Elizabeth Warren Warns: Taxpayers Are "Involuntary Investors" in "Shaky" Banks, Risk-Taking Firms

Wednesday, 25 November 2009 12:50 By Art Levine, t r u t h o u t | Report | name.

 Elizabeth Warren Warns: Taxpayers Are "Involuntary Investors" in "Shaky" Banks, Risk-Taking Firms
(Image: Lance Page / t r u t h o u t; Adapted: Steve Wampler, epicharmus)

As financial reforms face new delays in Congress, the chair of the Congressional oversight panel on the TARP program, Elizabeth Warren, told Truthout Tuesday that the nation's financial institutions still pose major risks for taxpayers - and the economy.

She declared, "The rules that got us into this financial crisis have not yet been changed." Meanwhile, she said, "The too-big-to-fail institutions are bigger, the banking industry is more concentrated and the toxic assets remain on the books of the banks. Worse yet, the implicit government guarantee that let big companies take on high risks, then keep all the rewards if they succeed and get taxpayer bailouts when they failed, are even stronger than they were a year ago."

She added, "In other words, we are now operating under a set of rules that have proven to be disastrous, but we have not changed them."
 
She also noted the risks to taxpayers who have bailed out banks that are still holding on to so-called toxic subprime mortgages and are using government funds to help offset those losses. "Basically, the American taxpayer becomes an involuntary investor in shaky banks because they hold onto taxpayer dollars rather than make loans," she noted.
 
Her concerns take on added urgency as sweeping financial reforms proposed in both the House and Senate face a buzz-saw of industry opposition that's already carved out important loopholes, despite some legislative progress being made. Another roadblock: fights over health care and rising Congressional anger over unemployment that have pushed back the timetable for financial reform. As TPMDC headlined last week, "Trouble Ahead For Obama? Congress In Chaos Over Economy," citing news reports:

President Obama is facing an uprising from some of his allies in Congress over the economy. The Washington Post reports on "a wave of criticism and outright anger directed" at the White House as unemployment numbers continue to rise.

Many of the strongest critics are among Obama's strongest allies on the Hill, and the growing furor threatens to derail Obama's plan to reform the financial sector.
On top of all that, leading economic experts and some former federal regulators are pointing out the dangers of potential economic "bubbles" and risky speculation. Critics such as William K. Black, a former official at the Federal Savings and Loan Insurance Corporation who helped expose the S&L scandal, point to dicey trading in fuel, food markets, Asian real-estate, securities and the Brazillian economy that could, they fear, eventually pave the way for another worldwide crash.
 
And, this time around, much of it's being underwritten by American taxpayers. "If they win big, they keep the winnings," Black notes. "And if they lose, the taxpayers pay."
 
All that trading also poses deeper risks to national economies and even lives. In the meantime, for instance, the fuel futures trading by a Citicorps huckster enabled him to snare $100 million in fees this year for speculating in oil. Black points out, "If they win in energy speculation, it's terrible for us as a nation, because fuel costs rise."
 
Worse, "if you do it with food, it's inconvenient for those in the US, but globally it kills poor people," Black said. Indeed, earlier this year, a coalition of humanitarian, global rights and development groups wrote a letter to President Obama, as its statement said, "requesting decisive support for efforts to wring out excess speculation in agricultural futures markets that threatens the food security of hundreds of millions of people." The culprits, the appeal said, were familiar ones: "A significant part of last year's food price fluctuations were the result of excessive speculation in the commodities markets by the very hedge funds and investment banks that helped create the current economic meltdown."
 
So let's total up the ledger for Wall Street. On the plus side, some of the companies are rolling in huge profits and will be paying $140 billion this year to employees of leading Wall Street firms. Then there's the downside: their role in causing a worldwide economic collapse, taking trillions of US taxpayer dollars in wasteful TARP-related funds and then refusing to lend money to businesses, spurring starvation overseas and continuing risky speculation that could implode across the globe - but now mostly backed with our money. Naturally, as Goldman Sachs CEO Lloyd Blankfein half-jokingly said, they see themselves as "doing God's work."
 
Now, Black observes, "We're putting in place much more severely perverse incentives: There's the endorsement of ‘too big to fail’; and the gaming of accounting rules so they don't recognize the losses of lenders - and regulators can't prove that they should be shut down." All this, he says, "greatly exacerbates 'moral hazard' and makes fraud much more difficult to prove."

At a hearing last week of the oversight panel that Warren chairs, as Bloomberg News reported:
Elizabeth Warren, a chief watchdog of the government's rescue of Wall Street, said the $700 billion bailout hasn't stopped the "culture of excessive risk-taking" that led to the financial crisis.
 
The Troubled Asset Relief Program also has "injected an unprecedented level of pricing distortions and moral hazard into the marketplace," Warren said at a hearing today of the Congressional Oversight Panel on TARP, which she leads.
"Uncertainty persists about the stability of our financial institutions and whether they can survive without the benefit of government assistance," Warren said...
 
Warren said banks are relying on government aid and consumer lending to make money.
 
"That's not a sustainable profit model," she said.

In her interview with Truthout, Warren also emphasized that there's not much that can be done now to reform how the TARP money was spent, but that the federal government already has plenty of tools at its disposal - and some pending in Congress - to spur lending and help stem the rising tide of foreclosures.

