7/18/2012 5:40 PM ET|
Wall Street is ruining America
The Libor rate-setting scandal and Washington complacency are the latest examples of how big financial interests are destroying our economy and our way of life.
Wall Street -- that amalgam of hedge funds, bankers and the rest -- keeps committing transgressions at a time when most Americans are still raw over the housing bubble, the deep financial crisis that followed and the ensuing bailouts. There are so many, it's hard to keep up -- and to contain the outrage.
The latest is the scandal over the artificial fixing of the benchmark London Interbank Offered Rate, (Libor) on which the value of some $350 trillion worth of derivatives, mortgages, student loans and other assets is determined.
The kicker is that regulators around the world, including those at the New York Federal Reserve Bank when it was headed by Timothy Geithner, now the Treasury secretary, knew about the problem as early as 2007 and didn't do anything until the financial press blew the whistle and forced their hand.
Libor is an average of self-reported estimates of how cheaply banks can borrow very-short-term money from other banks. The system depends on the honesty of the responses. So, naturally, the financiers violated that trust in the interests of profits.
Before the financial crisis, they gamed the system to benefit trades made by divisions within their banks. During the crisis, the most vulnerable banks -- directed by management and possibly regulators at the Bank of England -- put in very low quotes to placate nervous investors by giving the impression that ample funding was available.
This is just more evidence that something is very wrong with our economy and those entrusted to manage it, and that the financial sector sits at the center of the problem. No wonder Bane takes out the Gotham Stock Exchange in the new Batman flick. Art imitates life, after all.
Too big, and failing
History suggests that unless we remove this cancer growing at the heart of the market between savers and borrowers, markets for everything else will continue to suffer.
Many important social issues, such as rising income inequality and household indebtedness, are related to the rise of finance into an unprecedentedly dominant force in the economy since the end of World War II. We had a similar but smaller bout of this in the 1920s. We know how that ended.
The list of exploits and abuses is long and includes the near $8 billion "hedging" mistake by JPMorgan Chase (JPM) (See Jim Jubak's column "Disgusted with JPMorgan" for more); banks like HSBC (HBC) and Citigroup (C) allegedly channeling funds to money launderers; the "robo-signing" foreclosure mess; outright frauds like those perpetrated by Bernie Madoff and Peregrine Financial; the out-of-control mortgage securitization that fueled the housing crash and now impedes a rebound; exorbitant bonuses; "flash crashes" in the stock market; predatory high-frequency computer trading algorithms; and the blatant narcissism, like the God complex over at Goldman Sachs (GS).
Plus, there's the fact that the entire industry continues to get preferential treatment from the government -- be it the $700 billion bailout in 2008 or the ongoing right to borrow massive amounts of essentially free money from the Federal Reserve, then turn around and loan it, risk free, to Uncle Sam at 1.5% or more per year, thus pocketing billions in easy money.
This is what happens when Gordon Gekko's "greed is good" mantra gets out of control.
So for all the trouble, what do we get?
We get banks sitting on trillions in idle cash and not loaning it out into the economy because they are worried about their balance sheets and unwilling to help consumers struggling to get by in an environment of persistent joblessness, stagnant wages and rising living costs.
We get high-powered lobbyists fighting to defang already underpowered efforts to reform and contain the financial industry. And we get a continuation of the asymmetrical yet chummy relationship between regulators and the financial sector.
Washington and Wall Street
Half the time, Wall Street outmaneuvers the bureaucrats with better talent and higher pay packages. What's more, big political donations and a revolving door keep pro-Wall Street types in the halls of power. For example, former Treasury Secretary Hank Paulson, European Central Bank chief Mario Draghi, Italian Prime Minister Mario Monti and former Greek Prime Minister Lucas Papademos all have strong ties to one institution: Goldman Sachs. Wall Street also heavily funded President Barack Obama's 2008 campaign.
Just look at how the Libor scandal has progressed. Regulators in at least seven countries are now investigating a wide swath of the financial system, even though members of the Fed were aware of deficiencies in the survey system that sets the interest rate five years ago. And now, there is evidence the Bank of England was complicit in the manipulation of rates in 2008.
Barclays' disgraced CEO Robert Diamond was forced out by British authorities for his failures -- yet was about to get a "you're fired" bonus of as much as $31 million before public rancor forced him to relinquish it.
