The Continuing Disaster of Wall Street, One Year Later

As he attempted to do with health care reform last week, the President is trying to breathe new life into financial reform. He's using the anniversary of the death of Lehman Brothers and the near-death experience of the rest of the Street, culminating with a $600 billion taxpayer financed bailout, to summon the political will for change. Yet the prospects seem dubious. As with health care reform, he has stood on the sidelines for months and allowed vested interests to frame the debate. Nor has he come up with a sufficiently bold or coherent set of reforms likely to change the way the Street does business, even if enacted.

Let's be clear: The Street today is up to the same tricks it was playing before its near-death experience. Derivatives, derivatives of derivatives, fancy-dance trading schemes, high-risk bets. "Our model really never changed, we've said very consistently that our business model remained the same," says Goldman Sach's chief financial officer.

The only difference now is that the Street's biggest banks know for sure they'll be bailed out by the federal government if their bets turn sour -- which means even bigger bets and bigger bucks.

Meanwhile, the banks' gigantic pile of non-performing loans is also growing bigger, as more and more jobless Americans can't pay their mortgages, credit card bills, and car loans. So forget any new lending to Main Street. Small businesses still can't get loans. Even credit-worthy borrowers are having a hard time getting new mortgages.

The mega-bailout of Wall Street accomplished little. The only big winners have been top bank executives and traders, whose pay packages are once again in the stratosphere. Banks have been so eager to lure and keep top deal makers and traders they've even revived the practice of offering ironclad, multimillion-dollar payments -- guaranteed no matter how the employee performs. Goldman Sachs is on course to hand out bonuses that could rival its record pre-meltdown paydays. In the second quarter this year it posted its fattest quarterly profit in its 140-year history, and earmarked $11.4 billion to compensate its happy campers. Which translates into about $770,000 per Goldman employee on average, just about what they earned at height of boom. Of course, top executives and traders will pocket much more.

Every other big bank feels it has to match Goldman's pay packages if it wants to hold on to its "talent." Citigroup, still on life-support courtesy of $45 billion from American taxpayers, has told the White House it needs to pay its twenty-five top executives an average of $10 million each this year, and award its best trader $100 million.

A few banks like Goldman have officially repaid their TARP money but look more closely and you'll find that every one of them is still on the public dole. Goldman won't repay taxpayers the $13 billion it never would have collected from AIG had we not kept AIG alive. (In one of the most blatant conflicts of interest in all of American history, Goldman CEO Lloyd Blankfein attended the closed-door meeting last fall where then Treasury Secretary Hank Paulson, who was formerly Goldman's CEO, and Tim Geithner, then at the New York Fed, made the decision to bail out AIG.) Meanwhile, Goldman is still depending on $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation. Which means you and I are still indirectly funding Goldman's high-risk operations.

So will the President succeed on financial reform? I wish I could be optimistic. His milktoast list of proposed reforms is inadequate to the task, even if adopted. The Street's behavior since its bailout should be proof enough that halfway measures won't do. The basic function of commercial banking in our economic system -- linking savers to borrowers -- should never have been confused with the casino-like function of investment banking. Securitization, whereby loans are turned into securities traded around the world, has made lenders unaccountable for the risks they take on. The Glass-Steagall Act should be resurrected. Pension and 401 (k) plans, meanwhile, should never have been allowed to subject their beneficiaries to the risks that Wall Street gamblers routinely run. Put simply, the Street has been given too many opportunities to play too many games with other peoples' money.

But, like the health care industry, Wall Street has platoons of lobbyists and an almost unlimited war chest to protect its interests and prevent change. And with the Dow Jones Industrial Average trending upward again -- and the public's and the media's attention focused elsewhere, especially on health care -- it will be difficult to summon the same sense of urgency financial reform commanded six months ago.

Yet without substantial reform, the nation and the world will almost certainly be plunged into the same crisis or worse at some point in the not-too-distant future. Wall Street's major banks are already en route to their old, dangerous ways -- now made more dangerous by their sure knowledge that they are too big to fail.

