They’re Back – 
Run For Your Lives!

What do you think our leaders would do when confronted by the imminent collapse of a sector of our economy whose assets are equal to 56% of our GDP? Given what they did in 2008 –properly we think– we can safely assume they would prop up the institutions at risk. Are you surprised that five of the banks we rescued in 2008 now have assets equal to 56% of our GDP*? In 2006 -before the collapse- these same five banks’ combined assets equaled 47% of our GDP*.

Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, and Wells Fargo, five of the players whose reckless actions drove the world economy off the cliff, are lined up to do it again. Their assets grew more than 40% from 2006 through 2011*. Why? That’s no mystery, the banks know and investors know that if there’s another collapse we will bail the Zombies out again. With the taxpayers on the hook, big banks are gambling with the same risky stuff that led to the 2008 collapse –derivatives, swaps etc., the stuff the bankers refer to as “crap.”

If it goes all wrong, the bankers and their investors have the taxpayers ready to bail them out again. Where else would investors put their bucks, high returns no risk? Published reports say all three rating services along with a covey of regional Federal Reserve presidents, see a bailout for the Zombie Banks down the road. Meanwhile, your neighborhood community bank –the bank down the street on the corner– doesn’t have an investment (AKA gambling hall) division; putting them at a distinct disadvantage in finding investors and customers.

We know how to solve this problem, been there, done that. Eighty years ago when the wheels fell off our economy our nation faced the same dilemma. They busted up the big banks and made them choose the sector of the banking world in which they wanted to operate. The Glass-Steagall Act separated investment banks from the regular commercial banks that we ordinary folk deal with.

During the 1990s’ deregulation frenzy the investment banks –Goldman Sachs in particular– pressed hard to break down this wall. In 1999 they succeeded Glass-Steagall was repealed. Then they convinced the Congress to exempt them from the gambling laws and they were off to the races. Take any risk, bet on any crazy thing, as long as you could call it an investment – it is legal. Within a few years they distorted the derivative and commodity markets turning them into Zombie bank gambling halls. Here’s the catch. They know they can’t lose. They know the suckers (AKA customers) take the losses. Worse comes to worse the taxpayers will be stuck with the mess. The bankers and investors will be just fine.

We all know what happened in the decade following the repeal of Glass-Steagall. We had to bail the banks out and now they are fine; back doing the exact same things that drove us off the cliff. Meanwhile the rest of America –and the world– is working its way out the hole they left us in. They are not doing anything illegal; however, ethically it stinks. It’s time to break up the Zombie banks and put them back in their cages, investment banks on one side of the business and commercial banks on the other. If not, we’ll be bailing them out again. They are counting on it

 *Bloomberg 04.19.12

A Glimmer Of Justice

Last week (2.9), we finally got a deal for a few big banks to make a $25 billion down payment on what they owe America. You’ll recall that less than a decade after they conned Congress into dumping the Glass-Steagall Act passed in 1932 to protect Americans from reckless bankers, reckless bankers drove most of the world off a cliff. A cliff created through their relentless efforts to profit from packages of securitized mortgages. They lured naïve folks into mortgages the bankers and their cronies knew they couldn’t afford. When the bottom fell out did the bankers use the money we gave them 2008 to help those they had enticed?

Nope, but the alarm bells were set off by Hank Paulsen, plucked by George Bush from his post as CEO of Goldman Sachs –perhaps the most reckless and devious nest of bankers on the planet– to become Secretary of the Treasury. The Congress passed the $700 Billion TARP Act (largely crafted by Paulson) to save the banks. At the same time – unbeknownst to most of us until earlier this year– the Federal Reserve poured about ten times that much into the banks, interest free. The $25 billion –chump change for these banks– will help a few of the millions who owe more on their mortgages than their homes are worth. Others, pushed out of their homes erroneously may get a few bucks.

