Wall Street’s 10 Greatest Lies of 2009 
On December 13, President Obama declared that he was not elected to help the
“fat cats.” But the cats got another version of that memo. A day later, 10 of them
were supposed to partake in some White House face-time to talk about their
responsibilities to the rest of the country, but only seven could make it. No-shows for the
“very serious discussion” — due to inclement New York weather or being too busy with
internal bonus discussions to bother with the President — were Goldman Sachs CEO
Lloyd Blankfein, Morgan Stanley CEO John Mack and Citigroup Chairman Richard
Parsons.
Yes, Obama inherited a big financial mess from the Bush administration — which
inherited its set-up from the Clinton administration (financial recklessness, it turns out, is
non-partisan) — but he and his appointees have spent the year talking about fighting risk
and excess on Wall Street, while both have grown.
Treasury Secretary Tim Geithner patted himself on the back for making the “difficult and
necessary’ decisions of fronting Wall Street boatloads of money to cover its losses
and capital crunch last fall. Federal Reserve Chairman Ben Bernanke (a Bush-Obama
favorite) was named Time Magazine’s Person of the Year for saving the free
world as we know it. And Congress is talking “sweeping reform” about a bill that leaves
the banking landscape intact, save for some minor alterations. For starters, it
doesn’t resurrect the Glass-Steagall Act of 1933, which separated risk-taking
(once non-government-backed) investment banks from consumer oriented
(government-supported) commercial banks.
Meanwhile, Wall Street is restructuring (the financial equivalent of re-gifting) old toxic
assets into new ones, finding fresh ways to profit from credit derivatives trading, and
paying itself record bonuses — on our dime. Despite recent TARP payback enthusiasm,
the industry still floats on trillions of dollars of non-TARP subsidies and certain players
wouldn’t even exist today without our help.
Wall Street’s return to robustness and Main Street’s continued
deterioration are the main takeaways for 2009 that stemmed from the 2008 choices to
flush the financial system with capital and leave the real economy to fend for itself. Lies that
exacerbate this divide only perpetuate its growth. With that, here is my top 10 list of lies.
Please consider adding your own, and let’s all hope for a more honest New Year.
1) The economy has improved.
Recently, Bernanke declared, “Having faced the most serious financial
crisis and the worst recession since the Great Depression, our economy has made
important progress during the past year. Although the economic stress faced by many
families and businesses remains intense, with job openings scarce and credit still hard to
come by, the financial system and the economy have moved back from the brink of
collapse.”
Sure, the economy is better — if you work at Goldman Sachs or had an affair with Tiger
Woods. But while Bernanke, former Treasury Secretary Hank Paulson and Geithner
turned the Federal Reserve into a national hedge fund (cheap money backing toxic assets
in secrecy), and the Treasury Department into a bank insurance policy, the rest of the real
economy took hit after hit — starting with jobs.
The national unemployment rate remains at double digits. Despite Washington’s
bizarre euphoria about unemployment rates last month being better (they edged down in
November to 10 percent from 10.2 percent in October), the number of Americans filing
for initial unemployment insurance rose during the second week of December. After all the
temporary holiday hires, that number will probably increase again. Plus, unemployment
rates in 372 metropolitan areas are higher than they were last year.
2) If you give banks capital, they will lend it out.
On Jan. 13, 2009 Bernanke concluded that “More capital injections and guarantees may
become necessary to ensure stability and the normalization of credit markets.’ He
said that “Our economic system is critically dependent on the free flow of credit.” He was
referring to the big banks. Not the little people.
Ten months later, though, he admitted that, “Access to credit remains strained for
borrowers who are particularly dependent on banks, such as households and small
businesses’ and that “bank lending has contracted sharply this year.”
In other words, big banks don’t share their good fortunes. Shocking. And as a
result, bankruptcies are rapidly rising for businesses and individuals – a direct result
of lack of credit coupled with other economic hardships like job losses.
