by Nomi Prins
Unfortunately, these conversations are not being carried out in depth. Instead, the discussion is focused on cosmetic regulatory fixes that may help a little but won’t fix the system. It happens every time. And with every major uptick of the Dow, calls for more stringent rules, bonus caps, and the like become dim background noise.
Nothing sweeps problems under the carpet like spin. By April 2009, the media were predicting the possible end of the economic crisis because the Dow and bank stocks had rallied. Was it because there were any signs at all of job growth? Or of foreclosures stalling? Or small businesses opening? No, not all. The markets rose because the country’s second-biggest home-lending bank, Wells Fargo, announced that it would have better than expected (by none other than bank analysts’) earnings estimates. A record first-quarter profit, no less. So everything was going to be better, just like that. And the choir rose in song as Bloomberg reported the following:
“The worst is behind us. We’re working our way through the credit crisis and that’s why the market is cheering,” enthused Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees $60 billion.
“Government stress tests of U.S. banks’ ability to withstand a deeper recession are likely to indicate that most don’t need more taxpayer money,” said Federal Reserve Bank of Kansas City president Thomas Hoenig.
Even Lawrence Summers, White House chief economic adviser, was confident that what he called the economic “free-fall” would end soon.72
Of course, the financial sector was thrilled; it went on to get more federal assistance at our expense and got to keep the lax structure in which it existed. If someone gave you a whole bunch of money, people would have confidence in your ability to pay them whatever you might owe them, too. It doesn’t mean you discovered a safer way to operate. Thus, on April 9, 2009, Wells Fargo, after an abysmal year, preannounced (so strategic) good earnings, “exceptionally strong mortgage banking results for the first quarter of 2009, $100 billion in mortgage originations and a 41% increase in mortgage applications, and strong indication for the second quarter of 2009.”73 This kind of sleight of hand is what begins a new pillage cycle. Wells Fargo didn’t distinguish whether these were new mortgages or refinanced old ones. Refinanced old ones mean that people are taking advantage of lower rates to lower their payments, which might or might not be good for staving off foreclosures, but the lack of explanation reeks of Wall Street as usual.
Meanwhile, in a speech at Peking University on May 31, 2009, Tim Geithner, aka Pollyanna, swung into sugarcoating mode: “We are starting to see some initial signs of improvement. The global recession seems to be losing force. In the United States, the pace of decline in economic activity has slowed.”
Now, how many of you readers feel better about your personal finances right now given that the “pace of decline” has slowed?
Geithner continued on about his true constituents, “The financial system is starting to heal. The clarity and disclosure provided by our capital assessment of major U.S. banks has helped improve market confidence in them, making it possible for banks that needed capital to raise it from private investors and to borrow without guarantees.”74
Nice that the treasury secretary, who is a public servant, feels that things are getting better—for the banks. But has he tried to get a job in the real world recently? Naturally, Wall Street is doing better than Main Street. Thirteen trillion dollars of government assistance will do a lot for your industry. So it’s not surprising that on May 5, 2009, the Wall Street Journal wrote: “Merrill Lynch has gone on a hiring spree. The firm is offering one of the highest paying recruiting deals in the industry for top producing advisers who join the firm.”75
There was more sugar from the media. On June 3, 2009, Evan Newmark of the Wall Street Journal even called for Paulson to be named a national hero. He wrote, “The TARP bailout worked. The Wall Street crisis is over.”76 Six days later, the Treasury Department announced that ten banks could pay back $68 billion of their TARP money. Tim Ryan, CEO of the Securities Industry and Financial Markets Association (SIFMA), wrote an op ed in the Financial Times on behalf of the banks, stating: “The industry accepts its share of responsibility for its role in the economic crisis and its duty to be part of the recovery. We intend to partner with governments to overhaul the regulatory system to help prevent such a crisis again. . . . Financial market participants know the time for change and reform in financial services has come.”77
These banks actually owed $229.7 billion between the TARP, TGLP, AIG money, and other avenues, but gee, it’s swell that the Treasury Department was going to “allow” them to pay back a whole $68 billion, to escape government restrictions without imposing any new ones for the rest of the money.78
Geithner should have taken a moment to look at that real world. He seemed oblivious to the New York Times warning that came out about a week before that speech. With job losses rising, “growing numbers of American homeowners with once solid credit are falling behind on their mortgages, amplifying a wave of foreclosures.” The article also stated that “Economy.com expects that 60 percent of the mortgage defaults this year will be set off primarily by unemployment, up from 29 percent last year.”79
Adding more pain to the mix, housing values plummeted, according to the S&P/Case Schiller Home Price Indices, to a seven-year low of 128.81 by the first quarter of 2009.80 That’s not improvement, Tim. But don’t worry, you’ve got someone else on your side: none other than Jim Cramer.
