ACCORDING TO LIZ - What, if anything, ties the Wall Street implosion of 2008 to the bank failures of today?
It certainly includes the constant pressure on government to loosen regulations to allow financial wheeler-and-dealers increased access to capital, other people’s capital, while reducing regulation and their personal risk.
Something for nothing = gambling. This is a problem when you are putting up your own assets, more of one when you risk your family’s future, but it’s disgraceful when supposedly staid bankers speculate with their customers’ cash.
Banking, with the stringent regulations imposed in the wake of the Great Depression magically removed under Clinton, has become a one-armed bandit with Wall Street spinning the wheels as a behind-the-scenes evil Wizard of Oz encouraging gross negligence at the cost of the small investor. Small investors who don’t participate in the bells of the pay-out but whose savings are sucked up all the same.
The Frank-Dodd Act, enacted in response to the oh-so-predictable Wall Street 2008 meltdown, was partially eviscerated by the financial lobbyists before it even made it out of committee. What passed was a labyrinthine morass giving rise to endless opportunities to further game the system.
And Trump, encouraged by his 1% buddies, made it even easier for mid-sized banks.
This sponsorship of corporate greed over human need is a prescription for financial predation.
The chum of failed and struggling banks inevitably attracts the financial piranhas of leveraged buyouts, private equity firms and venture capitalists circling to scoop up and further monetize the remains, almost certainly at the expense of those who have oops, had, money in those banks.
Those who turned away from traditional banks to cryptocurrency fared little better. Worse than the pet rocks of the 1970s, using overly effective marketing to the gullible, it uses huge amounts of energy for no tangible results. Just because supposedly smart people got sucked in doesn’t make it any less stupid.
Leveraged buyouts abounded a couple of decades ago with vulnerable companies being purchased primarily with debt – often 90% or more of the value – by private equity firms. The more rapacious ones then used the target company’s cash flow to pay only the minimum of the debt’s carrying charges while busily gutting the assets.
Since even servicing that level of debt is often not tenable, after borrowing further against what remained and quickly removing themselves from the husk before it filed for bankruptcy, the equity vultures laughed all the way to the bank with the excellent return on their 10% investment.
Leaving workers without jobs, unable to pay mortgages and hollowing out whole communities.
Hedge fund managers game the system two ways. They handle unbelievable amounts of money, giving them inordinate power and contacts, on Wall Street and in Washington. And since they have managed to game the tax system, they do not even pay commensurate income taxes on what they make, giving them further incentive to continue to game the system.
Then come the heavy feet of the Federal Reserve, pushing up interest rates ostensibly, and mostly ineffectively, to address inflation concerns. Inflation that was actually driven by greedy corporations trying to wring more profit from the poor, not by rising wages.
The Fed’s fallacious approach led to its continuing to incrementally raise short term rates until these exceeded long term rates. And the higher they go, the greater the chance of dooming any bank that has protected its assets with safer long term investments.
With the loosening of oversight under Trump, and more overextended than most, the Silicon Valley Bank was the first to go. Its management was used to the hope and a prayer risk mentality of many of their high-flying tech start-ups, too used to it to focus on why their clients’ employed them: to be the responsible adult in the room.
It was the first domino the public saw fall, but clearly its CEO knew his bank was imperiled or he would not have dumped his own stock in the weeks before the collapse. Other players on Wall Street shorted the bank earning themselves hefty profits at the expense of those who had money in the bank… and the American taxpayer.
And once one domino teeters and falls, the rest is human nature. Even before the advent of the internet, stories circulate like wildfire in a heavy wind, pushing customers of at-risk banks to pull their money out.
According to the FDIC, the entire banking system is sitting on $620 billion in unrealized (paper) losses. This, the highest in recent history, reflects the increase in interest rates, not a loss of credit-worthiness. But logic doesn’t always count in a panic.
As a whole, the US banking system holds nearly $3 trillion in mortgage-backed securities, largely backed by mortgages issued on bullish real estate and driven by historically low interest rates. With home prices falling and the future for commercial properties a little sketchy at the tail end of the pandemic, what will happen when people can’t sell for enough to cover what they owe is somewhat predictable; we’ve been there before.
Hedge funds and Wall Street are not in the business of creating economic value but in tearing value apart to monetize what they can in the short term with no thought for the long term.
And now, swooping in to capitalize on these failures and taxpayer-funded rescue-deal largesse, the sharks are buying up tottering financial institutions for pennies and less on the dollar. They will make money but somehow someone else will have to pay the piper.
HSBC bought SVB UK, the Silicon Valley Bank’s British subsidiary for a pound (US $1.22) before it could be placed into insolvency by the Bank of England, leaving depositors with their guaranteed amount of up to £85,000 ($100,000), not enough to help many UK start-ups cover a fraction of their overheads of contracted purchases, leases and payroll.
UBS bought out the already shaky Credit Suisse at a price-per-share 99% below its 2007 value.
Hedge fund billionaire David Tepper bought SVB bonds between the bank’s collapse and it’s filing for bankruptcy protection by betting on the debt value rising as the bank itself is dismembered.
Goldman Sachs bought Silicon Valley Bank's bond portfolio for $2.5 billion below its valuation.
Members of the Federal Reserve, the central bank, and federal government oversight entities are rushing to stick fingers in failing dikes. Not so much to help the common man but because many know that their jobs are on the line. But at least they are taking action and the central banks in other countries are stepping up to help.
It’s fine to kick back with their buddies and help them amass fortunes in good times, but if matters deteriorate and whole economies collapse, those who stretched the rules know they will face endless Congressional hearings while ordinary people prowl the streets calling for their heads. While their erstwhile buddies kick back in Davos, spending their leveraged gains far from the fray.
In the twelve years ending in 2021, the S&P 500 index rose 517% – huge gains, but that pales in comparison to venture capital investments that rose 1,143 percent.
Those investors weren’t so particular about how that money was made. If it exported American jobs overseas, so be it. If it financed takeovers of healthy American companies only to tear them apart because the monetized parts were worth more than the sum of the whole – even as doing so destroyed towns and families, so be it. It’s just the joy of capitalism in this dog-eat-dog world.
Except only gold-plated dogs were invited to the fight, and the dog-handlers heard the whispers on Wall Street long before they trickled down to Main Street giving them an unfair advantage.
Or took over threatened banks that still had some value, more if there was a bailout.
Bailouts mean money for the customers so that should be a good thing, to make them whole? But look at where the money comes from, ultimately our tax dollars. And who does the money really benefit?
The myopia of the decision-makers’ focus on preventing further bank runs too often leads to subsidizing the well-heeled executives whose bad decisions drove the bank into the ground in the first place and the investors who ought to be prepared for losses when playing the roulette wheel of venture capitalism or the stock market. Not the customers, not ordinary Americans.
How to stop these leeches?
The day-to-day financial structure of this country is as much part of our infrastructure as power grids and sewer systems. It should not, and nor should they, be monetized.
If people with the wherewithal to gamble on capitalism want to, so be it. But it’s time to demand our government decouple Wall Street and exoteric investment vehicles from consumer banking, from basic savings and loans, from payroll and pensions.
And create stiff oversight for venture capitalism and hedge funds to ensure that they cannot tear down the fundamental base of America’s businesses and workforce.
To do so will probably necessitate all levels of government divest themselves from the power of lobbying. So be it.
(Liz Amsden is a contributor to CityWatch and an activist from Northeast Los Angeles with opinions on much of what goes on in our lives. She has written extensively on the City's budget and services as well as her many other interests and passions. In her real life she works on budgets for film and television where fiction can rarely be as strange as the truth of living in today's world.)