You�re Welcome, Wall Street
The New York Times (Link) - William D. Cohan (April 19, 2010)
In a 1964 concurring opinion deciding Jacobellis v. Ohio, Associate Supreme Court Justice Potter Stewart wrote about �hard-core pornography� and his struggle to define it: �Perhaps I could never succeed in intelligibly doing so. But I know it when I see it.�
Using Potter�s indisputable logic, it�s hard not to see something obscene in how Wall Street reaped massive profits and bonuses in 2009 � and continues to do so, as is clear from Monday�s announcement by Citigroup that it had earned $4.4 billion in the first quarter of 2010, which was even more than earned by Bank of America ($3.2 billion) and JPMorgan Chase ($3.3 billion) in the same period � merely 18 months after trillions of dollars of American taxpayers� treasure was used to save a financial system brought to the precipice by Wall Street�s greed and irresponsible risk-taking. Goldman Sachs, which is facing a civil fraud suit filed by Washington regulators, is expected to report robust earnings Tuesday morning as well.
How did this happen at the same time Main Street continues to suffer from an unemployment rate of almost 10 percent and from the worst recession in generations? Partly, this resulted from the original strategy of the Treasury and the Federal Reserve to first fix the banking system and then worry about repairing the wider economy. Hence, the $700 billion Troubled Asset Relief Program arrived in September 2008, followed by, in February 2009, the $787 billion stimulus program, or American Recovery and Reinvestment Act.
The benefits for Wall Street started with the extensive de-leveraging that continues the world over in the wake of the financial crisis (it caused) by helping companies raise new equity and refinance existing debt. The Wall Street firms that survived the crisis reap billions of dollars in fees for this sort of work. Mostly, though, Wall Street is making money by taking advantage of its rock-bottom cost of capital, provided courtesy of the Federal Reserve � now that the big Wall Street firms are all bank holding companies � and then turning around and lending it at much higher rates.
The easiest and most profitable risk-adjusted trade available for the banks is to borrow billions from the Fed � at a cost of around half a percentage point � and then to lend the money back to the U.S. Treasury at yields of around 3 percent, or higher, a moment later. The imbedded profit � of some 2.5 percentage points � is an outright and ongoing gift from American taxpayers to Wall Street.
And now for the truly obscene part. By keeping interest rates so stubbornly low � and by remaining committed to doing so � the Fed is crushing the rest of us, especially senior citizens on fixed incomes and those who have rediscovered saving in order to have some peace of mind.
For instance, despite my bank calling it a �premier platinum savings� account, I am getting a measly 0.15 percent interest rate. On my �premier platinum checking� account, the interest rate is 0.01 percent. In an essay in The Wall Street Journal recently, Charles Schwab pointed out that there is more than $7.5 trillion in American household wealth stored in short-term, interest-bearing checking, savings and CD accounts. (The average interest rate for a one-year CD is 1.3 percent.)
Our savings is another source of virtually free capital for banks to use to lend out at much higher rates. These anemic yields are a �potential disaster striking at core American principles of self-reliance, individual responsibility and fairness,� Mr. Schwab observed correctly.
Sure seems to be working for Wall Street, though. At $140 billion in compensation and benefits, the 2009 paychecks on Wall Street were the best ever. While several top executives named in public filings may have tried to minimize their 2009 compensation after so much populist rage, they could only take this charade so far.
Hedge fund managers did even better. The top 25 earned a total of $25.3 billion in 2009 � an average of $1 billion each � with the lowest paid hedge-fund manager receiving $350 million. Topping the list was David Tepper, of Appaloosa Management. He made $4 billion last year. �We bet on the country�s revival,� Mr. Tepper said in an interview with The Times.
Let�s be clear about one thing: The American people made a bigger bet on the country�s revival than did Mr. Tepper. But we are still waiting for our payoff. Surely Justice Stewart could see that the tax on American savers and the corresponding subsidy to hedge-fund managers, bankers and traders is nothing less than hard-core pornography.