The era of financial bubbles and crises has been defined by banking industry consolidation. According to the FDIC, there are now 6,618 deposit-taking institutions in America, down from 15,158 in 1990.

Change is constant, and the U.S. still has many more banks than its counterparts in Europe, but from the one-upmanship of the go-go bubble era (Fleet, First Union) to the shotgun weddings of the post-crisis period (Wachovia, Washington Mutual), mergers have created a financial system dominated by a handful of giant, complex firms.

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This pace of consolidation has slowed down in recent years. But now, federal regulators, reeling from accusations about their light touch on Wall Street, must decide whether to approve a merger that could restart the drive for big banks to get even bigger.

In July, CIT Bank announced a $3.4 billion deal to merge with OneWest, the largest bank merger since Capital One’s $9 billion purchase of ING Direct in 2011. The merger would give CIT roughly $67 billion in assets, crossing the $50 billion threshold for a “systemically significant” institution, which triggers additional regulatory scrutiny. The deal has generally been praised by analysts. “Bankers may be ready to believe in themselves again,” gushed Crain’s New York.

Echoes of the financial crisis reverberate on all sides. CIT, mostly a small-business and commercial real estate lender, was on the verge of collapse in 2009 when it got over-extended with bad mortgage lending and credit markets tightened. The bank received $2.3 billion in TARP funds, but the government rejected a bigger lifeline, and soon after, the bank fell into bankruptcy, the fifth largest in U.S. history.

The bankruptcy wiped out preferred stock from the TARP deal, and CIT never repaid the government. But it emerged from bankruptcy with a new CEO, John Thain, the notorious former head of Merrill Lynch who was ousted during the crisis for, among other things, a million-dollar re-decoration of his office, complete with a $35,000 commode.

CIT, newly free from Federal Reserve restrictions on its operations, now wants to buy OneWest, itself a crisis-era construct. OneWest rose from the ashes of IndyMac, the Los Angeles-area savings and loan, which spectacularly failed in July 2008 under the weight of too many risky mortgages. A consortium of Wall Street tycoons, led by hedge funders George Soros and John Paulson and several former Goldman Sachs executives, bought IndyMac’s assets from the FDIC for $1.55 billion in 2009. The consortium stands to double their money in the merger.

When they purchased IndyMac, OneWest entered into a loss-sharing agreement with the FDIC over IndyMac’s bad loans. The Los Angeles Times estimates that FDIC has paid losses of $13.1 billion, while OneWest has booked $3.1 billion in profits. To this day, the public doesn’t know exactly how much public money OneWest has received under the loss-sharing agreement. This rankles Kevin Stein, associate director of the California Reinvestment Coalition (CRC), which comprises over 300 community organizations across the state.

Stein said he asked OneWest executives how much money they’ve received in the loss-sharing agreement, and the bank wouldn’t tell him. CRC then filed a Freedom of Information Act request with the FDIC, seeking information on the payouts to OneWest. Initially the FDIC responded by saying that the deal was no longer in the public interest. Stein was incredulous. “Things done during the financial crisis are not a matter of public interest?” CRC continues to fight for the information.

Under the deal, the loss-sharing guarantees would transfer to CIT. “People may have disagreed about (the loss-share) in 2009, but at least FDIC could say this was about preserving the financial system,” Stein said. “But what does it mean for CIT to take that for the enrichment of investors? It feels like there’s a lot of public subsidy in both these institutions.”

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CRC’s primary contention is that regulators must consider whether the big bank merger generates a public benefit. Under the Community Reinvestment Act (CRA), banks must serve low- and moderate-income (LMI) communities in their area.

After meeting with CIT, Stein remains unconvinced that their plan measures up. “We’ve seen their plan, and it’s not commensurate with the size of the institution,” he says. CRC recommends that the bank set benchmarks for affordable housing and economic development lending, all of which could draw a profit for CIT.

One problem with the merger concerns how CRA obligations relate to bank branch presence. Without branches in LMI areas, banks are not required to make loans there. And CIT branches are largely Internet-based. It is only obligated to reinvest in Utah, where it has its headquarters.

“(CIT) isn’t only taking deposits in Utah, they have $14 billion in deposits all over the country,” Stein said. “It kind of disregards the idea behind the CRA.”

In the merger, CIT would pick up OneWest’s California locations, but only 15 percent of those are in LMI neighborhoods, which Stein describes as extremely low. This is in accord with banks disproportionately closing branches that serve the poor, in part to shed these obligations.

Several regulators must approve the complicated CIT/OneWest deal, including the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, Fannie Mae and the FDIC (which must consent to the transfer of the loss-sharing agreement). The New York Fed’s deadline for public comment on the deal ends today. CRC wants to extend that period, and for regulators to hold public hearings on the deal.

Considering the legacy of homeowners harmed by IndyMac, regulators should insist that the newly formed big bank does not abandon these communities again. “When two big companies merge, one plus one usually equals less than two, and communities lose out,” says Stein.

Interestingly, the New York Fed is on the hot seat over allegations from former employees that its regulators take a light approach with big banks like Goldman Sachs (whose former executives stand to gain in this merger). Rubber-stamping the CIT deal could trigger a new round of industry consolidation, and a new class of too big to fail institutions. We’ve seen how regulators treat them with kid gloves.

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Analysts have focused on how the deal gives two nearly dead banks a “second chance.” There have been no second chances for the millions of workers and homeowners abused by the practices of big banks. Before we move back into an era of big bank growth, and reward investors handsomely for banks that the public helped bail out, maybe we should ensure some second chances for Main Street first.

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