Robert Reich on Investment Banks
Robert Reich | JPMorgan and Goldman Sachs
Late last year JPMorgan was the recipient of $25 billion in bailout loans through the government's Troubled Asset Relief Program. But today is a different story, as JPMorgan performed well beyond analysts' expectations with an impressive second quarter. The second quarter earnings increased by 36% over the first quarter of this year to $2.7 billion. With that performance, JPMorgan has joined Goldman Sachs as a top investment bank that went from bailout to produce huge earnings. Goldman Sachs, which also received government help, emerged from the pile by earning $3.44 billion in the second quarter. Both firms are now set to be the top firms on Wall Street. The high earnings in comparison to the other investment banks, which have struggled to overcome the damage of the global financial crisis, allows them to outspend their competition. They can now use the profits to buy top talent from the other investment banks and further accumulate profits by charging clients higher fees along with other advantages that come from being the biggest on the Street.
Robert Reich, a Professor of Public Policy at UC Berkley is critical of the top-performing firms and sees a greater role for the government in overseeing the powerful banks. He believes that antitrust enforcers should be charging the banks a hefty insurace fee in exchange for marking them "too big to fail" giving them the assurance that they will be bailed out if risky choices don't pan out. Professor Reich argues that even though both banks have repaid their federal loans the governement should not allow the banks to influence the debate over financial regulations--especially in regards to derivatives trading. He prescribes the following:
Antitrust law was designed to prevent just this sort of market power and political heft. The Justice Department or the Federal Trade Commission should investigate the new-found dominance of Goldman and JP -- and, if warranted, break them up. Alternatively, Congress should impose a surtax on the newly-exclusive group of Wall Street firms, most notably Goldman and JPMorgan, which are now backed by implicit government bailout insurance guaranteeing that, should they get into trouble, taxpayers will keep them afloat. The surtax would approximate the economic benefit to these firms of such government largesse, which I'd estimate to be at least 50 percent of their profits from here on.
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