Granted, the $700 billion dollar TARP bailout was a massive
bait-and-switch. The government said it was doing it to
soak up toxic assets, and then switched to saying it was needed to free
up lending. It didn't
do that either. Indeed, the Fed doesn't
want the banks to lend.
True, as I wrote in
The bailout money is just going to line the pockets of
the wealthy, instead of helping to stabilize the economy or even the
companies receiving the bailouts:
Bailout money is being used to subsidize companies
run by horrible business men, allowing the bankers to receive fat
bonuses, toredecorate their
offices, and to buy gold
toilets and prostitutes
A lot of the bailout money is going to the failing
Indeed, a leading progressive economist says that
the true purpose of the bank rescue plans is "a massive redistribution
of wealth to the bank shareholders and their top executives"
The Treasury Department encouraged banks
to use the bailout money to buy their competitors, and pushed
through an amendment to the tax laws which rewards mergers in
the banking industry (this has caused a lot of companies to bite off
more than they can chew, destabilizing the acquiring companies)
And as the New York Times notes,
"Tens of billions of [bailout] dollars have merely passed through
A.I.G. to its derivatives trading partners".
In other words, through a little game-playing by the Fed, taxpayer
money is going straight into the pockets of investors in
AIG's credit default swaps and is not even really stabilizing AIG.
But the TARP bailout is peanuts compared to the
numerous other bailouts the government has given to the giant banks.
And I'm not referring to the $23
trillion in bailouts, loans, guarantees and other known
shenanigans that the special inspector general for the TARP program
mentions. I'm talking about more covert types of bailouts.
Guaranteeing a Fat Spread on Interest Rates
Well, as Bloomberg notes:
“The trading profits of the Street is just another way of
measuring the subsidy the Fed is giving to the banks,” said
Christopher Whalen, managing director of Torrance,
California-based Institutional Risk Analytics. “It’s a transfer
from savers to banks.”
The trading results, which helped the banks report higher
quarterly profit than analysts estimated even as unemployment stagnated
at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central
bank helped lenders by holding short-term borrowing costs near zero,
giving them a chance to profit by carrying even 10-year government
notes that yielded an average of 3.70 percent last quarter.
The gap between short-term interest rates, such as what
banks may pay to borrow in interbank markets or on savings accounts,
and longer-term rates, known as the yield curve, has been at record
levels. The difference between yields on 2- and 10-year Treasuries
yesterday touched 2.71 percentage points, near the all-time high of
2.94 percentage points set Feb. 18.
Harry Blodget explains:
The latest quarterly reports from the big Wall Street
banks revealed a startling fact: None of the big four banks had a
single day in the quarter in which they lost money trading.
For the 63 straight trading days in Q1, in other words,
Goldman Sachs (GS), JP Morgan (JPM), Bank of America (BAC), and
Citigroup (C) made money trading for their own accounts.
Trading, of course, is supposed to be a risky business:
You win some, you lose some. That's how traders justify their
gargantuan bonuses--their jobs are so risky that they deserve to be
paid millions for protecting their firms' precious capital. (Of course,
the only thing that happens if traders fail to protect that capital is
that taxpayers bail out the bank and the traders are paid huge
"retention" bonuses to prevent them from leaving to trade somewhere
else, but that's a different story).
But these days, trading isn't risky at all. In fact, it's
safer than walking down the street.
Because the US government
is lending money to the big banks at near-zero interest rates. And the
banks are then turning around and lending that money back to the US government
at 3%-4% interest rates, making 3%+ on the spread. What's more, the
banks are leveraging this trade, borrowing at least $10 for every $1 of
equity capital they have, to increase the size of their bets. Which
means the banks can turn relatively small amounts of equity into huge
profits--by borrowing from the taxpayer and then lending back to the
The government's zero-interest-rate policy, in other
words, is the biggest Wall Street subsidy yet. So far, it has done
little to increase the supply of credit in the real economy. But it has
hosed responsible people who lived within their means and are now
earning next-to-nothing on their savings. It has also allowed the big
Wall Street banks to print money to offset all the dumb bets that
brought the financial system to the brink of collapse two years ago.
And it has fattened Wall Street bonus pools to record levels again.
Paul Abrams chimes
To get a clear picture of what is going on here, ignore
the intermediate steps (borrowing money from the fed, investing in
Treasuries), as they are riskless, and it immediately becomes clear
that this is merely a direct payment from the Fed to the banking
executives...for nothing. No nifty new tech product has been created.
