There are a few right-wing diehards who think the huge bonuses to big bankers are “the American way” and a small group on the left who think we should nationalize them all. But for most of us in the middle, it is really hard to understand why these behemoths have “reduced lending for five consecutive quarters, even as [they have] regained profitability thanks to vast public aid… The amount of money on loan from banks fell by almost $600 billion, or 7.2 percent, from September 2008 to September 2009, according to the Federal Deposit Insurance Corp. Lending to businesses, excluding construction loans, fell 15 percent.” (Dec. 14th NY Times). Likewise, the federal Making Home Affordable loan modification program has resulted in permanent restructuring for about 4% of the applicants, who in turn represent a small fraction of total homeowners with distressed mortgages.
While the President has excoriated the “fat cat bankers… who still don’t get it,” we are watching the old “monkey see, monkey do” pattern of banks following the example of other banks, regardless of the consequences of their collective actions. Remember when if you didn’t ply the subprime market, you weren’t a competitive financial institution; “everybody” was doing it, so it must be okay, and clearly repealing government regulation that would have limited the damages proves that naked, free markets simply could not stop the hemorrhaging.
The latest “monkey” is Citigroup. Watching their neighbors down the street, Goldman Sachs, pay out an expected $700,000 for every employee after removing the ceiling on executive pay by repaying their TARP money, “Citigroup announced a broad program that will replace the $20 billion of remaining bailout aid with money from private investors, facilitate the sale of the government’s $25 billion in bank stock and allow it to wean itself off other forms of federal assistance… To help replenish its coffers, Citigroup expects to raise about $17 billion by selling stock as early as this week and issue up to $7.2 billion in other capital by the first quarter of next year.” The Times.
The general explanation for this behavior (big bonuses) is that banks have to compete for the best and the brightest talent, and executive ceiling caps and “confiscatory taxes” on the big bonuses make financial institutions uncompetitive in this talent market. Further, they say, Wall Street pays its revenue-generators on a bonus system both to incentivize their activity and because salaries are generally modest, with the bulk of compensation comes from bonuses. I’ve blogged this one more than once. That the UK – with France and Germany soon to follow – is taxing excess bonuses at a 50% rate shows a pretty clear path as to how to put all the “talent” in the same boat so as the void the “best and brightest” argument. And let’s face it, if these banks wildly overcompensate employees for taking big risks, surprise… their employees will take big risks; it’s what got us into this mess to begin with!
No matter what the justification, the mere fact that banks have been able themselves to borrow from the Fed at near-zero rates, which loans have helped support their heavy speculation in the marketplace, is profoundly un-American. We are not a nation of dukes and earls, lords and ladies given special grants and privileges not accorded to the mass of individual citizens and small businesses. The old Marie Antoinette retort to being told that her people could not find enough bread to eat comes to mind: “Let them eat cake!” Forget about the TARP money or the AIG bail-out that really benefited Wall Street on investments gone bad, the ability to borrow from the government alone justifies a different result.
I watched Sunday’s “Meet the Press” (Dec.13th) on NBC, where the topic was a “jobless recovery,” and while former Fed chief, Dr. Alan Greenspan, defended the rising stock market and the profits coming out of Wall Street, Democratic Michigan Gov. Jennifer Granholm stated the obvious: without reopening the small business and housing credit markets, the prospects for any grassroots recoveries in housing or employment are bleak. And as the Congress drills down on a new regulatory schema for this market sector, it almost seems as if the financial community is begging for such crushing regulation. But instead of dealing with their outrageous pay-scales, they choose instead to fight against any attempt to rein them in.
Wall Street has mounted a full-court press against the pending Congressional efforts to impose greater regulations upon them. Enlisting Republican and Democrats alike, the big banks are fighting hard. Even the President is frustrated: “What's really frustrating me right now is that you've got these same banks who benefited from taxpayer assistance who are fighting tooth and nail with their lobbyists . . . up on Capitol Hill, fighting against financial regulatory control…” (CBS “60 Minutes” on December 13th) Meeting with 12 CEOs of the biggest banks on the 14th, Obama remind them that the government bailed them “of predicament largely of their own making.” Emphasizing the credit needs of the small and medium-size business, the President stressed that he expects the bank to take the special steps necessary to restart this stalled engine or face undisclosed consequences.
Many will argue that all the banks are doing is apply prudence to consumer and business borrowing sorely lacking as the financial world collapsed; they simply lent too much too easily. The pendulum, they promise, will swing back when stability and recovery spread more widely throughout the economy. Good point, but they don’t explain why they can borrow to invest and make a killing in the market with those Fed funds that the government clearly intended for them to deploy into the general credit marketplace. They also don’t tell you that without restoring the normal credit markets, it will take vastly more time for that stability and recovery. And sorry, Mr. President, but jawboning seems to be little more than applying the principle of “sticks and stones will hurt my bones, but names with never hurt me.” Want action?! Take action!! Are these banks self-destructing… or are we?!
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