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TBTF Bank Fraud Continues…But the Decision to Put Profits First Is Nothing New

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Matt Taibbi, of Rolling Stone, published a lengthy article on Bank of America’s failure of ethics regarding credit cards accounts. His reporting cites robo-signing abuses, failure to document customer records, and outright fraud. Yet, BofA continues to be protected by our government as a Too Big to Fail bank.

Bank of AmericaHowever, BofA’s malfeasance…and arrogance towards its customers…is neither new nor only a decade long. BofA has a long history of a management that has made poor decisions and expected their regular customers to financially bail out the bank.

Bank of America’s problems began long before the company moved its headquarters from San Francisco to Charlotte, NC. In the early ‘80s, I went to work for one of BofA’s ad agencies – one of many spread around San Francisco. Not long after, BofA found itself in deep financial trouble as a result of overexposure in the California housing market which was undergoing a price decline and an even larger exposure to So. American loans that were failing. BofA was in a panic as their losses mounted, particularly on the So. American loans.

You’d think they would have had some humility about their losses, but instead management became even more arrogant. They began increasing fees on their regular banking customers while at the same time treating those customers with distain. Customers who complained about errors or unknown fees were regularly treated with derision. The attitude was “we’re better than you so go suck a lemon.”

At the same time, BofA decided it could make more money by catering to the wealthy. No longer did their marketing focus on regular banking customers who needed a checking account or a home mortgage or a credit card at reasonable interest rates or a savings account that gave a decent rate of interest return. Bleeding the poor suckers was fine with management if it shored up the bank’s huge losses.

Instead of maintaining Giannini’s record being a bank for average, hardworking families, BofA refocused their moneymaking strategy on Private Banking to attract wealthy customers. They offered wealthy customers a personal banker who was intimately familiar with the customer’s finances; a haute couture private lounge, complete with designer coffee and wine, so their wealthy customers never had to rub shoulders with the riff-raff; and a culture within the bank to make the wealthy feel superior.

Within a year, BofA saw a mass exodus of their regular banking customers. But don’t take my word for it, look up what Charles Schwab said about BofA’s attitudes towards its customers during this time period.

It didn’t take long – a year or so – for BofA to realize the mistake they made in driving off regular, middle income banking customers. Thousands, if not hundred of thousands, of ordinary middle income customers had deserted BofA. As a result, BofA began to court these customers with a vengeance because they realized the bank could not survive without them.

Within a few years, BofA, in its search for every higher profits, became one of the largest credit card offerers, from an insider’s marketer position, in the marketplace because credit cards became enormously profitable – and became the bank’s largest profit center, outstripping anything other product by huge margins.

After the merger which moved BofA’s headquarters to Charlotte, the arrogance of management did not recede. It became worse as management decided their customers were little more than cash cows which the bank could bleed to their hearts’ content…and they used every trick on the books to do so.

But BofA is not alone in this type of thinking or attitude. Each and every one of the TBTF banks is complicit in the same kind of behavior.

I’m sure A.G. Giannini, were he alive today, would mourn what became of his workers’ bank…and deeply ashamed of his bank’s modern day management that chose to put its’ profit over its customers well being.

What “escaped” media headlines today….

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Articles that need to be read:

JP Morgan takes $250 million in debt and turns it into over $1.1 Billion debt for Jefferson Country, AL, even paying Goldman Sachs $3million to not compete.

Matt Taibbi’s story – Looting Main Street – in Rolling Stone elucidates how towns across America and countries like Greece have been hoodwinked by U.S. mega-banks and brought to near bankruptcy, with bills they may never be able to repay.

