even accounting for the year he took a $1 salary during the financial crisis.

Several Wall Street heavyweights have recently said that banks need to rethink the sky-high compensation they’ve been paying (which has helped exacerbate the nation’s income inequality). For instance, Morgan Stanley CEO called the financial industry “overpaid.” “There’s way too much capacity and compensation is way too high,” he said.

A new regulation meant to prohibit federally-insured banks from engaging in risky trading practices will cost the nation’s largest financial institutions more than twice as much as originally estimated, according to a new analysis by ratings agency Standard & Poor’s. But the rule would also make those banks less of a risk to the U.S. economy, S&P found.

The Volcker Rule, which will keep banks that are backed by taxpayers from engaging in the risky proprietary trading that played an outsized role in bringing down the financial market four years ago, will cost the nation’s eight largest banks up to $10 billion in annual profits, two-and-a-half times as much as S&P estimated in 2010:

“We currently estimate that the Volcker rule could reduce combined pretax earnings for the eight largest U.S. banks by up to $10 billion annually, up from our initial $4 billion estimate two years ago,” S&P said today in a statement announcing a new report on the issue.

Still, that will hardly put a dent in their collective profits. The eight banks — JP Morgan Chase, Morgan Stanley, Bank of America, Goldman Sachs, Wells Fargo, U.S. Bancorp, Citigroup, and PNC — earned more than $63 billion in combined profits in 2011 as Wall Street continued to rebound from the financial crisis. JP Morgan ($19 billion) and U.S. Bank ($4.9 billion) each posted record profits last year; Wells Fargo ($15.9 billion) and Citigroup ($11.3 billion) joined JP Morgan as the three banks to earn more than $10 billion in profits individually.

And, as S&P noted, less risky trading will lead to safer banks. “The implementation of the Volcker rule could have favorable implications for the credit profiles of some of the largest U.S. banks, such as reducing trading portfolio risk,” S&P said. “This risk mitigation could lessen revenue and earnings volatility, which we would view favorably.”

Wall Street has attempted to water down the Volcker Rule since its insertion into the Dodd-Frank Wall Street Reform Act in 2010. They were successful in lobbying for a loophole that allowed them to continue some risky trading practices, and since the law’s passage, the banks have attempted to make the rule even more tepid. Regulators are scheduled to finalize the proposed rule by the end of this year.

A new study from economists Arnoud Boot at the University of Amsterdam and Lev Ratnovski at the International Monetary Fund shows that banks trade too much, so new regulation is necessary to keep the world’s biggest banks from posing a risk to the entire global economy.

Boot and Ratnovski’s study found that excess capital generated from traditional banking activities allows banks to gamble on risky trading, and since the biggest banks have more capital, they gamble even more. This causes a diversion of capital toward trading that adds instability to financial markets.

And because banks will always engage in such trading, the best way to prevent it is through regulation like the Volcker Rule, a provision in the 2010 Dodd-Frank Wall Street Reform Act that would prevent banks from making risky trades with taxpayer backed dollars:

Our results highlight the dynamic problems in universal banking and sheds light on the desirability of restricting bank activities of the type that were recently proposed by the Volcker rule in the U.S. and the Vickers report in the UK.

Originally one of the strongest provisions contained in Dodd-Frank, the Volcker Rule was watered down by Republican senators and bank lobbyists so much its namesake Paul Volcker is no longer satisfied with it. But recent trading losses like the one sustained in JP Morgan Chase’s “London Whale” trade have caused the rule’s authors to urge regulators to strengthen it before it is fully implemented.

According to Boot and Ratnovski, banks that are allowed to engage in risky trading will always do so because it allows them to gain larger profits. Because of this, the supermarket banking model — in which banks both lend and act as investing houses — “is no longer sustainable.” That’s a view shared by many former bankers, including former Citigroup CEO Sandy Weill, who helped pioneer the expansion of banking institutions into trading and other services.

The growth of high-frequency trading is beginning to catch the attention of federal regulators at the Securities and Exchange Commission as criticism mounts that the U.S. is far behind the curve when it comes to monitoring and regulating a computer trading industry that has added threatening levels of volatility to financial markets.

That explosion has caught the attention of leaders in the financial industry too, after high-frequency trading caused multiple “flash crashes” that sent stocks plummeting. The growth of high-speed trading, as well as the potential damage it can cause, is “terrifying,” one chief executive told the Wall Street Journal:

“It’s terrifying,” said Mark Gorton, chief executive of Tower Research Capital LLC, which is among the biggest high-frequency trading businesses in the U.S. Tower uses complex computer programs to trade stocks, currencies and other securities at speeds measured in fractions of a second. Such firms have come to account for the majority of trades in the U.S. stock market and are expanding in trading of foreign currencies, commodities and fixed income.

