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Before the Election was Over, Wall Street won

Before the campaign contributors lavished billions of dollars on their favorite candidate; and long after they toast their winner or drink to forget their loser, Wall Street was already primed to continue its reign over the economy.

For, after three debates (well, four), when it comes to banking, finance, and the ongoing subsidization of Wall Street, both presidential candidates and their parties’ attitudes toward the banking sector is similar  – i.e. it must be preserved – as is – at all costs, rhetoric to the contrary, aside.

Obama hasn’t brought ‘sweeping reform’ upon the Establishment Banks, nor does Romney need to exude deregulatory babble, because nothing structurally substantive has been done to harness the biggest banks of the financial sector, enabled, as they are, by entities from the SEC to the Fed to the Treasury Department to the White House.

In addition, though much is made of each candidates' tax plans, and the related math that doesn’t add up (for both presidential candidates), the bottom line is, Obama hasn’t explained exactly WHY there’s $5 trillion more in debt during his presidency, nor has Romney explained HOW to get a $5 trillion savings. 

For the record, both missed, or don’t get, that nearly 32% of that Treasury debt is reserved (in excess) at the Fed, floating the banking system that supposedly doesn’t need help. The ‘worst economic period since the Great Depression’ barely produced a short-fall of  an approximate average of $200 billion in personal and corporate tax revenues per year, according to federal data.)

Consider that the amount of tax revenue since 2008, has dropped for individual income contributions from $1.15 trillion in 2008 to $915 billion in 2009, to $899 billion in 2010, then risen to $1.1 trillion in 2011. Corporate tax contributions have dropped (by more of course) from $304 billion in 2008 to $138 billion in 2009 to $191 billion in 2010, to $181 billion in 2011. Thus, at most, we can consider to have lost $420 billion in individual revenue and $402 billion in corporate revenue, or $822 billion from 2009 on. The Fed has, in addition, held on average of $1.6 trillion Treasuries in excess reserves. That, plus $822 billion equals $2.42 trillion, add on the other $900 billion of Fed held mortgage securities, and you get $3.32 trillion, NOT $5 trillion, and most to float banks.

The most consistent political platform is that big finance trumps main street economics, and the needs of the banking sector trump those of the population.  We have a national policy condoning zero-interest-rate policy (ZIRP) as somehow job-creative. (Fed Funds rates dropped to 0% by the end of 2008, where they have remained since.)

We are left with a regulatory policy of pretend. Rather than re-instating Glass-Steagall to divide commercial from investment banking and insurance activity, thereby removing the platform of government (or public) supported speculation and expansion, props leaders that pretend linguistic tweaks are a match for financial might. We have no leader that will take on Jamie Dimon, Chairman of the country’s largest bank, JPM Chase, who can devote 15% of the capital of JPM Chase, which remains backstopped by customer deposit insurance, to bet on the direction of potential corporate defaults, and slide by two Congressional investigations like walks in the park.

Pillars of Collusion

A few months ago, Paul Craig Roberts and I co-wrote an article about the LIBOR scandal; the crux of which, was lost on most of the media. That is; the banks, the Fed, and the Treasury Department knew banks were manipulating rates lower to artificially support the prices of hemorrhaging assets and debt securities. But no one in  Washington complained, because they were in on it; because it made the over-arching problem of debt-manufacturing and bloating the Fed’s balance sheet to subsidize a banking industry at the expense of national economic health, evaporate in the ether of delusion.

In the same vein, the Fed announced QE3, the unlimited version – the Fed would buy $40 billion a month of mortgage-backed securities from banks. Why – if the recession is supposedly over and the housing market has supposedly bottomed out – would this be necessary? 

Simple. If the Fed is buying securities, it’s because the banks can’t sell them anywhere else. And because  banks still need to get rid of these mortgage assets, they won't lend again or refinance loans at faster rates, thereby sharing their advantage for cheaper money, as anyone trying to even refinance a mortgage has discovered. Thus, Banks simply aren’t ‘healthy’, not withstanding their $1.53 trillion of excess reserves (earning interest), and nearly $900 billion in mortgage backed securities parked at the Fed. The open-ended QE program is merely perpetuating the illusion that as long as bank assets get marked higher (through artificial buyers, zero percent interest rates, or not having to mark them to market), everything is fine.

