Article 43

 

Monday, December 17, 2012

Austerity American Style Part 4 - Big Bad Banks

Corporate Welfare

Markets are a creation of government, just as corporations exist only by authorization of government. Governments set the rules of the market. And, since our government is of, by, and for We The People, those rules have historically been set to first maximize the public good resulting from people doing business.
- Democracy - Not The “Free Market” - Will Save Americas Middle Class, Thom Hartman, March 12, 2004

The ability of the financial sector to block meaningful reform after bringing the world to the brink of a second great depression proves how exceptional IT’S POWERS are to corrupt nearly every critical sector of American public and economic life.
- How the Servant Became a Predator, Neww Deal 2.0, October 12, 2009

Plundering U.S. cities is what large financial firms do. This is a troubling reality. A bankruptcy attorney featured on the NBC News report about Scranton offered this grim assessment: cutting worker pay is necessary to avoid more drastic measures. The reporter didnt explain this statement, leaving viewers to imagine what terrible fate awaits those who don’t accept the reigning neoliberal orthodoxy that city budgets must be balanced by cutting worker pay, gutting public services, and issuing more debt to profit the 1 percent.
- Cities in the Red: Austerity Hits America. Dissent, November 16, 2012

The money printing by the Fed is at the heart of the massive debt crisis. But it has been great for the bankers, with compensation at the 32 largest banks slated to hit an all-time high of $207 billion this year, according to a Wall Street Journal estimate. This reward for ripping off the public is almost three times the amount the federal government spends on education. Once again the bankers are blessed for their failures, receiving such wildly excessive compensation despite the fact that banking revenue is down 7.2 percent over the last two years.

The ugly tale of Americas Great Recession is inextricably entwined with the deplorable practices of Citigroup, the too-big-to-fail bank made legal by Bill Clinton’s signing off on reversing the Glass-Steagall law that prevented the merger of investment and commercial banks. The first beneficiary of the revised law was the newly created Citigroup, saved from bankruptcy a decade later by the taxpayers.
- A Sign That Obama Will Repeat Economic Mistakes, TruthDig, December 7, 2012

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A Sign That Obama Will Repeat Economic Mistakes

By Robert Scheer
TruthDig
December 7, 2012

Please don’t tell me that these reports in the business press touting Sallie Krawcheck as a front-runner for chairman of the SEC or even a possible candidate to be the next Treasury secretary are true. Who is she? Oh, just another former Citigroup CFO, and therefore a prime participant in the great banking hustle that has savaged the world’s economy. Krawcheck was paid $11 million in 2005 while her bank contributed to the toxic mortgage crisis that would cost millions their jobs and homes.

Not that you would know that sordid history from reading the recent glowing references to Krawcheck in the New York Times, the Wall Street Journal and Bloomberg News that stress her pioneering role as a leading female banker - a working mother no less - but manage to avoid her role in a bank that led the way in destroying the lives of so many women, men and their children. Nor did her financial finagling end with Citigroup, as Krawcheck added a troubling stint in the leadership at Merrill Lynch and Bank of America to her rsum.

A woman who would be an excellent choice as the most experienced as well as principled candidate to head the SEC or Treasury is Sheila Bair, former head of the FDIC, who labored to protect consumers rather than undermine them. Indeed, her outstanding book “Bull by the Horns,” chronicling her fight in the last two administrations to hold the banksters accountable, should be required reading for the president and those who are advising him on selecting his new economic team.

The SEC is supposed to supervise the banks rather than abet them in their chicanery. And although the Treasury Department has been a captive of Wall Street lobbyists for most of the modern era, one would expect something better from the second coming of Barack Obama. Those are key appointments in determining whether the president can turn around the still-moribund economy by channeling the spirit of Franklin D. Roosevelt. Or will he continue to plod along on the course set by George W. Bush, bailing out the banks while ignoring beleaguered homeowners and the many other victims of this banking-engineered crisis?

Obama was given a pass on the economy by voters only because Mitt Romney was an even more craven enabler of Wall Street greed. But the outlines of the Bush Wall Street payoff remain in place, with the Federal Reserve continuing to bail out the banks with virtually free money and the purchase of $40 billion in toxic mortgage-based bonds every month to add to the more than trillion dollars in that junk that the Fed previously had taken off the banks’ books.

The money printing by the Fed is at the heart of the massive debt crisis. But it has been great for the bankers, with compensation at the 32 largest banks slated to hit an all-time high of $207 billion this year, according to a Wall Street Journal estimate. This reward for ripping off the public is almost three times the amount the federal government spends on education. Once again the bankers are blessed for their failures, receiving such wildly excessive compensation despite the fact that banking revenue is down 7.2 percent over the last two years.

