The People of the United States v. Wall Street’s Bankers
When I was a young boy, they used to say: “What’s good for General Motors is good for this country.” Back then my uncle was a Ford man, my father a GM man, and all I knew for certain was that like two parallel lines, the two would never intersect.
Then 1973 rolled around and all of a sudden General Motors, Ford, Chrysler and American Motors… the Big 4, if you can remember that far back… all seemed terribly out of step with what was going on in the world. Their cars got terrible gas mileage and leaked oil and besides all that, their executives still looked like they were living in the 1950s.
The stock market wasn’t “the big thing” back then. The Dow Jones Industrial Average was about as exciting as watching them give haircuts on Saturday. In 1966 it crossed the 995 mark, and it was November of 1973 before it broke 1,000 for the first time ever, only to go crashing back to 577 in December of 1974. Not exactly the stuff of which Hollywood movies are made. The DOW wouldn’t cross the 1,000 mark again until late in 1982.
When Ronald Reagan was inaugurated in January of 1981, we were about to finish up a 16 year bear market that had begin in 1966 and wouldn’t end until 1982.
On January 1, 1980, the DOW opened at 759.13, and from that point forward, albeit with a few bumps along the way, our stock market went straight up, closing at 11,497 by the end of 1999. There are an awful lot of people who attempt to explain this meteoric ascent. Many people credit Reagan’s economic policies, which included reducing taxes to some degree, increasing defense spending, and generally deregulating things. I’ve never been sure how much one thing accomplished over another, and I’ve always wondered whether it wasn’t mostly the demographics of the baby boom population that drove our growth, but whatever it was… from 1982 forward, Wall Street was on the move.
I was a Yuppie in the 1980s when things changed. Spaghetti turned into “pasta”. Sherbet became “sorbet”. Greed was, in a way, good. And from that point forward “they” said: “What’s good for Wall Street is good for America,” and “You can’t have Main Street without Wall Street”. In fact, over the last thirty years, this type of thinking became a part of our culture in this country. Wall Street was the place everyone wanted to be.
Today, of course, the bloom has come off of the rose, to say the least. I have always said that there are only two things that lead to true learning… age and pain, and although we’ve seen two or three other costly bubbles along the way, the demise of this last one has already caused enough pain to teach us something and stay with us for quite some time. Right? Or has it?
As I’ve watched the economy deteriorate over the last two years, I have been amazed and bewildered at our government’s response, or lack thereof. And the more I’ve learned, the worse I’ve felt about our ability to fix what has been so badly and obviously broken beyond repair.
Nine months ago, everyone agreed that our banking system was not functioning. We needed to pump $350 billion into the banks and now, or the world as we knew it would soon come to an end. So, we came up with the TARP. It was supposed to buy “troubled assets,” hence the ‘T’ and the ‘A’. But that didn’t work out, because Paulson couldn’t arrive at price for assets that are still impossible to gauge, and losing value every day. The banks wanted 100 cents on the dollar for these “toxic assets,” so Paulson decided the only thing to do to inject the necessary capital into the failed financial institutions was to buy preferred shares in the insolvent banks.
Then we were going to have some sort of TALF program, but that didn’t really work out either. And then it was the PPIP… the Public Private Investment Partnership… until that too, died on the vine. The Wall Street Journal (“WSJ”) even reported that two of the government agencies that are supposed to be singing out of the same hymn book are not in agreement at all.
According to the WSJ…
A government program designed to rid banks of bad loans, part of a broader effort once viewed as central to tackling the financial crisis, is stalling and may soon be put on hold, according to people familiar with the matter.
The Legacy Loans Program, being crafted by the Federal Deposit Insurance Corp., is part of the $1 trillion Public Private Investment Program the Obama administration announced in March as a way to encourage banks to sell securities and loans weighing on their balance sheets to willing investors.
But prospective buyers and sellers have expressed reluctance to the FDIC about participating for fear the program’s rules will change in a political atmosphere hostile to Wall Street. In addition, some banks that might have sold troubled loans into the program earlier in the year have become less eager as they regained a sense of stability.
Senior Treasury officials weren’t keen on the FDIC’s program because of the large gap between potential buyers and sellers. In fact, some Treasury officials didn’t want the FDIC program to even be created.