The deal, in the works forever, was held up by two State Attorneys General who refused to sign because the banks got protection against future prosecution. California AG Kamala Harris and New York’s Eric Schneiderman booted the get-out-of-jail-free-cards. Housing Secretary Shaun Donovan brokered the deal over Super Bowl week and last Friday (2.10) announced that 49 states, the Justice Department, and other Federal entities had signed onto the deal. Ally Financial (formerly GMAC), Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo, the biggest mortgage servicers, are coming up with the$25 billion.

It better be a down payment; the bankers received hundreds of billions from the American taxpayers. Up to now they have used our money mostly to return to the reckless risks that got us into this mess in the first place. An outcome Mr. Paulson could have forestalled, had there been any real conditions attached to the bailout bucks. But why would he? Could it be because Paulson had his hand on the tiller at Goldman while they were raking in billions selling crap (their term), all-the-while betting against their customers with the idiots at AIG? The same AIG we bailed out only to have Goldman suck up a ton of that bailout, collecting on the sure losers they hung on AIG.

Before sundown the day the $25 billion deal went public Schneiderman sued three big banks: Bank of America, JP Morgan Chase, and Wells Fargo, along with the MERS system. The banks set up and control MERS cloaking the foreclosure world. The banking entities and some of the individuals involved left the ethical line far behind in this display of unbridled greed.

“Round One,” The Banks vs. The Rest of Us

“Round One,” The Banks vs. The Rest of Us

Within a month Federal District Judge Jed Rakoff has launched what may be the beginning of the end for rapacious behavior on the part of our banking sector. Earlier this month he refused once again to rubberstamp an under-the-table deal the Security and Exchange Commission (SEC) made with a “Too Big To Fail” Bank, this time Citi. Unlike earlier deals that came before him, he is apparently not going to agree to any settlement without all the gory details being revealed.

As you may recall from our 11.15.11 OP-ED, Citi has been charged with fraud. With selling their customers a bundle of crappy investment vehicles while at the same time betting against them. Of course the crappy stuff turned out to be crappy and when they failed, Citi’s customers took a hit somewhere north of $700 million bucks and Citi collected on their bet. Judge Rakoff questioned the settlement -$95 million- and the fact that only one individual was charged with criminal behavior. In an earlier case (Bank of America) Rakoff signed off when the SEC upped the penalty. Two other Federal Judges signed off on similar deals with Goldman Sachs and J.P. Morgan Securities, as many judges have over the years.

After mulling over the Citi deal for a couple weeks, Rakoff took a very different tack. This time he rejected the premise that Citi could walk away with a fine and a promise to never do it again. He wants all the gory details out on the table. A path that drew a snarky headline, “Rakoff Cements Status as Populist Firebrand”, on the American Lawyer Magazine website’s report on his ruling. Basically saying that his failure to play “go along to get along” would end any chance of promotion for the judge.  But isn’t that what ethics is all about, doing the right thing without regard for self interest?

An end may be at hand to the age of repeated SEC “Peanuts and a promise” deals for those who pull off massive ripoffs. As Steve Denning noted in a recent Forbes article, What Shall We Do With The Big, Bad Banks, “Over the last 15 years, some 19 large major financial institutions have been found by the SEC to have broken anti-fraud security laws at least 51 times—laws  that they agreed ‘never again to breach’. The group of offenders included Citigroup, Bank of America, JPMorgan Chase, UBS, Goldman Sachs, Wachovia, and AIG. In this period, the Securities and Exchange Commission has never once brought a contempt of court citation against any of the banks for repeated offences.”

The leaders of these behemoths, the Lloyd Blankfeins and Jamie Dimons and their minions who hide behind these “Don’t Ask, Don’t Tell” deals with the SEC, may be called to task if it turns out that they were aware of the double dealings underlying the SEC charges. An outcome sure to be cheered by the State Attorney Generals across the country that have been pursuing the culprits who triggered the financial collapse we are enduring; looking for someone to jail.

Wouldn’t that be nice? Three cheers for Judge Jed Rakoff.