Wall Street Still Trumps Main Street

Tea Party members are riled to the point of rabid protest by one simple fact – Wall Street still trumps Main Street. Wall Street bankers are a) bigger than ever and more likely to fail catastrophically than before; b)are bonusing and compensating themselves bigger than ever before while still being on the dole for Fed interest rates that are debilitatingly low at 0.5% which banks can lend out at no less than 3.5% but up to 20% legally[repaying the TARP money is just an illusion, the banks are still on the Federal dole to the tune of trillions of dollars]; c)are still placing complex casino-like bets with the very same derivative instruments that brought financial markets down while playing all sides of the bets with no regard for fiduciary trust[see the Goldman Sachs indictment for starters]; and d)are paying tens of millions of dollars to Democrats and Republicans alike to insure that “meaningful” is removed from financial reforms so that banks can continue to game the system. This is the fundamental disconnect that angers not just Tea Party members but the general public

So banks are acting with the same disdain for their clients and customers that preceded the Financial Crisis. The one exception is that they are de-leveraging their bad portfolios and exposure, estimated today by the IMF to be still nearly $1trillion, but at the expense of their depositors and clients and with the continued low rates of interest guaranteed by Central Banks. William D. Cohan, a former Wall Street banker with help from Charles Schwab, CEO of the investment house, describe the situation in stark terms:

… how Wall Street reaped massive profits and bonuses in 2009 — and continues to do so, as is clear from Monday’s announcement by Citigroup that it had earned $4.4 billion in the first quarter of 2010, which was even more than earned by Bank of America ($3.2 billion) and JPMorgan Chase ($3.3 billion) in the same period — merely 18 months after trillions of dollars of American taxpayers’ treasure was used to save a financial system brought to the precipice by Wall Street’s greed and irresponsible risk-taking. …

How did this happen at the same time Main Street continues to suffer from an unemployment rate of almost 10 percent and from the worst recession in generations? Partly, this resulted from the original strategy of the Treasury and the Federal Reserve to first fix the banking system and then worry about repairing the wider economy. Hence, the $700 billion Troubled Asset Relief Program arrived in September 2008, followed by, in February 2009, the $787 billion stimulus program, or American Recovery and Reinvestment Act.

The benefits for Wall Street started with the extensive de-leveraging that continues the world over in the wake of the financial crisis (it caused) by banks helping companies raise new equity and refinance existing debt. The Wall Street firms that survived the crisis reap billions of dollars in fees for this sort of work. Mostly, though, Wall Street is making money by taking advantage of its rock-bottom cost of capital, provided courtesy of the Federal Reserve — now that the big Wall Street firms are all bank holding companies — and then turning around and lending it at much higher rates.

The easiest and most profitable risk-adjusted trade available for the banks is to borrow billions from the Fed — at a cost of around half a percentage point — and then to lend the money back to the U.S. Treasury at yields of around 3 percent, or higher, a moment later. The imbedded profit — of some 2.5 percentage points — is an outright and ongoing gift from American taxpayers to Wall Street.

You’re welcome.

And now for the truly obscene part. By keeping interest rates so stubbornly low — and by remaining committed to doing so — the Fed is crushing the rest of us, especially senior citizens on fixed incomes and those who have rediscovered saving in order to have some peace of mind.

For instance, despite my bank calling it a “premier platinum savings” account, I am getting a measly 0.15 percent interest rate. On my “premier platinum checking” account, the interest rate is 0.01 percent. In an essay in The Wall Street Journal recently, Charles Schwab pointed out that there is more than $7.5 trillion in American household wealth stored in short-term, interest-bearing checking, savings and CD accounts. (The average interest rate for a one-year CD is 1.3 percent.)

Our savings is another source of virtually free capital for banks to use to lend out at much higher rates. These anemic yields are a “potential disaster striking at core American principles of self-reliance, individual responsibility and fairness,” Mr. Schwab observed correctly.

[takethe5th.com is responsible for the emphasis in the quotes above].

The simple fact of the matter is both under President George Bush and President Barack Obama the financial community has enjoyed “head of the line” government aid. They have and continue to get the lions share of the Federal deficit dole outs. Jobs programs have barely amounted to 1/4 [roughly half of the program outlined here go to direct jobs aid while inflation rises but not employment or wages for those earning less than $100,000/year] of the amount of financial  aid received if you consider TARP funds [$800B ]plus  the continuing low interest loans to banks [$600B]. Meanwhile the financial industry continues despites its great profitability to be stingy with loans to small busineses and continue to charge usurious rates on credit cards.

But most worrisome, the financial community has mounted a concerted attack on financial reforms ontributing  in one quarter of the year already $116M. The net result is that this weekend all 41 GOP Senators signing a petition calling for starting all over on financial reform bill because it legislates bailouts. The fact is that the $50B fund cited by GOP is paid for by the banks and is used to effect an orderly dissolution of a failing bank – top officers and board dismissed, shareholders lose everything, creditors getting fractions of their dollars, taxpayers not on the hook as in September 2008.

But Democrats are not blameless. They have received 51% in 2008 and 56% so far of the Finance community’s money. President Barack Obama received $71M [to John MaCain’s 61M] from the financial community in 2008. Perhaps this partially explains why with the help of advisers like Larry Summers, Tim Geithner, Ben Bernanke, Lloyd Blanfein of Goldman Sachs, Robert Rubin formerly with Citigroup – The financial institutions are first in line for government crisis aid.  The economy had truly seized up in 2008, but giving creditors of AIG 100 cents on the dollar was a largesse under President George Bush that has continued with interest rates at 0 to 0.25% at the Fed window and Financial Reform deferred until after Health Care under Barack Obama.

The one exception to a rosy path for banks  under the Obama administration is the indictment of Goldman Sachs for securities fraud. But the legitimate question remains: is this just a PR stunt, a Martha Stewart-like indictment that leaves all of the devious if not Madoff-like criminal financial  players able to stay Scott Free.

Depending on what happens in the next two months, the US  population like me  may very well  side with the Tea Party – and say kick the financial reform procrastinators out of office –  Democrats and Republicans alike.

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