"The assistance to banks, once thought to cost the taxpayers untold billions, is on track to actually reap billions in profit for the taxpaying public." -- President Obama, December 8, 2009
"But like many other big banks, Bank of America is once again making money, in large part through Wall Street businesses like trading stocks and bonds, rather than by making loans." -- New York Times, December 29, 2009
After a year of holy hell we may be witnessing an economic miracle: The Bank of America, so recently on life support, comes up with $45 billion in hard cold cash to repay TARP in less than a year. I mean this is one of the most amazing turnarounds since the 1969 Mets. (Citigroup, with a strong case of bonus envy, is next line for a miraculous payback scheme.)
Not only are the big Wall Street players repaying the bailout funds more rapidly than expected, but our president tells us that we, the taxpayers, are going "to actually reap billions in profits."
Time to celebrate? Or are the big banks paying back TARP with funny money and accounting tricks?
Are we finally getting our fair share of bailout-induced Wall Street profits and bonuses? Or is that "profit" actually recycled bailout money that is coming from us?
Why the big banks are in a frenzy to repay TARP is no secret: They seek an escape from federal restrictions so that they can pay themselves however much they want, whenever they want. After all, they truly believe that they deserve mega-salaries and bonuses, even after they crashed our economy, and even though they still are causing unemployment by not loaning out money. But bankers see nothing at all wrong with seven figure compensation packages for helping to create the Great Recession and destroy over seven million jobs. (As my cousin Jeff points out, this is a precisely like the captain of the Exxon Valdez demanding and getting a big bonus.)
But just how did such a troubled bank come up with that kind of money?
Some of it is easy to spot. Bank of America will sell $4 billion worth of assets and it will raise another $18.8 billion by selling new stock. That dilutes stock holder equity but who cares. Better to pay back the taxpayer.
That leaves about $22.2 billion that comes from "trading stocks and bonds, rather than by making loans." Just what does that mean? Do the BOA financial wizards (the same ones that lost hundreds of billions last fall) just have a run of good luck? What enormous skills did they put to work?
Then again, it might be prudent to explore whether BOA and the other big Wall Street banks are engaged in one or more of the following:
1. High-speed trading where the bank -- informed of your intention to buy or sell -- comes in a nano-second before you make the trade to get a better price at your expense? Yep, this is the latest casino game played by the big banks and of course no one has the nerve to outlaw it. Is BOA playing this game and if so how big a player are they? If in fact, "profit" is coming from this form of market manipulation it would mean that taxpayers, each time they trade stocks or bonds, are helping BOA repay their TARP money -- that is taxpayers are being scammed to repay taxpayers.
2. Creating, packaging and selling the same kind of derivatives that crashed the system only a year ago? No, say it ain't so! But we need to remind ourselves that all of those derivative products that should have been outlawed are still legal. Also, because everyone knows that Bank of America and the other 19 large banks are officially too big to fail, there's little risk in taking a gamble with them. There are fat fees embedded in those make-believe securities. The billionaire bailout logic of this move is quite galling: The fantasy finance instruments that crashed the system in the first place are being traded again so as to pay us back for bailing them out... so that we can bail them out again in the future when these unregulated instruments crash again.
3. Moving money around from one federal bailout program to another? TARP is only a small portion of the enormous government rescue packages for Wall Street that total more than $12 trillion. (See Nomi Prins's excellent accounting.) BOA has access to all kinds of liquidity deals where money can be obtained at little or no cost. The taxpayer is guaranteeing all kinds of toxic assets held by Wall Street banks. Maybe I'm not being fair to these honorable bankers, but I suspect a few of them would be more than willing to set up an elaborate shell game so that, presto, $22.2 billion in cash appears under one of the fast moving thimbles. Are they paying back TARP with our own money yet again?
4. Revaluing toxic assets? As Ben Bernanke makes clear, no one knows how to properly value the toxic assets -- CDOs, CDO squared, cubed and synthetic. (See The Looting of America for how these casino games work...and don't work.) Why can't these assets be valued properly? Because there's no real market for them. So it becomes a judgment call which in turn gives bank accountants quite a bit of leeway. Perhaps they are marking them up as other assets rise, which in turn frees up capital for the TARP payback? Go ahead and try to prove that their accountants are wrong.
5. Pure fantasy finance? It is possible that BOA and other banks are trading back and forth credit default swaps (insurance policies on assets that neither party own) booking CDSs as assets with value, when in fact they have no value at all? Is this legal? I have no clue but it seems to have been going on for years before the crash. If it started up again, who would be shocked?
6. They made if fair and square buying low and selling high on the stock, bond commodity markets? No comment.
The sad point is that the media and our political watch-dogs are drinking the Wall Street Kool-Aid again. Even the president seems to have had a few sips. They now believe that the financial markets are up and running, everything is fine and banks who couldn't tie their shoes a few months ago are humming again.
But, at this late date, it should seem obvious that these kinds of bankers will do anything it takes, by all means necessary, to make more money. Paying back TARP means more compensation for executives and traders - lots of it. If that requires cooking the books, they will do so as long as it's legal, or even just defensible in court.
But we're missing much more than the possibility of yet another financial slight of hand. We are willfully ignoring the most basic question: If BOA isn't lending out money, what value does it produce for our economy and our society? If BOA can come up with $22.2 billion in extra crash by trading "stocks and bonds," is that really good for us or is it a sign of rot within our billionaire bailout society?
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.