Meanwhile, Washington coddles and subsidizes the biggest banks - not to encourage lending, not to encourage saving, and  not to better the country, but to contain harsh truths about how badly banks played, and are still playing, the nation.

The SEC’s Role

According to the SEC’s own report card on “Enforcement Actions: Addressing Misconduct that led to or arose from the Financial Crisis”: the SEC has levied charges against 112 entities and individuals, of which 55 were CEOs, CFOs, and other Senior Corporate Officers.

In terms of fines; the SEC ‘ordered or agreed to’ $1.4 billion of penalties, $460 million of disgorgement and prejudgment interest, and $355 million of “Additional Monetary Relief Obtained for Harmed Investors. That’s a  grand total of $2.2 billion of fines. (The Department of Justice dismissed additional charges or punitive moves.)

Goldman, Sachs received the largest  fine, of $550 million, taking no responsibility (in SEC-speak, “neither confirming nor denying’ any wrongdoing) for packaging CDOs on behalf of one client, which supported their prevailing trading position, and pushing them on investors without disclosing that information, which would have materially changed pricing and attractiveness. (The DOJ found nothing else to charge Goldman with, apparently not considering misleading investors, fraud.)

Obama-appointed SEC head, Mary Shapiro, originally settled with Bank of America for a friendly $34 million, until Judge Rakoff quintupled the fine to $150 million, for misleading shareholders during its Fed-approved, Treasury department pushed, acquisition of Merrill Lynch, regarding bonus compensation. (Merrill’s $3.6 billion of  bonuses were paid before the year-end of 2008, while TARP and other subsidies were utilized). Still embroiled in ongoing lawsuits related to its Countrywide acquisition, Bank of America agreed to an additional $601.5 million in one non-SEC settlement, and $2.43 billion in another relating to those Merrill bonuses. Likewise, Wells Fargo agreed to pay $590 million for its fall-2008 acquisition of Wachovia’s foul loans and securities. These are small prices to pay to grow your asset and customer base.

Citigroup agreed to pay $285 million to the SEC to settle charges of misleading investors and betting against them, in the sale of one (one!) $1 billion CDO. Judge Rakoff rejected the settlement, but Citigroup is appealing. So is its friend, the SEC.  Outside of that, Citigroup agreed to an additional $590 million to settle a shareholder CDO lawsuit, denying wrongdoing.

JPM Chase agreed to a $153.5 million SEC fine relating to one (one!) CDO. Outside of Washington, it agreed to a $100 million settlement for hiking credit card fees, and a $150 million settlement for a lawsuit filed by the American Federation of Television and Radio Artists retirement fund and other investors, over losses from its purchase of  JPM’s Sigma Finance Hedge Fund, when it used to be rated ‘AAA.’

There you have it. No one did anything wrong. The total of $2.2 billion in SEC fines, and about $4.4 billion in outside lawsuits is paltry. Consider that for the same period (since 2007), total Wall Street bonuses topped $679 billion, or nearly 309 times as much as the SEC fines, and 154 times as much as all the settlements.

The SEC & Dodd Frank Dance

The SEC embarked upon 90 actions, divided into 15 categories, related to the Dodd-Frank Act that amount to proposing or adopting rules with loopholes galore, and creating reports that summarize things we know. Some of the obvious categories, like asset backed related products or derivatives, don’t even include CDOs, which got the lion’s share of SEC fines and DOJ indifference.

Rather than tightening regulations on the most egregious financial product culprits; insurance swaps, such as the credit default swaps imbedded in CDOs, the SEC loosened them. It did so by approving an order making many of the Exchange Act requirements not applicable to security-based swaps. In one new post-Dodd-Frank order, it stated, a “product will not be considered a swap or security-based swap if ,,, it falls within the category of…insurance, including against default on individual residential mortgages.” Thus, credit default swaps, considered insurance since their inception, warrant no special attention in the grand land of sweeping reform.

