Liberal protesters "occupying" Wall Street hate the big
banks, which they see as the engine of capitalism. But
conservatives ought to hate the big banks because they are the
enemies of capitalism.
Three events last week cemented how the bailed-out subsidy
sucklers of Wall Street continue to profit, not from the
free exchange and risk-taking that embodies the market, but
from cronyism and offloading their risk onto the taxpayer.
First, Bank of America, which would have collapsed if not
for the 2008 taxpayer-funded bailout, moved a reported $55
trillion in derivatives from its investment banking arm,
Merrill Lynch, to a subsidiary that is backstopped by
taxpayers through the Federal Deposit Insurance Corp.
Bloomberg news reported that FDIC officials don't like the
move, which puts depositors' money at risk and taxpayers
ultimately on the hook if risky derivatives blow up. But
Wall Street insiders like the move for precisely that
reason: If Bank of America melts down, these hedge fund
managers or other big-time investors want their money in a
division of the bank propped up by government.
In short, big-time investors in risky financial products
want taxpayers to bear some of their risk, and Bank of
America has come up with a clever way to do that.
Banks play the same public-risk-private-profit game in the
mortgage industry, where lenders and Realtors have
successfully pushed a measure to expand taxpayer insurance
for mortgages to include big-dollar homes. Sens. Johnny
Isakson, R-Ga., and Robert Menendez, D-N.J., last week
passed through the Senate a measure to expand the size of a
loan that the federal government can insure, up to $729,750.
The Menendez-Isakson measure would allow government-owned
mortgage giants Fannie Mae and Freddie Mac to buy loans of
that size off of lenders, and the Federal Housing
Administration could insure loans that big. If a loan owned
by Fannnie or Freddie (or insured by the FHA) fails,
taxpayers take it on the chin while banks still get paid.
Assuming a 20 percent down payment, this proposed new
bailout limit would have taxpayers subsidizing homes worth
more than $910,000. Even in pricey Potomac, Md. -- plush
with the wealth of lobbyists, government consultants and
dual GS-15 incomes -- that sum could buy you a five-bedroom,
2 1/2-bath home with a two-car garage on a cul-de-sac.
Finally, last week we learned how much self-dealing was
involved in the 2008 bank bailouts. A Government
Accountability Office report highlighted plenty of conflicts
of interest at the Federal Reserve. New York Fed official
Stephen Friedman was on the board of Goldman Sachs and
actively buying up shares of Goldman while the Fed moved to
give Goldman special access to its lending windows.
JP Morgan CEO Jamie Dimon sat on the New York Fed's board
while the Fed was pouring billions of bailout dollars into
JP Morgan and granting JP Morgan special regulatory
exceptions.
Meanwhile, the banks keep hiring the "public servants" who
help steer bailouts their way, further corrupting both the
market and the government. Fed bailout honcho Brian Madigan,
who, according to the New York Times, "played a leading role
in the emergency lending programs during the financial
crisis," cashed out to Barclays this year.
Senate Banking Committee counsel Amy Friend, who helped
pass the summer 2008 housing bailout (dubbed the "Bank of
America Bill"), now works for a leading financial consulting
and lobbying firm. And FHA Commissioner David Stevens, who
helped craft a handful of mortgage bailouts, cashed out to
the Mortgage Bankers Association. That's just naming a few.
And all of these big banks still profit from an implicit
bailout. The credit ratings agency Moody's recently
downgraded Bank of America, Wells Fargo and Citigroup
because the agency saw the likelihood of a bailout decrease
from certain to "very high." These banks' credit is rated
higher than they would be in a free market, meaning they
profit from the expectation of a bailout, if necessary.
So banks profit largely through activities that do not
create value or efficiencies. They profit through financial
games that rest on government favors. Many Occupy Wall
Street protestors demonize all profit. Conservatives defend
profit-seeking as the engine that creates prosperity for all
of society.
But the big banks have rigged the game so that they profit
without creating value. In fact, they profit from activities
that weaken the economy by creating instability.
Today, big banks give capitalism a bad name. Believers in
the free market should stop giving banks cover.