Given the [expletive] of money to be made on the refinancing deals, J.P. Morgan was prepared to pay whatever it took to buy off officials in Jefferson County. In 2002, during a conversation recorded in Nixonian fashion by J.P. Morgan itself, LeCroy bragged that he had agreed to funnel payoff money to a pair of local companies to secure the votes of two county commissioners. … […]

Last November, the SEC charged J.P. Morgan with fraud and canceled the $647 million in termination fees. The bank agreed to pay a $25 million fine and fork over $50 million to assist displaced workers in Jefferson County. So far, the county has managed to avoid bankruptcy, but the sewer fiasco had downgraded its credit rating, triggering payments on other outstanding loans and pushing Birmingham toward the status of an African debtor state. For the next generation, the county will be in a constant fight to collect enough taxes just to pay off its debt, which now totals $4,800 per resident.

Jessie’s Cafe American takes on Warren Mosler, “an economist specializing in monetary policy and running for Senator Dodd’s Senate seat in the November elections.”

And further, in the case of commercial entities like the TBTF bullion banks JPM and HSBC, they are not complaining about short selling that is backed by physical metal, duly paid and accounted for. They are asking questions about what appear to be enormous naked short positions against silver, questionable ownership and claims to collateral, and naked shorting by banks using public funds and powerful influence over the regulators, with selling patterns indicating the intention of manipulating the price in order to gain from it. Sound familiar? It seems as though this has been the very basis of the US financial system since the repeal of Glass-Steagall.

Although your essay contains a number of factual errors, this does stand out as a particularly misleading statement:

“If you hold gold, lending it is a way to make extra money with very little risk.”

Tell that to the miners like Barrick that took a multi-billion dollar bath on their hedge book. Derivatives and transactions involving naked shorting and selling the same thing multiple times are never, ever relatively riskless or easy. There is always the real risk of the mispricing of risk and miscalculation of probability, and counterparty failure, which at times can reach the point of becoming systemically risky, as we most recently have seen in the case of AIG et al. This is the story of all bubbles and bank runs. Reckless leverage and mispricing of risk.

Janet Tavakoli sounded the alarm that a short squeeze in gold could bring JPM and the banks to their knees, and risk the global markets again. JPM is dealing in trillions of derivatives exposure, with a leverage that is breath-taking. To dismiss the complaints and concerns about this is as reckless as some of the more outlandish assurances made by Greenspan,and then Bernanke, just prior to the credit crunch about the housing bubble.[…]
At the end of the day its about honesty. And playing by the rules, the same rules for everyone. Its about justice, for all, and not just the powerful few. Not privatizing outlandish profits, and then socializing the mispricing of risk that is at the heart of the imbalances creating those outsized profits for a few in the first place. That is the very basis of fraud, and it requires secrecy and regulatory annulment to flourish.

“The very word ‘secrecy’ is repugnant in a free and open society; and we are as a people inherently and historically opposed to secret societies, to secret oaths, and to secret proceedings.” John F. Kennedy

So thank you for the primer on gold lending. I see you have also read the primer about answering the question you wish you had been asked, rather than the one which you have been asked, in order to divert the conversation away from something you do not wish to discuss at all.

Washington’s Blog, guest posting on Naked Capitalism, blasts the Fed and SEC regarding Repo 105 during the Bush Administration

Regulators like the Fed and SEC have said they didn’t know about Lehman’s use of Repo 105s to hide its mountain of debt.

But in a must-read New York Times Op-Ed, law school professors Susan P. Koniak, George M. Cohen, David A. Dana, and Thomas Ross point out:

Our bank regulators were not, as they would like us to believe, outside the disco, deaf and blind to the revelry going on within. They were bouncing to the same beat. In 2006, the agencies jointly published something called the “Interagency Statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Activities.” It became official policy the following year.

What are “complex structured finance” transactions? As defined by the regulators, these include deals that “lack economic or business purpose” and are “designed or used primarily for questionable accounting, regulatory or tax objectives, particularly when the transactions are executed at year end or at the end of a reporting period.”

How does one propose “sound practices” for practices that are inherently unsound? Yet that is what our regulatory guardians did. The statement is powerful evidence of the permissive approach bank regulators took toward the debt-dissolving financial products that our banks had been developing, hawking and using themselves for years. And it’s good reason for Americans to be outraged by the “who me, what, where?” reaction of Mr. Bernanke and the S.E.C. to the revelation of Lehman’s Repo 105 scam.

