It's Those Fat Cats at the Top!

According to reports from Democracy Now the financial crisis is far from over with many banks around the nation at risk of shutting their doors. In the headline, Federal Deposit Insurance Corporation Chair, Sheila Bair, has said that banks have decreased lending by $587 billion in 2009. She went on to specifically point a finger at major banks saying they need "to do a better job of stepping up to the plate." She also noted that over 700 banks were cited as in danger of failing at the end of 2009.
In a related article published just four days before the aforementioned headline, Damian Paletta of the Wall Street Journal also commented on the situation citing the fact that four banks were shut down from Florida to California just this past Friday! This is an ongoing crisis folks! The following excerpt from Mr. Paletta's article details the largest of these closures, nearby in San Diego California:

"The largest bank to fail Friday was the 10-branch La Jolla Bank in California. Its $3.6 billion of assets made it the biggest bank to fail in 2010. The FDIC sold all of La Jolla's deposits and virtually all of its assets to OneWest FSB, a thrift created last year after investors bought up pieces of the failed IndyMac Bank. The FDIC and OneWest agreed to share future losses on $3.3 billion of the La Jolla Bank's deposits."

What is evident here is the burden on taxpayers through the FDIC. What is perhaps between the lines and not so apparent is the harsh economic realities of what happens when recession hits: Negative speculation grips the market with fear, lending rates go down which stagnates investment and new business and job creation. Home-ownership loans and other forms of personal reasons to borrow money are decreased as fewer people are eligible due to their credit scores, past debts, bankruptcies, unemployment, etc...

Why I think these stats are important lay in other facts. Also on Democracy Now this morning (see link above) and many other times on the show, the fact that while Wall Street bonuses are at an all time high growth rate, and companies like Goldman Sachs are making record profits, Main Street is suffering. The closure of smaller banks indicates the failure of the Obama/Geithner/Bernanke bailout plan to have some sort of "trickle down effect" from the 'bloated' big banks who received the bulk of compensation. I am personally disgusted. Tips on my next post (check the tags at the bottom to see author) on how to support good banks and local credit unions as opposed to those large malpractictioners like B of A, Wells, Chase, Citi.....you get the picture.

picture from: https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtZQaTTgs7blwPn6gNpclKSQEypRM5LIbgmkvrW6kJR5rk4d_r8WJDYiGOenb8KPt3N4SKy9c2aaQImIQpYw4H61RqwAPsjnxI_9HyLkI5z4eyOAmreK1ytj4uFnDepccg3eYRzv_710Y/s1600-h/KLARC's+Fat+Cat+cartoon1.JPG

Overseeing Banks: Who Does It?

With the economy slowly limping back towards the positive, government action is starting to take place. Pushed along by President Obama, Congress finally has banking regulation bills on the floor. Though the House has already passed a primary bill, debate in the Senate continues over who should be in charge of overseeing the banking industry. Their are currently two choices, the Fed (Federal Reserve Bank), and the Treasury Department. Neither party has solidified which side it supports with both Democrats and Republicans supporting each "candidate."

The House bill provides for continued Fed power, however it is likely the the Senate decision will strip the Fed of some of its responsibilities, bequeathing them to the Treasury Department. The most important is financial regulation. Mr. Bernanke (head of the Reserve) said earlier this month that he would support a Treasury-lead council, however only in regards to risk management.

Whether or not the Fed should lose control of some regulation is still up for debate. What is clear, is that Congress will soon pass a bill creating a committee to watch over financial institutions in an effort to prevent another economic collapse. Hopefully this committee will mark a meeting of the Fed and the Treasury, and that a coalition of these agencies will promote a more watchful guardian over the big national banks.

Colbert Report--Eliot Spitzer

Here Eliot Spitzer, a former Democratic politician and New York Governor, is interviewing with Stephen Colbert about the current financial system. Spitzer is criticizing the fact that the United States is rebuilding the entire system exactly the same way as it was before the burst. He believes that everyone should be angry that hundreds of thousands of dollars of our tax money are being put to rebuilding the system, rather than investing this tax money in the economy, which needs it more. He declares that we should constrain the banks, for if they receive bailout money and guaranteed federal credit, then they need to lend the money as opposed to the trading and casino economy.

You can watch that clip here on Colbertnation.com .

Summers on CNBC: Oh how memory fades...

