The Big Bank Bailout - In an article Secrets and Lies of the Bailout, Matt Taibbi says “It was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people.

 

 The Big Bank Bailout

Most people think that the big bank bailout was the $700 billion that the treasury department used to save the banks during the financial crash in September of 2008. But this is a long way from the truth because the bailout is still ongoing. The Special Inspector General for TARP summary of the bailout says that the total commitment of government is $16.8 trillion dollars with the $4.6 trillion already paid out. Yes, it was trillions not billions and the banks are now larger and still too big to fail. But it isn’t just the government bailout money that tells the story of the bailout. This is a story about lies, cheating, and a multi-faceted corruption which was often criminal.

• Rating agencies- Rating agencies like Standard and Poor’s are paid by the banks (which is a conflict of interest) and have a huge influence on the ratings of securities. During the housing bubble ratings agencies continued to give triple AAA ratings to toxic mortgages. The justice department wants $5 billion in restitution from Standard and Poor’s for its part in falsifying ratings.

• Money laundering – It has been proven that the American Division of the HSBC bank did money laundering for Mexican drug cartels to the tune of $881 billion according to the Justice Department. The penalty to this bank for blatant corruption was $1.9 billion and the New York Times laments that HSBC was too big to indict. Nobody goes to jail at a time when an unemployed black person gets 10 years for robbing a minute mart.

• Betting Against – Both JP Morgan Chase and Goldman Sachs worked with hedge funds to bet against the toxic mortgages after the crash had started. They made money by selling short on the financial catastrophe they had created. JP Morgan was fined $296.9 million and Goldman Sachs was fined $550 million for actions

 

• Insider Trading –The jailed billionaire Raj Rajartmn made nearly $One million a minute by getting inside information from Goldman Schs. The New York attorney has fingered 70 hedge funds but the prosecution is very slow.

The operating principles of the big banks is a cesspool of greed, ethics and criminal intent and they give a very bad name to free market capitalism. During the housing bubble Wall street was considered the heart and soul of free market capitalism, but when they were in danger of total collapse they fell on their knees as socialists, begging the government and tax payers to bail them out

Many people have asked why the government bailed them out. Isn’t capitalism designed to get rid of the weak and the failed; so why didn’t we just let them fail? The answer was that they were too big to fail and allowing them to fail could have created a worldwide depression. . In fact, in a meeting with Congress on September 18th, 2008. Treasury Secretary Paulson told the members that $5.5 trillion in wealth could disappear by 2pm of that day. In a meeting with Senator Sherrod Brown, Secretary Paulson and Federal Reserve Chairman Ben Bernanke said, “we need $700 billion and we need it in 3 days.”

So how did this all happen?

1933 - The Glass –Stiegel Act regulated interest rates, established deposit insurance, and erected a wall between commercial and investment banking by restricting the former from engaging in non-banking activities like securities and insurance.

1978 – A successful legal challenge to the state usury laws and the massive promotion of credit cards by the banks led to dramatic growth of credit card debt by consumers.

1979 – Pension regulation was loosened which created a new market for speculation and the capital to feed it.

1980 – Investors fled conventional interest bearing accounts to alternatives such as money market, venture capital and hedge funds which were lightly regulated.

1982- Congress passed the Garn-St. Germaine Depository Institution Act which deregulated the Savings and Loan industry. This led to speculation with other people’s money and a crisis which would cost the taxpayer $201 billion. The deregulation of interest rates at conventional banks also led to elimination of bank net-worth, accounting standards, and loan to value ratio requirements.

1999-Republican Phil Gramm successfully led the effort that repealed most of the Glass-Stiegel Act, which was a depression era law that kept Commercial Banking and Investment separated.

2000- Only a year later Gramm inserted the new Commodity Futures Modernization Act into a must pass budget bill that rocketed through the Congress. One part of this bill would prohibit the regulation of Derivatives which allowed finance gurus to leverage and speculate with other people’s money. By using derivatives, credit default swaps and other unregulated financial instruments the big banks were able to chop up and resell loans and mortgages as repackaged securities or derivatives. The new securitization became globalized and eventually affected the world economy

After the creation of new financial tools (like credit default swaps and derivatives) as well as more access to everybody’s money; the banks began to do high risk gambling just like a big casino. The new financial tools were backed by the government so that taxpayers would get hung with the bill.

2007 – The speculation and lack of effective regulation eventually led to the crash of 2007 and The Great Recession. The industry is not afraid to do it again because they know no one goes to jail and the government will bail them out.