The interagency statement on “sound practices” of 2006 … was greeted with effusive praise from bankers, their lawyers and accountants. Gone was the requirement [proposed by the law professors and others] to ensure that customers understood these instruments and that the banks document that they would not be used to phony-up a company’s books.

The Fourteenth Banker Blog offers an interesting – and welcome and ethical perspective – on the financial sector with which many bankers, given the comments, apparently agree.

So in weighing what makes a citizen, I choose to act. I will seek to comply with my bank’s code and my agreements, except where doing so is the equivalent of being complicit in misinformation or flat untruths.

Despite being with a big bank, I support reform legislation ending TBTF, separation of Commercial and Investment banking, an independent consumer protection agency and other meaningful reforms. Why? I have seen first hand the perversions that happen because of some who believe that the an institution exists for them and the stockholders primarily. Countless others have been hypnotized by this illusion as well. Free market idealism is conveniently permissive of unbridled self interest. I believe in the free market. In fact, this blog is a free market of ideas and is meant to lead to a free market in banking where institutions self police as a matter of competitiveness. I have hopes of a free market where being in community in a responsible and consistent way is the path to prosperity, a free market where we recognize that if we take care of the community, the community will take care of us. It takes a sort of faith. Or does it? Is not all successful business enterprise based on providing more value than is consumed?

Writing this post The Fourteeth Banker blog asks: What would happen if we were broken up?

If you work for a big bank, say Bank of America (great name), what would happen if the bank is broken up? Well, that would be very complicated financially, but the result is probably not that hard to predict. Most obviously, deposits would need to stay in the core bank. What would this mean for the way the core bank works to succeed, the non core products it distributes, and the way its deposits fund investments compared to the way things are now? I suspect less net deposits taken out of the community and more loans made in the community.

The different businesses would be spun off to shareholders or sold. Watch the ball here. The Investment Bank is going to want and need a disproportionate share of the capital if they want to maintain their lifestyles. Absent the cloak of respectability the bank provides, they are going to want to be the next Goldman. Watch the ball. Capital is critical. In fact, as a sort of mind game, I wonder how much capital regulators or the SEC or Moody’s would require? What would that leave for the bank?

Is the core bank impacted by “Originate to Distribute” type issues? Does it sell swaps? What happens to the swaps after that? Good questions. Why the push on credit cards? Because they can be securitized. Would we not better serve our clients if we made them direct consumer loans, even some unsecured loans like we used to a long time ago, at a reasonable rate, with a fixed payment that fully amortize in five years instead of minimum payments that drag on forever, endless extra charges and arbitrary changes in terms? Would that not be a good plain vanilla product for the client?

Media Matters launches a new website, Protect the Consumer, in an attempt to counter Chamber of Commerce assertions, funded by the mega-banks.

What would the CFPA do?

The CFPA would close gaps in the regulatory fabric, and respond quickly and effectively when regulation is needed. Right now, there are seven agencies who share the responsibility of consumer protection, but none of them have it as their top priority. A CFPA would consolidate this task and have the power to write and enforce rules regarding consumer protection. It would:

* Ensure that credit and payment products do not have predatory or deceptive features
* Ban products which don’t meet certain safety requirements
* Conduct research and investigations into credit industry products and services
* Stay on top of market innovation to make sure new products meet safety requirements, and
* Provide consumers with high quality information about how to avoid abusive lending and credit problems.

In addition to improving current regulatory practices, the CFPA would allow for oversight of products and practices which are presently ignored by federal agencies. These include payday loans, bank fees, and credit scoring agencies.

Christopher Helman, of Forbes, asks this question: How can it be that you pay more to the IRS than General Electric?

Last year the conglomerate generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion. […]

…it’s the tax benefit of overseas operations that is the biggest reason why multinationals end up with lower tax rates than the rest of us. It only makes sense that multinationals “put costs in high-tax countries and profits in low-tax countries,” says Scott Hodge, president of the Tax Foundation.