In a New York magazine article with the headline “Thank Bernanke,” Cramer concluded that “Ben Bernanke will go down as the greatest Federal Reserve chairman in history.” According to Cramer, “The moment of crisis has passed, the parallels to the Great Depression are gone, all because Bernanke learned the lessons of history and refused to let it repeat itself. Bernanke once seemed Lilliputian compared to Greenspan. Now their statures have been reversed.”81
Okay, I do agree with Cramer on one thing. Bernanke is bigger than Greenspan. Greenspan never conspired to subsidize the banking industry with $13 trillion.
Free Markets Aren’t Free
This kind of shallow analysis means that in a year or two, there will be collective government and media sighs of relief, accompanied by enthusiasm that America’s financial tree has shaken off its bad apples, and those spunky free markets have once again corrected themselves.
But we have to remember that the “free” markets aren’t actually free—they cost trillions of dollars in Fed and Treasury secrets and bailouts, billions of dollars in bonuses, and millions of jobs. And because the remaining financial titans can afford to wait out a year or two of turmoil—as long as they retain control of the rules, which they will—we’ll soon experience another round of convoluted off book, nontransparent transactions engineered by teams of Ivy League PhDs, abetted by practices paid for by the finance industry.
A few years after the death of Bear Stearns and Lehman Brothers and the acquisition of Merrill Lynch by Bank of America, of Washington Mutual by JPMorgan Chase, and of Wachovia by Wells Fargo, some smoking hot product will emerge to replace subprime CDOs, just as something replaced Enronian derivatives wizardry, WorldCom broadband bonds, Long Term Capital Management magic, dot com IPOs, and junk bonds.
The new Wall Street landscape will be divided into a bunch of risk laden mega-banks, headed by ex Goldmanites or other members of the political banking elite squad. Pieces of the investment banks that have supposedly changed their spots through acquisition or altering their status to BHCs to extract more government support will spin off into private companies—streamlined and focused, they will call them—to ward off any possibility of enduring forced regulation, which will be a nonevent anyway. Bonuses will boom, and the cycle will begin again. Then we will wonder why, yet again, so much money has transferred pockets, and no lessons were learned. Why is it that the more Wall Street changes, the more it remains the same?
We have got to be
louder in our demands for real change. No Fed secrecy. No Treasury backing for toxic assets. No merging of banks that misbehave or that take our money to finance the deed. No banks that mingle consumer deposits with risky bets. No securities packaged with so many layers that they are impossible to understand, let alone regulate or value. No acceptance of the idea that free markets mean no constraints. No public dime supporting private losses. No status quo. We can achieve this, just as U.S citizens did in the past. A flood of visible public outrage provoked necessary and stabilizing changes in the 1930s, and the president, the treasury secretary, and Congress combined their strengths to reform the banking system.
We may not be in the middle of an exact duplicate of the Great Depression today, with high unemployment rates and bread lines, but in terms of wealth loss and federal subsidies extended to the banking system, we have surpassed those times. We need to flood Congress with our opinions again. We need better than equal treatment for people over banks. Our representatives need to know beyond a shadow of any doubt that we will not give them our votes if they take from us our future. E-mail them, march before their offices, vote against the ones who don’t represent you and tell them why, start petitions, Twitter them. Flood their Facebook inboxes. Silence is too costly and unfair. Revolutionize regulation. The government has shown us the money is available.
We must ask ourselves: Do we have what it takes to stop the financial insanity this time? Or will we be lulled into complacency once again, so eager for a return to “normal” that we fail to stop the same systemic cascade of reckless and shady practices and greed from devastating us all over again? And the answer must be: No, we won’t! It’s past time to flex our will and end the next pillage before it starts.
