${Html.ActionLink("My MarketWatch", "index", new { controller = "composite", area = "section", page = "my" })} | !{Html.ActionLink("Sign out", "LogOff", new { area = "User", controller = "Account" }, new { id = "signOutLink" })}
Welcome, ${UserDisplayName}
Log in
Become a MarketWatch member today
Rex Nutting Archives | Email alerts
March 8, 2012, 12:00 a.m. EST
Want to see how this story relates to your portfolio?
Just add items to create a portfolio now:
Create Portfolio or Cancel Already have a portfolio? Log In
By Rex Nutting, MarketWatch
WASHINGTON (MarketWatch) "“ Wall Street complains that the federal government is hostile, but Washington sure has a funny way of showing it, showering favors on companies that could barely survive without a government subsidy.
And the businesses are returning the favor, supporting politicians with millions in campaign donations. Anyone who believes in competitive markets and competitive elections would be appalled by a system that distorts not only our economy but our politics as well.
Some call it "crony capitalism" but in Washington it's just business as usual.
Details of ADP's payroll report, showing continued growth in the job market, and the countdown to Greece's debt swap. AP Photo/Tulsa World, Stephen Pingry
Three years ago, just after the big banks and the big pseudo-banks helped drive the global economy off a cliff, it looked for a moment as if those who caused the greatest economic meltdown in a lifetime would be forced to pay for what they had done, and be stripped of their power to do more harm later.
That moment came and went. Instead of recognizing that the mere existence of too-big-to-fail banks was inherently dangerous, Congress was prodded by ideologues and lobbyists into writing the overly complicated Dodd-Frank Act. Instead of requiring the big banks to break themselves up into smaller pieces that could succeed or fail on their own without bothering the rest of us, the politicians created a fantastical monument to regulation that's simultaneously too onerous and too weak.
The Federal Reserve, the government institution that bears the most responsibility for letting the financial system blow up, continues to coddle the biggest banks, knowing that they remain too big to fail. The Fed, in the depths of the crisis, lobbied hard for Congress to bail out the banks with TARP money and on its own provided hundreds of billions of dollars in very cheap loans to the banks, guaranteeing their continued existence.
Those actions were necessary in the middle of the panic, although they should have been taken on terms much less favorable to those who were guilty of financial malpractice.
The TARP money has now been mostly repaid and the Fed isn't providing those emergency loans any more, but the Fed has kept the federal funds overnight rate near 0%, and has pulled out all the stops to keep interest rates low, a huge subsidy for banks that are charging their best customers 20% or more to borrow on their credit cards.
And, even though the big banks are still in a precarious position, the ever-helpful Fed also allowed them to deplete some of their precious capital. According to an investigative report by Jesse Eisinger in ProPublica, a year ago the Fed overruled an objection by the Federal Deposit Insurance Corp. and allowed 19 large banks to reduce their retained earnings by paying dividends and buying back shares. Read "Fed Shrugged Off Warnings, Let Bank Pay Shareholders Billions" on ProPublica.
The 19 banks paid out $33 billion in the first nine months of 2011 after the Fed gave the green light, Eisinger reported. That's $33 billion that the banks don't have to cushion themselves from the impact of the euro crisis or the robo-signing scandal or any other black-swan event that might threaten them. That's $33 billion closer to another catastrophe.
Why did the Fed approve the payments of dividends even though the banks need to preserve every penny of capital?
On the one hand, the Fed wants to do its public duty and prevent another financial meltdown "“ that would require that the Fed demand that the banks raise sufficient capital and refrain from engaging in irresponsible behavior. The Fed is charged with ensuring the "safety and soundness" of the banks, individually and collectively.
On the other hand, the banks have immense clout at the Fed's regional banks, where most of the supervision and regulation takes place. The Fed has been captured by the industry it is supposed to regulate.
In approving the dividends and buybacks, the Fed served as a cheerleader for investor confidence, filling the niche that Wall Street analysts once held. The Fed figured that if banks were allowed to pay dividends, that would boost investor confidence in the banks, which would allow them to raise even more capital from new investors than they were giving back to old investors via dividends.
And best of all, the insiders who manage the banks and lobby the Fed every day would personally benefit from the dividend payments and stock buybacks.
Of course, the coddling of the big banks is even worse in Europe, where propping up a handful of big banks is deemed to be more important than the lives of millions of Greeks, Spaniards, Italians and other Europeans who may be condemned to decades of austerity and stagnant living standards.
What's most incredible about this crony capitalism isn't the way politicians and business leaders cozy up to each other "” that's the way it's always been. No, what's really mind-blowing is that we've forgotten just how dangerous large banks can be, less than four years after they nearly totaled the global economy.
Rex Nutting is a columnist and MarketWatch's international commentary editor, based in Washington.
Apple ekes out gain, Pandora plunges
Stock futures rise further after ADP data
U.S. stocks rebound on jobs data, Fed report
Apple looks to stay ahead in tablet race
Apple unwraps new iPad, due out March 16
Will Iceland decide to go loonie?
Is Apple vs. Amazon winner-take-all battle?
Labor costs becoming a challenge to Fed, companies
Six tricks to spend less, save more for retirement
Quality Is Investors' No. 1 Job
Asia Week Ahead: Investors Eye Aussie Data, NPC
What Romney, Obama Tax Plans Might Mean for You
The Big Themes From Mobile World Congress
Plunge protection team hedging on Greece
Central bank observers could be forgiven for thinking a Federal Reserve discussion of more free money...
Will Iceland decide to go loonie?
These days, Iceland especially doesn't hate Canada. It might even adopt the Canadian loonie as its currency...
Japan recovery: Heroic bid may yet fall short
Flash flooding hits Sydney after torrential rains
A deluge of rain on Thursday morning saw flooding in Australia reach the New South Wales capital of Sydney...
Apple unwraps new iPad, due out March 16
Read Full Article »