Mine disaster could have been – and should have been – avoided
Dylan Matthews, part of a trio covering for Ezra Klein, writes in Coal, corruption and campaign finance reform that Don Blankenship, owner of Massey Energy, bought his company out of tighter regulations and $50 million in fines.

If you think this makes Massey unpopular among residents of West Virginia, where it does most of its mining, you’d be right. West Virginians overwhelmingly oppose mountaintop removal mining, and some politicians, like Sen. Robert Byrd and Rep. Nick Rahall, openly criticize Massey. But the effects are limited, as Blankenship has more or less purchased the state’s government. He’s certainly bought the state Supreme Court, spending millions to unseat a justice who had ruled in favor of mine workers. The court, including the new justice Blankenship had elected, soon thereafter reversed a $50 million judgment against Massey. The U.S. Supreme Court eventually had to demand a rehearing of the case with the new justice recusing himself, because the quid pro quo involved was so obvious. Similarly, when Gov. Joe Manchin proposed a bond not to Blankenship’s liking, the businessman spent hundreds of thousands of dollars to sink it. After the bond vote, Blankenship sued Manchin, saying the governor’s attempts to regulate Massey amounted to punishment of Blankenship for opposing the bond measure, and thus was a violation of his free speech rights.

Mike Konczal, part of the trio covering for Ezra Klein, asks What are you worth to your bank?

The question at hand was, “How much is a customer worth to a commercial bank?” This is what we came up with:

There’s whatever you pay in fees. Whatever you having in your checking and savings account is lent out, and the spread is going to be at least 2.5 percent, so they make a ballpark 2.5 percent off whatever you keep in your accounts. And whenever you pay with a credit card or a debit card, your bank is making at least 1.7 percent of the transaction, paid for by the merchant.[…]
So here’s a good question: Do you feel you get half a grand worth of service from your bank? Or in general are they difficult to deal with for customer service, pushy and abrasive when it comes to trying to get you to take on new products? Half a grand might be what you pay for a basic cable service; do you get that much quality from your bank?

Another thing they pointed out is how much of the banking model is predicated on how many different lines of business you have with your bank. If you live in an urban environment, where real estate is expensive, notice how much space is dedicated to commercial banking. Walk in space, staffed, looking to simply cash your check. Part of it functions as advertisement, though there are other ways to advertise. And part of that is loss-leading by national brands to sweat out the local branches and take over. But part of it is that so much of banking is dependent on the physical hard sell of adding an additional product line. So listen for when you deal with your bank, how hard they sell you on upgrades — that’s their business model. And it is one that is eventually going to die out.

Bill Moyers, of PBS, reminds us that inequity of income has been growing in this country for decades. But never more explicitly clear than these statistics.

Since 1980, the year Ronald Reagan was elected president, the incomes of people at the top have doubled while those in the middle and at the bottom have remained flat.

Let me throw some more statistics at you. You’ll find their sources at our site online. Keep in mind that each of these numbers represents lived human experience.

In this richest of countries, more than 40 million people are living in poverty.

At some point in their childhoods, half of America’s children will use food stamps to eat.

Some 30 million workers are unemployed or under-employed, and for those still working, the median wage today is about $32 thousand a year, which is why so many people are working two jobs trying to make ends meet.

Meanwhile, as the economist Robert Reich recently reminded us, in the 1950’s and 60’s, the CEO’s of major American companies took home about 25 to 30 times the wages of the typical worker. By 1980 the big company CEO took home roughly 40 times the worker’s wage. By 1990, it was 100 times. And by 2007, executives at the largest American companies received about 350 times the pay of the average employee. In many of the top corporations, the chief executive earns more every day than the average worker gets paid in a year. […]

You can see the stakes here. You can see why we need to reclaim the economic vision of both Abraham Lincoln and Martin Luther King, Jr. If you want more evidence, get your hands on this book, “The Spirit Level: Why Greater Equality Makes Societies Stronger.” As carpenters know, a spirit level is a device to measure the level of surfaces. Richard Wilkinson and Kate Pickett are not carpenters; they’re epidemiologists who combined have spent more than 50 years taking the measure of different societies, comparing how inequality affects the health of populations.

