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In U.S. Monetary Policy, a Boon to Banks

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The most pronounced development in banking today is that executives have become bolder as their business has gotten worse.

The economy is clearly weaker than expected, and housing prices are falling throughout the land, eroding bank asset values. Yet regulators are on their heels in Washington as bankers and their lobbyists push back against the postcrisis regulations, even publicly condemning the new rules.

In a well-covered exchange, Jamie Dimon, JPMorgan Chase's chief executive, challenged Ben S. Bernanke, the Federal Reserve chairman, about the costs and benefits of the Dodd-Frank rules. More attention has been paid to the banker's audacity, but the response of the world's most powerful banking regulator was more troubling. Mr. Bernanke scraped and bowed in apology without mentioning the staggering costs of the crisis the banks led us into.

So this is a good occasion to step way back to understand just how good the banks have it today.

The federal government, in ways explicit and implicit, profoundly subsidizes and shelters the banking industry. True since the 1930s, it is much more so today. And that makes Mr. Dimon no capitalist colossus astride the Isle of Manhattan, but one of the great welfare queens in America.

The protection is so well established that we barely notice it anymore. The government supervises bank activities and guarantees deposits. When people walk into a bank, they assume it is as safe as their local supermarket.

Banks are also the mechanism through which we express economic policy, especially as fiscal stimulus has been eliminated as an option. The result is that the government pays a "vig" to banks in order to reach its policy goals.

When the Federal Reserve lowers interest rates to help buoy the economy during a slowdown, banks are the first beneficiaries. As the Fed lowers short-term rates, banks borrow cheaply and lend out for a lot more, making any new lending highly profitable (assuming the banks make good loans). This is classic monetary policy, and supported nearly universally. But let's not pretend that it isn't a boon to banks.

Some think bolstering banks' fortunes is a major goal, not a side effect.

"The Fed not only wants to stimulate the economy but also to recapitalize the banks, and this is a stealth technique to do it," said Herbert M. Allison Jr., a former investment banker who has turned banking apostate in a new white paper called "The Megabanks Mess," published as a Kindle Single. The reason "banks aren't doing more lending is that they still hold a lot of troubled assets that tie up equity."

Then there are the more subtle subsidies and protections. Take regulatory forbearance. In 2009, regulators gave banks a gift on their commercial real estate loans. They allowed banks to look primarily at whether the loans were current, rather than at whether the underlying value of the property had declined. Of course, given the commercial real estate collapse, this had the effect of protecting banks from write-downs.

Banks and regulators say this is justified because an underwater borrower isn't necessarily going to default. True, but it's hard to see how those borrowers -- and therefore the banks -- are better off for the crash in their collateral.

Commercial real estate is the least of it. The government is profoundly subsidizing the housing market, too. Hardly a loan gets made today by a bank that isn't guaranteed by either Fannie Mae, Freddie Mac or the Federal Housing Administration. There is no subprime mortgage business outside of the F.H.A. When banks make mortgages and sell the credit risk to the government, they make a quick, safe profit.

The first effect of these policies, for better or worse, is to keep a floor under the housing market. But it also helps banks that own trillions in real estate assets that the government is propping up.

Another way taxpayers coddle the biggest banks is by implicitly guaranteeing their derivatives business. JPMorgan, widely viewed as safe and well managed, is a huge beneficiary here. It had $79 billion worth of derivatives on its books in the first quarter. Even if it's hedged, prudent and has thin margins, it's still going to throw off a nice chunk of profits.

Institutions on the other side of these trades wouldn't enter contracts without believing that they have some underlying protection — protection that comes from the government.

"No sensible person would put a nickel on deposit in the normal course given the enormity and opacity of the derivatives portfolios," said Amar Bhidé, a former trader and business professor at the Fletcher School. "It's entirely a function of deposit insurance and the implicit guarantee that the JPMorgan counterparties have."

The government's actions in the financial crisis only cemented that certainty. Counterparties and investors that were previously not guaranteed, like holders of money market funds, were protected at every turn.

This bailout never ended. "In effect, we nationalized the biggest banks years ago," Mr. Allison said. "We implicitly guaranteed them. The taxpayers are still the ultimate owners of the risk in those banks -- they just don't get equity returns for that ownership."

So when taxpayers hear a bank chief, like Jamie Dimon, complaining, it's worth keeping in mind that his 10-figure paycheck is largely coming courtesy of us.

The behavior of these criminals is in no way surprising. It has long been the method of the more educated criminal to not only adopt the strategy of deny, deny, deny but to go on the offensive.

The result, when dealing with an ineffectual opponent such as the Fed/SEC/DOJ, is that they kowtow and spend their time replying rather than regulating and/or prosecuting.

