Dear Readers: My formal post on California Derangement Syndrome, discussing Arizonans’ retaliatory boycott of our state, is now posted on the San Diego News Network for your reading enjoyment: California lacks the leadership Arizona has.
Today, I have a post from Professor Athena. I am hoping to chat with the Shrine’s economic expert on the speed-passage of the banking reform bill today. Here is her take on Tuesday’s election results, and what they mean to us:
Did You Hear the One About the Banker Who Lost the Primary?
After the results of primary elections in various states across the nation, the anti-incumbent attitude prevailing among voters is heard (as we would say here in Tennessee) “loud and clear” (yes, I know in most parts of the country prone to less colloquial grammar, it would be “loudly and clearly”).
One overriding opinion of voters heard last night during election reports was the near-hatred for Wall Street. I have to address this opinion, since I believe like so much of public opinion it is shaped by the main-stream media and others who may not truly understand or care about truth when they arrive at a point of consensus.
To be sure, Wall Street played a large part in the financial meltdown which culminated in the failure of Shearson Lehman in the fall of 2008 and the subsequent financial disarray in short-term lending markets which necessitated “TARP1.0”, or the financial stimulus package signed into law by President Bush just prior to leaving office. More on that in a moment.
But the distinction between “TARP1.0” and what followed during the Obama administration could not be more important to emphasize. The loss of financing through short-term lending that goes on daily in the repurchase, or “repo” markets along with commercial paper was immediate. What had been a more volatile short-term financing market for months following the merger of Bear Stearns suddenly froze. None of this type of bread-and-butter lending could be done as the ghastly Lehman situation unfolded. This meant that short-term financing of all types that facilitate lending by banks and various financial firms could not happen as credit markets absorbed the Lehman defaults. Without short-term loans made by the government to allow business to go on as usual, thousands of companies across a variety of business types in America would have gone bankrupt, payrolls would not have been met, and a depression would have ensued, eliminating many millions of jobs for Americans. What Congress and the President, advised by the Federal Reserve, chose to do was to LEND and not GIVE various qualifying banks money with which to operate, to be repaid to taxpayers, and about 75% of which has been repaid to-date. Let me be something I sometimes love to be, which is redundant (yes, I was in the Glee Club in high school and so refrains are in my head for life: “The money has been or is being repaid”). The taxpayers are so far making money on loans made under TARP1.0. About 90% of working Americans have kept our jobs, which would not have been possible without the initial decision to fund TARP. What followed was different, and not in a good way.
The massive stimulus package of over a trillion dollars by the Obama administration gave money to a variety of troubled areas in the economy, but the bulk of it was funneled to Democrat-run state and local governments and political “groups”. A huge chunk went to AIG and GM. There is little chance of repayment of this money, ever. It is a true “bail-out”, whereas TARP1.0. was not.
Another huge chunk went into vote-pandering social engineering designed to keep the unemployed perpetuated through extension of unemployment benefits and mortgage loan modifications and first-time homebuyer credits, etc. This was pitched by the media and the administration and especially by the President on his constant podium as “helping out Main Street instead of Wall Street”. When indeed the initial funding had done much more to help out Main Street than was ever conveyed. Someone in the capacity of adviser told them to keep the FNMA and FHLMC (i.e, “Fannie Mae and Fredie Mac) story as far into the background as possible, and the government assumed control of both housing GSE’s almost overnight.
These are the massive institutions over which Congress had near-total oversight and examination authority as far as their management, salary and benefit policies, earnings, and asset/liability make-up. The “breaking news story” quiet on this is deafening. Financial market insiders are well aware that FNMA and FHLMC created a huge pipeline for subprime loan originators. The public should also be aware that without FNMA and FHLMC establishing a clear subprime market value, Wall Street would not have had the demand for CDO (Collateralized Debt Obligation) markets. CDS (Credit Default Swap) markets likely would have not taken off to the degree they did. Again, it’s all about the volume and the liquidity (bid/offer spreads establish a market and a point of value reference). It happened not only on Congress’ watch, it happened largely with their blessing and affirmation. Both FNMA and FHLMC are so far escaping the financial reform package in Congress. They are not being named among the villainous “bankers” who abused consumers. Instead, Wall Street is. This is obfuscation by design.
Wall Street levered a structured product based upon the likelihood that Americans homeowners always pay their mortgages. It was a reasonable bet not only in the view of Wall Street traders and investment bankers, it was a reasonable one in the view of various rating agencies, and most impressively as a valid form of logic, it was the viewpoint of a diversified and well-informed group of professional investors both domestic and global. At point of evidence in this contention is that the bets lost them their firms. Except for Goldman Sachs, who is now being sued by the SEC largely due to being the only remaining large Wall Street firm not merged into a bank owing its TARP to taxpayers.
Wall Street as we all knew it before September 2008 is gone. No business intentionally ruins the very markets which support them. We have to ask who ho indeed would kill such a goose that is laying golden eggs, thus?
The federal government in Washington, D.C.(in form of Congress and most especially the current administration with its anti-business policies) is doing exactly that. Where are the receipts to come from, if not corporate profits? Where will jobs be created that are add real value to GDP (Gross Domestic Product)? (Note: trick question, they aren’t the government jobs). Will financial reform similar to Sarbanes-Oxley cause even more onerous burdens on small businesses and corporations to the extent that the trend of “de-listing” on the NYSE (as Daimler-Benz did yesterday) replicates? Will Wall Street be replaced by Hong Kong? Perhaps the most important question is: How much punishment and anger being aimed at financial markets is too much?
Anger and frustration can understandably cause a rush to blame someone. But, fueled by a media needing a story, a Congress that has yet to find a scruple amidst the desire to secure a vote, and an administration whose stated goal is to “change” America, we seem to be increasingly unable to separate what is accident from deliberate malfeasance, whether we are discussing Hurricane Katrina, or the BP Deep Horizon blowout, or the meltdown of U.S. financial markets. If much of America feels that Wall Street got the bailouts and they instead got the bills, at least realize that the initiator of the massive deficit borrowing is not Wall Street. The best finance minds in the Big Apple and elsewhere have never managed to leverage close to 100% of what they produced. Wall Street may not appear to have the best interests of Main Street in mind. Yet they lock their doors each night knowing that without Main Street they would in the end have no companies to take public, no equities to trade, no bonds to invest. Wall Street and much of the banking and financial services business added millions of jobs in the past decades. Going forward, instead of golden eggs, we’ll have to eat the ones being laid by Congress. At least there appear to be plenty of them so far.
Mr. President, just as we should not confuse Main Street with Wall Street, we should neither confuse Wall Street with Washington, D.C. Last night’s election results hint that voters may just be intelligent enough to at some point aim their anger at sitting members of Congress and the highest office.