Now I have no idea what we’re planning to do. All I know, if I listen to Secretary Geithner or President Obama is that things are looking up. I also know that they are both completely full of malarkey.
What caused the banks to have a “regained a sense of stability?” We haven’t done or changed a Goddamned thing since the TARP except let the banks repay some TARP funds so they can use the FDIC loan guarantees to pay themselves huge bonuses again this year? Seriously? It’s downright embarrassing.
The S&P 500 has rallied 40% from its March lows. Fed officials and many others have been talking up the economy and there has been talk of “green shoots” appearing in the economy. Some economists are projecting a recovery in the second half of this year.
Despite rallies in the stock markets and talk of recovery, the recent Global Financial Stability Report by the IMF states that economies of the developed world will experience a deeper protracted recession due to further deterioration in residential and commercial real estate markets, tight lending conditions and rising defaults in corporate and consumer loans.
Futures are pointing to further declines in the US and UK residential mortgages of both prime and sub-prime loans. Loan workout programs and foreclosure moratoriums have failed to reverse the decline in the housing market. The charge-off rates in the U.S. residential real estate market is projected to peak in late 2010. Commercial mortgages are projected to follow the residential markets and have already begun to worsen in the US and UK.
So, what have we done to change things? What have we put in place to make sure what happened doesn’t happen again? How have we changed how the banking industry operates? We haven’t changed a damn thing. We put some limits on executive compensation for four months or so, but other than that, what?
The banking lobbies sure look stronger than ever… essentially more than capable of leaping tall buildings in a single bound. The Obama administration certainly ran like the dickens in every confrontation with the financial sector that’s presented itself thus far. Bankruptcy reform, the credit card bill, loan modifications, lending… what the banks want, it would seem, the banks get… the country’s best interests be damned.
In conducting the research for this piece, I came across one of the best articles I’ve ever read. Simon Johnson, a former chief economist from the International Monetary Fund, wrote it, and it appeared in The Atlantic in May of this year. (I actually read Mr. Johnson’s blog, The Baseline Scenario religiously, but never knew that it was him that I was reading.) The title of the article is The Quiet Coup, and it’s introductory paragraph changed my whole year…
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government-a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
Johnson has been very critical of the Obama Administration for caving in to financial interests and he continues his criticism:
The real news is that the administration does not want to take on these financial lobbies. Why exactly they are ducking any confrontation is open to debate — particularly as these same lobbies helped get us into the crisis, for example, by opposing regulation of derivatives.
So, do you see the picture? The banks gain immense political power over a thirty-year bull market, as they become part of our cultural elite. Then they screw the pooch. Drop the ball. Come up short. Okay, they break the world, and it becomes abundantly apparent to any objective and even slightly knowledgeable observer that reforms are needed and compromises need to be made if we are to right the ship that they have capsized.
But they still have a lot of political power and money, and we’ve grown to believe that what’s good for Wall Street is good for Main Street. And as if that wasn’t enough, many of the people in government came from Wall Street and are likely to return to those jobs after serving in government.
The problem is that what they want is a return to the status quo and we the people should realize that we absolutely cannot allow them to direct the policies that will restore our economic prosperity or at least stop our downward slide. They are not out for “us”. They are only out for “them”. Everyone knows that, right?
In “The Quiet Coup,” Johnson writes:
Elite business interests-financiers, in the case of the U.S.-played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
And a few paragraphs later:
The great wealth that the financial sector created and concentrated gave bankers enormous political weight-a weight not seen in the U.S. since the era of J.P. Morgan. In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.
The American financial industry gained political power by amassing a kind of cultural capital-a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country.
(Hey, that’s what I said… he’s stealing my thinking…)
The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.
Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway.
Well, now that’s the good news. That’s where the good old Founding Fathers come in. You see.. it really is our country. We’re actually in control. We leave most things to “them” that we elected, but lest anyone ever forget… I can only say… remember the AIG bonuses…
Honey, would you prefer a pitchfork or a torch?”
“I think I’ll have a pitchfork this time out, dear. I carried the torch last time.”
We can force the issue here and our representatives will stand up to the banking industry lobbyists because they will have no choice but to do so. Our elected representatives may want the banking lobby’s money, but they want voters even more. And when they hear our voice in unison, they perk right up. They passed the 90% AIG Bonus Tax in under a week. Seriously. I went to lunch and we had a new bill on the floor of the House. It was amazing. I had no idea they could move that quickly anymore.
