Just imagine how angry the American public would be if they knew the whole story.
For months, we have listened to the whining from Wall Street. U.S. banks are having a record year, and they want to be paid a lot of money. Billions and billions of dollars.
Public indignation is deep. After all, over the past year, we have watched as hundreds of billions of dollars of public money has been poured into bank balance sheets. We have--we are assured--taken steps that were necessary to bring our financial system back from the brink. We may not have liked it, but we had no choice.
But now that we have stemmed the tide, now that the Great Panic of 2008 has abated, we have been forced to watch these same institutions moan about how bad they have it. Citigroup--the one that received $45 billion in taxpayer funds, plus a couple hundred billion extra in public underwriting of bad assets--wants to wipe the slate clean by paying the money back and calling it even. So they can pay themselves billions of dollars in bonuses.
Wells Fargo, the arriviste among the financial elite, is complaining about the competitive disadvantages that they face as a consequence of federal compensation constraints. Constraints that prevent them from paying themselves billions of dollars in bonuses.
Goldman Sachs--caught in a lie by a federal Inspector General who refuted Goldman's sanctimonious claim that even if the world had collapsed, they would have been fine--is trying to fend off accusations of unwarranted hubris and greed--which reached a pinnacle when they announced plans to pay themselves $21 billion in bonuses--by announcing that their senior partners will take their share of the billions in stock.
But what if the public understood the whole story? How is it that the banks are now having one of their most profitable years ever? Given that there is not much lending going on, and that the newly increased credit card fees have only just begun to flow into bank coffers, where is all that money coming from?
It is coming from proprietary trading. "Prop trading" is the kind of betting with the bank balance sheet that was made illegal for commercial banks back during the Great Depression, when the FDIC and deposit insurance was created. The price of having the federal government guarantee bank deposits was separating the lending and depositary functions of commercial banking from trading and risk activities of investment banking. Thus, in 1935, the commercial bank J.P. Morgan & Company was separated from the investment firm Morgan Stanley.
But this separation was undone in 1999 to facilitate the creation of the megabanks that we have today. However, the Financial Services Modernization Act of 1999 ended the separation of activities, FDIC deposit insurance remained in place. And this year, the elite of the financial world--JP, Citi, Wells, BofA, Goldman and Morgan Stanley--have finally emerged for what they are: Gigantic hedge funds backed up by the full faith and credit of the United States of America. Wall Street bankers making big bets with our money, content in the knowledge that if they win their bets, they will pocket the cash. And if they lose, we will all pick up the mess.
But it really does get better. So exactly how did they make all that money this year?
Well, the trade of the moment has been the U.S. dollar carry trade. A foreign currency carry trade is simple in concept. Borrow money where interest rates are low, and invest where interest rates are high. Or simply stated: Short the U.S. dollar. Buy the currency of a country where interest rates are higher. The beauty part is that by continually assuring the world that U.S. interest rates will remain near zero for the foreseeable future, the Federal Reserve has assured traders that they can keep the trade in place for some time.
So the Wall Street elite, just months removed from their near-death experience, are now making a fortune shorting the U.S. dollar. One year ago, faced with the greatest financial panic in generations, the American people swallowed hard and bailed out the banks. Today, the banks have moved on, and are tearing down the currency of the nation that saved them.
But it is nothing personal. It is strictly business.
And the carry trade will work out fine. Until it doesn't. Then the trade will unwind quickly, and those who do not get out in time will get hurt badly.
But the banks are not worried. If the unwinding of what NYU economist Nouriel Roubini has labeled "the mother of all carry trades" takes a bank or two down with it, everything will be all right. Because the bank deposits are still insured, and we now know to an absolute certainty that if one of the elite institutions fails, we will bail it out. Again.
It is time that we come to grips with the depravity of the current situation, and potential damage that continuing down this path may yet do to the financial system and to our economy.
Our commercial banks are not, and should not be, hedge funds. U.S. dollar carry trades and writing credit default swaps are not core commercial banking functions. They are not necessary to the efficient functioning of our financial system.
