Sunday, May 10, 2009

American Bankers Have Learned Nothing!

American Bankers Have Learned Nothing! Obama Versus Wall Street

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At the first signs of a lull in the crisis, they have but one idea in their heads: get rid of the government's trusteeship as fast as possible so they can pay themselves allowances and bonuses as they did before. The power struggle with the Obama administration has begun.

"Wall Street statesman." The expression is so pretentious that one hardly dares translate it. Yet that, in any case, is the title the little world of finance reserves for its stars, for its great captains installed at the summits of New York skyscrapers. If one were to believe his biographer, JP Morgan CEO Jamie Dimon is an authentic Wall Street statesman, with wisdom worthy of a president. Jamie Dimon does not like people to criticize his peers: "When I hear people continually criticize American business, I personally do not understand. That hurts our country." He also hates having the government come stick its nose into his books. With the head of the powerful bank, Goldman Sachs, and several other financiers, he is demanding a rapid reimbursement of the loans the government granted them this fall when Wall Street panicked. He wants to resume his banker's freedom.

But Jamie Dimon will perhaps have to wait. While the American administration publishes the results of its "stress tests" imposed on the 19 largest banks, relations between the White House and Wall Street's gnomes are increasingly taking on the aspect of a riveting arm-wrestling contest between Titans. A friend and close adviser to Obama, Valerie Jarrett, is in continuous contact with bank bosses; Secretary of the Treasury Tim Geithner knows them all personally from his stint as president of the New York Fed; and although Barack Obama rejected the head-on collision that nationalization of the weakest banks would have constituted, it is he who imposed these stress tests based on scenarios too pessimistic for their taste. A change of heart? More of an irritation. "I don't have the power to push a button and suddenly see the bankers do exactly what I want," the president recently confided. A euphemism. In reality, the White House is dumbfounded by Wall Street's chutzpah. So Obama has just called the hedge funds that "refused to make sacrifices like everyone else" and forced Chrysler's bankruptcy "speculators." About twenty hedge funds and investment banks blocked the rescue plan for the automobile manufacturer by refusing to agree to a write-down of their bonds. The government proposed the securities be valued at 33 percent only of their theoretical value. That was a big difference, but in reality those investors had for the most part acquired those securities at very low prices. That little group of financiers believed that the government would yield at the last minute. They blew it!

Reforms Torpedoed

Another example of arrogance and rapacity: Goldman Sachs, JP Morgan and some other big banks are reporting good results (too good to be true, some assert ...) and now want to reimburse the government's loans so they can once again do whatever they want. An unbelievable pretension! Their results owe a great deal to taxpayer largesse. Banks enjoy credit facilities at the Federal Reserve for practically 0 percent that they are using to make loans at a far higher rate. Difficult not to profit under those conditions. And then there's the affair of insurer AIG. Goldman Sachs was able to unwind 10 billion Euros worth of contracts with AIG for 100 percent of their face value, while they would not have been worth one cent without the taxpayers' emergency rescue of the insurer. That's not all. The big banks are publicly declaring their disinterest in the Obama plan for the repurchase of their toxic assets since it's not advantageous enough to them. No doubt they prefer to hold those assets at their perfectly fictitious inflated book value. And tough luck if this accounting fuzziness prevents any serious cleaning out of the financial sector and consequently any revival of the economy.

Wall Street has learned nothing, understood nothing. During the first quarter, six of the largest banks have set aside 28 billion Euros to pay their employees. Remunerations for 2009 - largely comprised of bonuses - could almost return to their record of 2007. At the rate of the first quarter, Goldman Sachs will pay over $569,000 (438,000 Euros) per employee. Not surprising that that establishment should want to become free again to pay out the bonuses it desires.... Even banks getting continuous transfusions from the government, such as Citigroup, are begging to be allowed to pay out big bonuses to their financial aces. Always with the same argument: in the absence of carrots, they'll leave for the competition. Fannie Mae, nationalized to avoid bankruptcy, has just decided to pay a million Euro bonus to Paul George, its ... director of human resources.

Traditionally, the remuneration paid by Wall Street represents a disproportionate share of revenues: around 50 percent for investment banks, less for commercial banks. Citigroup, for example, wants to continue to pay enormous bonuses to the head of its commodities brokerage division (who received close to 80 million Euros in 2008), because that activity generated revenues of 513 million Euros last year. No industry has pushed this rationale to such a mockery, but Wall Street finance could care less. It brews money, the raw material for pay packages. It can help itself to it from the source.

Up until now, it has been able to exercise its billions to weave incestuous relationships with political power centers and to torpedo any vague attempt at serious reform. No later than last week, bank lobbyists succeeded in deep-sixing a law that would have allowed judges to modify the terms of a home mortgage in personal bankruptcy cases. The disgusted comment of the senator who had sponsored that law - against which 13 of his Democratic colleagues voted (along with the Republicans): in Congress, Wall Street "frankly owns the place ..." Some believe the banks' influence extends well beyond the millions they pay this or that candidate. At the center of the Democratic left, the theory of the administration's infiltration by the big investment bank Goldman Sachs has come to light, based on the number of that bank's former employees in the higher echelons of the administration and the fact that it's provided two Treasury secretaries in the last fifteen years. More moderate in his views, Simon Johnson, former chief economist at IMF and a professor at MIT, denounces an oligarchy and invokes French sociologist Pierre Bourdieu to explain Wall Street's influence on the political culture: in the same way the upper classes take their children to museums to transmit the cultural capital that will perpetuate their domination, Wall Street has created and propagates the myth that what is good for finance is good for America. According to Johnson, Tim Geithner would be the perfect illustration of those "honest politicians and civil servants who really, truly believe that they are acting in the public interest when they come to the aid of the largest banks."

A Certain Patience

Extreme criticisms. One of the attributes of a Geithner or his adviser Larry Summers, Obama confides, is not their ideological bias, but, on the contrary, their "great appreciation for the complexity" of problems. And for the president, who spends hours in meetings devising detailed economic and financial plans, the rejection of bank nationalization "has nothing to do with ideology or politics. (...) It's simply that we're convinced that preemptive nationalizations would be more expensive for the taxpayer and that they're more likely to undermine confidence than create it." Barack Obama wants to be "uncompromisingly pragmatic in economic policy," which involves a certain patience vis-a-vis bankers who are more unpopular than ever. But by their abuse of that patience, the former masters-of-the-universe risk losing the power struggle against the true statesman, the one whom Americans have installed in Washington and not on Wall Street, and who is demanding "an updating of regulatory tools comparable to what we did in the 1930's."

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