Posted on 04/15/2009 10:02:26 AM PDT by Lorianne
Goldman Sachs reports better-than-expected profits this quarter. Wells Fargo cleared record profits last week. The President, understandably, points to signs of hope and encourages Americans to be optimistic about the economy. But when do we move from healthy confidence to a confidence game? The banks are reporting profits thanks to massive infusions of taxpayer bailout funds. It's simply silly to be lulled by cheery-sounding reports when the institutions are actually insolvent. At some point we have to take a clear-eyed look at the massive failure of our financial system. Ignoring it won't make it go away.
That's more or less what Elizabeth Warren, the distinguished chair of the Congressional Oversight Panel, says in her panel's six-month report on the bank bailout. Warren, the government's watchdog, concedes that there are differences of opinion on her panel, which probably accounts for her very carefully couched discussion of the crisis. Although she told The Observer-http://www.guardian.co.uk/business/2009/apr/05/useconomy-regulators that it is "preposterous" that the government hasn't fired the bank managers who are responsible for the derivatives disaster, her panel's report is cautious, with a scholarly explanation of the crisis in her video introduction. Nonetheless, the underlying criticism is obvious.
In a financial crisis like the current one, Warren explains, the government has three choices: 1. Liquidate failed banks. (That's what happened in the S&L crisis. The government took over institutions, fired the managers, wiped out investors, but protected depositors. A lot of savings and loans simply went out of business.) 2. Put them in receivership. (That's what Sweden did in the 1990s: failed managers were fired and replaced, depositors were protected, and the banks were returned to private hands under new management with healthier balance sheets.) or 3. Subsidize the banks. This last option is what led Japan to its "lost decade"--the real value of bank assets are obscured, as the government funnels tax money into insolvent banks, propping them up indefinitely. This last is the approach the United States is now taking.
If you want to hear someone absolutely destroy that approach to the current crisis, check out a round of recent interviews with William Black, the professor of economics and law at the University of Missouri who was deputy director of the Federal Savings and Loan Insurance Corp. during the S&L crisis in the 1980s. Black, who liquidated a few banks in his time and earned the eternal enmity of Charles Keating, minces no words in describing the massive fraud by bankers and the regulators, including Treasury Secretary Tim Geithner, whom he describes as abetting them.
"This whole bank scandal makes Teapot Dome look like some kind of kids' doll set," Black told the investors' journal Barron's in an interview published in the print edition on April 13. (The interview appeared online on April 9, but you need a paid subscription to access the site). He covers the same points in a highly watchable interview on Bill Moyer's Journal..
"We have lost the ability to be blunt," Black tells Barrons. He is talking about the person he describes to Bill Moyers as a "failed regulator," Geithner. "Now we have a situation where Treasury Secretary Tim Geithner can speak of a $2 trillion hole in the banking system, at the same time all the major banks report they are well capitalized. And you have seen no regulatory action against what amounts to a $2 trillion accounting fraud. The reason we don't see it--aren't told about it--is that if they were honest, prompt corrective action would kick in, and then they would have to deal with the problem banks."
In other words, the banks are insolvent. That's why they must rely on the Troubled Assets Relief Program. But at the same time, they are claiming to be healthy. Both things can't be true.
So we get smiley-face reports about how Goldman and Wells Fargo are posting record profits. Investors and citizens are supposed to be excited to see those profit numbers--comprised of their own tax dollars plus the banks refusing to accurately value their toxic assets.
This is more than an unfortunate downturn, Black says. It is the result of massive, pervasive fraud, and a deregulatory culture that has nurtured criminal behavior by very highly paid bank executives.
The whole culture is rotten. And the regulators come right out of that corrupt, Wall Street culture.
"No one has to tell someone to stretch the numbers," Black says of the way corruption trickles down through these institutions. "It is all around them. It is in the rank-or-yank performance and retention systems advocated by top business executives. Here, the top 20 percent get the bulk of the benefits and the bottom 10 percent get fired. You don't directly tell your employees to lie or cheat. You set up an atmosphere of results at any cost."
Yet we live in a broader culture so enamored of the money-making magicians of Wall Street that a front-page story in the Sunday New York Times is still lamenting the "brain drain" on Wall Street. The lead anecdote features former UBS employee (whose firm's major screw-ups turned it into a prime TARP welfare recipient). He is so disturbed by shrinking bonuses and a climate of gloom in his old gig that he has moved to the high-rolling Aladdin Capital. That's the real name. As in Poof! There goes your money!
It's time for real regulation to stop all this, says Black. Geithner must go.
"Unless the current administration changes course pretty drastically, the scandal will destroy Barack Obama's presidency," he predicts.
The beauty part: real regulators will have no trouble getting through Congress, Black tells Moyers, because they pay their taxes.
I have one question about this article. Wasn’t Wells Fargo supposed to be one of the banks who didn’t want the TARP money because they hadn’t invested in the risky assets that other banks had? The reason I ask is that the author cites them as one of the problem banks being propped up.
For later.
Wells Fargo and Goldman. Neither of these banks requested a bailout.
Profits? How much are the banks going to pony up to pay back the U.S. Treasury?
Obama may completely wreck the economy, but he'll still be re-elected easily as long as the Republican Party is demonized, demoralized, and disorganized. If the GOP does start to get its act together, there will be plenty of money available to make sure no strong Presidential candidate emerges.
Fo’ shizzle!
So US banks owe $176 trillion. Who do the banks owe all this money to?
A fallacy indeed. No doubt this same idea is used by all these so called bankrupt companies. How else to explain the HUGE CEO amounts paid them by many of these companies.
No one is worth making the monies they are being paid ... as salary. The money is there so why not siphon it off?
Now, if they started a company that made that kind of profit and employed others then they actually created and risked much in the venture and sure enough it succeeded. AMERICAN ENTERPRIZE SYSTEM WORKING. MO I do believe in freedom, and that some earn large salaries for growing the company and so no. But it is simply a rip off of the stock holders that actually own the company. The money is there so why not siphon it off? Perhaps I am off track here. It seems grossly twisted in reality. Almost a ponzi scheme. ????????? Ball player ans actors etc., are paid exorbitant salaries in a few cases. Different system they parlay into being a percentage of the gross or simply huge signing bonuses. Based on the income they produce. These CEO's are different. They often are simply riding on the coat tails of the workers.
Themselves and their shareholders they expect us to pay for it!
No one?
Are you going to cap what I can earn?
Then this article is totally without merit.
Doom and gloom ping list. Economics and geo-political economics.
No, they don’t owe even a fraction of this. In fact, many of these derivatives are “in-the-money”, meaning someone owes them.
To be sure, complicated derivates have caused a lot of trouble in the financial system. However, we need to understand that much of this “notional” value not only isn’t owed to anyone, it never will be.
You also should know there are two sides to each of these transactions. Where one bank has a gain, another has a loss.
Do you mean Spencer Herbert : The Man versus the State (1884)?
Do you actually believe it is okay to make a deal with a few of the heads of a company to give you a salary 0f #300 million dollars as a bonus? The companies are almost all owned by stockholders. IT IS THE SAME THEFT THE GOVERNMENT IS DOING NOW.
I guess I am incapable of clearly expressing the situation.
Fmr Secy O’Neil: TARP Goal Deceive Public
http://www.ritholtz.com/blog/2009/04/fmr-secy-oneil-tarp-goal-deceive-public/
I think that is a very dangerous precedent that we don't want to start.
Henry Hazlitt actually. Its very good.
http://mises.org/books/manwelfarestate.pdf
read the chapter “We owe it to ourselves”
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