Cross-posted from Robert Reich's Blog

Comments

[liberty68]

So why allow 'too big to fail' to continue? Why aren;t we, as Moyers seems intent to do on his PBS special 10/9, educating the public about what anti-trust is all about and how it harms competition and allows the 'too bigs' to raid our treasury to the tune of $700 B as they just did? Let's show some historical background when we broke up the Robber Baron trusts of the past. Geithner and Summers are Trojan Horses in our midst.

[Fonfax]

If stockholders had any clout the outrageous pay packages would be reduced.

[Ping]

Another great article. Thank you Dr Reich.

[Querent]

Thanks for the warning, Mr. Reich.

[koineaisthesis]

Wow. Deja Vu. Didn't we go through this in the 90's with Clinton's health plan? I want a single payer plan. Why? Because I'm not rich or powerful (which means I'm not a politician, lobbyist or the AMA.) But I am a concerned citizen of this country and don't like the idea that other citizens like me are denied medical treatment and DIE because they are not a politician, lobbyist or the AMA. What kind of country was I born and raised in? I'm starting to say,"It's not my fault I was born in the USA!" That's sad.

[seawolf77]

I would like to paint an alternative picture. All the banking institutions that got in over their head are allowred to fail. GM and Chrysler are allowed to fail. Home prices are allowed to fall. No cash fo clunkers. No bailouts. Then the engineers that always wanted to build a completely electric car band togther and form a new company called VOLT. They go on to electrify America transportation grid and get us off foreign oil. They are American heroes. All the banking crooks that got us into this mess are driven out of the business . never to be heard from again. The banking industry is flushed out. It comes back stronger. Trust is restored. We go on. Now what did we DO???????????

[GrumpyOldGeek]

And just where are those bright engineers going to get the funds to build the manufacturing plants?
Oh, wait. They'll just build the plants in China. Yeah, that'll fix the problem. Never mind.

[seawolf77]

In the capitol markets Duh? Except know they won't be dealing with a bunch of crooks and nitwits.

[tweedledeedumb]

Should heve let them all go out of business. It is hard lesson but one this country needs to learn...again.

[JayDDrew]

I absolutely don't believe the banks are not lending. If they weren't, how did people finance their cars in the cash for clunkers program? I think the banks are just playing it safe and not making risky loans, which is the mistake they made in the first place. And anyone still fortunate enough to have a job and retirement funds are not spending money like drunken sailors anymore. The days of negative savings rates for Americans are over for the foreseeable future. That's why the government had to do the bailout, it was the spender of last resort to re-prime the economic pump.
This will be our second jobless recovery, unless the federal government enacts tariffs to force multinationals to bring jobs back to America (not going to happen). Otherwise, we're seeing a slow reset of American wealth. We still have the superrich, but the average American's wealth is regressing towards the world's mean.

[Organic-Guy]

Obviously you don't own a business. Lending is almost at a stand still and suppliers have pulled in their already too short, too little 30 day lines of credit they used to offer because most of them have lost their lines of credit at their lending institutions so you wind uo buying all or most of your inventory with available cash which is tied up until the inventory sells, which restricts your ability to move in any direction because you have no money. With the eighty twenty rule in charge, as always, you sell 20% of your best inventory first and it needs replenishment before the rest is gone but you can't replenish it because the rest of the money you need is tied up in the last 80% that takes longer to sell. This is why we have a jobless recovery. There's no shortage of marketing and product ideas in this country and there are still enough customers that do have money that want to buy but there's just no serious amount of working capital available to make a move forward and act on any idea you might have. Until this changes, we're going to be locked in irons.

[JayDDrew]

I'm a partner in a multi-million dollar business that just built a two million dollar satellite building. There was zero problem getting a loan.
The problem we're have is there in your description: businesses have little or no capital reserve, so banks are afraid to work with that risk.
I'm not completely disagreeing with you, I understand exactly what you are saying, and you are right. The banks have always looked past the lack of capital reserve and were willing to float credit and shortterm loans. No more. Businesses were so use to it, they took it for granted. But now, those banks are obeying the rules and the "just in time" business model of the current era is not set up to deal with the financial restrictions that have been present, but not enforced.
A few years ago, I recommended to my partners we build up a capital reserve fund, a "war chest", if u will. It ended up being prescient. As small business owners, no longer can we take all the earnings home and expect the banks to carry all the risk.
I was speaking more on the consumer side. But small businesses also have to tighten their belts and do a better job with their finances.
It's unfortunate the employees are taking the brunt of this with layoffs and increasing unemployment.