Total bankruptcy filings for the first nine months of 2009 were up 35 percent to 1,100,035
vs. the same period in 2008. The number of business bankruptcies during the first three
quarters of 2009 eclipsed all of 2008. Individual consumer filings totaled 373,308 during
the third quarter of 2009 and were up 33 percent vs. the same period of 2008. Tell those
people about the free flow of credit, Ben.
3) Taxpayers are being repaid.
On December 17, the Treasury Department announced: ‘As a result of our efforts
under EESA (the Emergency Economic Stabilization Act that spawned TARP),
confidence in our financial system has improved, credit is flowing, and the economy is
growing. The government is exiting from its emergency financial policies and taxpayers are
being repaid.’
Even as banks rush to repay TARP in order to get the government off their backs before
annual bonuses are set, the Treasury Department is helping them out. On December 11,
the Internal Revenue Service gave government-subsidized banks a tax exemption that, for
instance, allows Citigroup to keep the benefit of $38 billion. Three days later, Citigroup
announced its $20 billion repayment of TARP. Get the math? Not exactly a taxpayer
windfall.
Additionally, the FDIC gave banks including Citigroup, Bank of America, and JPMorgan
Chase a holiday gift — at least a six-month break from having to raise capital to support
the billions of dollars of securities (read: toxic assets — remember those?) that firms
are going to have to add to their books in 2010. That will open a whole new can of worms
— a glimpse into either insolvency and a replay from the too-big-to-fail scenario, or
book-cooking (the Financial Accounting Standards Board, as of last year, has allowed
banks to price their own assets if there’s no true market for them — fun
times), or both. Meanwhile, banks can use the capital for bonus payments instead.
4) Homeowners are being helped.
Last year’s big lie was that banks would turn around and help their borrowers if
they got federal money. Yet, they were under no obligation to do so, and thus, they
didn’t.
Since the Obama administration released guidelines for the Home Affordable Modification
Program (HAMP) on March 4, 2009, the HAMP permanent loan modification numbers
have been anemic.
Separately, by almost every measure, mortgage and credit problems are worse this year
than last. There were almost a million new foreclosure fillings in the third quarter of this
year, 5 percent more than in the second quarter, and 23 percent more than during the third
quarter of 2008.
Plus, foreclosures are not abating. Mortgage delinquencies (borrower 60 or more days
overdue) increased for the 11th quarter in a row, reaching a national average record of
6.25 percent for the third quarter of 2009. Delinquencies precede foreclosures. Compared
to last year, mortgage borrower delinquencies are up 58 percent. Meanwhile, banks are
sitting on properties they acquired to avoid selling them into the market and having to book
the resultant loss.
5) Big banks will help small businesses.
On October 24, because a whole year had passed without this happening, Obama
declared, “It’s time for our banks to stand by creditworthy small businesses and
make the loans they need to open their doors, grow their operations and create new jobs.”
Small businesses, which employ half of all private sector employees, had received less than
$400 million in new loans under government programs, and were granted access to just
one program that buys up to $15 billion in securities tied to small business loans.
According to the Small Business Administration (SBA) the number of approved loans
shrunk from 124,360 in 2007 to 69,764 in 2009 (it was 93,541 in 2008).
Two months later, since that didn’t work, Obama reiterated, “given the
difficulty business people are having as lending has declined, and given the exceptional
assistance banks received to get them through a difficult time, we expect them to explore
every responsible way to help get our economy moving again.” He asked the big bank
chiefs to take “extraordinary” steps to revive lending for small businesses and homeowners.
Too bad banks don’t gear their business strategy to expectations and suggestions.
Still, as a gesture of good faith, Bank of America promised to kick in an extra $5 billion
more to small- and medium-sized businesses next year. JP Morgan Chase promised to
increase lending by $4 billion. Goldman had already decided to go the pledge route a few
weeks earlier, putting up half a billion dollars in small business “charity” to help its
deservedly negative image.
To make up for what the banks aren’t doing, the Obama administration is setting
aside $30 billion from the financial bailout fund to stimulate lending to small businesses.
6) The Fed values transparency.
