The Most Fun I Never Want To Have Again: A Mid-Life Crisis in Community Banking


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WHAT HAPPENS DURING A MID-LIFE CRISIS?

Data Rooms Login. Site Map. January 1. About Us. Contact Us. Cumming, GA info coldriverdev. Web design by Make it Loud, Inc. But in — arguing that banks were losing profits on cash parked at the Fed — regulators agreed to make small interest payments on the money. In theory, there should never be much money in such reserve accounts, because any halfway-competent bank could make far more money lending the cash out than parking it at the Fed, where it earns a measly quarter of a percent.

That means there was suddenly more money sitting uselessly in Fed accounts than Congress had approved for either the TARP bailout or the much-loathed Obama stimulus. Instead of lending their new cash to struggling homeowners and small businesses, as Summers had promised, the banks were literally sitting on it.

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Nothing, that is, except earning a few crumbs of risk-free interest for the banks. Put another way, banks are getting paid about as much every year for not lending money as 1 million Americans received for mortgage modifications and other housing aid in the whole of the past four years. Moreover, instead of using the bailout money as promised — to jump-start the economy — Wall Street used the funds to make the economy more dangerous.

Other banks found more creative uses for bailout money. As it turned out, however, about a third of the companies that took part in the program used at least some of the money to repay their original TARP loans. Small banks that still owed TARP money essentially took out cheaper loans from the government to repay their more expensive TARP loans — a move that conveniently exempted them from the limits on executive bonuses mandated by the bailout. If anything, the bailouts actually hindered lending, as banks became more like house pets that grow fat and lazy on two guaranteed meals a day than wild animals that have to go out into the jungle and hunt for opportunities in order to eat.

The biggest drop in lending — 3. It just flooded the banking system with billions for the banks. Soon after TARP passed, Paulson and other officials announced the guidelines for their unilaterally changed bailout plan. Although Paulson claimed at the time that handing money directly to the banks was a faster way to restore market confidence than lending it to homeowners, he later confessed that he had been contemplating the direct-cash-injection plan even before the vote.

This, at the core, was the entire justification for the bailout: That the huge infusion of taxpayer cash would not be used to rescue individual banks, but to kick-start the economy as a whole by helping healthy banks start lending again.

But right after the bailouts began, soon-to-be Treasury Secretary Tim Geithner admitted to Barofsky, the inspector general, that he and his cohorts had picked the first nine bailout recipients because of their size, without bothering to assess their health and viability. Paulson, meanwhile, later admitted that he had serious concerns about at least one of the nine firms he had publicly pronounced healthy.

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And in November , Bernanke gave a closed-door interview to the Financial Crisis Inquiry Commission, the body charged with investigating the causes of the economic meltdown, in which he admitted that 12 of the 13 most prominent financial companies in America were on the brink of failure during the time of the initial bailouts. On the inside, at least, almost everyone connected with the bailout knew that the top banks were in deep trouble. This early episode would prove to be a crucial moment in the history of the bailout. It set the precedent of the government allowing unhealthy banks to not only call themselves healthy, but to get the government to endorse their claims.

Projecting an image of soundness was, to the government, more important than disclosing the truth. In doing so, they created a bizarre new two-tiered financial market, divided between those who knew the truth about how bad things were and those who did not.


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Only weeks after Paulson and Co. In the heat of the crisis, just as Citi was receiving the second of what would turn out to be three massive federal bailouts, the bank inexplicably enjoyed a three rating — the financial equivalent of a passing grade. The sweeping impact of these crucial decisions has never been fully appreciated.

In the years preceding the bailouts, banks like Citi had been perpetuating a kind of fraud upon the public by pretending to be far healthier than they really were. In some cases, the fraud was outright, as in the case of Lehman Brothers, which was using an arcane accounting trick to book tens of billions of loans as revenues each quarter, making it look like it had more cash than it really did.


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  • The whole financial sector, in fact, had taken on Ponzi-like characteristics, as many banks were hugely dependent on a continual influx of new money from things like sales of subprime mortgages to cover up massive future liabilities from toxic investments that, sooner or later, were going to come to the surface. Now, instead of using the bailouts as a clear-the-air moment, the government decided to double down on such fraud, awarding healthy ratings to these failing banks and even twisting its numerical audits and assessments to fit the cooked-up narrative.

