The Banks Are Doing Well Following Their Trillion Dollar Bailout
It’s a great time to be in business if you’re a bank.
According to the New York Times, the largest banks in the United States finished conducting their annual stress tests on Thursday, concluding they have the capacity to pay out $90 billion in assets to their shareholders (1).
A Bank Stress Test is an analysis run by a bank’s own risk management team – but also conducted by the government annually – which is designed to determine the resiliency of a bank in the face of an economic crisis or a downturn (3).
When a bank has $50 billion in assets, the government requires them to implement internal stress tests by their own team, but also from the Federal Reserve (1).
Currently, the central banks in the United States are in an unthinkable position in comparison to ten years ago when they faced a recession created by the sub-prime mortgage crisis – something from which they profited (1).
The Times stated that, since then, banks have doubled their capital, which serves as their main defense against economic downturns and potential calamities (1).
However, the truth is that – if the past is any indication of the future – the banks wouldn’t face the consequences anyway, considering the tax-payers bailed them out last time.
Banks are currently doing exceptionally well in the midst of Trump administration, as they’re profiting from both the stronger economy and the rollbacks of regulation implemented by the GOP (the Republican Party) (1).
Since Donald Trump’s inauguration in January of 2017, the banks have done better than the rest of the stock market (1).
Once again, the chief executives on Wall Street are enjoying large paychecks. Lenders now are using new technologies to innovate and change dated parts of their industry.
Next week, the Federal Reserve will determine if the main banks will be able to distribute capital to their shareholders. And the results yesterday, suggest they will get what they want (1).
Analysts at Barclays believe the banks have more capital than their regulators demand of them, and for that reason, they have the capacity to offer profits to their investors (1).
Banks Should Fortify Themselves So Tax-Payer Funds Are Not Necessary
Critics of the industry say that instead of enriching their investors, they should retain it to strengthen their balance sheets, so they don’t have to rely on tax-payer funds in case of a needed bailout like in 2008 (1).
Following the recession ten years ago, policymakers posited that making the banks more resilient would allow for more lending, and it appears that this has occurred in many ways.
According to data published by the Federal Reserve, two years after Barack Obama’s inauguration in 2010, banks have added $2.5 trillion in loans, a 37% increase (1).
And their profits have soared.
Data gathered by the Federal Deposit Insurance Corporation showed that the industry has had their highest profits in the last twenty years (1).
JPMorgan, Citigroup, Bank Of America, Wells Fargo, Goldman Sachs, and Morgan Stanley, are all making a killing right now (1). In 2017, the aforementioned banks made pretax profits of $141 billion. They doubled their profits of $75 billion in 2010 (1).
Trump’s Tax Cuts
And Trump’s tax cuts last year have strengthened the profits of banks, and with rising interest rates and a more fortified economy, they’re expected to do even well later in 2018 (1).
The people behind the regulatory overhaul following the worldwide recession say that the current economy shows that the government used the right amount of regulation.
The stress tests conducted on Thursday show that the banks can withstand some losses and downturns (1).
They also think that the Bank Of America, for example, can deal with $50 billion of losses on its loans and still have ample capital (1).
The problem is that banks should perhaps shield themselves from economic losses so that tax-payers don’t have to bail them out again.
Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, explained that the problem isn’t whether or not the banks can do well when the economy is strong (1).
In his words, the question should be, “how do banks perform if there is a major economic downturn?(1).”
According to Mr. Kashkari, who was one of the Treasury officials during the recession, turning a bank’s debt into equity wouldn’t work in a crisis again (1).
He said that if something like that happened for the second time, a bailout using taxpayer money would be needed.
“They Don’t Have A Business Model That Works” If They Need Citizens’ Money
Kashkari added if their current business model needs tax-payer money, “then they don’t have a business model that works (1).”
And now with Trump’s administration in full swing, it’s not likely to see more regulations asking for banks to fortify themselves from calamity.
Investors are hoping, simply, that deregulation will allow them to distribute more capital to their shareholders. Since Trump’s election, the relaxing of regulatory stipulations has seen bank stocks rise by 44% (1).
The Standard And Poor’s 500-stock index has jumped by 29% in comparison (1). Thankfully, some bankers have argued they’re not in favor of dismantling many of the post-crisis rules.
They want to, instead, refine the rules to make lending less of a big deal and cumbersome.
Phillip L. Swagel, a professor of International economic policy at the University of Maryland, explained that those in the banking industry think they don’t need to change because they’re doing well (1).
But they could be better, “so then let’s make it better,” he said (1).
Perhaps We Should Make It Better
And yes, maybe banks could be better. Perhaps they should figure out a way to pay off the debt they owe due to the massive bailout in 2008?
To this day, most people think that the bailout banks used to save themselves during the crash in 2008 was $700 billion (2).
However, according to Forbes Magazine, the Special Inspector General for TARP said the “total commitment of government is $16.8 trillion dollars with the $4.6 trillion already paid out (2).”
This means that the government paid trillions of dollars to bail them out, not billions. If the banks are doing so well right now, maybe they should be encouraged to use some of that cash to pay off what they owe, considering the role they played in the crash.
The banking system has been allowed to flourish at the expense of the average citizen due to a few factors.
