There was a time not so long ago when the biggest banks in the country had revenue coming out of their ears. The financial sector was the biggest in the U.S. economy, providing millions of jobs in the "New Economy," where producing goods was out and providing services was in.

In another measure of perceived greatness, financial sector stocks made up a larger portion of the S&P 500 than any other group.

These banks were a far cry from how banks had made their money in the past, the basic business of taking core deposits and lending. These admirals of modern industry had found lucrative new streams of cash from mortgage origination, selling complex insurance derivatives and creating hedge funds and pools of private equity.

When the Big Started Getting Bigger
The consolidation of banking and financial services within the U.S. was not a new trend. Ever since the passage of the Gramm-Leach-Bliley Act in 1999, which allowed banks to also engage in the business of insurance and investments, the creation of mega financial institutions has been a big theme. Banks saw the opportunity to cross-sell investments, insurance and mortgages to their customers. And for many years, it seemed like a perfect business model.

Citigroup kicked off the mega-mergers in 1998 with the absorption of insurance group Travelers. In 2000, Chase Manhattan acquired J.P. Morgan to create JPMorgan Chase & Co., creating a behemoth in both deposits and investments.

Bank of America went out and purchased FleetBoston Financial (at the time a top-10 bank in the U.S.) for $47 billion in 2004, then spent $35 billion to acquire credit card company MBNA in 2005.

All along the way, shareholders applauded the consolidation, seeing "synergies" and the ability to cut costs and theoretically provide cheaper services to clients. Meanwhile, a surging housing market had all these banks handing out mortgages like a hot dog vendor, while relaxed standards on leverage allowed them to invest 20-, 30-, even 40-times their assets in the now infamous CDOs, CMBSs, CDSs, CMOs and a slew of other ill-begotten acronyms.

The Great Recession and its Fallout
In 2008, 25 banks fell under the control of the FDIC, eight times more than the previous three years combined. In 2009, 95 more banks have failed, putting immense strain on the FDIC. This strain has led the FDIC to recently announce they would be requiring banks to prepay three years' worth of insurance premiums to beef up the FDIC's depleted insurance fund.

And it hasn't just been small regional banks that have imploded. IndyMac bank failed in July of 2008. At the time, it was the biggest savings & loan in the Los Angeles area and a top-10 mortgage originator in the United States.

Washington Mutual went under in September 2008, the single largest bank failure in history by assets. JPMorgan assumed most of WaMu's assets, including the assumption of over $30 billion in losses.

Merrill Lynch was put into a pre-packaged sale to Bank of America when it was on the brink of collapse. A similar arrangement was reached with Bear Stearns' acquisition by JPMorgan Chase and Countrywide Financial by Bank of America.

Where Are They Today?
JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo remain the four largest banks in America. But in the past year, hundreds of billions in assets have been wiped off the books, and the combined market capitalization of this group is about half of what it was in 2007.

For better or worse, there is more consolidation within the banking world today than ever before. For a country grappling with the moral consequences of "too big to fail," there are important questions to be answered. How much leverage should institutions this large and pervasive be allowed to have? How much of a "safety moat" should be put around assets to ensure that even if we have another recession (which we're sure to), there is no systemic collapse? These questions must not only be answered, but be stringently enforced once they are.

In the meantime, these wounded titans have much work to do to restore our confidence in their ability to manage risk, offer legitimate services and provide value rather than erode it.

Related Articles
  1. Investing

    Why Is Financial Literacy and Education so Important?

    Financial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
  2. Professionals

    10 Must Watch Documentaries For Finance Professionals

    Find out about some of the best documentaries that finance professionals can watch to gain a better understanding of their industry.
  3. Markets

    Is Another Bear Market Ahead?

    With market volatility recently reaching its highest level, investors are questioning what the outlook is for U.S. stocks in 2015 and beyond.
  4. Stock Analysis

    Why Is GE Selling Some of Its Subsidiaries?

    Learn why GE is selling off a substantial amount so it does not have to comply with increased government regulation in the wake of the 2008 financial crisis.
  5. Investing Basics

    Understanding the Inverted Yield Curve

    An inverted yield curve occurs during the rare times when short-term interest rates are higher than long-term interest rates.
  6. Economics

    How Does the Puerto Rican Debt Crisis Affect the US?

    Learn about the specifics of the Puerto Rican debt crisis and why economists disagree on how significantly it could affect the United States.
  7. Forex

    Brazil's Recession and its Effect on the World Economy

    In 2010, Brazil's economic growth was a precursor to arrival on the world stage. Five years later, the economy is in shambles. What happened?
  8. Economics

    Is U.S. Inflation on the Horizon?

    Inflation, or the general price level of all goods and services in an economy, has remained subdued in the years following the Great Recession. Given recent developments, is the U.S. on the verge ...
  9. Investing News

    Canada in Recession

    On September 1, 2015, Statistics Canada reported that the economy has contracted by 0.5% in Q2 2015, after falling 0.8% in previous quarter.
  10. Economics

    Is a Recession Coming?

    In the space of a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.
  1. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  2. How does the risk of investing in the industrial sector compare to the broader market?

    There is increased risk when investing in the industrial sector compared to the broader market due to high debt loads and ... Read Full Answer >>
  3. What is the correlation between term structure of interest rates and recessions?

    There is no question that interest rates have enormous macroeconomic importance. Many economists and analysts believe the ... Read Full Answer >>
  4. How can I hedge my portfolio to protect from a decline in the retail sector?

    The retail sector provides growth investors with a great opportunity for better-than-average gains during periods of market ... Read Full Answer >>
  5. Why should an investor in the retail sector consider the Consumer Confidence Index?

    Investors in the retail sector should consider the Consumer Confidence Index, or CCI, because it measures how consumers feel ... Read Full Answer >>
  6. Which type of retailers tend to perform best during weak periods in the economy?

    Retail is a broad investment sector comprising many different market segments, such as automotive, building supply, grocery ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!