As for penalties, Morgan Stanley estimates that the 12 global banks tied to the scandal will be on the hook for $22 billion in regulatory penalties. Barclays, the first to pay, shelled out just $456 million in June. That would be just 4% to 13% of 2012 earnings per share for the group, according to Morgan Stanley's analysts -- or just 0.5% of book value. Nothing more than a limp slap on the wrist.
How does the scandal affect you?
Well, about half of all variable-rate student loans are tied to Libor. Out of all adjustable-rate mortgages, 45% of prime loans and 80% of subprime loans are tied to it. State and local governments have exposure to Libor when they use interest-rate derivatives to control their credit exposure. And many types of consumer loans are tied to the rate.
Small is beautiful
It doesn't have to be this way. Indeed, it shouldn't be this way.
Research shows (.pdf file) that there is a threshold above which too much finance -- securities engineering, repackaged loans, all of it -- no longer has a positive effect on growth. In other words, there is a point at which selling more "synthetic" credit-default swap protection against an index of corporate investment-grade bonds -- the trade that blew up in JPMorgan's face -- won't benefit the collective good. That point is when credit to the private sector reaches 110% of the overall economy.
Right now, according to the World Bank, we're at 193% on this measure, down from a peak of 214% in 2007 but up from 92.2% in 1982, as shown in the chart above. And we're not alone: The developed rich-world economies as a whole are at 162%.
What's more, separate research shows that despite all the growth, the industry hasn't become any better or more efficient at channeling funds from savers to investors -- which, after all, is the raison d'être of banks.
Academicians aren't sure what causes growth to slow when bankers get too powerful, but they have some ideas.
The first is that too much finance encourages economic volatility, increasing the probability of large economic crashes.
The second is that the accumulation of power encourages the misallocation of resources in the good times via excessive leverage. Thus, Pets.com and Miami condos with granite counters and outlandish price-to-rent ratios.
It could also contribute to higher levels of inflation via things like the recent commodity-trader-driven spikes in food and fuel prices.
The takeaway is that we need tighter regulation and capital requirements for large, global institutions, despite worries from the industry and some on the right that this will reduce profitability and tighten lending.
The 2010 Dodd-Frank financial reform, which addressed the problem with tools like the new Consumer Financial Protection Bureau, was criticized by Republicans as being too harsh. In reality, the package was too lenient, because it failed to address Wall Street titans' too-big-to-fail status.
This analysis suggests tighter credit would actually be a good thing, because, with lending to households already down, it would hit the "shadow" banking system of derivatives, collateralized loans and other types of gimmickry the usurers are indulging in at our expense.
We've been here before
With our economy and indeed our very liberty at stake, it's comforting to know that our predecessors fought similar problems and found creative solutions. I checked in with Robert Wright, an economic historian at Augustana College in Illinois, for some perspective on all this. He noted two things:
- First, it's unusual, and somewhat frightening, that, aside from GOP presidential candidate Rep. Ron Paul of Texas, there is no political figure sounding the anti-Wall-Street battle cry.
There is no modern-day Andrew Jackson, who took down the Second Bank of the United States -- one of our early central banks -- out of concern that stockholders were earning easy profits from taxpayers via the privilege of using cheap government money to make loans. Sounds like the deal today's Federal Reserve member banks get.
- Second, although the Fed has held short-term interest rates near 0% since 2008 and has spent trillions pushing down long-term rates, many households still aren't benefiting in a big way because of the problems of tightened credit standards, negative home equity and Wall Street's need to protect profit margins.
Wright suggests one remedy would be to bypass Wall Street completely and have the government issue mortgage loans at 0.25%, the upper end of the Fed's short-term policy-rate window.
This would cut defaults by significantly lowering monthly payments, and it wouldn't require write-downs of mortgage principal (a bailout to homeowners that helped fuel the genesis of the Tea Party). Such a move would give every Tom, Dick and Harry access to the kind of financing enjoyed by Citigroup and JPMorgan.
On a typical 30-year $250,000 mortgage, a drop in rates from 3.5% to 0.25% would slash payments by 30%, from $1,435 to around $1,000.
Yes, there is a risk of political exploitation. And, despite the availability of the Internal Revenue Service to collect on these loans via things like wage garnishment, the government might be too lenient on borrowers. But there are precedents for it. In the colonial period, general loan offices in Massachusetts, Pennsylvania, New Jersey and New York made loans to farmers to help support the economy. And right now, the state of North Dakota is issuing loans via its Bank of North Dakota -- an institution funded by state deposits created in 1919 on a wave of populist anger toward the moneyed interests back east.
Socialized financing of the type pioneered by the founding fathers and maintained by one the reddest states in the union? No one said the cure to a problem generations in the making would be easy.