The more equal the society, they found, the longer its people live, while the most unequal countries have more homicide, more obesity, more mental illness, more teen pregnancy, more high-school dropouts, and more people in prison. The United States, they report, has the greatest inequality of income of any major developed country. That’s the betrayal of the American promise.

Court decision on Comcast v FCC hampers net neutrality unless Senate Bill is passed.

The Washington Post writes,

The U.S. Court of Appeals for the District of Columbia, in a 3-0 decision, ruled that the FCC lacked the authority to require Comcast, the nation’s biggest broadband services provider, to treat all Internet traffic equally on its network.[…]

The court’s decision comes just days before the agency accepts final comments on a separate open Internet regulatory effort this Thursday. And the agency will be faced with a steep legal challenge going forward as it attempts to convert itself from a broadcast- and phone-era agency into one that draws new rules for the Internet era.

Andrew Schwartzman, policy director for Media Access Project, said the ruling “represents a severe restriction on the FCC’s powers.” […]

Gigi Sohn, executive director of Public Knowledge, a public interest group, said the decision gives broadband service providers carte blanche over what applications can go over their networks and stops the FCC from acting as watchdog over prices, speeds and consumer protections for Internet services. She said Comcast, for example, could decide to block Hulu or YouTube to make sure no competing video providers compete with their own video service.

Time for a new resolution trust authority to deal with “TBTF” banks?

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Few people have the experience and respect of Paul Volcker, now chairman of the president’s Economic Recovery Advisory Board. Volcker’s op-ed in the NY Times Sunday edition not only makes considerable sense but may be a way out of the “too big to fail” financial market mess that now plagues the world markets.

banks with cutout illustration

Artist: Brian Cronin, NYTimes

What we do need is protection against the outliers. There are a limited number of investment banks (or perhaps insurance companies or other firms) the failure of which would be so disturbing as to raise concern about a broader market disruption. In such cases, authority by a relevant supervisory agency to limit their capital and leverage would be important, as the president has proposed.

To meet the possibility that failure of such institutions may nonetheless threaten the system, the reform proposals of the Obama administration and other governments point to the need for a new “resolution authority.” Specifically, the appropriately designated agency should be authorized to intervene in the event that a systemically critical capital market institution is on the brink of failure. The agency would assume control for the sole purpose of arranging an orderly liquidation or merger. Limited funds would be made available to maintain continuity of operations while preparing for the demise of the organization.

To help facilitate that process, the concept of a “living will” has been set forth by a number of governments. Stockholders and management would not be protected. Creditors would be at risk, and would suffer to the extent that the ultimate liquidation value of the firm would fall short of its debts.

To put it simply, in no sense would these capital market institutions be deemed “too big to fail.” What they would be free to do is to innovate, to trade, to speculate, to manage private pools of capital — and as ordinary businesses in a capitalist economy, to fail.

Congress should be listening to Volcker and acting on his recommendations rather than playing political games with the security of American and world finances. Economic security is a requirement for businesses as well as families. Right now, the trust in that economic security is lost. Even the participants of the World Economic Forum in Davos recognized that not only has the game changed, but that the rules must change to prevent the next collapse.

Written by Valerie Curl

January 31, 2010 at 4:22 PM

$3.6 billion in bonuses paid in 2008

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Last year, employees of the 9 largest banks took home more than $32.6 billion in bonuses. That breaks down to an average $3.6 billion per each bank to the very same people who took down the economy. Imagine how much they would have made if they hadn’t taken down the economy?

They survived the financial turmoil with taxpayers money, still nine leading US banks shelled out more than $32 billion in bonus to their employees last year, with crisis-ridden Citigroup alone paying $5.3 billion.