A prime example is Krawchecks old bank, Citigroup, whose new CEO this week announced that the company has been forced to engage in a major retrenchment, eliminating 11,000 jobs and closing 84 branches. The bank has been deeply troubled ever since the housing meltdown it helped trigger first began, and it was saved from bankruptcy only by a direct infusion of $45 billion in taxpayer money and a commitment of an additional $300 billion in underwriting of Citigroup’s bad paper.

The ugly tale of Americas Great Recession is inextricably entwined with the deplorable practices of Citigroup, the too-big-to-fail bank made legal by Bill ClintonҒs signing off on reversing the Glass-Steagall law that prevented the merger of investment and commercial banks. The first beneficiary of the revised law was the newly created Citigroup, saved from bankruptcy a decade later by the taxpayers.

I shouldnt be surprised that Krawcheck would be considered a viable nominee for a central position in managing our economy. After all, her colleague in the top ranks at Citigroup during the years of financial depravity, Robert Rubin, is considered a significant adviser to the Obama administration, and his protҩgs, led by Treasury Secretary Timothy Geithner, are still directing policy. It was Rubin who pushed through the reversal of Glass-Steagall, an act of betrayal of the public interest that was rewarded with obscene amounts of money when he ultimately took the job of leading the bank he made legal.

The very fact that these folks remain influential, as witnessed by Krawcheck being considered to head the SEC rather than being the subject of one of its much-needed investigations, gives further evidence of the enduring but ultimately terminal illness of crony capitalism.

SOURCE

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Top Fed Official: The Moment Is Now to Break Up Big Banks

By Sarah Moughty
Frontline
April 2, 2012

The nations largest banks are “a perversion of capitalism” and a clear and present danger to the U.S. economy. The Dodd-Frank financial reform legislation passed in the wake of the crisis “may actually perpetuate an already dangerous trend of increasing banking industry concentration.”

These arguments come not from an Occupy Wall Street activist, not from a Tea Party member, but from a SCATHING REPORT released last week by one of the nation’s top banking regulators, the Federal Reserve Board of Dallas. In a column for ProPublica and The New York Times, reporter Jesse Eisenger described the report as a radical indictment of the nation’s financial system.

FRONTLINE sat down on Saturday with the Dallas Fed CEO and president, former banker Richard W. Fisher, to talk about the report and its core argument about “too big to fail” institutions. According to their calculation, the five biggest commercial banks - JPMorgan, Bank of America, Citigroup, Wells Fargo and U.S. Bancorp hold 52 percent of all U.S. deposits, which means the “too big to fail: problem is with us now more than ever.

Dodd-Frank proposes to solve this problem by giving the government “resolution authority” to dismantle a big bank, but Fisher suggests a better solution is to not allow banks to get so big.

Fisher argues that now is an ideal time to solve this problem. Regulators feared that aggressive steps to end the too big to fail problem during the crisis would further destabilize an already delicate system. But now that the financial system is healthier, and the normal lending and borrowing that keeps the system liquid has been restored, the risks have lessened.

FRONTLINE producer MICHAEL KIRK (Inside the Meltdown, The Warning) interviewed Fisher for our upcoming series Money, Power and Wall Street, airing April 24 and May 1 (check local listings).  In this special four-hour investigation, FRONTLINE will tell the inside story of the struggles to rescue and repair a shattered economy, exploring key decisions, missed opportunities, and the unprecedented and uneasy partnership between government leaders and titans of finance that affects the fortunes of millions of people around the world.

SOURCE

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The “Fiscal Cliff” Is A Diversion: The Derivatives Tsunami and the Dollar Bubble

By Paul Craig Roberts
December 17, 2012

The “fiscal cliff” is another hoax designed to shift the attention of policymakers, the media, and the attentive public, if any, from huge problems to small ones.

The fiscal cliff is automatic spending cuts and tax increases in order to reduce the deficit by an insignificant amount over ten years if Congress takes no action itself to cut spending and to raise taxes.  In other words, the “fiscal cliff” is going to happen either way.

The problem from the standpoint of conventional economics with the fiscal cliff is that it amounts to a double-barrel dose of austerity delivered to a faltering and recessionary economy.  Ever since John Maynard Keynes, most economists have understood that austerity is not the answer to recession or depression.

Regardless, the fiscal cliff is about small numbers compared to the Derivatives Tsunami or to bond market and dollar market bubbles.

The fiscal cliff requires that the federal government cut spending by $1.3 trillion over ten years. The Guardian REPORTS that means the federal deficit has to be reduced about $109 billion per year or 3 percent of the current budget.  More simply, just divide $1.3 trillion by ten and it comes to $130 billion per year. This can be done by simply taking a three month vacation each year from Washingtons wars.

The Derivatives Tsunami and the bond and dollar bubbles are of a different magnitude.