THE REAL NUMBERS: BAILOUT, TARP, AND CEO COMPENSATION
In the course of considering all the tentacles of the government sponsored bailout of the financial industry, there were a lot of numbers to process. In order to establish as comprehensive a set of reports as possible, Krisztina Ugrin and I scoured primary sources including Federal Reserve press releases and reports, Securities and Exchange Commission annual reports and proxy statements, Treasury Department press releases, U.S. Department of State reports, AIG’s counterparty report, Citigroup’s loss sharing program release, Congressional Research Service (CRS) reports, the SIGTARP (Special Inspector General for the Troubled Asset Relief Program) report, Federal Deposit Insurance Corporation (FDIC) press releases and reports, the Reuters and Dealogic Temporary Liquidity Guarantee Program reports, and corporate press releases. Where necessary, we questioned people at the Fed, Treasury Department, and FDIC for clarifications. John Olagues, owner and principal consultant of Truth in Options, stock options consultants, also provided assistance in determining the true value of executive options, in order to determine their total compensation. Each of our reports contains first source links. To access the reports, please visit http://www.nomiprins.com/bailout.html.
1. Nomi Prins and Krisztina Ugrin, “Bailout Tally,” June 2009: This report breaks down the $13 trillion by government area (Treasury Department, Fed, FDIC, etc.) and by company to illustrate exactly how much assistance came from what federal entity. Each of the various lending facilities are delineated as well. We will update this report monthly.
2. Nomi Prins and Krisztina Ugrin, “CEO Compensation and Bonuses”: This report provides information on total executive compensation for the top TARP capital purchase program recipients, comparing their compensations in 2007 (before the bailout) with those in 2008 (after the bailout) and also the losses/profits of each firm for those years. We will release the information for 2009, as it becomes available. The report depicts the various reclassifications of compensation that firms have used to pay their executives, outside of any possible government restrictions, as well as an evaluation of the stock and option awards by John Olagues for Citigroup, JPMorgan Chase, and Goldman Sachs.
3. Nomi Prins and Krisztina Ugrin, “TARP Evaluation,” June 2009: Because there is certain information missing from the 250 page quarterly SIGTARP report released on April 21, 2009, we compiled a report to augment it. We evaluate TARP investments and provide a point of comparison with other reports that have been released on TARP. We will update the report as new SIGTARP reports are released.
NOTES
Introduction. The More Wall Street Changes, the More It Stays the Same
1 Eric Dash, “Bankers Pledge Cooperation with Obama,” New York Times, March 27, 2009, http://www.nytimes.com/2009/03/28/business/economy/28bank.html.
2 U.S. Department of the Treasury, Biography of Secretary Henry M. Paulson, n. d., http://www.ustreas.gov/education/history/secretaries/hmpaulson.shtml; Associated Press, “Henry Paulson: ‘Major Decisions Were Right,’ ” MSNBC, March 26, 2009, http://www.msnbc.msn.com/id/29896951.
3 U.S. Department of the Treasury, “Secretary Geithner Introduces Financial Stability Plan,” press release: TG-18, February 10, 2009, http://treas.gov/press/releases/tg18.htm; U.S. Department of the Treasury, “Treasury Department Releases Details on Public Private Partnership Investment Program,” press release: TG 65, March 23, 2009, http://www.treas.gov/press/releases/tg65.htm.
4 Narcotics Anonymous, “NA White Booklet,” Narcotics Anonymous World Services, Inc., p. 2, http://www.na.org/admin/include/spaw2/uploads/pdf/litfiles/us_english/Booklet/NA%20White%20Booklet.pdf.
5 U.S. Securities and Exchange Commission, “Statement Regarding Recent Market Events and Lehman Brothers” (Updated), press release 2008-198, September 15, 2008, http://sec.gov/news/press/2008/2008-198.htm.
6 Reuters, “SEC Probes BofA Over Merrill Bonuses,” CNNMoney.com, April 14, 2009, http://money.cnn.com/2009/04/14/news/companies/sec_boa.reut/; U.S. Department of the Treasury, Capital Purchase Program—Transaction Report, Financial-Stability. gov, December 22, 2008, p. 1, http://www.financialstability.gov/docs/12-29-08.pdf.
