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.

Conclusion
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.

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