Wednesday, June 8, 2011

How We Keep Getting Robbed...Again and Again

(Excerpted from an article by Glenn Cox "The Success of Failure" and a newsletter from Too Much.)

Were you aware that the Federal Reserve has been lending money to member banks for 0.10 percent? Banks can borrow at the Fed Funds target rate of one tenth of one percent. (video below: The American Sucker)

One million dollars can be borrowed for the cost of $1,000. The Treasury then offers up one million dollars in treasury bills which will pay the bearer 3.10 percent interest - or that one million dollars that was so casually handed over to the banker for $1,000 will cost the taxpayers $31,000 . 

The bankers can buy those treasury notes and make three percent interest without even getting out of bed in the morning! And you pay for this!

This program has been in place over two years since the end of the Bush administration, and now the Federal Reserve has decided to expand the money supply by $600 billion dollars more. Who gains from this? 

Bankers are cashing their bonus checks again while Real Estate losses are swept under the rug. Tax rates for the wealthy are lower than they've been in a century. The sales of new Jaguars and Rolls Royce are up, up, up and the sales of new corporate jets are at full capacity with waiting lists. There is no crisis at the upper echelons of society, in fact, things have never been better.

Under the TARP agreement the banks can take your defaulting mortgage loan and present it to the Federal Reserve and the kindly Fed bankers will write the bank a credit for the full amount of your loan. Crisis? What crisis?

Say that you bought your home in 2006 for $200,000 but the homes in your neighborhood are now selling for $140,000. At auction your house might only bring in $110,000 but that's for the other guys, that's for suckers. The bank presents its deed to the Federal Reserve and says my customer defaulted owing $185,000 and the Fed writes them a check for $185,000.

Of course the banks must make it look like they're at least trying to help homeowners. The back log of homes on the market is as high now as it was during the beginning of the mortgage crisis so the banks make a few modifications just to keep up appearances, just to make it look good.

So these banks are flush with cash and anxious to spend it - - - anxious to spend it, that is, on anything but you. This is how conservatism works. Let the free market do what is best for the free market. During Roosevelt's New Deal the government regulated the banks, they created work programs and public construction programs to restart the economy. This time around the banks have, through the offices of Bush and Obama, obtained a free money policy.

The stock market crashed in 2007 and the banks were reimbursed for their losses and there was money to be made picking up bargains on Wall Street. Goldman Sachs made money every day of the last quarter except one. Ask yourself, if you played cards with a guy who won every hand except one, would you assume that he's just a really good card player?

"All of Wall Street is just a ponzi scheme." ~ Bernie Madoff

Recently the Justice Department issued subpoena's to Goldman Sachs, there is an election year coming up, you know. So somebody's got to go down, somebody's going to be made an example of to appease public sensibilities and outrage. A public hanging or two ought to quell the public's appetite for vengeance.

A veteran CEO of a $68-billion regional U.S. bank, M&T Bank’s Robert Wilmers charged in an interview that overpaid executives have turned American banking into a “virtual casino” that no longer services the needs of average Americans. 

Former Reagan aide Bruce Bartlett, meanwhile, blasted GOP leaders in Congress for asserting, without evidence, “that cutting taxes for the well-to-do and big corporations” will solve what ails America. In truth, says Bartlett, federal taxes on corporations and the rich remain “very low,” and we have “no reason to believe that reducing them further will do anything to raise growth or reduce unemployment.”

How the Banks Benefit

The economy is sputtering, I wonder why? Home prices are falling faster than ever; prices are falling at double last year's rate at one percent per month. Home prices have fallen for fifty two consecutive months so the Federal Reserve tries a second round of quantitative easing, quantitative = money, easing = add more.  (video below: The American Sucker)

Suppose then that you owned a hamburger stand and you earned a one dollar profit from each hamburger sold. The hamburger stand is one million dollars in debt; you will have to sell one million hamburgers just to break even. Suddenly the currency becomes inflated or quantitatively eased, your cost to produce hamburgers doubles. You do the only thing that you can do and raise the price of hamburgers. The price of a hamburger has doubled but you now earn two dollars for every hamburger sold. You are now only half a million hamburgers in debt.

Suppose it is not a hamburger stand that you own but a bank. Quantitative easing helps you to bury your debt through currency inflation. Wages for working people have risen on average one percent per year so in effect with three percent annual inflation working people take a ten percent wage cut every five years. This is how consumers were led to spend beyond their means. This is how the economy was brought to the brink of collapse.

This is how the banking industry is subsidized by free money from the Federal government. This is how so called Free Trade empties the treasury while filling the pockets of the investor class. This is how Wall Street is juiced; this is how the deficits soar. This is how politicians justify calling for cuts to Medicare and Social Security. This is how state and local government justify cutting 28,000 employees just last month and cutting benefits to millions more. A class war Hiroshima strike, where failure is success.

A Call from Labor: Ban Big Bank Stock Options

Federal agencies are now preparing new regs for enforcing the banker pay reforms enacted last summer. These new regs, says the AFL-CIO, need to prohibit the 'incentive' that's still stuffing bankers with billions.

If you wear a power suit to work every day, you probably don't care all that much about your salary — because most of your income doesn't come from salary. Most comes from something called “incentive-based compensation.” 

This “incentive-based” pay can come in many forms. You can get cash as an incentive if you meet certain “performance” goals. You can get actual shares of stock as a incentive. Or, maybe best of all, you can get stock options.

Stock options, in today’s corporate and banking world, essentially serve as lottery tickets for big-time executives. Lottery tickets with a difference. 

The first difference: These executive lottery tickets come free. Executives pay nothing to get them. The second: This executive lottery pays off big — and often. 