In fact, our outrage over the AIG bonuses caused congress to move faster than I’ve ever seen it move in my lifetime… faster than they moved after 9/11, for heaven’s sake. They saw us all screaming the same thing in 200 million-part harmony and that was it. Presto chango!
The Website Seeking Alpha reported the following on June 14th. The added emphasis is my own.
Signs are emerging that optimism in the financial services sector may be misplaced, or at least, premature.
It’s no secret that banks have been eschewing government aid. But, in the tradition of these giant money machines, they seem to be doing so again at the expense of their long-term security – all for the sake of quarterly earnings results.
Take for example, the approval by the Treasury Department for 10 banks to repay their TARP loans more or less ahead of schedule. Rortybomb points out that the big banks may need as much as $390 billion in the worst case scenario, according to a model using rising unemployment statistics
I was actually surprised – I assume turning up the numbers a bit would cause everything to start leaking red ink. Instead it seems that if there is an additional slight downturn in the economy, we know the firms that will have all the problems. They are the ones that are too big to fail. Funny that.
Tuesday, it was reported there that the congressional panel overseeing TARP repayments gave rising unemployment statistics as the number one reason why banks should be “retested” for capital adequacy requirements. That argument was compounded by the issue that Treasury ONLY tested the banks on a hypothetical 2-year scenario.
Most recently, there’s talk of the Private Public Investment Program (PPIP) coming apart at the seams, as banks reject the possibility of marking-down the value of their toxic assets in order to sell them for cents on the dollar. Such a plan, argue banks, would force many of them to declare themselves severely financially hampered in the immediate term, since a price-floor for the securities they hold on their balance sheets would be set by the fire-sale of their assets.
Actually, banks have more or less done exactly the opposite of what the PPIP would ensure. First quarter earnings results showed that banks were not only applying the “fair value” rule of accounting for their toxic assets pretty liberally, but even declaring multi-billion dollar losses as windfall gains.
Part of the potential future problem for banks has, ironically, been their own good fortune lately in the stock market. Reuters’ Felix Salmon puts it pretty succinctly:
The market loved this idea that assets at banks would finally have a certain value, and started going up rather than down, to the point at which people weren’t scared any more about the amount of toxic assets on banks’ balance sheets. And so it didn’t matter that the adverse scenario in the stress tests is looking positively sunny these days. And it didn’t matter that PPIP disappeared with a whimper, the toxic assets no more priced now than they were six months ago. So long as the stock markets are happy, what’s to worry about?
Now that the stock market is surging, the banks are back to old tricks: generating the best possible quarterly earnings reports in order to play catch-up with expectations.
It’s true that banks are seeing signs of an increase in inter-bank lending and business in general, and that confidence has played a big part in getting that going again. It would also be dangerous to abruptly let the air out of consumer and investor optimism.
But confidence and expectations can only provide price support for so long, before the banks will be forced again into having to assume another round of loans. That scenario may put banking in even worse a scenario than the one it found itself in, in the first place.
Even a few Senators have been surprised at the power that has been amassed by the banking lobby over the last three decades.
“It’s hard to believe in a time when we’re facing a banking crisis that many of the banks created – they are still the most powerful lobby on Capitol Hill. And frankly, they own the place.”
That was Sen. Dick Durbin speaking bitterly on his hometown’s radio program following the defeat of bankruptcy reform. At the end of the proverbial day, the battle was lost because twelve democrats signed on with the Republicans to vote for the bankers, and against the interests of families who are struggling to save their homes and might have been able to in bankruptcy. Senators Baucus, Bennett, Byrd, Carper, Dorgan, Johnson, Landrieu, Lincoln, Ben Nelson, Pryor, Specter and Tester all voted with the Republicans… I mean with the banking lobby.
As a presidential candidate, Obama chose not to support bankruptcy reform, but he did promise that he would support it if he were elected.
The bankruptcy reform legislation would have changed things. The power would have shifted a little bit to the borrower in the best interests of the country, because if the bank refused to deal, the homeowner could turn to the bankruptcy court for possible relief. It was estimated that 1.5 million homes would be have been saved from foreclosure if the bill passed.