Rating agencies like the S&P-500, for instance, are directly influenced by the banks,- clearly, a conflict of interest – and they influence the ratings of securities (2).
During the financial crisis in 2008, the housing bubble ratings allowed for the use of AAA ratings to toxic subprime mortgages (2).
And the Justice Department has requested, and rightly so, $5 billion in restitution for their part in falsifying the ratings. However, $5 billion isn’t nearly enough (2).
The Justice Department proved that the American Division of The HSBC bank had been money laundering for Mexican drug cartels to the tune of nearly a trillion dollars – $881 billion, perhaps one of the most scandalous facts ever uncovered (2).
The government penalized them with a miniscule fine of $1.9 billion, and the New York Times claims that the HSBC was “too big to indict(2).”
And both JP Morgan Chase and Goldman Sachs worked with hedge fund managers to bet against the sub-prime mortgages after the crash began (2).
They made money, like the movie the Big Short explained, through selling short on the financial catastrophe they played a significant role in creating.
Their punishment for that was a mere $296.9 million and $550 million for Goldman Sachs (2).
They also used insider training. For example, Raj Rajartmn made millions of dollars by getting information from Goldman Sachs (2).
The New York District Attorney has pointed to around 70 hedge funds guilty of the same thing (2).
Ironically, the big banks act like they are the embodiment of free-market capitalism, but when it comes time to pay up for the catastrophes they created, they resort to socialist government bailouts (2).
Perhaps, the most tragic part of is this is the fact that banks couldn’t have failed, because had they did, it would’ve started a worldwide depression.
During a meeting with Congress on the 18th of September, 2008, the Treasury Secretary Paulson said that $5.5 trillion in wealth could’ve disappeared by that day (2).
The Federal Reserve Chairman, Ben Bernanke, said they needed $700 billion otherwise the system would collapse (2).
How Did They Do It?
After credit default swaps and derivatives, as well as other newly created tools, banks began gambling as if they were a casino, and the financial tools at their disposal would foot the bill on the tax-payers (2).
This sort of thing could easily happen again, because, as it was mentioned above, these banks are not that fortified by an economic crisis. They would merely transfer the responsibility on the tax-payer.
In an article written by Matt Taibbi for Rolling Stone Magazine called, Secrets and Lies of the Bailout, he posited that the government told tax-payers they would temporarily strengthen the banks against the recession (4).
At first, it was only $700 billion, but it ended up being trillions of dollars over the years, a fact hidden at first (4).
At first, the public only knew of the original bailout in the millions. But after the audit of the Federal Reserve by Congress, we found out that it was $7.7 trillion in secret emergency lending (2).
And the banks weren’t required to pay it back. They could literally do whatever they wanted with the money.
The bailout also allowed for the merger of several huge banks, like Chase and Bear Stearns; Wells Fargo and Wachovia; and Bank of America with Merrill Lynch (2).
The effect of this is that the banks are even bigger today. The top 12 banks right now control 70% of the bank assets (2).
Momentarily, the Dodd-Frank Laws required them to remove their ability to use derivatives, but they are once again allowed and backed by the FDIC (2).
At the time, the Dodd-Frank Bill was supposed to be the answer to the transgressions committed by Wall Street. However, now, only around half of the regulations have been imposed and enforced by the government (2).
One of the rules, the Volker Rule, was supposed to stop allowing banks to use consumer money for making trades as well as proprietary trading – a form of trading when banks or a firm invest for the sake of their own gain rather than through commission dollars on behalf of their clients (2).
Dodd-Frank created one mechanism called the Resolution Authority, but House Republicans are trying to remove it because it would supposedly cost the taxpayer $22 billion (2).
Resolution Authority is supposed to use treasury funds to shut down the bank and pay back the taxpayers by selling off the bank’s assets.
However, the banks have so much money and influence that they’re able to lobby Congress so they don’t have to do such a thing.
If we’re to stop this from happening again, we could break up the banks using legislation. However, most people don’t even know that the bailout consisted of trillions of dollars rather than billions (2).
Also, we could protect only the commercial bank operations rather than the gambling part of the banks.
The rating agencies have to go as well, because they, essentially, are operated upon and influenced by the banks, and are a massive conflict of interest (2).
Forbes.com advocates for a financial tax placed on the sales of all stocks, bonds, options, and futures. It would funnel money back to the consumer and taxpayer (2).
Wall Street ignores most of the regulations but they would listen if they lost some of that cash through a tax (2).
Another solution is to tax hedge funds, who profit from insider training, high-frequency trading, rumor mongering, and special tax loopholes and front-running trades (2).
However, one of the most effective solutions is to hold CEOs and managers of some of these companies liable for their criminal behavior (2).
It wouldn’t be a bad idea to put the fear of God into them, so they’re discouraged from causing another worldwide recession.
However, according to the official data from the United States Government Accountability Office, the money awarded to banks had to be paid back (5).
The document released by the agency claimed that for a “significant portion of the fees, program recipients” had to reimburse the Reserve Banks or they had to pay it back from program income (5).
In a chart released by the United States Accountability Office, some of these banks actually did pay off what they owed.
However, are they to be trusted?