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Wednesday May 12, 2010 - 17:07:32 GMT
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Big Banking...Riches to Rags and Back Again (FXA)

Big Banking...Riches to Rags and Back Again


In case you missed the very loud reminder from Bloomberg today on a perfect quarter of earnings for the largest US banks thanks in large part to ZIRP from the Fed – a gift by any other name and not a gift made from choice based on love.  No the Fed is handing this one over like a divorced dad strapped with a huge alimony payment.   


Don’t get me wrong.  I like bankers and banking…it is what I do in a reduced state…sell content to banks and investors.  Not all bankers are responsible for what happened in 2007-2009 and not all banks participated in the subprime frenzy to the same extent.  And yes GSE’s played a key role in getting a market up and running for unqualified homeowners.  And yes between GSE’s and banks, Congress was thoroughly bought off by this scam and because it was so socially equalizing not even the Fed and regulators could see it  (more like wanted to see it) for what it was. 


So now that we are a year plus out of the crapper and banks are money printing machines (not credit creation machines), we should have little doubt that Washington’s answer to the financial crisis that nearly brought down everything in late 2008 and early 2009 was to hit the restart button.  As I have said before Treasury Secretary Geithner is on record stating that the goal of the White House regarding banking crisis was to get banks back on their feet before taking up fin reg.  This view, while not so publicly, was shared by the Fed…really sponsored by the Fed.  Indeed it is very possible that ZIRP will reach the 2-year mark this fall.  I like to think my 4 year old daughter is above average in intelligence…okay way above…is there a dad out there who thinks differently about a child who appears gifted?  My point is that even if my daughter, emotionally adjusted, is average, she at her age could produce a perfect quarter of earnings if the cost of funding was near zero, the availability of funds available at near zero cost approaching infinity and with the US Treasury curve upward sloping (3.56% yield on the 10-year…say a risk free 350bps return).  This is not banking my friends, nor risk taking.  This is a federally sponsored license to print profits. 


I am grateful that banks have paid back TARP (well most have…few have not).  But TARP is the tip of the iceberg of government subsidies.  ZIRP is the iceberg.  Has any bank executive called for the Fed to raise rates?  Biz is awesome.  They all say customer activity is returning.  Even problem commercial loans are stabilizing (even in real estate).  They say delinquencies are slowing.  And they are chalking up record profits.


We went into the crisis with a major flaw in the system…moral hazard or too big to fail.  Well the 13 too big financial firms are now down to 6.  By my count that means the moral hazard problem has been doubled not reduced.


Now that Geithner and others feel the system can stand on its own (with ZIRP bionic legs) and fin reg is back on the front burner, all we hear from the banks (bank execs) is how government is overreaching and unintended consequences.  No doubt there is truth in this cry.  But there is also the question of what else would any reasonable person think after what happened and after the Fed underwrote bank profitability to allow banks to be thoroughly impressed with themselves like weight lifters at the gym standing in front of the wall of mirrors. 


Let’s look back in US history to the early 20th century when vertical monopolies had about sunk capitalism…the then US president was a Republican named Teddy Roosevelt.  He came down a lot harder on the likes of large business combinations that threatened the economy and were largely seen as generating huge income inequality for the day.  Roosevelt was partly elected on the premise he would be a friend of business.  Instead he was a “trust buster” using his Justice Department to file 44 suits against the largest businesses including Morgan Guaranty, Standard Oil, Carnegie Steel and American Tobacco Company.  He said at the time he was more interested in regulating business not breaking up large companies, but quickly Roosevelt was no longer seen as a friend of business.  What would Teddy Roosevelt do if he were president today with the banks?   Somehow I think they might be feeling a whole lot more government intrusion than anything seen to date in this country or anywhere else on the planet.


I don’t believe in marching on Wall Street with torches and pitch forks alongside the wing nuts of the left and right.  But I do take offence at the entitlement bank executives appear to embrace in the face of a massive and ongoing bailout from the US government…and yet time and again aligning with the political side that claims big government (the same big government that saved their behinds) is the root of all evil in the economy.  


Government is big, ugly and inefficient (even the military…why it gets a free pass is beyond me…especially in time of war when bills are largest).  But bankers and plain folks like those along the Cumberland River in Nashville or the shrimpers in Port Fourchon, Louisiana rightly turn to the government when there is an emergency.  And usually the government is there.  How could we come through what we did with it being any different?    As clumsy and overreaching (and unintended consequences) as government can be, anything less than this would be the equivalent of leaving BP, Halliburton and Transocean to clean up the Gulf oil spill.   How about some humility from the masters of the universe running the largest financial institutions…they should be telling their accountants to find ways to reduce profitability, not waving record earnings on ZIRP in everyone’s face and calling that masterful stewardship.


David Gilmore



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