Last June 5 in “Collapse At Hand”, I POINTED OUT that according to the Office of the Comptroller of the Currency’s fourth quarter report for 2011, about 95% of the $230 trillion in US derivative exposure was held by four US financial institutions: JP Morgan Chase Bank, Bank of America, Citibank, and Goldman Sachs.

Prior to financial deregulation, essentially the repeal of the Glass-Steagall Act and the non-regulation of derivativesa joint achievement of the Clinton administration and the Republican Party - Chase, Bank of America, and Citibank were commercial banks that took depositors deposits and made loans to businesses and consumers and purchased Treasury bonds with any extra reserves.

With the repeal of Glass-Steagall these honest commercial banks became gambling casinos, like the investment bank, Goldman Sachs, betting not only their own money but also depositors money on uncovered bets on interest rates, currency exchange rates, mortgages, and prices of commodities and equities.

These bets soon exceeded many times not only US GDP but world GDP.  Indeed, the gambling bets of JP Morgan Chase Bank alone are equal to world Gross Domestic Product.

According to the first quarter 2012 report from the Comptroller of the Currency, total derivative exposure of US banks has fallen insignificantly from the previous quarter to $227 trillion. The exposure of the 4 US banks accounts for almost of all of the exposure and is many multiples of their assets or of their risk capital.

The Derivatives Tsunami is the result of the handful of fools and corrupt public officials who deregulated the US financial system. Today merely four US banks have derivative exposure equal to 3.3 times world Gross Domestic Product.  When I was a US Treasury official, such a possibility would have been considered beyond science fiction.

Hopefully, much of the derivative exposure somehow nets out so that the net exposure, while still larger than many countries’ GDPs, is not in the hundreds of trillions of dollars. Still, the situation is so worrying to the Federal Reserve that after announcing a third round of quantitative easing, that is, printing money to buy bonds - both US Treasuries and the banks’ bad assets - the Fed has just announced that it is doubling its QE 3 purchases.

In other words, the entire economic policy of the United States is dedicated to saving four banks that are too large to fail. The banks are too large to fail only because deregulation permitted financial concentration, as if the Anti-Trust Act did not exist.

The purpose of QE is to keep the prices of debt, which supports the banks’ bets, high. The Federal Reserve claims that the purpose of its massive monetization of debt is to help the economy with low interest rates and increased home sales.  But the Feds policy is hurting the economy by depriving savers, especially the retired, of interest income, forcing them to draw down their savings.  Real interest rates paid on CDs, money market funds, and bonds are lower than the rate of inflation.

Moreover, the money that the Fed is creating in order to bail out the four banks is making holders of dollars, both at home and abroad, nervous.  If investors desert the dollar and its exchange value falls, the price of the financial instruments that the Fed’s purchases are supporting will also fall, and interest rates will rise. The only way the Fed could support the dollar would be to raise interest rates. In that event, bond holders would be wiped out, and the interest charges on the governments debt would explode.

With such a catastrophe following the previous stock and real estate collapses, the remains of people’s wealth would be wiped out. Investors have been deserting equities for safe US Treasuries.  This is why the Fed can keep bond prices so high that the real interest rate is negative.

The hyped threat of the fiscal cliff is immaterial compared to the threat of the derivatives overhang and the threat to the US dollar and bond market of the Federal Reserves commitment to save four US banks.

Once again, the media and its master, the US government, hide the real issues behind a fake one.  The fiscal cliff has become the way for the Republicans to save the country from bankruptcy by destroying the social safety net put in place during the 1930s, supplemented by Lyndon Johnson’s “Great Society” in the mid-1960s.

Now that there are no jobs, now that real family incomes have been stagnant or declining for decades, and now that wealth and income have been concentrated in few hands is the time, Republicans say, to destroy the social safety net so that we don’t fall over the fiscal cliff.

In human history, such a policy usually produces revolt and revolution, which is what the US so DESPERATELY NEEDS.

Perhaps our STUPID AND CORRUPT policymakers are doing us a favor after all.

SOURCE

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How to Cut Megabanks Down to Size

By Gretchen Mogenson
NY Times
January 19, 2013

IT is a prevailing myth in Washington: big bailouts are over for good. Never again, the line goes, could giant financial institutions imperil the nations economy.

This is nonsense, of course. Whatever regulators and lawmakers say, the Dodd-Frank financial overhaul lacks any guarantee that taxpayers won’t have to come to the rescue again.

So it was refreshing to hear a member of the Federal Reserve Board debunk the bailouts-are-gone theory last week.

The official was Richard W. Fisher, the president of the Federal Reserve Bank of Dallas and a longstanding truth-teller about too-big-to-fail banks. On Wednesday, in a speech in Washington, Mr. Fisher laid out a compelling proposal for shrinking financial giants in order to protect taxpayers. He suggested that megabanks be chopped into pieces, so that no one of them could endanger the financial system if it ran into trouble.

