May 2013 | Too Big Has Failed

Monthly Archives: May 2013

Wall Street and Main Street Grew At the Same Pace From 1940-1980. Since Then, Not So Much. Why Is That?

The Growth of Compensation For Most Americans Has Slowed

This chart, a simplified version of a figure from the Financial Crisis Commission Inquiry Report, shows that from 1940-1980 the financial and nonfinancial sectors both grew at the same pace.

Since that time, however, average financial sector compensation has skyrocketed while nonfinancial has increased at a much slower pace.

To illustrate:

The chart shows that from 1950-1980 average compensation in the nonfinancial sector grew by nearly $20,000.

By contrast, over the next thirty years it grew by only about $10,000.

In other words, if average nonfinancial sector compensation had kept up with the 1950-1980 pace, it’d be around $70,000 or more today.

What Created the Recent Disparity?

There were likely many causes for this recent disparity (including the invention of the computer, which let Wall Street handle complex transactions), but we’ll just address two:

Reason #1: Changes In the Tax Code

The top marginal tax rate and the capital gains tax rate started dropping in the 1980s, encouraging more and more people to give their surplus money to Wall Street to invest. The theory was that this would jump-start the entire economy—a theory called into question by the chart above, since growth in the nonfinancial sector slowed after 1980.

At any rate, one thing these changes in the tax code definitely led to was more surplus money on Wall Street, and when there’s more money on Wall Street there’s more money for Wall Street. After all, Wall Street likes low top marginal taxes and low capital gains taxes because it means more fees for them.

Of course, these lower rates have critics. One of the more poignant critics is Sheila Bair, a Republican and former chairman of the FDIC (appointed by George Bush). Speaking of the low capital gains tax rates, she says:

The rationale for this $90-billion-a-year tax benefit is that it spurs job-producing investments, though there is little credible economic evidence that this is the case. Equally likely is that it contributes to a glut of investment dollars searching for return, with too few opportunities in the “real” economy. So we create incentives for banks to come up with an endless array of complex “structured” financial products to meet investors’ insatiable demand for return. Just how many jobs did all of those CDOs-squared give us anyway?

And what does this tell young people? Get a job and find the cure for cancer, and we will tax you at 35%. But hey, go manage a hedge fund and only pay 15%.

Bair is right to focus the attention on hedge fund managers. More than any group, hedge fund managers have led the drive in the disparity between the financial and nonfinancial sector:

source

We have a tax code that encourages this insane disparity.

Reason #2: Deregulation on Wall Street

In the 1990s and early 2000s, three laws (all with fabulously boring names!) caused an intense concentration in the banking industry.

The first, called the “Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,” allowed interstate bank mergers, creating bigger banks.

The second, called the “Gramm-Leach-Bliley Act of 1999,” repealed Glass-Steagall, a depression-era law that split investment and commercial banks. The repeal of Glass-Steagall meant that the creation of enormous bank conglomeration was now legal (though Glass-Steagall had been eroding for years leading up to 1999).

The third, called “The Commodity Futures Modernization Act of 2000,” deregulated complex financial transactions called derivatives. This law effectively allowed Wall Street to corner the market on a deregulated industry, slanting the playing field in their favor and allowing them to eat up other smaller market players.

Here’s what it all looked like:

By 2009 the three biggest banks, which had held about 10% of total commercial bank assets for over 60 years, suddenly held over 40%. This concentration of power led to the rise of “too big to fail.” It also led to a unified and concentrated financial sector that continued to game the system in their favor. In fact, their political contributions more than tripled from 1996 to 2012.

So What?

We want to conclude by making two points forcefully.

The first is that Wall Street hasn’t always been this way. There are people who seem to justify the status quo by saying there have always been bad apples and inequality in America. That statement is technically true, of course. But it’s important that people understand that the Wall Street of today isn’t the same as the Wall Street of yesterday. Things have fundamentally shifted in recent decades.

The second point is that we can change this. If you look again at the graph at the top of the page, you’ll see that after the Great Depression the disparity between the financial and nonfinancial sectors closed. If it happened once, it can happen again. We can—with enough political will—reform Wall Street and get back to an economy where all industries can grow better together. To do this, we need to revamp the tax code and revamp regulations among many other things. But history proves that it is possible to do these things.