The U.S. dollar carry trade is destructive to our currency, and is creating asset bubbles across the world, as leverage is transferred from our markets into others. For their part, credit default swaps serve no useful purpose in proportion to the systemic risks they create.
It is time to go back to basics. Commercial banks provide essential services in our economy. They enable the Fed to control the distribution and pricing of capital to the productive sectors of the economy. They provide secure depositary and asset management services.
Unfortunately, pending Congressional legislation has done nothing to address the central risks that the new financial landscape presents to our economy. Rather than reinstitute restrictions on bank activities or restrain institution size, Congress is looking to regulatory solutions that hold little promise of success when the next crisis emerges. And rather than recognizing the problem of moral hazard, this week Congress took the first step of embracing it in statute.
This year, Wall Street has shown its true colors, but the public has yet to understand the depth of the betrayal. It is not the continuing absence of lending, or jacking up credit card fees, or hiking consumer interest rates, or even the constant refrain of complaints about limitations on executive compensation. No, the greatest betrayal is that with the American economy as weak as it has been in years, with the dollar weakness threatening to unravel the international commitment to the role of the dollar as the reserve currency, Wall Street has shown no shame about attacking the currency of the nation that came to its aid.
If this is the path that the elite commercial banks have chosen, if they have been fully seduced by the lucre of trading, Congress needs to revisit the fundamental rules of the game, and revisit the central rationale for deposit insurance and the structure of the commercial banking system.
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So you're telling me the investment banks are taking the 0% interest rate loans from the Fed and lending that money out abroad via the foreign currency carry trade? Does this mean they're lending to foreigners but not to Americans?
GRRRREAT Article ... yes, the Gov't should prevent Goldman and the Morgans from reversing their bank holding company elections (whereby they achieved access to the full array of FED lending facilities) and then prohibit bank holding companies from proprietary trading. It would emasculate Goldman and the Morgans OVERNIGHT. Just do it.
"Goldman Sachs--caught in a lie by a federal Inspector General who refuted Goldman's sanctimonious claim that even if the world had collapsed, they would have been fine--is trying to fend off accusations of unwarranted hubris and greed- ..." SIGTARP did no such thing, and the above is an affront to truth. In a what-if scenario, SIGTARP suggested Goldman Sachs might not have gotten all its 2.5 billion. Might. As in: maybe, perhaps, possibly, etc. This is not even remotely close to being a refutation of Goldman Sachs' opinion that they would have suffered no economic damage because of an AIG bankruptcy. Because the 2.5 billion was subject to daily marks to market, it likely GS already was holding a significant percentage of it in collateral.
For the umpteenth time ... please review the concept of reflexivity as Soros relates it to economics, as well as the concept as variable change. "We participated in things that were clearly wrong and have reason to regret," "We apologize." - Lloyd Blankfein .. head of Goldman Sachs November 17, 2009 (at a conference in NY hosted by Directorship magazine)
For the umpteenth time ... Please review the concept of reflexivity as Soros relates it to economics, and the concept of variable change. "We participated in things that were clearly wrong and have reason to regret," "We apologize." - Lloyd Blankfein .. head of Goldman Sachs November 17, 2009 (at a conference in NY hosted by Directorship magazine)
Every American should read and re-read this article. Excellent job and very true. Wall street, the banks, and the Fed have complete control over Obama and the Congress. Obama browbeating the banks is a joke as he is in their pocket. It will all end miserably.
wall street is short the dollar at the moment (even though euro could not hold 1.5100) because with their quantitative easing policy the federal reserve, in compliance with the treasury gave them no other choice from a return standpoint. dlr is roadkill of fed's asset re-inflation program.
How about this: the Dollar lost 20% of value in the Philippines in 4 years. Black market traders charge now an extra 15%. 2005: 56 Pisos, 2009: 45 Pisos. There are just too many Dollars on the market. With flooding the world market, they Dollar is loosing so much money. No wonder other countries want to get away from the Dollar.
