Obama Banking Too Much on Banks

Wall Street Monday to promote a regulatory overhaul of the US financial system. The visit came on the one-year anniversary of the collapse of the investment bank Lehman Brothers. Lehman’s bankruptcy set off a series of events across the financial markets, leading to a full-scale economic meltdown. Speaking at Federal Hall, Obama promoted Democratic proposals for new financial oversight and a consumer protection agency to protect Americans from unfair loans, but Nomi Prins, an investment banker turned journalist, says Obama’s proposed reforms don’t go deep enough.

Speaking at Federal Hall, Obama touted the federal government response in the year since, including the massive Wall Street bailout. He also promoted Democratic proposals for new financial oversight and a consumer protection agency to protect Americans from unfair loans. In some of his most pointed criticism of Wall Street to date, Obama said “reckless behavior and unchecked excess” was “at the heart of the crisis.”

Although Obama had harsh words for Wall Street, he took a softer line in asking for a series of voluntary changes, including overhauling pay structures and subjecting bonuses to a shareholder vote.

Nomi Prins talking:

Most of what Obama was saying to the Wall Street leaders who were in that room was kind of help us do what we need to do. You cut down your bonuses, you take care of helping homeowners renegotiate their mortgages. Kind of, we’re not going to make you do it. We will probably pass few reforms that will do something to that effect, but, could you guys help us out restrain you?

And just that very notion and the notion that because Wall Street is healthier than it was last year after receiving something like $17.5 billion worth of guarantees, of cheap loans, of other kinds of subsidies, of backup for in case they lose money again, the fact that they’ve returned to some kind of health and normalcy, as Obama put it, rather than looking at what Main Street is actually going through and how it has declined in terms of its own economic health, really just places the emphasis on the wrong group of people.

What about the issue of these big banks becoming even bigger? Part of the reason for the bailout was, we were told, they were too big to fail; if they failed, it would cause a systemic collapse of the financial system. Now, a year later after this, many of these big banks are even bigger, and if the risk taking is left unchecked, doesn’t that set us up for a bigger fall?

This time the bigger fall will have been federally funded and federally invoked, because, for one thing, the bigger banks are bigger.

JPMorgan Chase was given Bear Stearns and Washington Mutual, with some padding from the US government in terms of guaranteeing additional losses that it might incur from acquiring those companies. It became bigger.

Fargo-Wachovia became bigger. Wachovia was run for a little bit by a former Goldman executive. It became bigger under a Fed and Treasury decision, although it’s ultimately the Fed’s decision to push mergers.

Bank of America-Merrill Lynch, bigger. That is a risky, risky institution. Merrill Lynch was on the brink of failure; it was about to become a Lehman Brothers, and the choice was to give it to Bank of America and make the combined entity bigger.

So now we have three banks that actually push outside of the ten percent limit laws that the FDIC is supposed to enforce and has in place to restrict the amount of deposits, consumer deposits, they can hold. They are all at or above the limits. And they were put there by the federal government.

We saw earlier this year an uproar over the bonuses at AIG. Goldman Sachs this year is on track, on average, per employee, to earn $700,000, on average. It does not seem that compensation has been curtailed at all.

In fact, compensation is actually running ahead of what it was in 2007. So not only has it not been curtailed at a place like Goldman Sachs, it’s actually on track to be more than it was before the crisis. So the idea that there’s going to be any sort of constraint or restraint coming from inside the meeting rooms where bonuses are fought for and discussed really every day of the year after every big trade that happens is just ludicrous.

It was insane that the SEC agreed to a $33.5 million settlement on a $3.6 billion bonus misrepresentation, when the federal government backed the acquisition of Merrill Lynch by Bank of America at the end of last year that took effect on January of this year. The fact that there was even a settlement to begin with, so quick and so cheap, was absolutely insane. So Judge Rakoff absolutely did the right thing to say, wait a minute, this is not moral, this isn’t just, this isn’t right.

We’ve paid money to have that merger happen. And you know what? We are still paying money to float the risk that that merger has incurred. We are still paying money into Bank of America. It still has a lot of taxpayer money, almost $118 billion that is on record, and more in loans from the Fed that the Fed refuses to disclose the exact nature of.

And that fact that the SEC, under President Obama, made the decision to allow a sort of little wrist slap for that behavior was wrong to begin with. Fight for bonuses goes on all the time, and bonuses are collectively more. But it is good that that decision was made.

The total level of the bailout is over $19 trillion, over $17 trillion of which went to the financial industry.

That number is compiled. It is compiled out of all publicly available information, from releases from the FDIC, from going into their databases, which anyone can do looking at the Fed’s balance sheet, looking at the language—and some of it’s very convoluted—of what comes out of the Treasury when they change programs and enhance programs that have already been given to the banks, that don’t tend to get headline news when they happen. So it’s really kind of digging and scratching into what is publicly available and changes publicly, but not openly, to try and compile a picture of where the ballot has been.