President Obama's top economic advisor, Larry Summers, appeared on CNBC last weekend with a message for the big banks: You're bloated. (Yes, he used the word "bloated").

That is, among other criticisms. He has also recently advocated a ban on proprietary trading (trading done with the bank's own money, not the deposits it takes from customers) and limits on the acceptable size of banks. Not to say these policies are unwise--in fact, you might call them perfectly reasonable--one should note they represent a major flip-flop for Summers.

That's because as Treasury Secretary under the Clinton administration, Summers stood behind the Gramm-Leach-Bliley Act, which neutered the Glass-Steagal act of the Depression era and opened the floodgates for some of the greedy and risky mergers that put the banks (and the American people) in trouble over the last several years.

Nonetheless, we can hope that this change of heart is genuine and repentant (though probably not repentant), and that it does real, positive good for the stability of the financial system.

Colbert Report--Eliot Spitzer

Here Eliot Spitzer, a former Democratic politician and New York Governor, is interviewing with Stephen Colbert about the current financial system. Spitzer is criticizing the fact that the United States is rebuilding the entire system exactly the same way as it was before the burst. He believes that everyone should be angry that hundreds of thousands of dollars of our tax money are being put to rebuilding the system, rather than investing this tax money in the economy, which needs it more. He declares that we should constrain the banks, for if they receive bailout money and guaranteed federal credit, then they need to lend the money as opposed to the trading and casino economy.

http://www.colbertnation.com/the-colbert-report-videos/263255/february-02-2010/eliot-spitzer (just in case the video doesn't play..I've tried like multiple times to upload it but it's been acting up every time)

Manipulation in Merrill Lynch Bailout

This past week New York state officials filed a lawsuit against Bank of America executives regarding the Merrill Lynch bailout. The bailout occurred in January 2009. Bank of America was allotted $45 billion in government funds after merging with Merrill Lynch. Merrill Lynch used money from the original bank bailout funds to pay executive bonuses knowing that the institution had sustained fiscal losses during that year. Despite this, Bank of America merged with Merrill Lynch and used their extra government funding to cover the losses incurrred due to payment of the bonuses.

In order to prevent further misuse of government funding the federal government needs to better allocate and oversee the distribution of bailout money. This would entail conducting more in depth inquiries regarding payments of bonuses to bank executives, monitoring how the bailout money is spent by banks, and restricting the use of funds. Fiscal transactions should be made more transparent as well. The public is now aware of the current scandal due largely to the media coverage of the filed lawsuit. Citizens, however, deserve protection against such manipulation of monetary funding which can be achieved through pre-emptive government regulation.

Please see the attached BBC article for further information regarding the Bank of America and Merrill Lynch lawsuit:

http://news.bbc.co.uk/2/hi/business/8499281.stm

Lackadaisical Banking Regulations Sink U.S. Economy.....in 1929....and again in 2009!

Obama inherited a banking crisis that had spiraled way out of control. On the eve of the largest impending collapse of our banking system, Obama was sworn into office and almost immediately began to piece together a solution to a farreaching financial problem that had its roots in the banking industry. Leading him to the controversial insistence, along with Geithner and Bernanke, that a gigantic bailout for the nation's banks was in order. This has happened before in American history (well, not the huge monetary bailouts). In 1933, Roosevelt’s highest priority, during what turned out to be an extremely busy first 100 days of his presidency, was the farreaching financial crisis that had its roots also in the banking sector of the United States. Roosevelt was inaugurated directly in the midst of impending crisis when all over the nation, even in Roosevelt’s home state of New York, banks were experiencing an extended holiday while a major financial hiccup was being analyzed and dealt with. Stemming from a network of unit banks acting as affiliates, a microcosmic example of a large-scale problem triggered a nationwide panic. Henry Ford’s personal network of banks (figuratively speaking) were found to be doctoring and concocting different fraudulent mechanisms to boost the reputation and deposit reserves of some 32 financial institutions, all associated with Guardian Detroit Union Group, Inc (the financial arm of the Ford dynasty). The reasons for these misrepresentations lay in the ill-advised loans, bonuses, and benefits that 52 of 61 financial directors and 33 of 43 banking officers all received. The inherent problem here is the mismanagement of business practices for the benefit of powerful individuals and entities like Henry Ford, Ford Motor Corporation, and the allies within the financial sector that supported him. This one example of a greater problem was the proverbial straw that broke the camel’s back. Once broken, the question became: How to regulate and progress the banking industry from its depths?