7 Nomi Prins and Krisztina Ugrin, “Bailout Tally,” June 2009, http://www.nomiprins.com/bailout.html.
8 CNNMoney.com, “Annual Ranking of America’s Largest Corporations, Fortune 500,” April 30, 2007, 1-100, http://money.cnn.com/magazines/fortune/fortune500/2007/full_list; CNNMoney.com, “Annual Ranking of America’s Largest Corporations,” Fortune 500, April 30, 2007, http://money.cnn.com/magazines/fortune/fortune500/2007/snapshots/1341.html.
9 Nomi Prins and Krisztina Ugrin, “Bailout Tally,” June 2009, http://www.nomiprins.com/bailout.html.
10 GPO, Economic Report of the President, U.S. Government Printing Office, Washington, 2003, p. 51, http://www.gpoaccess.gov/usbudget/fy04/pdf/2003_erp.pdf.
11 Nomi Prins, “Subprime Lending’s Smartest Guys in the Room,” Mother Jones, March- April 2008, http://www.motherjones.com/politics/2008/03/subprime-lendings-smartest-guys-room.
12 Office of Federal Housing Enterprise Oversight, House Price Appreciation Continues at Robust Pace, March 1, 2006, http://www.fhfa.gov/webfiles/2260/4q05hpi.pdf.
13 Office of Federal Housing Enterprise Oversight, U.S. House Price Appreciation Rate Steadies, March 1, 2007, http://www.fhfa.gov/webfiles/2192/4q06hpi.pdf.
14 Federal Reserve Bank of San Francisco, “Oil Prices and the U.S. Trade Deficit,” press release: 2006-24, September 22, 2006, http://www.frbsf.org/publications/economics/letter/2006/el2006-24.html.
15 Standard & Poor’s, “S&P/Case-Schiller U.S. National Home Price Values,” May 26, 2009, http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/2,3,4,0,1148433018483.html.
16 Alexandra Twin, “Dow, S&P Break Records,” CNNMoney.com, October 9, 2007, http://money.cnn.com/2007/10/09/markets/markets_0500/index.htm?postversion=2007100917.
17 Office of the New York State Comptroller: Thomas P. DiNapoli, “New York City Securities Industry Bonuses,” press release, January 17, 2008, http://www.osc.state.ny.us/press/releases/jan08/bonus.pdf.
18 Board of Governors of the Federal Reserve System, Federal Funds Effective Rate, http://www.federalreserve.gov/releases/h15/data/Monthly/H15_FF_O.txt.
19 Peter A. McKay, “Dow Is Off 7,401.24 Points from Its Record High in ‘07,” Wall Street Journal, March 3, 2009, http://online.wsj.com/article/SB123599406229708501.html.
20 Alan Katz and Ian Katz, “Greenspan Slept as Off-Books Debt Escaped Scrutiny (Update 1),” Bloomberg, October 30, 2008, http://www.bloomberg.com/apps/news?pid=20601087&sid=aYJZOB_gZi0I&refer=home.
21 Alan Sloan, “Why on Earth, Fortune’s Allan Sloan Asks, Should We Protect Banks from Their Mistakes?” CNNMoney.com, November 12, 2007, http://money.cnn.com/2007/10/26/magazines/fortune/citishelter.fortune/index.htm.
22 U.S. Department of the Treasury, Programs: What Is EESA? May 7, 2009, http://www.financialstability.gov/roadtostability/programs.htm.
23 Federal Deposit Insurance Corporation, About FDIC, n.d., http://www.fdic.gov/about/index.html.
24 Federal Deposit Insurance Corporation, Supervisory Insights—Enhancing Transparency in the Structured Finance Market, December 7, 2007, http://www.fdic.gov/regulations/examinations/supervisory/insights/sisum08/article01_transparency.html.
25 Satyajit Das, Credit Derivatives: CDOs and Structured Credit Products (Singapore: John Wiley & Sons, 2005), quoted in Richard Tomlinson, David Evans, and Christine Richard, “The Ratings Charade,” Bloomberg Markets, July 2007, http://www.bloomberg.com/news/marketsmag/ratings.html.