So let’s do them.

Join us here.

Political Contributions From The Financial Sector Have More Than Tripled Since 1996. We Should Oppose This Loudly.

OpenSecrets.org has released data showing that political contributions from the financial sector have more than tripled since 1996. This might not come as a surprise since everyone has a sense that something about the political system is increasingly unfair, but it doesn’t mean that we shouldn’t continue to be loud about the matter.

In fact, according to Neil Barofsky, who spoke at a recent event about his experience as attorney general for TARP, when it comes to reforming Wall Street we should ”keep being loud about it. And let’s just hope that we can get this resolved before the next crisis.”

This is why we must continue to demand Wall Street reform until it happens. Until reform happens, we’re at serious risk of a repeated crisis. We all know someone who either lost a job, was foreclosed on, or who is struggling to find a job as a result of the last crash. And we can’t be too sure that another crisis won’t hit again until we reform Wall Street and refuse to allow them to so fully capture Washington.

After all, the big banks are bigger than they were in 2008, and they still have trillions of dollars in credit default swaps and other exotic derivatives. Plus, they’ve now seen proof that in a crunch Washington will help them out. Why should we think the status quo is safe? We shouldn’t.

Groups like Move Your Money and Bank Transfer Day have done tremendous good for calling attention to Wall Street excess. We need to keep movements like these alive, and be loud about Wall Street reform. “Write to your congressman and senator,” Barofsky said. “Sounds like an ‘I’m just a Bill,’ School House Rock thing, but it works.” With enough concerted force and focused attention on this, we will see reform, and we’ll create a safer economic environment.

The last crash was not an accident. Wall Street will repeat it however they can unless we figure out a way to put them in their place.

Quote discovered here.

Charlie Munger Quotes

Charlie Munger quotes are among the best zingers to Wall Street in existence. Known as Warren Buffett’s folksy business partner, Munger to has a way with words that makes him fun to listen to. Here are a few that stand out to us.

“The major non-investment banks have by and large misbehaved in consumer lending. They have had a marketing model which is the equivalent of a liquor company that seeks out the people very susceptible to alcoholism, and tries to suck them into alcoholism.” source

“To say that derivative accounting is a sewer is an insult to sewage.” source

“The derivatives traders have tended to rook their own customers. It’s not a pretty sight. It’s a dirty business.” source

***

While it’s unfortunate that Munger and Buffett invest in some of the very products and banks they denigrate, we strongly endorse the sentiments in the quotes above.

For more on derivatives, see our derivatives timeline and our post “What Are Derivatives, and Why Are They Dangerous?”

Who Took Down Stockton? A Mini-Documentary That Shows Wall Street Was a Main Culprit

Who Took Down Stockton?

Here’s a mini-documentary that asks why Stockton California went bankrupt and finds some major culprits on Wall Street. It’s a good look at how what happens on Wall Street affects all of us.

Stockton’s central problem was that it overreached. It promised too much in pensions for city employees, and it took on too much debt at the bidding of the Wall Street banks (which make lots of money from fees and interest whenever they underwrite city debt).

Here are some reasons Wall Street is culpable in Stockton’s problems:

They were part of a bid-rigging scandal where various banks colluded together in a bid for a city bond. They would decide the winner of the bid together, so that each winner could get a far better deal than they would have gotten if they were bidding against each other.
They preyed upon unsuspecting city council members who didn’t have the know-how to understand the intricacies of complex financial products (like derivatives) and who therefore unwittingly signed up for what eventually became horrible deals for the city.
When the problems started occurring, Wall Street offered what were essentially pay-day loans for the city. This allowed culpable city council members to finish their terms and move away before the full debt actually came due. These loans were good for Wall Street and horrible for Stockton.

This is a story of many municipalities across the United States. It’s a story of how Wall Street helps themselves and hurts the rest of us.