No illness has been treated. No teacher has figured out how to get a
third-grader to understand fractions. No singer's voice has entertained
a packed stadium. No batter has hit a walk-off double. No "risk"has
even been "managed", the current mantra for what big banks do that is
so goddamned important that it is doing "god's work".
Nor has any credit been extended to allow the real
value-producers to meet payroll, to reserve a stadium, to purchase
capital equipment, to hire employees. Nothing.
Congress should put an immediate halt to this practice.
Banks should have to show that the money they are borrowing from the
Fed is to provide credit to businesses, or consumers, or homeowners.
Not a penny should be allowed to be used to purchase Treasuries.
Otherwise, the Fed window should be slammed shut on their manicured
And, stiff criminal penalties should be enacted for those
banks that mislead the Fed about the destination of the money they are
borrowing. Bernie Madoff needs company.
There is another type of guaranteed spread that allows
the giant banks to make money hand over fist. Specifically, the
Fed pays the big banks interest to borrow money at no
interest and then keep money parked at the Fed itself. (The Fed is
intentionally doing this for the express
purpose of preventing too much money from being lent out to Main Street. That's just dandy.)
The giant banks are receiving many other covert bailouts
and subsidies as well.
Too Big As Subsidy
Initially, the fact that the giant banks are "too big to
them to take huge, risky gambles that they would not otherwise
take. If they win, they make bigbucks. If they lose, they know the
government will just bail them out. This is a gambling subsidy.
The very size of the too big to fails also decreases the
ability of the smaller banks to compete. And - since the government
itself helped make the giants even bigger - that is also a subsidy to
the big boys (see this).
The monopoly power given to the big banks (technically an
is a subsidy in other ways as well. For example, Nobel prize winning
economist Joseph Stiglitzsaid in
September that giants like Goldman are using their size to manipulate
"The main problem that Goldman
raises is a question of size: 'too big to fail.' In some markets, they
have a significant fraction of trades. Why is that important? They
trade both on their proprietary desk and on behalf of customers. When
you do that and you have a significant fraction of all trades, you have
a lot of information."
Further, he says, "That raises the potential of conflicts of interest,
problems of front-running, using that inside information for your
proprietary desk. And that's why the Volcker report came out and said
that we need to restrict the kinds of activity that these large
institutions have. If you're going to trade on behalf of others, if
you're going to be a commercial bank, you can't engage in certain kinds
of risk-taking behavior."
The giants (especially Goldman Sachs) have also used
high-frequency program trading which not only distorted
the markets - making up more than 70% of stock trades - but
which also let the program trading giants take a sneak peak at what the
real (aka “human”) traders are buying and selling, and then trade on
the insider information. See this, this, this, this and this.
(This is frontrunning,
which is illegal; but it is a lot bigger than garden variety
frontrunning, because the program traders are not only trading based on
inside knowledge of what their own clients are doing, they are also
trading based on knowledge of what all other traders are doing).
Goldman also admitted that
its proprietary trading program can "manipulate the markets in unfair
ways". The giant banks have also allegedly used their Counterparty
Risk Management Policy Group (CRMPG) to exchange secret
information and formulate coordinated mutually beneficial actions, all
with the government's
In addition, the giants receive many
billions in subsidies by receiving government guarantees that
they are "too big to fail", ensuring that they have to pay lower
interest rates to attract depositors.
And the government's failure to rein in derivatives or
break up the giant banks also constitute enormous subsidies, as it
allows the giants to make huge sums by keeping the true price points of
their derivatives secret. See this and this.
And the PPIP program - which was supposed to reduce the
toxic assets held by banks - actually increased them,
and just let the banks make a quick buck.
Mortgages and Housing
PhD economists John
Hussman and Dean
Baker (and fund manager and financial writer Barry Ritholtz)
say that the only reason the government keeps giving billions to Fannie
and Freddie is that it is really a huge, ongoing, back-door bailout of
the big banks.
Many also accuse Obama's foreclosure relief programs as
being backdoor bailouts for the banks. (See this, this and this).
The big banks - such as JP
Morgan - also benefit from foreign bailouts, such as the
European bailout, as they are some of the largest creditors of the
bailed out countries, and the bailouts allow them to get paid in full,
instead of having to write down their foreign losses.
These are just a few of the secret bailouts programs the
government is giving to the giant banks. There are many other bailout
programs as well. If these bailouts and subsidies are added up, they
amount to many tens - or perhaps even hundreds - of trillions of
And then there is the cost of debasing the currency in
order to print money to fund these bailouts. The cost to the American
citizen in less valuable dollars will be truly staggering.