Dodd/Frank is a joke at best and they have the balls to squeal like schoolchildren at what little was accomplished.

In the end one simply has to follow the money to understand the behavior on both sides and to realize that it will apparently take a great deal more than the likes of the “Great Recession” to get peoples attention. It will also take a great deal more to educate the voters and secure good government.

Richard McDonough

June 29, 2011, 4:28 p.m.

Of course it is a boon for banks.  Look at who owns the congress, look who was chosen by the present and past administrations to undersee the financial industry.

Come on!!

Gunther Steinberg

June 29, 2011, 4:50 p.m.

Having gotten away with their unsocial and damaging business practices, being bailed out by the tax payers, the banks still have the gall to complain.
All this while the Fed keeps interest rates low, which leaves the people who save with negative interest rates. Banks are profitable, though some still have the fruits of their fraudulent lending on their hands. They do not lend to the average citizen, but sock it to all account holders with fees and penalties.

They still have more influence than the rest of the population. They should be most fortunate that no criminal cases have been brought yet relative tot heir lending and foreclosure practices .

The Fed and Congress need to stand up for the rest of us. But unfortunately, most seem to be up for sale with the next election coming up and the need for for campaign funds.

Lord help the little people. We the little ones are becoming more and more each day slaves to the Corporatocracy. What bold steps can we use to fight back?

GWB and company should have never given investment firms the “bank status” which crowned them eligible for taxpayer’s future funding.

They are protecting their goose that lays their golden eggs. Unless the public buys better lobbyist we do not stand a chance. Unless we get rid of the creeps that fold to these special interests.
But that would take effort, so most of the public will not do it. As long as they get there meager pittance the ruling elite can continue to rape and pillage with reckless abandon. Their contempt for taxpayers is huge. They think we are stupid, because we act stupid. They divide us into democrat and republican, then divide and conquer. Us against them ad they are winning BIG!

John Henry Bicycle Lucas

June 29, 2011, 6:50 p.m.

I wondered about all the FHA, Feddie Mac and Fannie Mae loans when all of these current national fiscal problems began. This article seems to answer a lot of questions that I had then, along with the rest of puzzles of our economy it has become a lot clearer to me.

What we actually have is a capatalist banking system, backed by a socialist system, that benefits a limited number of people, that the rest of the taxpayers support.

The banks now seem to want to restrict loans to fewer people and businesses. For the life of me, I can’t understand why the banks will not loan money on forclosures so that they can get some value out of the properties they are holding with BANK FORECLOSURE signs out front. Any revenue that could be gained from these loans would be better than nothing, or actually costing them money. No wait, costing us taxpayers money…

So our government took our money, and bailed out the financial institutions, without any assurances that it would benefit the taxpayer in future loans, so they could restrict loaning money back to those that got left holding the bag on the whole fiasco. (Yes, that is you, Mr. Taxpayer)

When all the meetings and hearings take place, all the taxpayer actually is hearing is a lot of blaming and fingerpointing. No real ideas on how to identify and solve this problem without colapsing the entire economic structure of this country, other than printing more money!

The sad part is, that some brilliant economist were screaming to all that would hear, that this problem was bearing down upon us.
A conspiracy? Uh, no, I don’t think there is enough collective brainpower is Washington to pull one off!

The longer I live, the more I believe in this humorism, “The difference between stupidity and genius is that genius has it’s limits!”

I certainly Pray that we will still recognize this country after twelve years of ineffective leadership.

The total corruption of the system is revealed by the virtual lack of Federal CRIMINAL FRAUD prosecution against ANY major investment banking figure.

Somebody help me see how this ends without a complete collapse.  Government distorts and screws up every market it touches.

Heres one mans solution to being damaged by fraudulent Banks, a customer of BANK of HAWAII has palced a nearly 10 Billion dollar International Commercial Lien of Bank of Hawaii for being defrauded. This is the second claim of fraud for the Bank of Hawaii this year.It recently paid a settlement of 50 million for delying deposits so it could collect more on over draft fees.  see lien here getnotice.info/pbl.html
Lien holder says he will move to put Bank of hawaii into a chapter 7 case to protect his interest in the bank which equals the Banks admitted assets.
Its my understanding several of the largest shareholders are now in a bidding war to purchase the lien in an attempt to aquire shares of which 75% are held by the bank at a discount price.

Thank you for putting this into print.  The message will only get across to those in denial if they read it over and over and over.  Our Banking executives speak and act as if they are the smartest people on earth and that they and they alone are what foster their success.  In reality, the US government has fostered the success of banks as they protect executives from criminal liability for all the illegal actions their firms engage in.

Jamie Dimon, Lloyd Blankfein, John Mack and several others deserve a spot in jail.