Both sides of the aisle let this happen. I think it stems more from economic ignorance. As soon as you start to talk economic the "big" words come out and most people glaze over. The vast majority of American know that something is wrong, they just don't know what to really do about it. Thanks for this article. I'm sending it to lots of folks. It's straight forward and comprehensible. We need to bring back the strongest provisions of Glass/Stengel to stabilize our economy. The rest of this including the current bills are just icing with no cake so far. The bottom line is that we need to restore the anti-trust structure to bring back competition to get money following into the productive parts of our economy. Speculators always end up falling upon their own sword and I don't want to bail them out again. In 2010, it's time to get rid of any member of Congress who is blocking the restoration of a competitive economy. That's the Party of No and the Blue Dog fellow travelers. I will also include others who just haven't bothered to study enough economics to understand the bills being put before them.
Unless you are mega rich and/or come from Wall Street, you will be in the lower decks of the Titanic with the rest of us slaves...........
Don't forget the Unions. Remember, Wall Street is where all the pension funds are placed.
Great article. These criminal Banksters own the world, and have purchased our government. FBI investigate these criminals for FRAUD. Investigate Congress for Bribery! OUTLAW all Derivatives. Outlaw all contributions as the fraud they are. Bring democracy to the USA. 90% tax on income of a million. Or Suffer.
I'm right there with you!
Short selling is the sale of something you don't have. The US Government is the biggest short-seller of US dollars, printing and using trillions of them for bail outs, stimulus, congressional pet projects, mindless wars, etc. The US Government is doing much more long term damage to our economy than the banks could possibly accomplish on their own.
Incorrect. Short selling is borrowing something, selling it hoping that the price will go down, buying it later and paying it back. This is not what the US government does when it creates money.
This is true, but they are working in tandem. The results will be the demise of the US dollar and the collapse of the American Empire. And we'll watch as smaller countries also go into economic collapse while American burns and turns into civil war. Rest assured if we do not stop Wall Street and our Government, by abolishing both, along with unregulated free-market predatory capitalism, we will be listed in the history books right alongside the British Empire as one more FAILED EMPIRE. Sorry to say, even the best of astrologers have predicted this as have the economists who really know what they're doing.
Thanks Mr. Paul for this this very smart piece. Unfortunately it's too late. If people have not realised by now that wall st. has no allegiance to anyone or anything besides money (no matter in what currency) then really, we deserve what we get. During this past summer's bull crude market (with high prices seriously hurting the average American to the point where many families had to choose between food and fuel) the most vocal supporter of the crude rally was Goldman. In 'analyst report' after 'analyst report' Goldman repeatedly said that the market 'fundamentals' supported the crude rally, and that the astronomic prices would continue to rise in the indefinite future. I was not surprised to know Goldman had skin in the game when they published these 'analyst reports'. What a crock, if Wall st. could price gouge the American people at our most vulnerable point and sell us out to the highest bidder, they would jump at the opportunity without even thinking twice.
100% correct. Without a moderately informed electorate, this country can't survive. This will end with revolution if the public doesn't quickly FORCE the government to change course.
It's too late. Congress can barely pass a bill these days. It's not going to re-regulate banking in a significant way. America is doomed.
Congress not being able to pass a bill may be the thing in the end that saves us.
The BIG and the ELITE will do as they wish. We are back in France and it is 1780. How's your "cake"? Collapse of the entire economy is the only way to stop the BIGS from taking all our wealth, even the wealth we don't have.
I was against the bailouts for just this reason Ms. Shiela. I'm becoming more and more convinced that you're right. Unfortunately, right now the BIGs and ELITEs have the money and the power.
To quote Jim Morrison: "They've got the guns, we've got the numbers..."
Maybe they figured out something about shorting the dollar from George Soros.
Don't you get it ?? it's not red vs blue....it's wealth vs workers. The class war is over and THEY WON, get used to serfdom in the new feudal America
ROFLMAO!!! You're exactly right. Unfortunately, the term 'Wall Street' is synonymous with the other evil entity in the U.S., 'Big Business'. These two terms have the sole purpose of being the antagonist in the Democratic storyline, along with the Republican Party of course.
No wonder the banks are not lending to small businesses. They want to make sure the economy will not come back too fast to kill their carry trade. Besides, lending to small business will take years to make a profit, but this trade can be profitable within weeks. Hopefully, the Fed and Congress know what these behemoths are up to before it is too late.
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