Still Masters Of The Universe

What we're seeing from the big bank earnings reports is that the government reacted to a situation where the financial industry titans were too big to fail, and facilitated theconsolidation of them so that they grew even bigger. Goldman Sachs and JP Morgan Chase are the biggest of the lot, having seen their competition either eliminated or weakened.

“One theme here is that Goldman Sachs and JPMorgan really have emerged as the winners, as the last of the survivors,” said Robert Reich, a professor at the University of California, Berkeley, who was secretary of labor in the Clinton administration.

Both banks now stand astride post-bailout Wall Street, having benefited from billions of dollars in taxpayer support and cheap government financing to climb over banks that continue to struggle. They are capitalizing on the turmoil in financial markets and their rivals’ weakness to pull in billions in trading profits.

Even Bank of America and Citigroup posted big profits in the last quarter, although the elimination of mark-to-market accounting plays a major role in hiding the true weakness of a lot of these banks. The imminent failure of more community banks and larger firms like CIT present opportunities for JP Morgan and Goldman Sachs as well.

Paul Krugman gets shrill on Goldman Sachs today, and he makes the larger point that we have only made Wall Street more dangerous to the overall economy through no-strings bailouts and failing to rein in the excess.

Over the past generation — ever since the banking deregulation of the Reagan years — the U.S. economy has been “financialized.” The business of moving money around, of slicing, dicing and repackaging financial claims, has soared in importance compared with the actual production of useful stuff. The sector officially labeled “securities, commodity contracts and investments” has grown especially fast, from only 0.3 percent of G.D.P. in the late 1970s to 1.7 percent of G.D.P. in 2007.

Such growth would be fine if financialization really delivered on its promises — if financial firms made money by directing capital to its most productive uses, by developing innovative ways to spread and reduce risk. But can anyone, at this point, make those claims with a straight face? Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible consumers [...]

The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand.

And the events of the past year have skewed those incentives even more, by putting taxpayers as well as investors on the hook if things go wrong.

Basically, Krugman hinges the success of the bailout on meaningful financial regulation to keep Wall Street from making the same gambles. I'm not hopeful about that. But what I am hopeful about is the recognition, from across the political spectrum, that the bailout has produced perverse incentives that need to be reversed in whatever way possible.

The (Wall Street) Journal's take -- "We like profits as much as the next capitalist. But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business" -- is actually more in keeping with that of Robert Reich, who says that "Goldman's resurgence should send shivers down the backs of every hardworking American who has lost a large chunk of retirement savings in this economic debacle, as well as the millions who have lost their jobs.... Goldman's high-risk business model hasn't changed one bit from what it was before the implosion of Wall Street." [...]

There is much in the Wall Street Journal that I don't agree with but, when it comes to the failure of the administration to address and fundamentally reform what Kessler calls "the structural problems that got us into trouble in the first place," we are of the same mind. There is no daylight between a progressive position focused on the paramount need to get the real economy going and one based purely on what makes free markets work.

The editorial goes so far as to suggest imposing a tax (yes, the Wall Street Journal is proposing a tax!), an FDIC-style bailout tax to be precise, "for those in the too-big-to-fail camp."

Even Reagan-era economist Bruce Bartlett is arguing for higher taxes, albeit regressive ones. I actually think the proper context is in terms of the health care debate. Goldman Sachs and other Wall Street firms took advantage of a financial crisis to redistribute wealth upwards. To pay for health care for the indigent, we should unwind that redistribution, perhaps with Charlie Rangel's surtax that adds brackets at the high end. It is impossible for conservatives to argue against redistribution of wealth with a straight face, given the example of Goldman Sachs.

...Simon Johnson:

We are looking at a concentration of political power in the US banking system that we haven’t seen since the 1830s: Shades of Andrew Jackson vs. the Second Bank of the United States. We put up with a lot from our banking elite in this country, but historically we draw the line at financial power so concentrated it can confront the power of the President.

The logic for reform and for breaking up the big banks begins to build. Bank of America’s fall was, in some senses, a fortunate accident for Goldman and JP Morgan. But it has also given them an excessive and unsustainable degree of political power.

Of course, you also have to ask: Who can break that power, when, and how?

...This is a dangerous time, politically. 80% of the public believe that Wall Street benefited from the bailouts, and not taxpayers. That's an unsurprising result. The question is how the public reacts. We could see a right-wing populism take shape if the teabaggers ever get their act together, or a New Deal coalition reformed. I talked to a writer last night who said he felt like he was living through history, as the Depression-era battle lines are being drawn. We don't know who will win yet, but it doesn't look good from where I sit.