At the time of publication, Anthony Mirhaydari did not own or control shares of any company mentioned in this column.
Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at email@example.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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Wall Street is only part of a massive problem that is threatening to send our country over the edge.
Combine this a Congress that is not concerned in the least about American Citizens and what is best for us.
Congress has a game plan. Pit the U.S. Citizens agains themselves with our two party system so we are constantly pointing fingers to one side or the other. Promote discontent between Republicans and Democrats and deflect the real issues that are sending us over that financial cliff. Nobody in Congress has a clue about fiscal responsibility and how to bring spending in line with revenues taken in. Subsidies for farming and the oil industry need to end. Foreign aid? Stop paying it until we have satisfied our own needs for jobs and infrastructure replacements.
We are borrowing $.42 for every dollar that we spend. Is that responsible? Can that be sustained? Problems with social security because those funds were looted for other causes? Two wars which have not and will not accomplish anything that will further our goals in the long run.
A Health Care system that will be run and administered by the government more efficiently and for less money? Are we that naive? Look at Social Security. The US Post Office. Does anybody believe that Health Care money will only be used for Health Care? Congress cannot keep their hands off any amount of money that might accumulate in the treasury.
OK.......enough venting. We have got serious problems in this country and if we think that our politicians are going to solve them for us then once again we are headed for the cliff. Go to the polls and vote them all out. Term limits!
This article has some truths and some opinions that are clearly driven by a big government author. HOWEVER, I will say this...Wall street is indeed out of control. My solution won't be embraced by many of my conservative brethren but here goes...OUTLAW the secondary market gimmicks such as derrivatives, credit default swaps, PACKAGING mortgages (even re-selling mortgages). Throw in short term market trading and particularly high freqency trading. The stock market was developed to help companies, that actually make things or deliver a true worthwhile service, raise capital. It is now more of a traders gambling house that delivers more value to the manipulators than to the people that actually create and build. I do not share the belief that "free" markets have to include unlimited opportunities for people to gamble and manipulate.
BTW, I am a retired senior manager of a large American Corporation and a long-time, long-term investor.
Wall Street is ripping all of us off with the banks and corporations.
It is like who rips off the public more wins, just like some sort of sick game!
Yes, Wall Sreet and the other criminals in this crooked game need to be shut down!!!!!
With legalized corruption no-one goes to jail...just bigger bonuses. Wall street is married to the politicians. One way out of this mess?...get every Tom, Dick and Harry out of the Senate and House...yes I mean every one...good, bad, ugly, this will send a clear message that those newly elected better do something for the good or you are out too! Many politicians instill fear in the minds of the American people to get votes. I say the American people...who still have the power mind you, should instill fear in our politicians...meaning we will vote you out faster than you can say what the hell?!!. The alternative...lets just all jump off the fiscal US cliff...What's the saying? Hey if you jump I'll jump..
The one's not taking action are the US voters. I say rally the team with social media, if smaller countries can reshape their Government with this approach...what the hell are we waiting for?
Anthony, good article, writing about, what many of us have known for a long time. This article along with Jim Jubaks article about JP Morgan, which am quite sure you both had to have permission to print, might be a signal, that MSN has the courage, to expose the corruptness in the large banks.
If anything is going to change, however what is needed is much more media coverage, than MSN can provide. Americans need to know about the corruptness in the large banks, so they can hold there politicians accountable, if it continues.
Really, you all keep putting up with all this crap.
You know you can fight back with your wallet, that is the only thing these people understand. Don't put a dime in the greatest casino game on the planet, unless you daytrade, its hopeless and even if you daytrade its hopeless.
Invest in commodities, the real thing like gold, silver coins, not rare coins, a ripoff. Buy land, start a business, invest in your children because your family is all you have that really gives a damn about you. Stay healthy, its one commodity that is great when you have it but you are screwed if you loose it.
Have a great day.
to control the issue of their money,
first by inflation and then by deflation,
the banks and corporations that will
grow up around them (around the banks),
will deprive the people of their property
until their children will wake up homeless
on the continent their fathers conquered." Thomas Jefferson
The idea that politicians are 'elected' is an illusion. They are really 'hired' by the financial and corporate interests. And there are really two governments: the 'provisional' government 'elected' every four years, and the 'permanent' government that consists of highly placed individuals and corporate interests in military, military-industrial, banking and finance, and government positions.
The latter government is who really runs the country and decides policy that determines how things are.