The credit ratings category includes 20 items proposed, requested, or adopted. Under things accomplished, the SEC gave a report to Congress that basically says that the majority of rating agency business is paid for by issuers (which we knew), and proclaims (I kid you not) that a security is rated “investment grade” if it is rated “investment grade” by at least one rating agency. Further inspection of SEC self-labeled accomplishments provides no more confidence, that anything has, or will, change for the safer.

The White House & Congress

Yet, the Obama White House wants us to believe that Dodd-Frank was ‘sweeping reform.’ Romney and the Republicans are up and arms over it, simply because it exists and sounds like regulation, and Democrats defensively portray its effectiveness.

Ignore them both and ask yourself the relevant questions. Are the big banks bigger? Yes. Can they still make markets and keep crappy securities on their books, as long as they want, while formulating them into more complicated securities, buoyed by QE measures and ZIRP? Yes. Do they have to evaluate their positions in real world terms so we know what’s really going on? No.

Then, there’s the Volcker Rule  which equates spinning off private equity desks or moving them into asset management arms, with regulatory progress. If it could be fashioned to prohibit all speculative trading or connected securities creation on the backbone of FDIC-insured deposits, it might work, but then you’d have Glass-Steagall, which is the only form of regulatoin that will truly protect us from banking-spawned crisis.

Meanwhile, banks can still make markets and trade in everything they were doing before as long as they say it’s on behalf of a client. This was the entire problem during the pre-crisis period. The implosion of piles of toxic assets based on shaky loans or other assets didn’t result from  private equity trading or even from isolating trading of any bank’s own books (except in cases like that of Bear Stearns’ hedge funds), but from federally subsidized, highly risky, ridiculously leveraged, assets engineered under the guise of 'bespoke' customer requests or market making related ‘demand.’ 

When the Banking Act was passed in 1933, even Republican millionaire bankers, like the head of Chase, Winthrop Aldrich, understood that reducing systemic risk might even help them in the long run, and publicly supported it. Today, Jamie Dimon shuns all forms of separation or regulation, and neither political party dares interfere.

But things worked out for Dimon. JPM Chase’s board (of which he is Chairman) approved his $23 million 2011 compensation package (the top bank CEO package), despite disclosure of a $2 billion (now about $6 billion) loss in the infamous Whale Trade. He banked $20.8 million in 2010, the highest paid bank CEO that year, too. In 2009, Dimon made $1.32 million, publicly, but really bagged $16 million worth of stock and options. He made $19.7 million in total compensation for 2008, and $34 million for 2007. Still a New York Fed, Class A director, he’s proven himself to be untouchable.

Yet, the kinds of deals that were so problematic are creeping back. According to Asset Backed Alert, JPM Chase was the top asset-baked security (ABS) issuer for the first half of 2012, lead managing $66 billion of US ABS deals.

In addition, according to Asset Back Alert, US public ABS deal volume rose 92.8% for the second half of 2012 vs. 2011, while issuance of US prime MBS (high quality deals) fell 50.6%. Overall CDO issuance rose 50.2%. (Citigroup is the lead issuer (up 552%.))

ZIRP’s  hidden losses

According to a comprehensive analysis of data compiled from regulatory documents by  Bill Moreland and his team at my new favorite website,, some really scary numbers pop out. Here’s the kicker: ZIRP costs citizens and disproportionately helps the biggest banks, by about $120 billion a year.

Between 2005 and 2007, US commercial banks held approximately $6.97 trillion of interest bearing customer deposits. During the past two quarters, they held an average of $7.31 trillion. During that first period, when fed funds rates averaged 4.5%, banks paid their customers an average of $39.6 billion of interest per quarter. More recently, with ZIRP, they paid an average of $8.9 billion in interest per quarter, or nearly 77% LESS. In dollar terms - that’s about $30.7 billion less per quarter, or $123 billion less per year.

Since ZIRP kicked into gear in 2008, banks have saved nearly $486 billion in interest payments. Average salary and compensation increased by approximately 23%. Dividend payments declined by 14.05%.

The biggest banks are the biggest takers. Consider JPM Chase’s cut. Although its deposits disproportionately increased by 46% from 2007 (pre ZIRP and helped by the acquisition of Washington Mutual) to 2012, its interest expenses declined by nearly 89%. From 2004 to 2007, Chase paid out $34.4 billion in interest to its deposit customers. From 2008 to mid-2012, it paid out $3.4 billion. JPM Chase’s ratio of interest paid to deposits of .27% is the lowest of the big four banks, that on average pay less than smaller banks anyway.

