Attacks on Banks, Paid For By Banks?

If you look at photos of anti-Wall Street, Occupy-type protests, it seems clear that the people doing the demonstrating have not had lots of dealings with banks–like most Americans, actually. So they are acting on hearsay, or on a theory: they have been told that “big banks” are somehow responsible for the sorry state of our economy, in particular the fact that most young people can’t find good jobs.

Elizabeth Warren is the foremost exponent of that theory. You might think that she can’t be taken seriously as a presidential candidate, given that in her lifetime she has won–count ’em–one election. But she has emerged as the champion of the Democratic Party’s left wing, the tiny splinter group that thinks Barack Obama’s problem is that he isn’t liberal enough. As Democrats realize with mounting horror that Hillary Clinton is an awful candidate, they seem likely to turn to the woman who made a career out of pretending to be an Indian.

Of course, if the Democrats want to base their 2016 campaign on anti-bank populism, they will have to deal with the fact that the financial industry contributed more money to Barack Obama’s campaigns than any industry has contributed to any candidate in the nation’s history. Why might that be? The Democratic Party is, and has been for a long time, the party of Wall Street. The congruence between the Obama administration’s policies and Goldman Sachs’s interests is almost perfect. Will Elizabeth Warren really disrupt that alliance? Or will banks fund the Democrats’ demagogic attacks on themselves? The latter, I suspect. Wall Street will assume that Warren is a hypocrite, whereas I think she is just a liar.

I have a good friend who has had a notable career as an expert on risk management in the banking industry. His expertise, in other words, is vastly greater than Elizabeth Warren’s. I asked him to comment here on the amendment to Dodd-Frank that was part of the cromnibus compromise. Tonight, he offers these thoughts on Warren’s latest anti-bank screed:

The populism is bad enough, but it’s the Big Lie that gets under my skin.

In what sense were banks “bailed out”? They weren’t “given” anything. Large banks were forced to take liquidity loans by the lender of last resort to prevent a bank run while the equity holders got mercilessly hammered in the market. Most “bankers” had huge amounts of their bonuses and net worth in options or in equity in the bank, respectively, which also became nearly worthless. Hundreds of thousands of “bankers” lost their jobs and will never work in finance again, most likely. This is a “bailout”?

The “Wall Street banks” weren’t bailed out by taxpayers. Depositors, lenders and the entire financial system were bailed out, including, of course, those 99%-ers who successfully flipped houses with sub-prime financing (one third of sub-prime loans in California in ’06 – ’08) and those 99%-ers who sold during the bubble at inflated prices and had enormous windfalls of capital gains.

From Felix Salmon, hardly a bank apologist [the quote is from a comment on Salmon’s post]:

[F]irstly the Fed is there to be lender of last resort. That is its job. It was doing exactly what it was supposed to be doing under its charter in 1913, that is why these…stor[ies] are fundamentally BS. Secondly, I don’t get why the Fed is considered a subsidy. Unlike, say, lending to homeowners or car companies which is going to cost more than $50bn from TARP, all of the operations to do with banks MADE the government money at next to no risk. How many government interventions can you say that about?

I know in the end this is all just peeing in the wind, because thanks to lying dishonest scum like Louise Story, Gretchen Morgensen, [New York Times]…and their ilk, the idea banks got out “unscathed”, no bankers lost their jobs, no bankers lost money, that they got bailed out, that it cost the taxpayer billions or trillions is now well established. Turns out Goebbels was right about the Big Lie.

The bank liquidity programs were nothing like the bailout of GM or Chrysler, which were actually given money directly and indirectly, through special tax legislation creating a loophole worth about $45 billion in foregone taxes, most of which will never be recovered. And it was done in an irregular [Ed.: i.e., illegal] process that robbed senior creditors — now THAT’s a bailout!

Virtually all of the loans, not grants, made under duress in most cases to the large “Wall Street banks” were repaid in short order–and profitably! Including the worst at AIG.