JP Morgan Chase Greedier Than The Actual J.P. Morgan

Marcy Wheeler has been all over the effort by top banks who have been bailed out by the US government pushing Chrysler into bankruptcy by resisting pressure, as bondholders, to cut the carmaker's debt. Apparently there are a number of reasons for this.

The J.P. Morgan position, said these people, is that concessions by Chrysler's creditors should be treated as they would be in a normal bankruptcy -- meaning the billions of dollars of government debt and the UAW retiree health-care obligation should be wiped out before the secured lenders lose anything on their $6.8 billion.

In other words, JP Morgan Chase would be able to jump the line, as in a bankruptcy, and get repaid before US taxpayers and retirees. This is the same bank that's accepted at least $25 billion in public money, through TARP payments, AIG counter-party funds, and more, just to survive. But that's not all. A bankruptcy would cause, in Marcy's estimation, the loss of over 200,000 Chrysler jobs. You would think that a bank with substantial outlets in Michigan wouldn't want to see 200,000 unemployed Michiganders without the ability to deposit money into their Chase bank accounts. But they've got that covered.

JP Morgan Chase has figured out a way to profit off all the unemployed people it is creating in Michigan. Chase, you see, provides Michigan's unemployment insurance debit cards.

And the services can end up being pretty expensive for beneficiaries. Here's what Chase charges (and will be able to charge those that it causes to lose their job) for use of their debit card.

More than two withdrawals in a 2-week pay period: $1.50 each

Non-Chase withdrawals: $1.50 each

More than one bank teller withdrawal in a pay period: $4.00 each

Transaction denied for insufficient funds at POS, ATM, or teller: $1.50 each

More than one ATM balance inquiry in a pay period: $1.00 for each

Statement delivered by regular mail: 95¢ per statement

Granted, if an unemployed person manages their meager finances well and has Internet access (those inquiries are free), they probably can get by on one weekly withdrawal. But if someone loses track of their spending or doesn't have Internet access or likes dealing with human beings, these fees are going to start to take a huge bite out of what little they get.

Though debit card users can spend all they want in stores. As with Chase customers normally, Chase loves when you use your debit card at stores, because they get a bigger fee from merchants (back in the day when we still banked at Chase, that's what the Chase guy told me) than if you use a credit card. They're profiting coming and going.

The word "conflict of interest" fails to describe JP Morgan Chase at this point. And so if they want to force workers onto the street while keeping corporate welfare for themselves, consumers have a choice as well. They can cut up their cards.

My husband and I decided the only way to pressure JP Morgan Chase to negotiate in good faith with Chrysler was to close our Chase accounts. We want our money to go to a bank that is investing in rebuilding Michigan--not bankrupting it.

Now, FDL and Progress Michigan are calling on others to join our Chase boycott.

Sign the petition

Join the FaceBook group

Find your Michigan Chase branch and close your account

We don't have much more than our purchasing power at this point. Help out if you can.

Admitting They're Too Big To Exist

President Obama met with the nation's top bankers yesterday, and I think "jovial" would best describe the atmosphere, at least from press reports. The White House has calmed their rhetoric toward Wall Street of late, and after the meeting the bank CEOs were all smiles. They even might do us all the favor of keeping taxpayer money, which is awful nice of them.

Obama apparently did impress upon them the need to curb their excesses, at least in public.

Sitting at the center of a round table in the state dining room, Mr. Obama spoke firmly about how there had been a “cultural shift” regarding executive bonuses and Wall Street pay. He said that Americans had a right to be angry. “The anger is real,” the president said, according to people who attended the meeting. “The industry needs to show that they get it on the compensation issue.”

“Excess is out of fashion,” Mr. Obama added, noting that pay must be linked to performance.

The bankers nodded, but made no firm commitments.

As to any real change in compensation rules, I'm not from Missouri but they'll have to show me.

But I agree with Moe Tkacik that JP Morgan CEO Jamie Dimon might have offered a bit too much truth in the post-meeting press scrum:

"One of the main root causes [of the crisis], and this has been going on for a long time, was the huge trade and global financing imbalances which fueled very low rates and excess consumption, and over a long period of time I do not believe you can run those kind of trade deficits..."

Dimon was getting at one of the root structural causes of the current crisis -- America takes, the world (China especially) makes, an unsustainable situation sustained above all by an increasingly usurous financial services industry. As the CEO of PNC Financial Services just pointed out, banking is the biggest sector of the American economy -- and it's been to the detriment of everything else.