She explained, "Treasury never set up the TARP program to require any explanation of how the money would be used. The banks were free to use it for lending, as then-Secretary Paulson claimed they would, but they weren't required to do so."
 
Instead, she said, "They could keep the money locked away in their safes; they could use it to offset other bad loans; they could use it to purchase assets both in the US and abroad; or they could use it to buy up other financial institutions, thereby increasing concentration in the financial industry. There simply weren't any restrictions." They could also use the money for attending luxury retreats and offering more predatory loans, as Vanity Fair and other news outlets reported.
 
But there is far more the government can do with TARP funds moving forward to spend it in more helpful ways. "There's still a lot of money left in TARP. We haven't hit the $700 billion cap. The remaining money could be used explicitly for small business lending. It could be done through the SBA, but a more direct approach would be to tell financial institutions they can have TARP money only if they will offer proposals for how to use it for small business lending. Proposals work only if they can be verified - backed up with numbers about past and future lending," Warren said.
 
"This isn't hard," she said. "If the American government - the American taxpayer - wants to see more small business lending, then it would be a fairly simple step for Treasury to make tens of billions of dollars available to small and intermediate-size banks for the exclusive purpose of new small business lending."
 
She also said, adding to a critical report last month by her panel, that the Obama administration's current troubled efforts to help those facing foreclosure would only reach "half of the predicted foreclosures, at its maximum." Most people now facing foreclosures, hit by unemployment and with huge mortgages they can't meet due to exploding interest rates, aren't even eligible for today's program. She declined to comment further on foreclosure reforms, noting that her panel would be issuing future reports on the topic. But she told PBS Now recently:
I wanna be clear, there are multiple ways we can address this problem. One, is we can put more money into it. We certainly put money in at the top. We've put a lot less money into the home mortgage foreclosure process. But the other part, is we can talk about the investors in these mortgages, who can be forced to absorb some of their losses. You know, let's remember, a mortgage foreclosure, on average, costs the investors about $130 thousand dollars.
But so far, there has been little movement towards any meaningful reforms, and we're facing 2 million foreclosures in the next year. With national advocacy groups relatively quiet on the topic, one of the more promising ideas, a proposal by liberal economist Dean Baker to allow those who can't meet payments to pay rent instead, hasn't yet drawn either the activism or Congessional interest it deserves.

And there's even more to worry about. Warren says, "The major banks are producing the major portions of their profits, not by lending, but by gambling in stock trades using taxpayer dollars."
 
In fact, there could be something perhaps even scarier on the horizon, brought to you by the Federal Reserve. Some economists, including "Dr. Doom," Nouriel Roubini, say the Fed is fueling an overseas gold rush of investment in risky higher-paying assets through its extra-low interest rates to American financial firms. (Baker, who wrote a book on economic bubbles, believes that Roubini is "shouting" about disaster as he consistently does, but the risks now aren't nearly as dire.)
 
The practice that's alarming some economists is known in financial circles as the "carry trade," taking low-interest currency from one country and plowing it into higher-paying investments or currencies overseas. That's what European investors did with our once-soaring subprime mortgage securities market.
A leading academic expert on the Fed, Jane D'Arista, a reseach associate at University of Massachusett's Political Economy Research, told Truthout, "The carry trade is now huge, and it's another wall to crash into."
The well-regarded financial blog Naked Capitalism summed up recently the alarm bells being rung by Roubini, the Financial Times and other observers:
Nouriel Roubini has officially left the "hedging your bets on the economy" camp. He has declared the markets to be frothy because super low dollar borrowing rates have turned the greenback into the funding currency for the carry trade.
 
Far more important than the peppy rally in the stock market is the resumption of early 2007 style risk taking in the credit markets. As Gillian Tett of the Financial Times noted last week:
 
Earlier this month, I received a sobering e-mail from a senior, recently-retired banker. This particular man, a veteran of the credit world, had just chatted with ex-colleagues who are still in the markets - and was feeling deeply shocked.
 
"Forget about the events of the past 12 months ... the punters are back punting as aggressively as ever," he wrote. "Highly leveraged short-term trades are back in vogue as players ... jostle to load up on everything from Reits [real estate investment trusts] and commercial property, commodities, emerging markets and regular stocks and bonds.
 
"Oh, I am sure the banks' public relations people will talk about the subdued atmosphere in banking, but don't you believe it," he continued bitterly, noting that when money is virtually free - or, at least, at 0.5 per cent - traders feel stupid if they don't leverage up.
"Any sense of control is being chucked out of the window. After the dotcom boom and bust it took a good few years for the market to get its collective mojo back [but] this time it has taken just a few months," he added. He finished with a despairing question: "Was October 2008 just a dress rehearsal for the crash when this latest bubble bursts?"

Even so, Moody's respected Mark Zandi said on the PBS NewsHour Tuesday evening that there was little likelihood of any kind of crash-prone bubbles: "We have learned a lesson from the tech bubble, the housing bubble. I think it's much less likely that those animal spirits that one needs to create that kind of a bubble are going to come back, at least any time soon."

"Oh dear God!" William Black exclaimed in disbelief when told of this blithe comment. "All of [financial ] history shows us that people don't learn their lessons."
Last modified on Wednesday, 25 November 2009 13:57