Regular folks who play the lottery can, of course, certainly hit the jackpot. But the odds against scoring a major windfall can routinely run up to 76 million-to-one, the equivalent of throwing heads on 26 consecutive coin tosses. 

Financial industry execs who play the stock option lottery don’t have to toss 26 heads in a row to score big. They merely have to jack up their share price. And they’ve become quite adept at doing just that, by any means necessary.

Those means, we’ve learned from various investigations into the 2008 financial industry meltdown, have included everything from bankrolling sub-prime loan scams to cheating their own clients. Why do top execs take all these risks? With stock options, executives simply have no incentive not to take risks. 

Stock options give executives the “option” to purchase a specified number of their firm’s shares, at the current share price, at some future date. At that future date, if the shares have jumped in price, the executives “exercise” their options. They buy shares at the old price and then sell them off at the new one.

If their firm’s shares should decline in value over time, the executives lose nothing — since they’ve paid nothing for their options. But their gains, on the upside, have no limit. The higher a share price rises, for whatever reason, the bigger the executive personal profit from exercising the option.

These personal profits have been — and continue to be — enormous. Consider the power-suited executive phalanx at Goldman Sachs. Since 1999, the New York Times reported earlier this year, some 860 top Goldman execs have cashed out $20 billion from selling off shares from their personal stock stashes*.

* And they only pay 15% in capital gains taxes, thanks to the Bush tax cuts for the rich. See my post: Capital Gains Taxes - A Rich Man's Poison. Currently Tim Pawlenty endorses slashing corporate tax rates by more than half from 35 percent to 15 percent, and abolishing taxes on dividends, investments, capital gains and estates - - - making the rich even richer, while making our national debt even greater, and endorsing cuts to programs for the elderly and poor. Oil speculators like Goldman Sachs and the Koch brothers have made billions and paying so little in taxes, causing you to pay $4 for a gallon of gasoline.

Those shares came, in part, from option grants. In 2007, for instance, Goldman's board approved grants that gave execs options to purchase 3.5 million shares. But then came the 2008 meltdown, and Goldman shares plummeted in value. 

Goldman’s response: more options. Lots more. In December 2008, with Goldman shares trading at record lows, the bank’s top execs received nearly 36 million stock options, ten times the previous year’s total.

Goldman’s top execs also received, at about that same time, a massive bailout from Uncle Sam that saved the bank from collapse and set the stage for a robust share price recovery. By January 2011, the bank’s top 475 execs could look forward to $2.7 billion in personal profits from the 2008 stock option grant. 

Last summer, members of Congress took a stab at curbing such gross excesses. The Dodd-Frank financial reform legislation they passed includes a section that expressly prohibits “any type of incentive-based compensation” that “encourages inappropriate risks by providing excessive compensation.”

But this section 956 leaves the enforcement specifics up to the seven federal agencies that monitor the financial sector. This past March, these seven proposed draft regulations for implementing the lawmaker intent. Bank lobbyists and public interest groups have been sparring over these draft regs ever since. 

Much of the debate has revolved around a proposed regulatory rule that would require big banks to defer 50 percent of incentive compensation for a minimum of three years. The goal: to prevent executives from enriching themselves with short-term moves that end up wreaking long-term havoc.

Public interest groups like Americans for Financial Reform and Public Citizen are pushing for rules that require banks to defer a greater share of executive incentive pay — and for a longer deferral period. They’re also pushing for a clearer — and tougher — definition of  “excessive compensation.” 

The AFL-CIO, America’s biggest union federation, is pushing for even stiffer changes. Last Tuesday, the AFL-CIO’s top investment analyst, Daniel Pedrotty, asked regulators to place an outright ban on all big bank stock option incentives.

“Stock options promise executives all of the benefits of share price increases with none of the risk of share price declines,” noted Pedrotty. “In other words, stock options provide executives with asymmetric incentives to shoot for the moon.”

Options, he continued, also let top execs “inappropriately profit from share price volatility without creating additional value.”

The AFL-CIO bottom line: Stock options don’t rate “as an appropriate form of compensation for executives and should be prohibited.”

Mary Jo Carey would likely agree with this AFL-CIO appraisal. Before the 2008 financial collapse, she worked as a loan officer with a small brokerage firm in her Taos, New Mexico hometown. Carey recently sent the Securities and Exchange Commission a letter asking for tough restraints on Wall Street's “outrageous pay practices,” one of thousands of citizen letters the agency has received.

“Currently, most bankers receive stock options,” Carey wrote. “So if they can generate more profits, the stock price goes up, and their options become more valuable. This is insane! This will just cause another collapse.”

“I watch the revolts in Egypt, Tunisia, etc. and think,” Carey added, “that will be us someday. We are run by rich guys.”

How much those rich guys get their way on Section 956 will soon be apparent. The SEC and other involved federal regulatory agencies could be adopting final regs on financial institution executive incentive pay as early as this August. 

A new financial industry report by Global Wealth that was released last week says the world’s millionaires and billionaires are now sitting on $47.4 trillion in stocks, bonds, and other investments. A mere one-tenth of 1 percent tax levy on these assets would raise $47.4 billion a year...but the GOP wants to LOWER taxes even lower than they are now for the uber- rich and for large corporations.

According to the Boston Consulting Group, total world wealth (defined as cash deposits, money market funds, stocks and bonds, among other onshore and offshore assets) has jumped $10 trillion over the 2007 pre-Great Recession wealth level, the previous all-time record.

We have, in other words, never been as wealthy as a human race as we are now. Yet governments the world over are pleading poverty and imposing austerity on their people. No mystery in that paradox. Just beaucoup heaps of inequality.

No comments:

Post a Comment