But the president wouldn’t allow the bankruptcy provision to be included in the stimulus or in the first budget. The administration suggested that it could proceed as a stand-alone measure, which is a Washington D.C. euphemism for “guaranteed to fail”. In other words, President Obama ran like the dickens when faced with having to stand up and be counted by those in the all-powerful banking industry.
Given all of the adversities facing the country, I conclude that meaningful intervention is plausible only if it originates with people at large who are more distant from power. I envision the intrusion coming from “independent formations” free to ignore Washington’s insider routines and mobilized by citizens on behalf of their own convictions, their common sense ideas of what needs to be accomplished.
Okay, that one gave me chills… because that’s what I’ve been thinking too. This isn’t the time to molly coddle bullies because of some inappropriate amount of political power they seem to have amassed while we were out shopping. This is the United States of America… the land of the free and the home of the brave… my country. And they can’t have it… certainly not without a fight.
William Greider has been a reporter and best-selling author for some 40 years. He’s been everywhere during that time, from the White House to Wall Street. His career has included writing for newspapers small and large, magazines, public television and books. Greider writes about capitalism and democracy and explains how these two are “in collision”.
Greider joined the national staff of the Washington Post in 1968 and was a correspondent for a dozen years, eventually becoming the assistant managing editor directing national coverage. He even wrote a weekly column called “Against the Grain.” I like this guy.
On June 9th, Greider wrote an article titled: We’re Screwed on Everything From Health Care to the Economy If the Dems Don’t Shape Up, which appeared in The Nation, our nation’s oldest and largest weekly.
Here’s what he said in the opening paragraphs:
The governing party faced an awkward dilemma. People were hurting and furious at the government’s generous bailouts for banks. But how could the Democrats do something for the folks without upsetting their friends and patrons in the banking industry? Democrats think they found a way. They are enacting a series of measures described as “breakthrough” reform and “unprecedented” defeat for the bankers. Only these achievements are more accurately understood as “reform lite.” The house is on fire and Democrats brought a garden hose.
“This crisis brought down the world economy and yet Congress still hasn’t passed a bill making sure it doesn’t happen again.”
Julia Gordon, a lawyer with the Center for Responsible Lending said: ” When we look back at the foreclosure tsunami that devastated so many families, we’re going to be ashamed that we did not fix the bankruptcy code to permit mortgage modification. That move alone could have prevented more than a million foreclosures, and while I predict we will revisit the issue in the future, it will be like closing the barn door after the horse has died.”
If not now, when? That question ought to haunt the Democratic Party and President Obama, who has been missing in action himself on key issues. Congressional Democrats are responding to this epic conflagration with the same risk-avoidance tactics they learned during many years in minority status.
In those days, they could always blame right-wing Republicans for blocking their good intentions. But whom do the Dems blame now that they have the White House and fifty-nine votes in the Senate and a seventy-eight-seat majority in the House? Their standard explanation for not doing more is, “We didn’t have the votes.” So when might we expect Democrats to achieve more? When they have eighty votes in the Senate?
The much-celebrated “Credit Cardholders’ Bill of Rights” is a fresh example of how the Democratic Party tries to have it both ways — avoiding the tough votes while mollifying the folks. The credit card reform measure imposes new rules on the industry and does away with many of the most outrageous gimmicks bankers use to extract more money from debtors. Banks cannot raise interest rates retroactively on old credit card balances or pile on hidden fees or fail to give advance notice for rate increases. These and other changes are worthy.
The achievement seems less courageous if you know that Congress was largely ratifying the regulatory rules already adopted by the Federal Reserve last year. Or that the legislation gives the industry another nine months to gouge their customers before the new rules go into effect. Or that Visa and MasterCard, Citigroup and JPMorgan Chase are free to raise future interest rates to the sky — without limit. That is the industry’s intention, as bank lobbyists reported after the bill was passed.
But that’s “usury, ” isn’t it? Of course it is… Greider continued…
The straightforward way to stop usury is to enact a hard legal limit on the interest rates creditors can charge borrowers. In the House, several legislators introduced interest-rate caps, but party leaders would not let the issue get a roll call vote. Rep. Maurice Hinchey of New York and co-sponsors proposed an interest-rate cap of 18 percent, the same ceiling enacted years ago for credit unions. “Offering the amendment raised a lot of anxiety on the part of a lot of people,” Hinchey said.
“It was withdrawn because it had no possibility of success and it would have put a number of people in a tough situation. We had to back off.”
