Wednesday, April 21, 2010

Wall Street Makes Stealing an Art

This week Citigroup announced that it had earned a profit of $4.4 billion in the first quarter of this year, joining Bank of America ($3.2 billion) and JPMorgan Chase ($3.3 billion) in bouncing back quite spectacularly from the catastrophic crash of 2008.

How is it possible that with the economy still so abysmal for most Americans, Wall Street and the bankers are back to rolling in the dough?

One explanation is that the Federal Reserve is giving the bankers a continuing bailout by keeping interest rates at rock-bottom levels. In a New York Times blog (“You’re Welcome, Wall Street”), William Cohan writes that these current profits are obscene:

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.

You’re welcome.

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.

But Wall Street is stealing from us in so many other ways. In his column in today’s Washington Post, Harold Meyerson discusses the improving prospects of financial reform now that the Republicans have realized that they can’t play the party of No on this issue. Maybe what was most encouraging was the fact that large businesses are demanding reform of derivatives because the Wall Street casino is hurting their bottom line.

On Tuesday, leaders of industries that actually need to lock in prices on real commodities -- in particular, oil -- went to the Senate to endorse Lincoln's bill. "In 2008," said James May, president of the Air Transport Association of America, "we burned the same amount of fuel we burned in 2003, but we paid $42 billion more." The difference, he said, was the result of the vast increase in oil speculation carried on through derivatives. Over the past half-decade, for instance, the largest holder of home heating oil often has not been an energy company but, rather, Morgan Stanley. Such speculation, estimated Sean Cota of the Petroleum Marketers Association of America, has increased the cost of gas at the pump by about a dollar a gallon.

"We need predictability in prices," Cota said Tuesday. "The banks want volatility. . . . Old-fashioned bonds built Hoover Dam, but they were paid off over many years. The banks are only interested in trades that pay off in the next 30 seconds. . . . They have no concern for the future of the larger economy."

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