Oceans of [US] taxpayer money and patience have been devoted to propping up the US banking system. Why? So that when we go to retrieve our money from an ATM our money will actually come out.
At least that’s what then-Treasury Secretary Hank Paulson told us when the big US banks were on the verge of hitting the fan in 2008 and 2009.
The implication was that if the US banks failed – “poof” – our money would go with them. Nobody wanted to lose their cash, not at the same time many people’s 401(k)s were being turned into 201(k)s.
The government wasn’t going to let that happen. In the heat of the crisis the federal government committed $23.7 trillion – yes, with a “t” – to make sure bank depositors could sleep at night and bank executives had a place to work during the day.
That big, scary, impossible-to-comprehend number was calculated by Kevin Puvalowski, who worked directly for Neil Barofsky, the special inspector general for TARP (SIGTARP) and author of an illuminating new book about his experience, Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.
Barofsky writes that the alphabet soup of programs actually maxed out funding at only $4.7 trillion. But again, that number, $4.7 trillion, is $4,700 billion, or $4,700,000 million, or $4,700,000,000,000.
Now that we’re three years down the road, one would expect the US banking system to be healed, given all of the government’s monetary medicine. But while the FDIC’s Quarterly Banking Profile for the second quarter painted a positive picture for the banks, it was anything but rosy.
Sure, 63% of US banks reported higher earnings, but 732 US banks are still on the deposit insurer’s “problem” bank list (after 454 banks failed since the crisis began). That’s 10% of all insured institutions.
Industry earnings rose 21% over the past year, the 12th consecutive quarter of increased earnings. However, earnings continue to be driven by lowering of loan loss provisions and gains on sales of loans and assets. The net interest margin continues to sink with the Fed’s zero rate policy, and bank balance sheets are still loaded with troubled assets.
And while consumers and businesses are funneling money into bank deposits for safety, the FDIC Deposit Insurance Fund is now $22.7 billion, only a tiny fraction (30 basis points) of the $7.1 trillion in deposits the DIF backstops. The Problem Bank List website points out the problem:
This is equivalent to trying to protect yourself with an umbrella in the middle of a Category 3 hurricane. The collapse of one of the “too big to fail” banks would immediately require the FDIC to seek financial assistance from the U.S. Treasury. During the height of the financial crisis, the FDIC was granted a line of credit with the U.S. Treasury for up to $500 billion.
Dodd-Frank legislation requires that the DIF increase to 1.35% (135 basis points) by Sept. 30, 2020. Good luck with that.
The Dodd-Frank Act also set up another agency – the Financial Stability Oversight Council (FSOC) – to keep an eye out for future systemic risk.
After all, since the financial meltdown, the big institutions have only gotten bigger and the total number of US banks has shrunk. One percent of the banks now hold 78% of deposits. And when it comes to derivatives exposure, the one percenters hold virtually 100%, totaling almost $225 trillion at the end of the second quarter.
When asked if he thought the FSOC would prevent the next crisis, the ex-head man at the Office of the Comptroller of the Currency, John Walsh, told American Banker, “I would love to think that FSOC, the next time around, will have a meeting and catch the crystal just before it hits the cement floor, but I don’t think so. I think they’ll come with a broom and sweep up the debris.”
It won’t be long before another crash comes along, and no doubt there will be government agencies created to sweep up the glass. Fixing the problem isn’t ever the government’s priority, but instead, as Barofsky writes:
I soon learned that they [inspectors general] were mostly like any other agency. As such, their priorities were, in order of importance: maintaining and hopefully increasing their budget; giving the appearance of activity; and not making too many waves.
The head of SIGTARP also learned “shading of the truth was an accepted part of doing business in Washington.”
Barofsky’s depictions of Tim Geithner and Neel Kashkari are withering. Kashkari, interim assistant secretary of the Treasury for financial stability, does come out looking a bit better, with Barofsky writing, “I don’t think he ever flat out lied to me, which in Washington put him in rarefied air.”
Geithner would seem to be just a plain-old sociopath. Barofsky could get Geithner to meet with him only by threatening to report the secretary’s behavior to Congress. When they did meet, Geithner was hostile:
As we parried back and forth, Geithner repeatedly reached a pitch of anger, regaling me with detailed expletive-filled explanations that established my apparent idiocy. He would then calm himself down and give me a forced, almost demonic smile.
Barofsky’s wife, a psychiatrist, told her husband Geithner might suffer from narcissism, “and therefore might be psychologically incapable of truly admitting that he made a mistake.” The man who would go from running the New York Fed to Treasury secretary would prove her long-distance diagnosis correct.
Again, these were the guys dishing out trillions of taxpayer money to save the US banks. TARP, TALF, PPIP, and the rest turned out to be programs for Geithner and Kashkari to shovel money with no accountability to their friends on Wall Street.
There’s been plenty of criticism of the loose lending standards employed by the mortgage industry during the boom. But from what Barofsky describes, TARP was every bit as loose. Wall Street speculators put little money down to buy the toxic assets, with the government providing nonrecourse financing.
The rescue of AIG is especially galling, given it was essentially a bailout of the insurer’s counterparties. The New York Fed, under Geithner, authorized $60 billion to buy bonds from the insurer’s counterparties “that were worth less than half of that amount.”
Barofsky’s audit determined that Geithner never attempted to negotiate a discount, even when one of the US banks had offered it upfront. When asked about it, the New York Fed’s general counsel insisted that US banking laws required the payment of full price.
Geithner’s Treasury department went so far as to fudge the numbers on the AIG bailout, making tens of billions of TARP losses disappear for a report it prepared for Congress.
In the end, the ATMs kept working, and by 2010, compensation at the top 25 Wall Street firms broke records at $135 billion. JPMorgan Chase grew 36% in size, and Wells Fargo more than doubled. Wall Street lives happily ever after. The taxpayers, not so much.
The question is will the 848-page Dodd-Frank bill keep the financial system intact? Don’t bet on it. As Barofsky explains:
After all, one of the most-important lessons that should have been learned from the financial crisis was the remarkable fallibility of the regulators. They had been blind, or willfully blind, about the signs of the coming crisis, and their track record with respect to previous crises was no better.
U.S. banking: a fragile system living off fake reserves, awash in mispriced assets, regulated by sociopaths, and insured with but a wisp of reserves. Barofsky lays it all out in this firsthand report.
Nothing to worry about, right? The printing press is always close at hand.
Douglas E. French
for Markets and Money
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