The author should’ve also mentioned the following measures taken by the regulators post crisis:

Billions of dollars of corporate bonds guaranteed by the FDIC with an interest rate at less than 3% for ten years.

More billions of dollars loaned to big banks at the low rate of .25 percent then the banks loan it back to the Treasury at 3 or more percent for ten year Treasury bonds.

The Federal Reserve purchasing Treasuries from the big banks instead of directly from the Dept. of the Treasury during two phases otherwise known as QE and QE II. How much did the big banks make in commissions on trillions of treasury bond purchases from their market making depts?

The people that run the big banks are in over their head otherwise these welfare grants would not have to be rendered. 

Obama, et al should’ve nationalized them when they had the chance.  The US taxpayer, as the author quotes Mr. Allison,  is still on the hook for their losses but do not share in the profits.  This is crony capitalism at its worst.

Using RICO against one of the banks that fooled its customers into buying junk would buy 5 years of compliance. Rinse, repeat in 2016.

Can you elaborate on “implicitly guaranteeing their derivatives business”?  Just seems like a vague assertion and not sure how that does or doesn’t reconcile with the Lehman bankruptcy. 

I think comparing Jamie Dimon to a “welfare queen” is pretty stupid.  It makes you look childish and petty.  Lets be honest, Jamie Dimon is more accomplished than you or I will ever be.  He is a capitalist who operates in a highly regulated industry. The way you are using the term “welfare queen”, every American who takes a tax deduction is one.  It’s just needless rhetoric and serves no purpose to use the term in the article.  Why make it personal?  Thoughtful people see it for what it is—substituting hyperbole for analysis when the writer is too stupid or lazy to make a real argument. 

Also, I think the article is fairly weak overall.  The logic seems to be pretty incoherent:  Because the FDIC guarantees deposits, what Jamie Dimon says about Dodd-Frank has no credibility?  Really? 

You essentially admit that your logic is baseless : “This is classic monetary policy, and supported nearly universally. But let’s not pretend that it isn’t a boon to banks.”  Why not explore whether some of their criticisms to Dodd-Frank fall into the same category—something that is beneficial to banks but good policy as well?

@Timmy-“Why make it personal? Thoughtful people see it for what it is—substituting hyberpole for analysis when the writer is too stupid or lazy to make a real argument.”
My oh my aren’t you the thoughtful one. Evidently you are unaffected by all the criminal actions of these bankers. At the least I presume you enjoy paying for all their misdeeds with your tax dollars. Your praising them is very evident of who and what you worship. You must be very proud of yourself.

@Roy—Please specify what actions Jamie Dimon has done which constitute a crime, along with the associated law.  Sincerely, the Reality-Based Community

@timmy,  because it is personal

Mr. Eisinger,
We don’t need to be told that we’re always - not just now and then when they get themselves inot trouble, but always - bailing out the banks. By virtue of long-established, permanent policies designed to do just that. What else is new? Given the fact that Wall St.+ Big Biz owns “our” government, what else would one expect?

The purpose of your piece is to describe those bank-friendly policies and, on the whole, i think you’ve done a pretty good job. But you could have done a better job if you had d-jargonized it.

To cite just one example,  what does the sentence “troubled assets that tie up equity” mean?  We all know that “troubled (aka, toxic) assets” are bad, but what’s this “equity’ that gets “tied up” and how doees it prevent banks from lending? Please explain. In plain English.

Nor do i understand “(JPMorgan) had $79 billion worth of derivatives on its books in the first quarter. Even if it’s hedged, prudent and has thin margins, it’s still going to throw off a nice chunk of profits.”

First of all, to ignoramuses like me a derivative is dy/dx, where y(x) is ..., oh, never mind. And what’s its margin? And how is it “hedged”?

I’m sure some of your readers know - or pretend to know - what this gobbledygook means but I don’t. Nor do I understand why you, or any other writer, has the right to expect me to understand it. Moreover,  since one purpose of financial jargon is to conceal financial hanky panky from us ignorant peasants, you should take pains keep it out of
articles whose very purpose is to expose that hanky panky.

Dan Archer,  I enjoyed your post and could not agree with it more.

About the only power you have is to take all your money out of these taxpayer supported scams.  Government is bought an paid for by the bank lobby.  They will not get rich on my deposits, and the government will not need to cover the loss of my deposits when/if their risky bets go bad again.  I put my money in a credit union.  Better offerings and service, more respect, and any profit is folded back into the business (owned by me and the other members!).  And they don’t risk your money on risky trading that punishes the taxpayer if it goes bad and lines the pockets of top execs, whether or not the bets go bad.  Feels great to do my part.

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Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)