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    The government did wind up conducting regular stress tests of all the major bailout recipients, but the methodology proved to be such an obvious joke that it was even lampooned on Saturday Night Live. Such meaningless parodies of oversight continue to this day. Earlier this year, Regions Financial Corp. State hands over taxpayer money to functionally insolvent bank; state gives regulatory thumbs up to said bank; bank uses that thumbs up to sell stock; bank pays cash back to state.

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    Through behavior like this, the government has turned the entire financial system into a kind of vast confidence game — a Ponzi-like scam in which the value of just about everything in the system is inflated because of the widespread belief that the government will step in to prevent losses. But the market is behaving as if Daddy will step in to once again pay the rent the next time any or all of these kids sets the couch on fire and skips out on his security deposit. And while the signs of growth and recovery in this new faith-based economy may be fake, one aspect of the bailout has been consistently concrete: the broken promises over executive pay.

    But there were all sorts of ways around the restrictions. They could get bailouts through programs other than TARP that did not place limits on bonuses. Or they could simply pay bonuses not prohibited under TARP. TARP did indeed bar big cash-bonus payouts by firms that still owed money to the government.

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    But those firms were allowed to issue extra compensation to executives in the form of long-term restricted stock. We actually allowed them to pay bigger bonuses than they otherwise could have. Companies like AIG, GM and Citigroup, for instance, were given tens of billions of deferred tax assets — allowing them to carry losses from forward to offset future profits and keep future tax bills down. The bailout, in short, enabled the very banks and financial institutions that cratered the global economy to write off the losses from their toxic deals for years to come — further depriving the government of much-needed tax revenues it could have used to help homeowners and small businesses who were screwed over by the banks in the first place.

    Yet that funding was never disclosed to shareholders or taxpayers, a fact Goldman confirms. Meanwhile, at the same moment that leading banks were taking trillions in secret loans from the Fed, top officials at those firms were buying up stock in their companies, privy to insider info that was not available to the public at large.

    The implications here go far beyond the question of whether Dimon and Co. We will lie for you and let you get away with just about anything. We will make this ongoing bailout a pervasive and permanent part of the financial system. And most important of all, we will publicly commit to this policy, being so obvious about it that the markets will be able to put an exact price tag on the value of our preferential treatment.

    By the second quarter of , however, once the bailouts were in full swing, that spread had widened to 0. Today the borrowing advantage of a big bank remains almost exactly what it was three years ago — about 50 basis points, or half a percent. Why does the market believe that? Because the officials who administered the bailouts made that point explicitly, over and over again.

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    That psychological signaling, he concludes, is responsible for the crucial half-point borrowing spread. The inherent advantage of bigger banks — the permanent, ongoing bailout they are still receiving from the government — has led to a host of gruesome consequences. All the big banks have paid back their TARP loans, while more than smaller firms are still struggling to repay their bailout debts. Even worse, the big banks, instead of breaking down into manageable parts and becoming more efficient, have grown even bigger and more unmanageable, making the economy far more concentrated and dangerous than it was before.

    A recent study by the Kansas City Fed found that it would take 70, examiners to inspect such trillion-dollar banks with the same level of attention normally given to a community bank. Brown, who is drafting a bill to break up the megabanks.

    The Most Fun I Never Want To Have Again: A Mid-Life Crisis in Community Banking The Most Fun I Never Want To Have Again: A Mid-Life Crisis in Community Banking
    The Most Fun I Never Want To Have Again: A Mid-Life Crisis in Community Banking The Most Fun I Never Want To Have Again: A Mid-Life Crisis in Community Banking
    The Most Fun I Never Want To Have Again: A Mid-Life Crisis in Community Banking The Most Fun I Never Want To Have Again: A Mid-Life Crisis in Community Banking
    The Most Fun I Never Want To Have Again: A Mid-Life Crisis in Community Banking The Most Fun I Never Want To Have Again: A Mid-Life Crisis in Community Banking
    The Most Fun I Never Want To Have Again: A Mid-Life Crisis in Community Banking The Most Fun I Never Want To Have Again: A Mid-Life Crisis in Community Banking

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