Breaking it down then into what’s come out of the Fed, which is about $8 trillion of that; what’s come out of the Treasury Department, which is around $5.5 trillion; another almost $2 trillion from the FDIC; more in terms of joint efforts by all three that are a little harder to figure out who’s getting what risk and who’s paying what to the industry, and compile it that way. And that $17.5 trillion, that also includes a recent addition, which is $3.5 trillion to back money market funds. Recall, those were having deep problems at the end of last year and throughout the fall. They’re not having as many problems now, but there was still a choice made between the Treasury Department and the FDIC to enhance the guarantees in case those fall apart again.

Some of the money has been given direct; some of the money is on loan from the Fed, where we don’t have all of the details; and some of it’s kind of there as deep backup in case things go really south again for the banking industry. And then a small portion of that actually has been given to consumers in some way, through the fiscal stimulus package, through the Recovery Act, through some tax incentives to first-time home buyers, and through the cash-for-clunkers program. So there is a small portion, less than nine percent, that’s kind of been given to individuals, but the rest of it, the other 91 percent, has been given to Wall Street or to the markets in general.

The Wall Street lobbies and the Chamber of Commerce have gotten together, because this is the one thing they fear, that the business that they do is somehow going to be hampered, that the next time they come up with something creative, which tends to mean obtuse, won’t be able to be produced for their customers, they won’t be able to make money off it.

And the reason they’re also so scared goes to why a lot of this crisis happened. It wasn’t necessarily because of the subprime loans and those foreclosures and those defaults. It was because the banking industry packaged and repackaged and borrowed against and created this whole mass pyramid of risk on top of these little layer of loans, and that’s the problem. And they don’t want that layer to go away, because they cannot build up the risk and the debt above what’s not there. And that’s why they are scared.

So we definitely need a strong consumer financial protection agency, not in name, not as another regulatory body going through reports, but legitimately able to restrain the types of risks that are in products so that consumers do not get hurt by using products that ultimately are leveraged to the hilt and cause the risk and chaos to the general financial system that Wall Street created from them. So, the consumer financial protection agency does get created and does have the power to both help consumers and to get in the way—and that’s the thing that scares Wall Street the most, so you know it’s the right thing to do—to get in the way of packaging things and creating risk on top of consumers, as well, because that decays the entire system, as well as hurts consumers.

We’re not talking about true reform right now. The book, It Takes a Pillage, is really about tracking what truly went on; who said what to whom; how, for example, the meetings between Treasury Secretary Hank Paulson, who was a former CEO of Goldman Sachs, and the current CEO of Goldman Goldman Sachs, Lloyd Blankfein, went down; how the meetings between the current CEO of JPMorgan Chase, Jamie Dimon, and the other powers that be in Washington went down, when his piece of the banking pie was reconstructed, and all of that; how we wound up paying for that, not just in actual direct money, which we did, but also in all the loans and guarantees and debt to the system, that only—only serve to create a status quo situation that will potentially devolve into more risk, but on our money.

It used to be that the banking system floated on its own investments and raising its own capital and using, unfortunately, our loans and our credit products to borrow against and leverage up against and create more risk. Now they’re using the government’s money. So now we’re in a far worse situation. And the bailout was never about the little guy and never about the subprime mortgage; it was about so much more.

And in terms of reform, we need to return to Glass-Steagall. That was a time, in 1933, when Wall Street had really wrecked the rest of the economy, where the same types of practices, actually, that we now know today—the risk, the selling securities based on other little loans that don’t have as much value as they say they have, and all of that—that was happening in 1929. It was just with different stuff. It’s the same process. And in 1933, the decision by Congress, by FDR, who was a Democratic president, by a Treasury secretary that was a Republican, was that the banks should be divided into two components: a commercial bank that dealt with deposits and consumers and checking accounts and, you know, regular loans; and the risky investment bank and trading entities that could do whatever they wanted to do, but they didn’t get the government’s backing and the government’s help and the government guarantees to go and do it.

And that distinction, had we had that, would have saved us a lot of money. It also would have made sure that we don’t have banks trading on the back of consumer loans and therefore giving the incentive to screw around with consumer loans and to make them so nontransparent, because that is how they are most profitable when they get packaged up.

And so, dividing the landscape like was done then also allowed the regulatory agency at the time, the FDIC, to do its job better, to back deposits better. Now it keeps running out of money and asking Congress for more, because it’s supposed to back banks that have taken on all these other risks that have nothing to do with consumer deposits. And so, dividing the landscape really is the only way to bring stability, to really rein in Wall Street, not to ask them if it’s OK, but to just go ahead and do it. It will be cheaper for the country. It’ll be more stable for the economy. It will make more sense, actually, for the banking system.

Discussion: Nomi Prins, Amy Goodman, Sharif Abdel Kouddous.

Nomi Prins, Former investment banker turned journalist, she worked at Goldman Sachs and Bear Stearns, author of a number of books. Her newest is just out; it’s called It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street.

– from democracynow.org