“Everyone’s sitting there saying, ‘This could happen to me’ ” said Mr. Gorton.

Gorton isn’t the only person within the industry to express concern. Last month, one of high-frequency trading’s pioneers said that the current explosion contains “absolutely no social value.” It’s been two years since officials at the Federal Reserve Bank of Chicago warned regulators that high-speed trading was becoming increasingly dangerous.

Other countries, like Germany, have moved to curb high-speed trading, and lawmakers in the U.S. have proposed a financial transactions tax that would limit the number of computer trades by making them more costly. The SEC, though, is only “planning to catch up” with other countries, and it held meetings in Washington today to assess how it could better regulate the practice.

New York Attorney General Eric Schneiderman (D) has filed a civil lawsuit against JP Morgan Chase alleging “widespread fraud in the sale of mortgage-backed securities,” the Wall Street Journal reports. The suit is the first action brought by the Obama administration’s mortgage fraud task force, which Schneiderman chairs.

The residential mortgage-backed securities (RMBS) in question were actually tied to Bear Stearns, the failed financial institution that JP Morgan acquired before the 2008 financial crisis.

According to the suit, filed in New York state court, the bank was “aware that many of their loan originators were selling defective loans but continued to buy and securitize those loans,” and, similarly to the “shitty deals” peddled by Goldman Sachs bankers, had openly touted the bad packages they were selling:

Other internal communications reflect Defendants’ awareness of the bad quality of loans that were being included in other securitizations. In connection with the Bear Stearns Second Lien Trust 2007-1 (“BSSLT 2007- 1”) securitization, for example, one Bear Stearns executive asked whether the securitization was a “going out of business sale” and expressed a desire to “close this dog.” In another internal email, the SACO 2006-8 securitization was referred to as a “SACK OF SHIT” and a “shit breather.”

Still, the bankers led investors to believe they “had carefully evaluated – and would continue to monitor – the quality of the loans in their RMBS. In fact, Defendants systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans.”

By 2006, Bear Stearns’ RMBS business was the largest and most profitable on Wall Street, with its 345,000 securitized loans worth $69 billion. Between 2003 and 2006, it securitized $212 billion in loans, according to the suit.

“We intend to follow up with similar actions against other sponsors and underwriters of RMBS,” an official in Schneiderman’s office told the WSJ.

Two years ago, the Federal Reserve of Chicago warned the Securities and Exchange Commission about the dangers high-frequency trading posed to financial markets and the overall economy, but SEC regulators have been slow to move on reforms and rules that would limit the practice, according to a Reuters report.

High-frequency trading has caused multiple damaging “flash crashes” in the two years since, and the SEC has instituted small reforms aimed at mitigating the damage. But it is still dragging its feet on large-scale proposals by the Chicago Fed and other proponents of limiting the practice, Reuters noted:

The Chicago Fed said exchanges and other trading platforms should install more risk controls, even if it slowed down trading, including a “kill switch” at the trader workstation level. “The competitive quest for greater and greater speed must be balanced with appropriate risk controls so that a clearly erroneous trade does not destabilize markets by precipitating a cascade of other trades in response,” the Chicago Fed’s then Financial Markets Group Senior Vice President David Marshall said in the submission. [...]

And still the move towards reforms has been slow.

Proponents of limiting high-frequency trading include Thomas Peterffy, the man who pioneered computer-based high speed trading in the 1980s. In an interview with NPR’s Planet Money, Peterffy said the speed of today’s trading, which earns traders and firms millions of dollars in revenue by speeding up their ability to make transactions, “has absolutely no social value.” And still, with little oversight from regulators, high-frequency trading has exploded, as this chart from the market research firm Nanex shows:

Germany last week became the first country to make an explicit move toward limiting high-speed trading when its lawmakers approved draft legislation that would require licensing of all trades and limit the number of overall trades made at high-frequency. In the United States, Democratic lawmakers have proposed a return of the financial transactions tax, which would limit trading by levying a small tax on transactions. Such a plan would generate billions of dollars in revenue each year, according to Rep. Peter DeFazio (D-OR), while limiting the market volatility and sudden crashes that occur when high-frequency trades go wrong.