I don’t believe this has ever been reported publicly, but the CEO of one of the nation’s five or ten largest banks was told by representatives of the Obama administration [Update: A reader points our correctly that this was Tarp 1, so it was Bush’s Democrat Secretary of the Treasury, Henry Paulson, who forced federal money on the banks] that he would not be allowed to leave the room until he signed a document accepting federal TARP money, even though his bank had no need of it and didn’t want it. The Obama administration is just one small step above Mussolini.

But the bailouts of housing, FNMA/FHMLC [Fannie Mae and Freddie Mac], and autos — actual coverage of losses — will never be repaid.

It’s all a convenient distraction from the government sponsored and engineered housing bubble, aided and abetted by a huge and pervasive real estate complex in every Congressional district, lavishly maintained by lobbying and funding from FNMA and FHLMC to keep the game going.

For years, my friends in the banking industry told me that the federal government was forcing them to make bad loans. Mortgages were not the only such bad loans, but while they were the largest, they were also the least problematic from the banks’ standpoint, since the taxpayers, through Fannie Mae and Freddy Mac, stood ready to buy them and assume the risk. The financial collapse of 2008 and the recession that followed were caused primarily by liberal policies enforced by the federal government that went back to the Carter administration.

After all, where did all those loan proceeds GO? ANSWER: to developers, brokers, construction unions, contractors, landowners, lawyers, appraisers, servicers, local governments and boosters, real estate agents…AND homeowners, and house flippers getting windfall gains.

The fees that “Wall Street bankers” made (2% – 5%) and the net interest spread and returns expected by investors (but, of course, subject to losses) pale in comparison to the application of proceeds to the other beneficiaries. The banks got fees, but the 99% got the aggregate net principal from the loans. It is simply impossible for it to be otherwise. In the end there was, indeed, a wealth transfer from taxpayers (and to a lesser extent from investor losses) who paid for FNMA/FHLMC and other government agencies. But the wealth transfer was primarily TO the 99%, not to the “Wall Street banks”.

The real story here is the disastrous role played by [Fannie Mae and Freddie Mac] — Friends of Bill (Clinton) and Friends of Barry O, and Barney (Frank) and Chris (Dodd), which ultimately did get bailed out by taxpayers.

Jamie Gorelick, the Democratic Party hack who helped to facilitate 9/11 by imposing a strict wall of separation that prevented federal agencies from sharing information on terrorist plots, was rewarded with tens millions of dollars “earned” as the vice chairman of Fannie Mae, even though she had no financial expertise whatsoever. There are Democratic Party insiders–multimillionaires–and then, there are the rest of us.

FNMA/FHLMC is government-directed Industrial Policy for the housing and real estate sectors. Banking and finance is always a derivative or “following” activity, led by the “real” economic sectors. The banks certainly accommodated the housing bubble and in the process kept it going, but they didn’t create it. The government did, responding to and developing further long-standing New Deal/Great Society housing initiatives.

Of course, banks large and small made as much money as they could from the process — as did everyone else — and certainly became reckless. No doubt the incentives were skewed also, so they’re hardly innocents in this sad tale. But they weren’t “bailed out” in the commonly understood sense. The taxpayers will end up holding the bag for the government which directed allocation of capital to housing and to the auto industry (more specifically, the auto labor unions), not to Wall Street.

That’s why the Narrative, the Big Lie, must be continually repeated: to obscure and to create a scapegoat for the disaster in which millions participated, but politically cannot be blamed:

To see the full story of the credit collapse is to understand what a small role [Wall Street] really played in it. The real star turn was shared by millions of people, and the whole superstructure of careless lenders, eager bond buyers, and willing underwriters existed merely to service the base unit of the collapse: the ordinary American deadbeat. Every time your local paper tells the moving tale of some poor soul who ended up in foreclosure, mysteriously owing $220,000 on a house that originally closed at $63,000, you’re finding out…

Something tells me that we will return to this subject many times between now and November 2016.

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