For more on the bid-rigging scandal, check out Matt Taibbi’s long-form piece on it. Here’s an excerpt:

In the end, though, the conviction of a few bit players seems like far too puny a punishment, given that the bid rigging exposed in Carollo involved an entrenched system that affected major bond issues in every state in the nation. You find yourself thinking, America’s biggest banks ripped off the entire country, virtually every day, for more than a decade! …

Instead of anything resembling real censure, a few young executives got spanked, while the offending banks got off with slap-on-the-wrist fines and were allowed to retain their pre-eminent positions in the municipal bond market.

We shouldn’t stand for the status quo here. The more people who understand how Wall Street plays into bankrupted cities like Stockton, the less likely Wall Street will be to get away with it. Change can’t come too soon on this front.

The New York Times Exposes Why Congress Does Wall Street’s Bidding

The New York Times DealBook published an article late last night exposing why Congress does Wall Street’s bidding. We present a summation of the key points in the image above, and here are the corresponding passages from the article:

In a sign of Wall Street’s resurgent influence in Washington, Citigroup’s recommendations were reflected in more than 70 lines of the House committee’s 85-line bill. Two crucial paragraphs, prepared by Citigroup in conjunction with other Wall Street banks, were copied nearly word for word. (Lawmakers changed two words to make them plural.) …

The lawmakers who this month supported the bills championed by Wall Street received twice as much in contributions from financial institutions compared with those who opposed them…

At one dinner Wednesday night, corporate executives and lobbyists paid up to $2,500 to dine in a private room of a Greek restaurant just blocks from the Capitol with Representative Sean Patrick Maloney, Democrat of New York, a co-sponsor of the bill championed by Citigroup.

(Note: 70 lines/85 lines = over 80%, as reflected in our image above.)

The entire article is worth reading in full. It’s a good look at how legislation goes through Wall Street to Congress to eventually affect each of us. (After all, the bill loosens rules on derivatives trades, which were at the heart of the financial crisis.)

We need a political system that allows for equal representation. Simply put, there likely isn’t a single group advocating for a safer Wall Street that could afford to pay $2,500 for a meal to dine with a Congressman. For many of us, $2,500 exceeds our entire month’s budget for groceries many, many, many times over. So we’ve got a system where certain ideas aren’t given proper voice, and without a voice how can one be heard in Congress? We need to restore some sense of equality in the system.

To that end we strongly support advocacy groups like Rootstrikers, which argues for getting the money out of politics. If you haven’t heard Rootstriker founder Lawrence Lessig’s TED talk on this topic, we recommend it. (Actually, we recommend it even if you have heard it.) Lessig reveals the murky heart of the problem.

3 Reasons Jack Lew Probably Doesn’t Have Our Best Interests In Mind

Reason #1: Jack Lew Has Ties Direct Ties To Robert Rubin

The fact that Jack Lew has ties to Robert Rubin isn’t an automatic disqualifier for caring about the public, but it does deserve some attention. Here’s why:

Robert Rubin had a 26-year career at Goldman Sachs before he became Treasury secretary under President Clinton. There he worked with Larry Summers to help repeal Glass-Steagall, among other things. In 1999, Larry Summers became Treasury secretary, and he, following Rubin’s ideology, pushed to deregulate all derivatives.

During that time, Rubin and Summers mentored Tim Geithner, who was also part of the Treasury. Geithner later became Treasury secretary himself under President Obama, where he worked to make sure that the megabanks were bailed out 100 cents on the dollar, and where he announced he would exempt certain derivatives from regulation—an announcement that came on a Friday at 5:00 pm, right before Thanksgiving break (a great time to leak something you don’t want leaked too widely).

This leads us to Jack Lew, President Obama’s pick to replace Tim Geithner. Lew spent most of his career working for the government, but he did work at Citi from 2006 to 2009 while Robert Rubin was a chairman there. (In fact, Rubin brought Lew onboard at Citi.) Lew spent his time at Citi managing hedge funds and making $2 million, and he currently shares Rubin’s ideological views about Wall Street deregulation.

None of this is especially good news for people who think we need to reform the megabanks and their activity with derivatives. We’d like to see the revolving door between Washington and Wall Street come to an end.

Reason #2: Jack Lew Was Offered a $1 Million Exit Package When He Left Citi—If He Went Into Government

That’s right. Lew was offered a $1 million exit package when he left in 2008, but the contract said that the only way he’d get the million bucks is if he secured a “full time high level position with the U.S. government or regulatory body.”