Detailing the bonus payments made by the TARP-funded financial institutions in 2008, the latest report from the Office of the New York Attorney General has said that there “is no clear rhyme or reason to the way banks compensate and reward their employees”.

The US government had pumped in billions of dollars into the banks through the Troubled Asset Relief Program (TARP) to help them tide over the worst financial crisis in decades.
The nine banks together paid $32.6 billion in bonus while they received $175 billion worth funds from the US.

The ‘Bank Bonus Report’ by Attorney General Andrew M Cuomo said that even though Citigroup and Merrill Lynch incurred massive losses in 2008, together they paid nearly $9 billion in bonus to the employees.

The Citigroup, led by Indian-origin Vikram Pandit, gave away bonus worth $5.3 billion while Merrill Lynch shelled out $3.6 billion.

Others which paid huge bonus were JPMorgan Chase ($8.69 billion), Goldman Sachs ($4.8 billion), Morgan Stanley ($4.5 billion), Bank of America ($3.3 billion), Wells Fargo ($977.5 million), Bank of New York Mellon ($945 million) and State Street Corp ($469 million).

According to the Wall Street Journal:

Nine banks that received government aid money paid out bonuses of nearly $33 billion last year — including more than $1 million apiece to nearly 5,000 employees — despite huge losses that plunged the U.S. into economic turmoil.

The data, released Thursday by New York Attorney General Andrew Cuomo, provide a rare window into the pay culture of Wall Street, where top employees typically make 90% or more of their compensation in year-end bonuses.

The $32.6 billion in bonuses is one-third larger than California’s budget deficit. Six of the nine banks paid out more in bonuses than they received in profit. One in every 270 employees at the banks received more than $1 million.

I don’t mind people making really good incomes for producing something of value – actually making something that people or businesses need, will make life a bit easier, or solve a problem – but Wall Street incomes are out of line with the rest of U.S. incomes. Worse still, these enormous incomes foster reckless risk-taking – the kind of reckless risk-taking that crashed the economy and required the federal government to bail out the banking industry which still has yet to loosen lending to businesses, particularly to small businesses. Business Week explains,

Banks don’t plan to resume normal lending any time soon, even when economic growth returns. The Federal Reserve’s most recent survey of senior loan officers found that most expect to maintain higher lending standards through the second half of next year. For riskier borrowers—including many small businesses—credit “will remain tighter than average for the foreseeable future,” according to the report. Credit-card lending, once an easy source of unsecured funds, has also been curbed: 58 million cardholders had their limits reduced between April 2008 and April 2009, according to FICO (FICO).


So alternative finance is growing even with credit markets seized up. While some finance companies like CIT have faltered, asset-based lending increased 8% in 2008, according to the Commercial Finance Assn., which represents some 300 asset-based lenders and factors. The group’s CEO, Andrej Suskavcevic, sees continued growth ahead, as private equity groups and hedge funds look for profitable investments in nontraditional lenders. Companies squeezed by banks’ rising credit standards—including distressed firms, startups, or those trying to finance exponential growth—are “perfect clients for asset-based lenders,” he says.

The problem with this alternative, asset backed financing is that it is very expensive, but many businesses are being forced into this financing to stay in business and because they have no alternative.

However, as small businesses struggle to survive and unemployment climbs as a result of the financial debacle caused by unrestrained speculation and risk-taking, Wall Street appears ready to market a new speculative product, similar to the mortgage back securities that caused the current financial crisis.

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.

The idea is still in the planning stages. But already “our phones have been ringing off the hook with inquiries,” says Kathleen Tillwitz, a senior vice president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life-insurance securitizations from private investors and financial firms, including Credit Suisse.

“We’re hoping to get a herd stampeding after the first offering,” said one investment banker not authorized to speak to the news media.