[cordyc]

co sign

small business is hog tied by the lack of credit. Our financial system is so broken.

I do support strong consumer reforms but it the drain of capital to the schemes of the ultra wealthy that is bringing down this country.

No more derivatives and other crazy instruments should go unregulated.

[BrookerKristina]

Hello,

This message is in reply to the quote by Obama currently on the BBC website.
Obama: "US President Obama warns bankers against complacency, saying they
ignore the lessons of the financial crisis at their peril."

I'm wondering if the eluded to bankers are familar with my involvement in this crisis,
basically due to a "proof by induction" I prove being the interest rate in a possible job
in the economy. Also a fact about the $147 oil peak is I got up at that point in the oil
price and stood on a street corner with a sign that said "I am the interest rate", I believe
if I had of keep sleeping, classing more young as lucky to compete for a pension, that
other later point would have been the peak of the oil price. I decided to peak the oil at $147
not $200 or higher.
-please put your interest rate into a negative and then further negative amounts.
-Also "Always Bailout", and hopefully that means the consumer with indications about the
coming end to cash and the U.S. global standard currency.

Kristina Brooker, Newfoundland (the town), 126 395 086
maiden name Thomas (1942, 2002 interference)
The number one rank (error implied) consumer.

[thnk4selfagain]

It has been clear to every citizen since March what Obama, his economic advisors, and Treasury should do regarding the finance sector. Save it, then stand toe to toe with the industry to assert responsibility, regulation and restrictions to prevent another disaster that Americans have to pay for privately and publically. This is not in evidence and probably will not happen unless another crash occurs. The fear is that our seething but undermined society will not be able to get off its knees when it does.

When the obvious right thing is not done, one has to ask: What else is going on here? Could it be the American taxpayer bailed out the global economy, our national economic concerns are no longer of importance, and the Administration is enslaved to this (unsustainable) global dynamic. Because of this we are no longer a democracy. Heaven help the powerful haves when the have-nots figure this out en masse.

[sonofsamphm1c]

"Goldman won't repay taxpayers the $13 billion it never would have collected from AIG had we not kept AIG alive. ..."

They already had 5.6 billion of what they were owed by AIG on the swaps. They were well aware that AIG could not pay them the rest. That is why they went out and purchased additional loss coverage, and advised their clients to do the same.

So they were not going to lose a dime.

When the government made the correct decision to not allow any more big financial institutions to fail, the allowance of which would have devastated the financial livelihood of tens of millions of additional Americans over what we have now (advocating additional failures past Lehman is the height of economic recklessness) it would have been preposterous not to have paid AIG's commitments.

All you would have accomplished is less TARP at AIG, and more TARP at the institutions you just shafted. It's zero sum. You've saved nothing.

[venusvictrix]

So who did they purchase the additional "loss coverage" from? And were their clients equally as successful in obtaining said coverage from solid companies? Or did they need to get bailouts from their "partners" too?

I'm still waiting for an explanation about how to price a credit default swap for sale. Still sounds like a market position, rather than a marketable instrument. Anytime you wish to fill me in, I'm all ears.

[SeanOcali]

The president doesn't want to risk the appearance of new regulations contributing to the lousy economy.

[observer100]

Cheer up good citizens. The next collapse will be the last. Do you know where your money is?

[JayDDrew]

Exactly! Who the heck is still giving these criminals their money??? Any individual, small business, pension fund, etc. who still trusts their money to these people are a fools.

[marican2]

The serfs of Main Street, the new American middle class.

[FreedomCorpse]

Mr Reich, its a list of milquetoast reforms that Obama presented, not 'milktoast'...but yes indeed..its all lame. The commander-in-chief of the most powerful military in the world bows to the money power who is actually threatening national security while laughing all the way to their cayman island banks, unlike the uneducated, bombed out and impoverished people in Afghanistan and Iraq...its enough to make me throw up and feel embarrassed. Next thing we'll hear is another joke about the 'Haves and Have mores being his base' when a mic is left on by accident.

[unitron]

For those unfamiliar with the derivation of the term "milquetoast", please see the following:

http://en.wikipedia.org/wiki/Caspar_Milquetoast