Do you understand how insane that is?

Citigroup invests big money to get people into Washington where they know they’ll get returned favors. And it works. After all, Citi received $476.2 billion in cash and guarantees after the financial crisis—by far the most of any Wall Street bank. In other words, the reverse revolving door pays.

Unfortunately, this article from The Nation shows that “far from an aberration, such bonuses appear to be fairly common on Capitol Hill.” It’s something that the public shouldn’t stand for.

Reason #3: Jack Lew Won’t Commit To Breaking Up the Big Banks and Ending “Too Big to Fail”

On May 21, Elizabeth Warren questioned Treasury Secretary Jack Lew about whether he’d support a proposal to break up the banks. Leading up to her question, Warren showed that one of the main reasons such proposals have consistently failed in the past is that the previous Treasury Secretary (Tim Geithner) opposed them.

Therefore Warren wanted to know whether Lew would follow Geithner’s steps on this issue.

Here’s Warren’s clip:

Jon Stewart To Obama Administration: Targeting Press, Not Wall Street?

Last night Jon Stewart did a segment titled “Priorities, USA,” which showed how the Obama administration has prosecuted whistleblowers (more than any other administration in history) and targeted journalists, medicinal drug users, and hackers (including a guy who might get 25 years for hacking a story on the LA Times), instead of targeting and prosecuting Wall Street.

It’s a story without a partisan bent: Apply equal justice to all. If a Wall Street bank like HSBC is proven without doubt to have laundered drug money for nearly a decade and no one in the bank faces prosecution for it, then the priorities of this administration deserve to be questioned. (Unless, of course, they actually expect us to believe that no one at the bank happend to notice that drug dealers would “deposit hundreds of thousands of dollars in cash, in a single day, into a single account, using boxes designed to fit the precise dimensions of the teller windows.”)

As shown in the Jon Stewart Wall Street segment below, Eric Holder can say that no bank is too big to jail all he wants, but until the Department of Justice actually acts on that premise, it’s hard to believe.

After all, Eric Holder and his former assistant Lanny Breuer (who resigned after the scathing Frontline piece “The Untouchables” aired) both worked for a white collar law firm that defended Wall Street clients, so it’d be shortsighted to think they don’t still have their interests in mind now—or at least see the world with the same lens Wall Street does, which sees Wall Street as innocent. See Holder and Breuer listed below:

Watch both Jon Stewart segments below. The first one talks about journalists and whistleblowers. The second one talks about Wall Street.

Also see our last post, which shows why this is happening.

The Daily Show with Jon Stewart

Mon - Thurs 11p / 10c

Priorities USA

www.thedailyshow.com

Daily Show Full Episodes

Indecision Political Humor

The Daily Show on Facebook

The Daily Show with Jon Stewart

Mon - Thurs 11p / 10c

Priorities USA - Too Big to Jail

www.thedailyshow.com

Daily Show Full Episodes

Indecision Political Humor

The Daily Show on Facebook

Zero Wall Street Executives Have Been Arrested, While Over 7,700 Wall Street Protesters Have

An article in The Contributor today tells the startling news from Occupy Arrests: Over 7,700 Wall Street protesters have been arrested since September 2011. That’s 7,700 more protesters arrested than Wall Street executives, even after the largest financial crisis in history.

Some people wonder if no Wall Street executives were jailed because no Wall Streeters actually did anything illegal, however unethical their actions. We strongly don’t think this is the case. You can read the cases against specific individuals like Jon Corzine (here, here, and here), Dick Fuld (here, here, and here), and Angelo Mozilo (here, here, and here). But the wide-angle view on the lack of prosecutions on Wall Street during the 2008 crisis is just as telling.

After all, over 1,000 bankers were convicted following the Savings and Loans crisis in the 1980s and Enron employees faced jail time for their scandals in the early 2000s.

So what changed?

William Black, a key criminologist in the Savings and Loan crisis, gives one good answer in his 50-page testimonial to the Senate Banking Committee (linked to in this Economist article). Here’s a passage:

We have forgotten the successes of the past. During the S&L debacle, Congress responded to the S&L crisis … by ordering and funding a dramatic increase in DOJ resources dedicated to prosecuting the S&L accounting control frauds … President Bush (II), President Obama, and Congress have each failed to emulate the policies that proved so successful in prosecuting elite frauds that caused prior crises.

