Banks get bailed out, Greece doesn’t

Joseph Cannon came across this information on a comment thread on the Moon of Alabama blog.  It compares the amounts of the U.S. government bailouts of banks to the bailout needed to save Greece.

Citigroup – Citigroup $2.513 Trillion

Morgan Stanley – $2.041 Trillion

Merrill Lynch – $1.949 Trillion

Bank of America – $1.344 Trillion

Barclays PLC – $868 Billion

Bear Sterns – $853 B

Goldman Sachs – $814 B

Royal Bank of Scotland – $541 B

JP Morgan Chase $391 B

GREECE $370 BILLION

Deutche Bank – $354 B

UBS – $287 B

Credit Suisse – $262 B

Lehman Bros – $183 B

Bank of Scotland – $181 B

BNP Paribas – $175 B

Wells Fargo – $159 B

Dexia – $159 B

Wachovia – $142 B

Dresdner Bank – $135 B

via Moon of Alabama.

What these figures show—I haven’t verified them, but I take them to be correct—is that a rescure of Greece is not beyond the realm of fiscal possibility.

Now you could argue that these comparisons are unfair because the banks paid back their TARP funds.  That’s true, but, as Cannon pointed out, they paid them back largely with other government money.

The real reason that the comparisons are unfair is that the bulk of the Greek debt has been transferred from private banks to quasi-public entities.  Greece is not comparable to Citigroup or Morgan Stanley.  Rather the people are Greece are comparable to the people who lost their homes to mortgage foreclosures.

Too big to bail? the new financial bubble

When the French Bourbon monarchs were restored to power after the defeat of Napoleon, it was said that they had learned nothing and forgotten nothing.  The same is true of the half dozen biggest U.S. banks after the financial crisis.  They are busy doing the same things that led to the crisis in the first place.

Blogger Michael Snyder quoted the following figures from the most recent report of the Office of the Comptroller of the Currency.  The figures show the big banks’ investments in derivatives, which are investments not backed by any asset—in short, they are not investments at all, but gamblers’ bets on the future direction of the economy.  If the banks bet wrong, they crash, and if they crash, they bring down a large part of the U.S. economy with them.

JPMorgan Chase

Total Assets: $1,948,150,000,000 (just over 1.9 trillion dollars)

Total Exposure To Derivatives: $70,287,894,000,000 (more than 70 trillion dollars)

Citibank

Total Assets: $1,306,258,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $58,471,038,000,000 (more than 58 trillion dollars)

Bank Of America

Total Assets: $1,458,091,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,543,003,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $113,743,000,000 (a bit more than 113 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $42,251,600,000,000 (more than 42 trillion dollars)

That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 371 times greater than their total assets.

via Michael Snyder.

The six largest banks control two-thirds of U.S. financial assets.  The five largest originate 42 percent of loans in the United States.  The four largest employ a combined 1 million people.  If these banks fail, it is not just their executives who will suffer (actually, the executives won’t suffer at all).

The Federal Reserve Board is trying to keep the economy afloat by keeping the big banks afloat, through its policy of Quantitative Easing.  It issues money to buy up the big banks’ bad investments prior to the previous crash, but without doing anything to stop them from setting up the same conditions again.

How much better it would have been to finance the rebuilding of crumbling bridges and dams, water and sewerage systems and other public works!

Good advice from Iceland (with caveats)

I like and agree with this statement.

I like it even though Iceland’s politicians weren’t necessarily as brave and far-seeing as the statement implies.

Banks were allowed to go hog-wild in the United States and Europe in the years leading up to the 2008 financial crisis, but Iceland’s banks were wild and crazy even by Wall Street and City of London standards.   They collected money from depositors all over the world, and lent out money at high interest rates without thinking about the high risk.   Investors in the United Kingdom, the Netherlands and other countries bought into this risky behavior without considering that there would be a day of reckoning.

When the crash came, it wouldn’t have been possible for Iceland to bail out its banks even if it had wanted to do so.  The banks’ liabilities were equal to eight times Iceland’s GDP (its annual economic output).

Iceland did suffer severely from the recession, and it isn’t out of the woods yet.   Individual Icelanders are struggling economically, Iceland has a big trade deficit and the country is going to take another economic hit when the government lifts exchange rate controls on the Icelandic kroner.   In the last election, Icelanders voted in the political parties whose policies led to the financial crash, which is hard for me to understand.

Still Iceland’s recent history shows that it is possible to give relief to the honest citizen and prosecute the crooked financier, and still survive to tell the tale.

Qualitative Easting III: bank bailout continues

Michael Hudson, a research professor of economics at the University of Missouri at Kansas City, said the Federal Reserve Board’s Qualitative Easing is a continuation of the bank bailout under another name.

Ben Bernanke, chair of the Federal Reserve, announced a commitment to buy mortgage-backed securities (toxic assets?) while keeping interest rates low.  Pumping more money into the economy will supposedly make more money available for business loans and consumer purchases in the United States.  But Hudson noted that so far the banks have found more profitable things to do with the Fed’s money than to invest it in the real U.S. economy.

At present the rate of inflation is low.  But one cause (or definition) of inflation is too much money chasing too few goods.  If money is created, but the money is not used to produce more goods, then (as I see it) inflation could return.  Moderate inflation is supposed to be a cure for economic stagnation, but I can recall the “stagflation” of the 1970s when there was very serious inflation and economic stagnation at the same time.

Click on Fed to Buy More Bonds in Bid to Spur Economy for the Wall Street Journal’s explanation of the Federal Reserve’s rationale for QE.

Click on QE3 – Another Fed Giveaway to the Banks on the naked capitalism web log and scroll down to the discussion thread for the pros and cons of Hudson’s analysis.

Click on Michael Hudson | On finance, real estate and the powers of neoliberalism for Michael Hudson’s home page.

Lessons for Wall Street from Hammurabi’s Code

The Code of Hammurabi in ancient Babylon had this to say about the social responsibility of business.

If a builder builds a house and the house collapses and causes the death of the owner, the builder shall be put to death.  If it causes the death of the son of the owner, a son of the builder shall be put to death.

Nassim Nicholas Talbeb, author of Fooled by Randomness, The Black Swan and the forthcoming Anti-fragile: Things That Gain From Disorder, said in a still-relevant interview last October that the banking crisis is due to the fact that we’ve forgotten the age-old wisdom of every civilization since the time of Hammurabi—that people should be responsible for the consequences of their actions.

The opposite has been the case with the U.S. banking and financial system since the Reagan administration, he said.  The pattern is that financial institutions gain huge profits from taking huge risks, the executives walk away with huge bonuses and then when their gambles fail, they successfully look to taxpayers to be bailed out from the consequences of their actions. This is wrong.

“If there is an upside, there should be a downside,”  Taleb said.  If you get to keep the profits, you should bear the losses.  If your negligence causes other people to suffer, you should suffer yourself.   This has been well understood down through history until very recently.

No executive of a financial institution that has been bailed out should ever receive a bonus, Taleb said; no executive of a financial institution that has been bailed out should be paid more than a civil servant of equal rank.  After all, if the bank or investment firm has been rescued with U.S. tax dollars, then the executive are in effect employees of American taxpayers.

Taleb himself is a speculator in options and derivatives.   Speculation, like high-stakes poker, does no harm so long as the speculator is gambling with his own money and the money of people willing to take a chance on losing it.

Below is a later interview with Taleb.