Weekly Audit: Bank Execs Looting Customers, Shareholders and Taxpayers

by Zach Carter, TMC MediaWire Blogger  

Some of the largest U.S. banks may be on the ropes these days, but the disparity between the plight of financial executives and ordinary Americans has never been starker. Over the past two decades, the banking system has grown accustomed to scoring massive profits by preying on its own customers, making 2009's transition to pilfering taxpayer wallets an easy one. After burying the economy under a mountain of unaffordable debt, bank CEOs are now finding ways to subsidize their own paychecks with taxpayer bailout funds.  

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"Heckuva job, Timmy..."

Yet again, Robert Kuttner,  economist and urban theorist, co-founder and co-editor of the American Prospect Magazine, Boston Globe columnist and author of , "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency," nails it. In fact, perhaps this time, he delivers a grand slam homer in: "Geithner's Folly."

As Kuttner tells us:


President Obama deserves immense credit for being willing to spend serious money to prevent recession from becoming depression. He has resisted pressures from fiscal conservatives to put budget balance first, or to make social insurance bear the brunt of spending cuts down the road. And he has used his gifts as a teacher to enlist the broad support of the American people for a far-reaching strategy of public investment.

However, all of this good work will be for naught if his team doesn't get the banking system functioning again. And so far the grand design of Treasury Secretary Tim Geithner is entirely on the wrong track.

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Fed to Banks: "O.K. to steal $ from acct's!" (Really!)

The new MasterCard commercial that will never be produced.. .


Bear Stearns bailout. $29 billion.

Fannie Mae and Freddie Mac nationalization. $1 trillion-plus.

Lehman Brothers/Merrill Lynch/AIG head-fake by Bush/Paulson. Priceless!

Yes, you read that correctly, I just referred to one of the most depressing days in the entire history of Wall Street as a "head-fake by Bush/Paulson."

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The Biggest Bailout Ever

Like the proverbial thief in the night, the US federal government snuck in Friday night and bailed out Fannie Mae and Freddie Mac. I hate to say I told you so, but I wasn't surprised. They didn't really have a choice:

The Ministry of Finance and the Federal Reserve had no choice but to intervene due to one single reason: The collapse of Fannie Mae and Freddie Mac could have precipitated a core meltdown of the American bank and stock market systems, dragging the rest of the world with it into the abyss.

That is because these two banks are responsible for $5.3 billion (3.7 billion euros) of America's $12 billion (8.4 billion euro) total mortgage debt. That corresponds to one third of America's gross domestic product.

But never fear, the CEOs of the collapsing companies are safe:

Under the terms of his employment contract, Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay, retirement benefits and deferred compensation, provided his dismissal is deemed to be "without cause," according to an analysis by the consulting firm James F. Reda & Associates. Mr. Mudd has already taken home $12.4 million in cash compensation and stock option gains since becoming chief executive in 2004, according to an analysis by Equilar, an executive pay research firm.

Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million, largely because of a clause added to his employment contract in mid-July as his company's troubles deepened. He has taken home $17.1 million in pay and stock option gains since becoming chief executive in 2003.

Meanwhile more than one half of the state governments in the U.S. are running massive deficits too, but no bailout is in store for them.

As I've been posting for a while, the money being spent on bail outs for financial entities is larger than the combined deficit of all the states. This report from the Center on Budget & Policy Priorities shows that the states are now being hit hard by the same hard economic times that dropped Bear Sterns and now Fannie and Freddie:

At least twenty-seven states, including several of the nation's largest, face budget shortfalls in fiscal year 2009. Of these 27 states, specific estimates are available for 22 states and the District of Columbia; the combined deficits of these 22 states plus the District of Columbia are expected to total at least $39 billion for fiscal 2009 -- which begins July 2008 in most states. Another 3 states expect budget problems in fiscal year 2010, although some of those gaps may occur earlier than expected.

...

The 22 states in which revenues are expected to fall short of the amount needed to support current services in fiscal year 2009 are Alabama, Arizona, California, Florida, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Rhode Island, South Carolina, Vermont, Virginia, and Wisconsin. In addition, the District of Columbia is expecting a shortfall in fiscal year 2009. The budget gaps total $39.1 to $40.8 billion, averaging 8.9 - 9.3 percent of these states' general fund budgets.

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So The Taxpayers Don't Need to Worry About Fannie and Freddie?

Not to cause too much panic and alarm, but I couldn't help but get a sense of deja vu when the New York Times wrote on Wednesday that the cost of a loan bailout for taxpayers could be $25 billion. David M. Herszenhorn had the story:

The budget office said there was a better than even chance that the rescue package would not be needed before the end of 2009 and would not cost taxpayers any money. But the office also estimated a 5 percent chance that the mortgage companies, Fannie Mae and Freddie Mac, could lose $100 billion, which would cost taxpayers far more than $25 billion.

The likelihood that a Bear Stearns like bailout will be necessary this time around is much lower than it was when we went through this ordeal in March. That being said, it certainly wasn't the plan to spend $30 billion in taxpayer dollars to bail out the Bear Stearns investors either. That's why the  deal was closed in such a panicked rush.

The fact of the matter is no one, not even Director of the Budget Office Peter R. Orzag, knows whether or not a bailout will be necessary, and if so, what the exact cost of it will be:

Mr. Orszag, at a briefing with reporters, acknowledged that pinpointing the eventual cost of the package was impossible. "There is very significant uncertainty involved here," he said.

The uncertainty runs in both directions, with some government officials and market analysts suggesting that Fannie Mae and Freddie Mac are fundamentally sound and will perform well over the long-term. Others, including some private equity managers, are pessimistic and predict heavy losses.

We better hope that they are fundamentally sound, because it certainly doesn't take long for corporations deemed "too big to fail" to collapse. For Bear Stearns, the worst of the situation came to a head in less than a week:

This has been a remarkably fast fall for a titan of Wall Street. It took 85 years to build Bear Stearns and four days for it to dissolve.

The similarities are striking. A large corporation considered to be a prop holding up the economy turn out to be far less stable than originally thought. Rather than admitting it, the companies go to the brink until the government is "forced" to step in.

What makes this even worse? The combined $55 billion price tag of bailing out Bear Stearns and Fannie Mae/Freddie Mac would more than cover the $48 billion budget shortfall the states are facing.

We know the President loves to bail out the corporations. Let's hope he has a similar moment of clarity when the second stimulus package hits his desk later this year.

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