That is, Wall Streeters have avoided prosecution in the recent crisis because government never really looked for it. Instead, government unquestioningly accepted as fact that while what Wall Street did wasn’t cool, it wasn’t illegal. And government did this without putting forward the necessary resources to see if that premise were really true.

If they had dug deep, it’s sure they would have found something. Again, 1,000 bankers were convicted in the S&L crisis, but 0 were convicted in the recent financial crisis, which was orders of magnitude worse than what we saw in the 1980s.

To see the details of some of the crimes at the heart of the 2008 crash, watch PBS Frontline’s “The Untouchables,” which first aired in January and aired again last night. It’s as good of a summary as any about why Wall Street doesn’t deserve to be exempt from prosecution.

Photo credit

The Rise of Too Big To Fail, In One Chart

rise of too big to fail concentration of banks glass-steagall

Concentration of US Banking System. source

This chart shows that “too big to fail” is a relatively recent phenomenon in the United States—one that only really surfaced over the past 15 years with the slow erosion of Glass-Steagall (among other factors).

It’s a chart that shows good news and bad news.

The good news: It’s proof that the United States has succeeded—even thrived!—when the biggest banks were less concentrated (think of all the economic growth post-WWII). This means we don’t _need_ megabanks on Wall Street in order to have tremendous economic growth as some Wall Street executives tell us.

The bad news: It’s proof that these banks have more power than ever and are therefore more resistant to change. After all, ending “too big to fail” will lead to less revenue for megabank executives, so they’re fiercely opposed to it and have the resources to keep fighting relentlessly to do just that.

Fortunately, awareness about this issue is growing. With enough of the public protesting loudly for change, we’re bound to see it. We need more people to understand that “too big to fail” isn’t a necessity, and that it’s within our power to end it.

See our last post about how 50% of US adults want to break up the banks, with 27% undecided.

50% Favor Breaking Up the Big Banks, 27% Undecided

50 percent break up the banks too big to fail

Results from a Rasmussen Report. Photo Credit: Kevin Dooley

More than four years after the 2008 financial crisis, a report from Rasmussen shows that 50% of US adults say they favor breaking up the big banks, while 27% are undecided. The report comes after years of scandals and after megabanks have grown by 30% since they were deemed “too big to fail” in 2008.

Now, if the 50% who believe the banks should be broken up consisted of a bunch of uniformed plebs—people who weren’t paying attention to the ins and outs of the debate—then it would be okay to dismiss their opinion, even though they’re a majority (with only 23% opposing).

However, the 50% are in good good company.

As proof, we’ve created a long list of intelligent pundits, professors, and politicians who agree that the big banks should be broken up, and we’ve created a compilation video showing the same. What’s more, a debate in The Economist between Simon Johnson of MIT and Charles Calomiris of Columbia shows that 82% of readers polled favor breaking up the banks. So people who oppose breaking up the banks should at least consider that not only are they in the minority, but plenty of smart people disagree with them.

To illustrate, here are five quotes on the matter, from people who know the industry well:

Thomas Hoenig, FDIC Chair: “Looking back, one sees that the crisis was inevitable, if for no other reason than that these TBTF firms would push the boundaries until there was a crisis.”

Mervyn King, governor of the Bank of England: “It is hard to see how the existence of institutions that are “too important to fail” is consistent with their being in the private sector. Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk.”

Neil Barofsky, former Inspector General for TARP: “Pretending that Dodd-Frank solved all our problems, as some Democrats do, or simply saying that big banks won’t be bailed out again, as some Republicans have suggested, is unrealistic. Congress needs to proactively break up the “too big to fail” banks through legislation.”

Scott Shay, founder of Signature Bank: ”We wouldn’t trust our national defense to four military bases, but we trust our national economic security to four big banks.”

Roy Smith, former partner at Goldman Sachs: “Based on changing markets and increasing regulatory pressures, it is time to unwind the mega-banks into smaller, simpler, less risky business models.”

See our post titled Break Up the Banks Already.