How much money do these big banks owe you?

I originally posted this a couple of months ago. We still need to break up the banks and we are still owed money so, I thought I would re-post.

Last week, the Bureau of Labor Statistics released the employment report showing that 162,000 jobs were added in the month of March. Republicans look for the bad in the numbers, the Democrats look for the good and the reality was somewhere in the middle. It is nice that the economy has started adding jobs. The economy has added jobs three out of the last four months, yet we’re still in a huge jobs hole. In order to get the unemployment rate of 9.7% back down to the pre-recession rate of 5.0%, we need at least 11 million jobs. At our current rate it will take a 67 months to create 11 million jobs, just over five years. Who is willing to wait for five years?

I’m in the middle of reading Michael Lewis’ book, The Big Short. The whole subprime mortgage market was a big scam. These Wall Street banks would come up with new and exciting ways to entice people who could not afford a house to take out a mortgage on a house. As far as I know, it wasn’t illegal but it was unethical. The system was predicated on rising housing values. As long as the housing values rose, the folks with adjustable mortgages would simply refinance. (Many of us worry about the cost of refinancing, but those costs were waived in many of these subprime mortgages.) I’m still trying to figure out the purpose of derivatives. It seems like the purpose of derivatives is to hide the true risk and value of a particular security or commodity. It is like using Photoshop to morph me into Denzel Washington. That’s just wrong. If you are looking for Denzel and get me, I guarantee that you are going to be pissed!! Probably the only thing more deceptive and deceitful than derivatives would be these CDOs (collateralized debt obligations), which are nothing more than bundled derivatives. So, just in case you were able to figure out what was in a particular derivative, it became nearly impossible to figure out what was in the CDO. The big banks would then get a credit rating agency like Moody’s to put their AAA stamp of approval on these heaps of garbage. Then they would sell these heaps of garbage to your pension fund and my mutual fund. Funds would buy these things because they were AAA rated by S&P or Moody’s.

So, back to my original question, how much do these big banks owe you and me? When Lehman Brothers, Bear Stearns and Merrill Lynch began to implode in 2008, you and I came to the rescue. The government, using our money, decided that these guys were too big to fail (except for Lehmans, the government let them fail). Failure would’ve caused a catastrophic collapse of our financial system that’s what we were told. So, we reached deep into our pockets and pulled out hundreds of billions of dollars. Over the last several months, many of these banks have been paying back a large chunks of the billions of dollars we lent them. Once they pay all of the $700 billion back, are we square? My answer is no.. not even close. This guy (Andrew Haldane) over the Bank of England calculated that the irresponsibility of these large financial firms has cost the world approximately $4 trillion. When you think about job layoffs, businesses that had to close because the credit markets all froze up, the loss in value of retirement plans, yup… $4 trillion sounds about right.

The big question is how do we collect? It is clear that they owe us. I don’t think that we will ever get paid. I don’t think that we will ever get back the money that we lost because of their incompetence, arrogance and stupidity. The one thing that we can do is to make sure that this never happens again. We have to break up the banks. I don’t think that breaking them up into large chunks is a good idea. We need to break them up in such a way that they can fail without jeopardizing our economy. According to Robert Reich, $100 billion should be the upper limit. Okay, I can agree with this number. It is arbitrary. The loss of $100 billion is not going to bring down our economy. I like the number. (I also want to get rid of credit default swaps and derivatives need to be regulated, as do these huge pools of money called hedge funds.) So, it’s time to push Congress, and especially the Senate, towards better regulation and breaking up these huge banks and financial institutions.

0 Responses

  1. ECT: These Wall Street banks would come up with new and exciting ways to entice people who could not afford a house to take out a mortgage on a house. As far as I know, it wasn’t illegal but it was unethical.

    First, Happy Memorial Day.

    Second, still don’t follow your logic. What was the motive giving away money to people who can’t repay? Yea, it’s not illegal, maybe unethical but certainly stupid.

    Third, I guess that when you are talking about Wall Street, you don’t mean Lehman or AIG? My understanding is that they aren’t mortgage lenders.

    Fourth, CDO is an insurance policy against mortgage default so for Lehman and AIG to hand out to insurance against defaulting to risky borrowers is silly. Kinda like give life insurance to the member of the Hemlock Society. The insurance policies helped the lenders but did leave AIG and Lehman et al on Wall Street holding the bag.
    Finally, at least the Wall Street firms have become paying us back. Fannie Mae and Freddie Mac are still losing and “borrowing” money.

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Errington C. Thompson, MD

Dr. Thompson is a surgeon, scholar, full-time sports fan and part-time political activist. He is active in a number of community projects and initiatives. Through medicine, he strives to improve the physical health of all he treats.


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