I remember back in the days when I would buy stock directly from the company that I wanted to invest in. No middlemen. No Wall Street. No commissions.
Back then, it was easy and fun to watch my money grow without brokers and hedge fund hucksters manipulating my money. Oh, the good old days,,, when I could even trust my banker!
Great article! I secretly applaud every time I read an article that calls out the engine that is indeed ruining the very fabric of this country. Andrew Jackson! Haha .. I love it! I've been using that analogy for a long time with friends and family. We need a Jackson clone (can't we get his DNA from somewhere?) .. probably one of the only political figures of the past perfectly equipped to battle Wall Street on it's own terms and defeat it like the big, slobbery, overgrown Dog it's become. Course my family always comes back with the Trail of Tears, but I think a modern Jackson could create a modern day Trail of Tears ... with Wall street bankers and hedge fund managers making up "the trail"! haha
The real tragedy is that people like myself just don't trust Wall Street any further than I could throw them and are no longer investing is US stocks. I've personally pushed most of my investment cash into my residential real estate business, once a hobby to my reguar profession, but now seen as my primary retirement vehicle. I trust myself alone, and can manage everything 100% myself. That's what I trust. Like Scarface said ... "Who do I trust?? Me! That's who!"
Put Wall Street out of work ... invest in yourself, your own businesses and business assets and your own ideas .. you'll most certainly run a lower risk than investing with Wall Street. The system is corrupt and set up against you with only one pre-determined outcome ... making people like Lloyd Blankfein(aka Scum of the earth) rich and making your family pay for his undeserved wealth. Save money, buy real assets and businesses ... and write great articles exposing the scum out there at the controls because every little article chips away at their power and turns the tides against them.
Change will happen ... it's inevitable. Because what we have right now is simply unsustainable.
I vote that the writer of this column receive a Pulitzer Prize for his courage to write such a column, set aside the fact that one of our rights is freedom of speech and there are times that even those seem to be taken from us.
The future seems to be a lot more insecure than it was in 50's and 60's. Life was a one income family and still being able to take family summer vacations. The thought of needing 2 or 3 jobs just to survive didn't exist.
To me things are very discourageing and not getting any better. Anymore it is so hard to believe what is said by who is in office or even the ones who are trying to get there.
We know these things why can't we stop it. The vast majority of Americans want term limits on Congress why can't we get it. The vast majority of Americans want the borders of our country secured why can't we get it. The vast majority of Americans want this mortgage mess cleaned up and the banks setting on bailout cash involved why can't we get it. America is slowly becoming a police state where governments use police to carry out acts of violence against the people who rebel against governments take over attempts. The majority of Americans agreed basically with the 99% ers marches on Wall St. They were attacked by police. Given bad press until their supporst begin to fall. Our country maybe changing for the worse right before our eyes and we can do nothing to stop it. Can you imagine how bad it is going to get when the militias and the gangs start fighting back and wanting to take their shares. There will be no place for families amongst the killing. This country is going to hell in a hand basket and some very evil people are behind it that want to turn us into slaves.
People are so used to the status quo that when the tip of these heinous icebergs become visible, they are flabbergasted, outraged, and shocked. But the truth is that this is how it has been for quite some time. The shell game has simply played itself out.
Follow this to its logical conclusion. If the system is designed to reward those most willing to lie, cheat, backstab, murder, crush, and deceive their way to the top of the heap, then who is logically running the show? The sociopaths. Make no mistake: these are people who would gladly give us another holocaust if they thought they could get away with it and it would benefit them or even simply gratify them. The ONLY thing limiting their savagery is that right now the shell game is easier than the old ways, and they don't want to have to deal with the public outcry (read: inconvenience, unpleasantness - things all sociopaths hate having to confront because they aren't gratifying) if they don't have to.
But they DO NOT care about you or your country or anything else on the face of the earth but their own gratification and power. Anytime you fall back into doubting that, just ask yourself the simple question: "Is the system I find myself in currently stacked to reward those most willing to deceive, inflict suffering, self-serve, and self-gratify over the rest of us?" And if the answer is "yes," then remember that the logical conclusion of that line of thought is simple: the sociopaths are in charge.
Regardless of party, regardless of agenda, regardless of lip service and appearances, regardless of generation. If they had to raise money and did so by making deals with the various devils of the world, and if they are in power within a system that requires those in power to deceive, lie, steal, inflict suffering, and even murder, then the only way they are in power - whether corporate, military, or political - unless their power is derived solely from the people - is because they are the sociopaths. Never forget it.
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