A roll call on usury would have compelled legislators to choose between their constituents and their bankers. Rep. Donna Edwards of Maryland proposed a tougher ceiling on interest rates, but the House rules committee rejected her amendment. “Our constituents are so angry with the banks,” she observed, “siding with credit-card companies would not be helpful to me, and I expect that’s true in other districts.”
Bankers are contributors, so this is what members call “a money vote.” A consumer lobbyist explained. “Let’s face it,” he said. “The main reason lots of members get on the House Financial Services Committee is because they want to raise money from the financial industry.”
In the Senate, Dick Durbin of Illinois, the majority whip who rounds up votes for the party, introduced his own usury bill — a cap of 36 percent including the non-interest fees and charges. Durbin’s bill also empowered state governments to set lower limits. The Consumer Federation of America endorsed it, but the consumer lobbyists asked Durbin not to have a roll call on his measure because it might reveal their weakness.
Nevertheless, the redoubtable Bernie Sanders of Vermont demanded a vote on his bill — an interest-rate cap of 15 percent.
“When banks are charging 30 percent interest rates, they are not making credit available,” Sanders said. “They are engaged in loan sharking.” Sanders lost, 33 to 60. Twenty-one Democrats voted with the sharks. Senators Carper, Cantwell, Byrd, Bingaman, Bayh, Baucus, Akaka, Warner, Tester, Stabenow, Specter, Shaheen, Pryor, Ben Nelson, Murray, Lincoln, Landrieu, Kaufman, Johnson, Hagan.
The scandal of “payday” lending is being confronted by numerous state legislatures, but the issue stalled out in Congress. The industry pursued a race-based lobbying strategy that targeted black and Hispanic representatives with this pitch — poor people need these loans; don’t mess with them. Rep. Luis Gutierrez of Illinois proposed a bill that usurers found acceptable — an interest rate cap of 390 percent! (Emphasis mine, but can you blame me?)
In some ways, the politicians are prisoners too — captives of the money politics and the expensive mass-marketing that requires them to raise so much money and thus rely on the moneyed interests.
Representatives and senators know how the system works and what they need to do to survive. Now and then, they may try to win one for the folks, but mostly they are resigned to the confinements of the status quo. So long as activist groups will make no attempt to break out of this pattern or penalize incumbents for disloyalty, the party will continue to stiff the faithful.
These groups could function, not as a third party nor as standard “issue” advocates, but as a mixture of these capabilities. They could act like free-roaming guerillas who educate and agitate; like a political party that selectively destabilizes safe-seat incumbents by entering party primaries or running independent challengers; like a representative organization that can demand political relations through direct confrontations or even civil disobedience. This development sounds implausible, I know, especially in Washington. But our crisis demands a more aggressive response from citizens — something that threatens the power of both parties and makes them insecure.
Okay… so that’s pretty clear. And make no mistake, there’s plenty of time for us to fight this battle. FDIC Chair Sheila Bair said just this past Friday that:
“While the crisis that swept through the financial world last year has subsided somewhat, it was far from over and there would be ‘many more bank failures’ ahead.”
“I think there’s still some challenges, I think we need to be realistic. There are still some troubled assets on the books and we still have an economy that’s under significant stress,” said Bair in a 90-minute interview with Forbes reporters and editors on Friday.
“We still don’t know how deep the recession is going to be,” she said.
Really? And here I was told by your fabricators-in-arms that we were on the upswing. That banks were lending again. That the president’s decisive action taken with the last 100 days has saved the world as we know it. And he still had time for lunch and to create peace in the Middle East? Wow. I bet he’s more powerful than a locomotive, isn’t he?
Nothing has been done to-date, except that we sure threw a bunch of money around. We “papered over it,” is one way to look at it. It’s enough to dull some of the pain for a short period of time. But after that… it’s going to be a doozy. I think the Democrats are every bit as beholding to the banks as the Republicans and everything else in Washington D.C.
We the people need to stop being lazy and afraid. We need to wake up and mention that we’re all watching and we don’t like what we see… and there will be no hiding this time around, because this time it’s simply too important to our nation… to our homes… to our America. Because it is still our America.
Tell the banks to have a seat… a back seat to what our nation needs to recover from their inconceivably irresponsible actions. Because it’s not the borrowers… it’s the banks, betch!
I have nothing further… the prosecution rests.