That may sound like a return to the Glass-Steagall Act, the Depression-era law that separated investment banking and commercial banking until it was dismantled in 1999. But Mr. Fishers plan is more sophisticated than Glass-Steagall, in that it recognizes how complex big financial institutions have become. Glass-Steagall concerned only old-school banking businesses, like making loans, and Wall Street businesses, like trading stocks. TodayҒs financial behemoths are in so many different businesses that a top-to-bottom restructuring is required.

Why? Mr. Fisher argued that megabanks not only threaten taxpayers with bailouts, but that their continuing failure to lend is also thwarting the Feds efforts to jump-start the economy by keeping interest rates low. “I submit that these institutions, as a result of their privileged status, exact an unfair tax upon the American people,” he told his audience. “Moreover, they interfere with the transmission of monetary policy and inhibit the advancement of our nations economic prosperity.”

Smaller institutions, by contrast, have continued to lend in the post-crisis years, especially to the kinds of modest-size businesses that create so many jobs across the country. According to figures compiled by Mr. Fisher’s colleagues at the Dallas Fed, community banks - defined as those with no more than $10 billion in assets hold less than one-fifth of the nation’s banking assets. Nevertheless, they hold more than half of the industry’s small-business loans.

“Huge banks must be restructured and their access to the safety net scaled back”, Mr. Fisher said, “because neither regulators nor market participants have proved effective in monitoring risks at these institutions.”

The manic years before the credit crisis proved that regulators canҒt police financial institutions appropriately. And while market discipline has worked to keep smaller institutions on the straight and narrow, it has been ineffective with megabanks, Mr. Fisher said. He noted, for example, that community banks typically have a few large shareholders scrutinizing the risks in their operations. But too-big-to-fail institutions, with millions of disparate shareholders, dont benefit from this kind of concentrated policing mechanism.

Big banks’ creditors - like bond holders - don’t impose discipline, either. They know they will be protected by a taxpayer rescue should a large institution teeter.

Fairness is at the heart of Mr. Fisher’s argument. “Large institutions,” he said, “are financial firms whose owners, managers and customers believe themselves to be exempt from the processes of bankruptcy and creative destruction.” In other words, small institutions must submit to the rigors of the free market. Those too big to fail do not.

There are roughly 5,600 commercial banking institutions in the country, Mr. Fisher noted. Some 5,500 of them are community banks. While these organizations account for 98.6 percent of all banks, they hold only 12 percent of total industry assets. They are routinely allowed to fail if they get into trouble. Few of them did during the crisis.

Contrast these figures with those of the nations 12 largest banks, whose assets range from $250 billion to $2.3 trillion. They account for 0.2 percent of all banks but hold 69 percent of industry assets. These are the banks that enjoy all the perquisites of the federal safety net: significantly lower borrowing costs and a taxpayer backstop, for example.

Understanding that it will be a tough battle to break up the megabanks, Mr. Fisher suggests that in the meantime, only commercial banking operations receive protection from the federal safety net in the form of federal deposit insurance. An institutionҒs other activities securities trading, insurance operations and real estate, for example ח should fall outside any backstop. Furthermore, he recommends that these banks require customers and trading partners to sign an agreement stating that they understand the business they are conducting is not covered by any federal protection or guarantees. That would begin to reduce the perception that all of these institutions counterparties would be protected in a disaster.

“Financial stability rests on a level playing field that rewards sound judgment and integrity and penalizes excessive risk and complexity financed by taxpayer dollars,” Mr. Fisher said in his speech. “Government must retain its role as the financial systems watchdog, but it should render no institution immune to market discipline.”

IN an interview after the speech, Mr. Fisher said he believed his plan could appeal to both liberals and conservatives. “It’s politically palatable on both sides of the aisle,” he said. “This is one thing that both Republicans and Democrats can agree on.”

Or, as he said more pointedly in his speech: “If the administration and the Congress could agree as recently as two weeks ago on legislation that affects 1 percent of taxpayers, surely it can process a solution that affects 0.2 percent of the nation’s banks and is less complex and far more effective than Dodd-Frank.”

“The response to Mr. Fishers proposal has been resoundingly positive,” he said. Immediately after the speech was posted Wednesday evening on the Dallas Fed’s Web site, heavy traffic caused the site to shut down.

“I do think that this is something that can actually bring people on Capitol Hill together,” he said.

Wouldnt that be nice?

SOURCE

Austerity American Style
[PART 1] - Ending The Safety Net
[PART 2] - Enough Is Enough
[PART 3] - Big, Bad Businessmen
[PART 4] - Big, Bad Banks
[PART 5] - Selling Out The Public
[PART 6] - No Jobs Plan
[PART 7] - Big, Bad Cronies
[PART 8] - Red-State Model

Posted by Elvis on 12/17/12 •
Section Dying America • Section Austerity American Style • Section Next Recession, Next Depression
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