The answer came in the form of FDR cajoling together financial and economic heavyweights from congress, in this case Senators Glass and Steagall along with other financial advisors. The result of this brainstorming was the Glass-Steagall Act. The touchstone issues in the subsequent Glass-Steagall Bill of 1933 were two-fold. The first provision was the inclusion of the Federal Deposit Insurance Corporation (FDIC); which was basically a glorified savings account taken from public tax dollars and small increments from Federal Reserve member banks that would insure depositors most, if not all of their monetary funds in the commercial banking sector. The second provision effectively separated commercial banking, which is the traditional model where citizens hold their money in banks with interest accumulating in exchange for the bank's ability to use those funds to generate loans, from investment banking, which is the usage of bank reserves to put forth in other investments and loans that are much riskier and often repackaged and retooled as bonds, mutual funds, stocks, mortgages, etc...The inclusion of the creation of the FDIC was controversial but necessary for its context. It ensured to the masses that their deposits would never disappear; it stopped the phenomenon known as "bank runs". It was controversial because it was the first version of a law that protected bad business practices in the banking industry. If a bank failed, it was not responsible for refunding its customers; the FDIC fund would ensure a return on the deposits. While this alone is troubling, the provision of stopping private corporations from doing both commercial and investment banking was supposed to give banks less incentive to make bad decisions with the reserves they have accumulated through deposits. This part of the Glass-Steagall Act was mutually agreed upon by many experts as well as Roosevelt himself.

I have spent so much time discussing what is known as the first great economic downturn in the modern era that now I feel the need to make this information somehow linked to our current predicament in regards to the all-important American banking industry. In 1999 the section of the Glass-Steagall Act that seperated the two forms of banking was repealed. Interesting...........it now starts to make sense how this so called "unexpected" financial collapse commenced itself via the repeal of Great Depession Era legislation. The passage of the Gramm-Leech-Bliley Act, as it is known, is detailed here.

If you can put two and two together, which is sometimes tough when discussing such a boring subject as banking regulation, this bill allowed companies like Citigroup, Goldman Sachs, Freddie Mae and Fannie Mac to be able to dabble in multiple markets simultaneously such as the commercial banking sector, the mortgage industry, the stock and bond markets; which basically, when pooled together can be called the speculative wealth marketplace. In this sphere, companies such as, I don't know, say, Goldman Sachs, can buy and sell the rights to the mortgages of millions of Americans, just as an example (which did happen: Goldman Sachs overvalued a large amount of mortgage securities on purpose so they could sell them to other investment firms just before the mortgage industry bottomed out). The scenario I described earlier in regards to Ford Motor Company and its financial subsidiaries' money mongering is child's play compared to the vast complexities of financial instruments that have been invented by companies like Goldman Sachs in the last decade. To hear more about the repeal of parts of Glass-Steagall, John Stewart has a great interview with Elizabeth Warren about its effect on the world financial crisis we are currently weathering. Like Ford's executives in the 1920's, many specters of the current financial crisis just love to award themselves fat bonuses for a job poorly done. Thanks FDIC! Thanks Government Bailout!

Interestingly enough, good ole' boy moderate, John McCain, in 2009 called for the return of banking regulations such as those included in the aforementioned Great Depression legislation. There is a great article in Newsweek describing McCain and others' (including former Fed Chairmen Volker) call to restructure our banking system.

That is all for now, come back for more! We will be detailing in the coming editions, the players complicit in the financial crisis, those who are trying to do something about the power of big banks, and of course what measures are being talked about or perhaps are already on the floor being debated.

Men in Fancy Suits: Let's Play Icebreakers

The first step we'll take to understanding potential banking regulation this semester will be to get to know the people involved--the major players who we'll see on TV or hear on the radio, whose names are mentioned along with various plans, organizations, or other important individuals. We'll begin with four people whose names have been in the air since the Obama administration came to office in January of 2009. Even though some hail from academia and others from top banks, in reality, they are all just men in fancy suits.

We'll go alphabetically...

1. Ben Bernanke: Chairman of the Federal Reserve

The unassuming man from South Carolina spent much of his career teaching at Princeton University after receiving degrees from Harvard and M.I.T., where he had particular interest in the Great Depression. It was only in 2005 that he became involved in politics, when George W. Bush tapped him to become part of his Council of Economic Advisors. He spent a year there before being nominated and confirmed as the successor to Alan Greenspan as Chairman of the Federal Reserve. If he only knew what he was getting into...

