Five Largest Banks Had A Record $1 Billion At Risk During Average Trading Day In Second Quarter

Reuters noted yesterday that the Obama administration’s plan for overhauling the financial regulatory system is “bogged down in Congress,” and in particular has “no clear path forward in the Senate.” One obstacle was removed today with Sen. Chris Dodd (D-CT), who is an advocate of reforms that go even further than the administration’s, deciding to remain chairman of the Senate Banking Committee (instead of moving over to the HELP Committee). This keeps the Banking gavel out of the hands of the bank-friendly Sen. Tim Johnson (D-SD), and also prevents the delays inherent in a transition of chairmen.

However, it doesn’t change the fact that Congress is faced with a “rapidly dwindling legislative calendar” already consumed with health care reform and cap-and-trade. And in the meantime, as the Wall Street Journal reported today, “companies are selling exotic financial products similar to those that felled markets and the world economy last fall. And banks’ appetite for risk has grown”:

The nation’s top five banks collectively stood to lose more than $1 billion on an average day in the second quarter of 2009 should their trading bets go sour, a record level…The $1 billion that the top five banks stood to lose on an average day in the second quarter represents an 18% increase from a year earlier and is up 75% from the $592 million in the first half of 2007, according to regulatory filings.

This illustrates an unfortunate byproduct of the approach that’s been taken towards the banks, which encouraged mergers and didn’t mandate any sort of end for “too big to fail.” “There’s no fundamental change in the way the banks are run or regulated,” said Peter J. Solomon, who runs an investment bank in New York. “There’s just fewer of them.”


As the Washington Post reported, “a series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions.” JP Morgan Chase, Bank of America, and Wells Fargo now each hold “more than $1 of every $10 on deposit in this country.” Along with Citigroup, these banks “now issue one of every two mortgages and about two of every three credit cards.”

This consolidation, along with the banks returning to a pre-crisis business model, lead to the vast amount of risk that the Journal found, all of which makes getting regulatory reform through Congress — including some form of systemic risk regulator and a comprehensive resolution authority for unwinding failed financial firms — even more important. But can Congress find the time to make it happen? Or will the banks be allowed to run wild while regulatory reform languishes?