The percentage of JPM Chase’s assets comprised of loans and leases is lower at 36.04% compared to its peers’ percentage of 52.4%. Its trading portion of assets is higher, as 14.78% vs. 6.88% for its peers, and 4.23% for all banks.

Looking Ahead

To recap: savers, borrowers, and the economy are still losing money due to the preservation of the illusion of bank health. More critically, the big banks grew through acquisitions and the ongoing closures of smaller local banks that provided better banking terms to citizens.  The big banks have more assets and deposits, on which they are over-valuing prices, and paying less interest than before, due to a combination of Fed and Treasury blessed mergers in late 2008, QE and ZIRP. Yet, we’re supposed to believe this situation will somehow manifest a more solid and productive economy.  

Meanwhile, past faulty securities and  loans will fester until their transfer to the Fed is complete or they mature, while new ones take their place. This will inevitably lead to more of a clampdown on loans for productive purposes and further economic degradation and instability. Financial policy trumps economic policy. Banks trump citizens, and absent severe reconstruction of the banking system, the cycle will absolutely, unequivocally continue.

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Reader Comments (14)

Thank you for your clear and concise writing. I am disgusted by the whole situation.

October 23, 2012 | Unregistered CommenterSteven

Wow. Very clear explanation, with appropriate understated outrage. Although I'm not in the finance industry, I've been reading about this mess since '08. I've concluded that it's really not that hard to understand if it's explained for what it is. Question: Why aren't more people outraged by this? I understand our bought-and-paid for Congress not doing squat, but the average Joe who's getting .03% on his CD must (should) be pissed.

October 23, 2012 | Unregistered CommenterClark Thornton

An excellent but scary article. And if the "Occupy Wallstreet"movement is right? However, one is left with a feeling of being helpless and sidelined. Why are the big shots from the real economy accepting the value destruction by the financial institutions?

October 24, 2012 | Unregistered CommenterRichard Straub

Neil Barofsky on Pandit and Obama Administration Bankster Friendliness on Bill Moyers

Bill Moyers was taken enough with his chat with former SIGTARP chief Neil Barofsky that he’s having two segments with him. This is the first, which focuses on the Vikram Pandit sudden exit and Citigroup generally as well as the Obama Administration’s finance friendly policies.

Barofsky also shares his deep disappointment in President Obama for protecting — instead of reigning in — the big banks.

“I thought that if there was ever going to be a political figure that would take on the interests of Wall Street, it was going to be President Obama. And that just didn’t happen,” Barofsky says. “It was the exact opposite of that… He had the same ideology as Secretary Geithner and, frankly, the same ideology as a lot of those people who came from Wall Street.”"

October 24, 2012 | Unregistered Commenterrich

While I did not vote for Obama, the one hope I had for his term was that he would take the banks to task for what happened with the MBS fiasco; remember, the democratic party has always championed 'the little guy' and the 'least of those able to defend themselves in our society'. Well, after watching Jon Corzine walk and awaiting his arrest and subsequent prosecution for over a year. the fix is in - neither party intends to correct this mess and this election is more about who will be managing the collapse then who will right the ship.

I've stopped altogether writing to my congressman, seeing the futility in that effort, and have begun addressing Jamie Dimon and Lloyd Blankfein when I have a constitiuent complaint because I can clearly see, after 4 years of this mess, who is running the show.

October 25, 2012 | Unregistered CommenterAC

Thanks for the education on big economics.

The big picture with the biggest players in it looks intimidating, with unexplained happenings that could do a lot for many people with nothing yet in big trouble. A contrast that can only be played in the safer ground of novels.

October 25, 2012 | Unregistered Commenterraffle economics

Ok, at least some of the big pieces of data are uncovered, which helps in finding the best therapy for the current socioeconomic illness. Well, rather the modern world economic crisis.

Since it seems that the effect is cumulative and it operates by massive chunks one would expect that it will be too costly and lengthy to explore every detail before the situation is corrected to the point that many billions of people can have their life back to a decent minimal condition, or a decent opportunity at life. So how can this be resolved?