In 2007, when credit was beginning to tighten, Bernanke oversaw several large interest rate cuts. But only in 2008 did the credit crisis boil over, leading to the now infamous acquisition of Bear Stearns, a private investment bank, by JPMorgan Chase; the collapse of Lehmann Brothers; and the beginning of the bailouts. Bernanke is said to have helped coordinate the takeover of Bear Stearns, and has already taken much heat for advocating the bailout of the American International Group. During his tenure as Chairman of the Fed, he has overseen massive increases in the entity's power, utilizing billions of dollars of its funds to shore up unstable financial institutions. (See a very good bio of Bernanke HERE on nytimes.com)

2. Timothy Geithner: Secretary of the Treasury

When Tim Geithner's name was leaked as the nominee for the position of Secretary of the Treasury, stocks rose 300 points. That, in itself, should be an indication of his history with the financial industry. He is not a bank insider, per se, but his long career has included several decades of close work with the financial institutions that have borne much of the blame for the current recession. He first joined the Treasury department in 1988 as a low-level employee, and gradually worked his way upwards. During the Clinton administration, he was named under secretary of international affairs. On his way to becoming president of New York Federal Reserve in 2003, he spent some time as the director of the International Monetary Fund. Before being nominated to his current position, he worked closely with Hank Paulson, his predecessor, and Ben Bernanke, in order to stabilize a rapidly deteriorating economy. Much experience indeed...

As Secretary of the Treasury, Geithner has resisted some of the administration's vocal left-wing members. He has remained true to (or erred on, depending on how you see it) the side of handing banks large amounts of capital to open credit markets and cleanse balance sheets of toxic financial instruments. For that stance, he has faced considerable criticism from both sides of the aisle. But when A.I.G. announced it would be awarding generous bonuses in March 2009, Geithner really took heat. How did he not know about them? lawmakers asked, and why can't he stop them? Since, Geithner has been part of the Obama plan to limit the intricate financial activities of banks. Nonetheless, in recent weeks, several lawmakers have called for his resignation. (Read more on Geithner HERE).

3. Larry Summers: Director, National Economic Council

The former president of Harvard University, chief economist at the World Bank, and Treasury Secretary under President Clinton is known for his dogmatic emphasis on debate and discussion. He is President Obama's closest economic advisor, and controls what appears in each day's economic briefings.

In spite of his personal connection to high finance (he is said to have earned over $5 million while consulting--one day per week for two years--for one of the world's largest hedge funds, D. E. Shaw & Co.) he has recently shown himself allied more with President Obama's progressive political advisors than with his moderate cabinet members. Whether that means he will throw himself behind proposed regulations to reign some of Wall Street's most lucrative financial institutions, we don't currently know. However, his reputation does suggest he is "more sympathetic to the concerns of investment bankers (see the nytimes.com article on Volcker).

(More on Summers HERE).

4. Paul Volcker: Chair, President's Economic Recovery Advisory Board

Paul Volcker's reputation precedes him by miles. His career spans the the entire second half of the twentieth century, and includes tenures with the New York Fed, Chase Manhattan bank, the Treasury Department, Princeton University, the Federal Reserve, and his current position with the Obama administration. As chairman of the Federal Reserve in the 70s and 80s, he was at first criticized for pushing aggressive interest rate increases, which attempted to fend off the inflation caused by negative oil supply shocks in 1973 and 1978. In retrospect, however, he has been lauded for those tactics, and for laying the groundwork for subsequent economic growth.

Volcker is viewed by many as an opposing voice to those of Tim Geithner and Larry Summers. "The Volcker rule," or a ban on big bank's proprietary trading, stands as part of a greater progressive plan to stabilize and regulate the financial industry. Moreover, it has been said that Volcker and Summers do not get along. But while while Summer's has the advantage of leading a specific chain of command (and having the sole economic office in the West Wing), Volcker's role affords him greater freedom to voice his opinions. Whether Volcker's more aggressive plan prevails over or submits to the more conservative options is yet to be seen. (Read more on Volcker HERE).

(Credit for the material in this post is due to the New York Times online, Bloomberg News, and the New York Fed website).