On February 10, Bernanke told the Committee on Financial Services that he “firmly
believes that central banks should be as transparent as possible. Likewise, the Federal
Reserve is committed to keeping the Congress and the public informed about its lending
programs and balance sheet.”
Yet, on March 5, the Fed refused to comply with a Freedom of Information Act request
and lawsuit filed by Bloomberg News to disclose the details of its 11 lending facilities. In
front of the Senate Budget Committee, and in response to a question from Senator Bernie
Sanders, I-VT, about naming the firms that got money from those facilities, Bernanke said
“No” — such disclosure would be “counterproductive” and risk “stigmatizing
banks.”
Undaunted by this irony, on May 5, before the Joint Economic Committee, Bernanke
reiterated, “The Federal Reserve remains committed to transparency and openness
and, in particular, to keeping the Congress and the public informed about its lending
programs and balance sheet.’ He told PBS NewsHour on July 28 that “We
are completely open to providing any information Congress wants.’
To date, the Fed has not disclosed the recipients of its cheap loans for toxic collateral.
7) History will not repeat itself.
In the beginning of the year, Obama said of Wall Street firms, “There will be time
for them to make profits, and there will be time for them to get bonuses. Now is not that
time.’
He also said that “part of what we’re going to need is for the folks on Wall Street
who are asking for help to show some restraint and show some discipline and show some
sense of responsibility.’
Yeah. Wall Street’s really into restraint….
Nine month later, as banks were racking up record profits and bonuses, Obama said the
same thing, in different words, in his September 14 Federal Hall speech. “We will
not go back to the days of reckless behavior and unchecked excess at the heart of this
crisis, where too many were motivated only by the appetite for quick kills and bloated
bonuses… the old ways that led to this crisis cannot stand…History cannot be
allowed to repeat itself.’
The only problem? History was repeating itself, as he spoke. Big banks took more risk in
2009, and posted more of their profits from trading operations than they had before they
nearly collapsed in 2008. Trading profits at the top five banks rose from a $608 million
loss in 2008 to $118.5 billion for annualized 2009, and $61.7 billion in 2007.
8) The pay czar will fight against — pay.
Treasury Department pay czar Ken Feinberg was supposedly appointed to keep a lid on
excessive compensation for companies sitting on federal bailouts. Two problems with that:
first, the Treasury Department continues to ignore the fact that the TARP portion of the
bailout was only a tiny portion of the full bailout, and second, Wall Street was pushing
back and winning at every turn.
For instance, after announcing he’d cap compensation for the top 25 execs at AIG,
on October 23, Feinberg gave three of them a pass. These men were apparently
“particularly critical to the company’s long-term financial success.’ Turning
to his other role as Wall Street’s mouthpiece, Feinberg made excuses for AIG.
“AIG compensation practices are unique. We took into account independent, very
credible opinions of others to come up with a package that we think will help AIG thrive.”
That’s nice.
But he’s not kidding about thriving — those three employees will receive
bonuses of about $4 million, $5 million and $7 million. AIG’s new CEO, Robert
Benmosche, who joined AIG in August and got his pay approval out of the way on
October 2, is bagging $10.5 million in annual compensation, including $3 million in cash,
$4 million in stock options and $3.5 million in annual performance bonuses.
Then, on November 12, Feinberg said he was “very concerned” about scaring away top
talent at the seven firms that took the biggest bailouts. Way to keep a lid on it, Ken.
But to be fair, it’s not really Feinberg’s fault. New York Fed and Treasury
Department officials have been urging him to dial back restrictions for AIG folks in 2010
as well. Why? Because restricting pay will make it harder for the government to get back
its loans to AIG. Right. Somehow paying these people stupid sums of money is the only
way to get our money back. Because their “talent” worked out so well going into last year.