That would probably take either the restarting of the economy, with some workable conditions, though not perfect, or the starting a brand new system, but also making some workable assumptions that would yield something worthwhile and rather diminish what led to the current mess.

How about looking at law loopholes? either for attempting to correct this one or as for learning from the previous mistakes.

Either way it makes a lot of sense to me that the amount of money or its value HAVE to be proportional to the amount of people, and to access to money. But for real, not subjectively, or corruption prone.

Can we in the mean time device a respectable raffle system without running a casino? that is, every one is the house. Don't laugh, just try the numbers.

October 25, 2012 | Unregistered Commenterraffle economics

Thanks for your incredibly lucid, concise and brilliant portrayal of the numbers and facts --- exactly explains everything!

And to put the political theater in perspective: with either Wall Street lackey (President Obama or that cretin Romney) in the Oval Office, we can be assured we will never see any appointments of the quality of a John Kenneth Galbraith (Kennedy and FDR administrations), a Louis Brandeis (FDR and earlier administrations) or a Nomi Prins.

When Obama was first elected, one of his earliest appointments was Diana Farrell from McKinsey Global Institute; the Saudi financial reporters went bonkers with delight over her appointment to Obama's economics advisors council.

Farrell is the specific individual, among many others, which progressive activists such as myself and others have been battling with for many, many years --- she is the number one evangelist and promoter of the offshoring of American jobs, and with each job goes a portion of the American GDP.

From an comment of mine the other day:

A short look at their "free market": the Abacus CDO, which hedge fund guy, John Paulson, made $3.4 billion (paid off due to TARP bailout funds via the taxpayer), consisted of Paulson and Goldman Sachs working together to design a doomed deal, the Abacus CDO, full of crappy sure-to-default mortgages, then Paulson and GS purchased CDSes (naked credit default swaps, or unregulated insurance fraud instruments) against the sure-to-default deal they created and knowingly peddled.

At $1.4 million per CDS, the return was $100 million per --- only the banksters could create such instruments to defraud the public and dramatically increase the national debt by robbing and destroying the national tax base and tax revenues!

Another example of designed-to-fail, pure insider trading: Magnatar Capital, a Chicago hedge fund with a 96% default rate on all their deals (same CDO/CDS scam) with the defaults triggering the CDS payouts.

These, and many other similar deals, had nothing to do with progress, innovation, productivity or creation, they simply enriched a select few (pathological lying super-crooks and psychopaths) while destroying much --- dramatically increasing the national debt --- these examples are how all those multi-billionaires came into being, and why the debt is so colossal today.

Thanks again, Ms. Prins, for such an outstanding reality presentation.

October 25, 2012 | Unregistered Commentersgt_doom

It's too long between your postings, but when they're crackers like this one and your previous one with PGR they are worth waiting for.

I echo the other comments about the content and lucidity and thanks for another great piece.


October 30, 2012 | Unregistered CommenterDavidC

I've just re-read my comment - just in case there's any doubt, when I used the word crackers I DID mean great pieces as opposed to the other potential adjectival meaning of stupid! Phew!


November 3, 2012 | Unregistered CommenterDavidC

All the Financial Crime Cartel needs to do in order to offset not one brilliant, founded on facts, article like this one, but thousands of them, is to put a friendly face of its White House puppet all over the modern media translucent altars, and let him read their press release - "We helped the folks," - and all is fine in the boiled frogs nation.

November 3, 2012 | Unregistered CommenterJacques de Molay

"Why are the big shots from the real economy accepting the value destruction by the financial institutions?"
October 24, 2012 | Unregistered Commenter Richard Straub

Is GE one of the above big shots ? - Sure it is.

Kindly google the share of its profits from the financial operations...

November 3, 2012 | Unregistered Commentershed

Sure would be nice if someone as smart as Prins, who understands the problems, would propose some kind of realistic solution rather than just pointing out the obvious problems.

November 4, 2012 | Unregistered CommenterJim Jensen

@Jim Jensen

Nomi did propose solutions such as re-instating Glass-Steagall.

November 5, 2012 | Unregistered CommenterKevin Eshbach
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