Why didn’t more people know that the bailout had climbed into the trillions?

In an article Secrets and Lies of the Bailout, Matt Taibbi says “It was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people. We were told that the taxpayer was stepping in – only temporarily, mind you – to prop up the economy and save the world from financial catastrophe. What we actually ended up doing was the exact opposite: committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyper concentrated new financial system that exacerbates the greed and inequality that caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to increase risk rather than reduce it.

After the original $700 billion bailout, the ongoing bailout was kept very secret because Chairman Ben Bernanke, argued that revealing borrower details would create a stigma — investors and counterparties would shun firms that used the central bank as lender of last resort. In fact, $7.7 trillion of the secret emergency lending was only disclosed to the public after Congress forced a one-time audit of the Federal Reserve in November of 2011. After the audit the public found out the bailout was in trillions not billions; and that there were no requirements attached to the bailout money - the banks could use it for any purpose.

The big got even bigger

During the bailout the government also allowed many of the banks to use the bailout money to merge - Chase and Bear Stearns, Wells Fargo and Wachovia, Bank of America with Merrill Lynch. So the result is that they are much bigger today and have become an oligopoly that controls a huge amount of money. The 12 largest banks now control 70% of all bank assets. Their favorite tool Derivatives was taken away by the Dodd Frank laws but they cleverly got derivatives back by including them in a bill to fund the government. And derivatives are again backed by the FDIC so the banks are ready to gamble again.

The Dodd Frank bill was promoted as the real answer to Wall Street Improprieties. But it has now been 3 years since it was approved and only half of the regulations have been implemented. An important part of the Dodd Frank legislation was the Volker Rule, which was to bar banks from proprietary trading or making trades using customer funds. The legislation was scheduled to go into effect in 2012 but lobbyists have successfully stalled the bill until at least 2017.

Dodd Frank also includes a mechanism for closing down failing banks called Resolution Authority, but House Republicans are trying to repeal the legislation saying it would save the taxpayers $22 billion. This legislation would draw from the treasury to close down the bank and then pay back the taxpayers by selling the bank’s assets.

The problem is that the big Banks have enormous lobbying power to buy off Congress.

How can we prevent the big banks from doing it again?

1. The first thing that needs to be done is the solution proposed by the Federal Reserve Board of Dallas. Which said “the nation’s largest banks are a perversion of capitalism and a clear and present danger to the U.S. economy. “The report goes on to say that the 5 largest banks –JP Morgan, Citigroup, Bank of America, Wells Fargo, and US Bancorp hold 52% of all US deposits and are an oligopoly that should be broken up. Sherrod Brown a Democrat senator from Ohio submitted a bill to break up the big banks but only got 33 votes in the senate. Perhaps if the public would have known of the secret bailout using trillions of taxpayer dollars, the bill might have passed.

2. Some form of the Glass Stiegel act should be put in place that separates the commercial part of the banks from the investment part. In addition the FDIC insurance should apply and protect only commercial bank operations not the gambling part of the banks. The details on how to carry out these solutions is summarized in a report called Ending "Too Big To Fail" by the Federal Reserve Bank of Dallas

3. Another suggestion is get rid of ratings agencies. They are paid for by the banks and are a conflict of interest.

4. We should also consider placing a financial transaction tax on all sales of stocks, bonds, options, futures, etc. Some people call this the “Robin Hood tax” or a sin tax on all of Wall Street vices. Wall Street may ignore most regulations but they understand losing some of their profits through a tax. In this case Wall Street would have to share some of their money with Main Street.

5. Another suggestion is to raise taxes on hedge funds from 15 to 35%. Hedge funds profit from insider tips, high frequency trading, rumor mongering, front –running trades, special tax loopholes and even from stocks that are failing.

6. And of course, we must make derivatives illegal again.

7. But perhaps the best solution is to make the CEOs and top managers of the banks criminally liable for breaking these rules so that they fear going to jail. These people are not afraid to do it again so if you can’t put some real fear in their heads they will do it again.

Wall Street’s gambling created a giant hole in our economy. In just a few months 8 million people lost their jobs and it created the greatest recession since the Great Depression. The choice is clear, either we regulate the big banks like we did during the New Deal or they will eventually destroy both themselves and the economy. William Banzai put the big bank problem in perspective when he said, “If we don’t get rid of the incentive to loot, then the only question is what form the next round of looting will take.”

Mike Collins can be reached through his website mpcmgt.com

Mike Collins