In the aftermath of the financial meltdown, exotic investments dreamed up by Wall Street got much of the blame. It was not just subprime mortgage securities but an array of products — credit-default swaps, structured investment vehicles, collateralized debt obligations — that proved far riskier than anticipated.
The debacle gave financial wizardry a bad name generally, but not on Wall Street. Even as Washington debates increased financial regulation, bankers are scurrying to concoct new products.

Not too many years ago, the main function of banking – including investment banking – served to help businesses, and thus communities, grow and succeed. But banking now attracts people who invent get-rich-quick financial product schemes for their investors…and themselves.

Written by Valerie Curl

September 7, 2009 at 11:20 AM

Geithner: Solving the financial crisis

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Geithner’s press conference obviously left a lot to be desired. Just look at the market drop today. No one, worldwide, is satisfied. Nevertheless, this administration has only been in office for three weeks.

How many other administrations have dealt with so many combined, negative economic factors at the beginning?

Geithner has a tough, almost insurmountable, road ahead of him. Nothing like this has existed since the Great Depression. Solving it won’t be easy, especially in a worldwide economic recession in which all economies are so closely tied together.

So, even while the market wanted a quick answer, because that’s what we Americans want and the world banking system hoped for, answers to the banking problem are not easy.

So, settle down everyone and give the guy a couple of weeks to lay out a plan in more detail.

I took great heart from his initial statement…and I think he’s on the right path. It ain’t gonna be easy. Banks are gonna scream bloody murder at having to take a loss on their balance sheets when they sell those toxic assets…but selling them at a fair price will be the only way they’ll survive. They’re also gonna scream at having to make loans with government money when they’d rather buck up their balance sheets. For far too long, financial institutions have worked on the premise that profits for shareholders was the only way to do business.

That is a fallacy. What brought banks – like Wells Fargo and BofA – into fashion was personal banking. Knowing their customers.

Unlike the economic gurus who argue for fewer and larger banks, I believe that mega-banks are an anathema to business growth and productivity. Small banks, focused on the community and community businesses, provide greater business impetus. Moreover, small banks that focused on sponsoring local businesses and development, rather than on unsustainable real estate gambles, have weathered the financial meltdown better than the megabanks that focused only on profits, regardless of the risks involved.

TR was right when he pushed through legislation that broke up monopolies. Unfortunately, GOP administrations and Congresses failed to learn from TR. Over the last 30 years, mega-mergers brought enormous wealth to the few while hurting the overall economy as we now see.

Nevertheless, Geithner and his cohorts at the FDIC and the FED have their work cut out for them. It’s going to take all of their combined efforts to clean up the mess created during the last 10 or more years. As a NPR financial analyst stated today, one press conference does not solve the problems facing the American banking system.

A lot of details have yet to be worked out…and those solutions are not going to be easy. But he’s on the right path.

A different type of rescue/stabilization plan

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Mort Zuckerman of US News & World Report and Andrew Ross Sorkin of the NY Times, both financial writers, were on the Charlie Rose Show this evening. They offered up a different plan to the Paulson plan. They suggested the Federal Government do what Warren Buffett did with Goldman Sachs.

In a story today at US News, Katy Marquardt writes:

Last week’s deal with Goldman Sachs was a classic Buffett maneuver. The terms are quite cushy: Berkshire is buying $5 billion in perpetual preferred stock, the shares of which will pay a 10 percent annual dividend, or $500 million per year. Therein lies Buffett’s safety net (if a company goes belly up, preferred stockholders stand first in line for dividends and profits). “Remember, he’s got a cushion as a preferred stakeholder…so he doesn’t lose a penny until all of the money is wiped out,” says Bruce Berkowitz of the Fairholme Fund, which has long maintained Berkshire Hathaway as a top holding.

In other words, the feds could buy preferred stock from banks holding distressed paper. Then, let the banks figure out how to deal with it rather than the Fed. government having to figure out an accurate value purchase price and then doing a reverse auction.

I wonder if their idea would work? It sounds like it would be a great deal simpler.

Written by Valerie Curl

October 1, 2008 at 6:18 PM

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