Elsewhere on Wall Street, the top six banks are getting set to pay out $150 billion in
bonuses ($10 billion more than in 2008). GS is leading the pack in terms of bonus
increases; it will dole out a projected $22 billion in compensation in 2009, compared to
$11.8 billion in 2008 and $20.2 billion in 2007. JPM put aside $29.1 billion for 2009,
compared to $24.6 billion in 2008 and $29.9 billion in 2007. Wells Fargo is spending
$26.3 billion this year, compared to $23.1 billion in 2008 and $25.6 billion in 2007.
9) The lobbyists made us do it.
Going back to the big bank love fest at the White House earlier this month, execs
promised to do better on regulation matters, citing a “disconnect” between their steadfast
support for regulation and the fact that their lobbyists were pushing for as little new
regulation as possible.
Really? Because this disconnect cost the financial sector $334 million so far this year for
2,560 lobbyists; a pittance compared to bonuses, but still, hard-taken cash. I’m
sure another $334 million is coming to fight for stricter regulation in the New Year. Not.
10) Citigroup is the picture of health and too-big-to-fail is over.
Once the nation’s largest bank, later its largest bailout recipient, the firm exited its
TARP obligation on December 14 with CEO Vikram Pandit stating, “Once Citi repays the
$20 billion of TARP trust-preferred securities and upon termination of the loss-sharing
agreement, it will no longer be deemed to be a beneficiary of ‘exceptional financial
assistance’ under TARP beginning in 2010.” (Read: I don’t want to hear
about compensation caps anymore!)
He went on to say that, “By any measure of financial strength, Citi is among the strongest
banks in the industry, and we are in a position to support the economic recovery.”
Shareholders didn’t feel the same way. Citigroup shares already trading well below
those of its main competitors have fallen 13.5 percent since that announcement. One of
their key clients, the Abu Dhabi Investment Authority, accused the firm of misleading them
over a $7.5 billion investment. Plus, in order to come up with the money to pay back the
government, they had to raise it in the markets, thus diluting their stock — all to keep
their petulant star employees happy at bonus time.
The Citigroup story should be examined for the other big banks. They may talk tough
about paying back the government, but underneath they are hurting. And their pain will
become our cost again — because nothing fundamental has changed this year, and
that means — floating on our public money, these banks are actually still ticking time
bombs.
Bonus Lie: Goldman Sachs is sorry.
On November 17, Lloyd C. Blankfein said he was sorry about his firm’s role in the
financial crisis. “We participated in things that were clearly wrong and have reason to
regret, we apologize.” He didn’t say he was sorry the firm is still floated on $43
billion of total subsidies including FDIC guarantees for debt it raised, that were logically
supposed to aid consumer oriented banks, and the $12.9 billion it got through the AIG
bailout.
Yet the firm has the highest percentage of trading revenue of all the banks that got
assistance; in other words, the revenue most linked to risk-taking, at 79 percent, or $38
billion out of $47 billion for annualized 2009. This is up from 41 percent, or $9 billion in
2008, and 68 percent in 2007 and 2006. And as noted before, Goldman leads the bonus
sweepstakes for 2009. The firm is probably not very sorry about all of that.
Maybe I’m being too hard on everyone. Maybe all those toxic assets we all forgot
about have value now. Maybe bank profits are based on something real. Maybe the
increasing reserves against increasing credit losses aren’t happening. Maybe those
foreclosures aren’t really happening. Maybe banks aren’t sitting on homes
because they don’t want to dump them into the market and ruin the fantasy that
prices have hit bottom. Maybe eight million jobs are waiting on the other side of 2010.
Maybe I should just send a holiday card to Goldman saying thanks for everything.
I’m sorry I ever quit. Maybe Lloyd Blankfein really is God.
Or maybe, the next mammoth pillage will be the one that makes a difference. But I truly
don’t want us to have to find out. May 2010 be the start of a more insightful
decade.
By Nomi Prins, AlterNet
Posted on December 28, 2009, Printed on December 28, 2009
http://www.alternet.org/story/144776/
Nomi Prins is a senior fellow at the public policy center Demos and author of It
Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from
Washington to Wall Street.
© 2009 Independent Media Institute. All rights reserved.
View this story online at: http://www.alternet.org/story/144776/
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