...it was precisely Wall Street and corporate America that relentlessly lobbied the government over that very long period of time to enable those gaping imbalances to gape ever wider. What both Barack Obama and Jamie Dimon implicitly understand is that publicly traded corporations are not engineered to look out for their long-term interests. By allowing the financial sector to bloat "too big to fail", the country lost the kind of industries that are too vital to fail -- which is to say, manufacturing.

This is the point that my father, he of the 40 years in the textile industry, has made repeatedly to me since he lobbied Congress to save his industry - in 1979, mind you. A society that loses its industrial base at the expense of, in this case, the financial services sector, puts itself in great peril. The size and the increasingly lucrative nature of an overgrown financial sector combined with the desire for perpetual growth creates just the kind of bubble-based economy, and dangerous aftermath, that we see today.

I don't think Dimon was actually calling for the shrinking of his own industry, but that was the effect, at least on me.

In Charge And Mad You're Not Happy About It

Chris Bowers has the depressing details on the financial services industry, through their advocates in the Senate, continuing to hold up eminently sensible foreclosure reform.

A House-passed bill that would allow bankruptcy judges to modify the terms of troubled homeowners' mortgages has entered a holding pattern in the Senate, where the necessary 60 votes remain elusive.

The bankruptcy provision - often referred to as "cramdown" - is a key component of the Obama administration's housing initiative, but it worries moderate Democrats in both chambers.

Indiana Democrat Evan Bayh and Pennsylvania Republican Arlen Specter are leading a group of Senate moderates in an effort to limit the bill's reach in a way that could attract 60 votes.

Senate leaders had hoped to have the bill go straight to the floor as early as this week, but it may now have to go through the Senate Banking, Housing and Urban Affairs Committee as proponents of the measure search for a deal. On March 11, the bill was referred to the panel.

"There are still significant concerns with the bill on both sides of the aisle," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, a group that lobbies on behalf of the banking industry.

Lenders fiercely oppose the cramdown language, which would allow bankruptcy judges to reduce the principal owed on a primary-residence mortgage and order other modifications in mortgage terms.

These lenders lied on forms to get customers into loans, lied to their customers about the terms of those loans, sold these unstable loans around the world and caused a near-collapse of the global financial system.

In America, that not only means they still have a check on legislation, they think the lawmakers are being too mean to them as well.

“When I hear the constant vilification of corporate America, I personally don’t understand it,” (JP Morgan CEO Jamie) Dimon said in his speech. “I would ask a lot of our folks in government to stop doing it because I think it’s hurting our country.”

Jamie Dimon and all his buddies are lucky they aren't sharing the same cell right now. The audacity of these people, to have rewritten the rules of the US economy only to see it fail, and then demand courtesy!? We have paid you our tax dollars, given you the capital to finance your adventure (h/t Jon Stewart), and now you want a chocolate from us?

Oh, they also want all accounting laws changed so they can more easily fudge the numbers, too.

Before financial institutions have collapsed over the past several months, they have come to the Financial Accounting Standards Board, pleading for a change in mark-to-market accounting rules so that they can continue to appear to be solvent on their balance sheets.

Robert Herz, head of the FASB, told a panel of lawmakers Thursday that the loudest critics of fair market accounting practices have been the very same banks that have gone belly up when regulators would not let them adjust their accounting.

"There seems to be a clamoring for changing mark-to-market rules that seems to come largely from institutions that may be insolvent," Rep. Alan Grayson (D-Fla.) said to Herz at a meeting of the Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.

Grayson said that, from Herz' testimony, it seemed that "there may be institutions that are insolvent and they haven't been forced to write down their books to the point [of insolvency] yet, and those are maybe the same institutions that are asking us to modify the mark-to-market rules so that they won't have to admit that they're bankrupt. Is that correct?"

Herz said that it was.

As Grayson says, "We have people who break every rule in the book and then they think that the answer to their problems is to break more rules."

I'm all for criticizing the Obama Administration for their failure to come up with a workable plan to fix the banks; heck, I've done it on occasion. But I save some special loathing for these criminals running major companies into the ground, lying to everybody about the inner workings of their companies, exerting the same power and influence over the legislative process as if nothing happened, and coming back for more changes and work-arounds so they can keep the Wurlitzer playing for just a few hours longer. I think trained chimps in the corner offices of every firm on Wall Street could do better. And they wouldn't ask us to stop being so mean to them.