Banks bounce back, homeowners slump
By Adrianne Appel
BOSTON - Just months after getting a massive government handout to prevent the
collapse of Wall Street, big US banks say they are back on solid ground and
ready to repay the money. The banks are selling stock and debt, and racking up
excellent returns on mortgages, loans, high credit-card rates and refinancings.
Three big banks, Goldman Sachs, JPMorgan and Morgan Stanley, say they are so
healthy now that they can begin to pay back the billions they were given by the
US Treasury in December, when they said they were on the brink of failure.
Meanwhile, home foreclosures in April were 342,000 - the highest level yet -
and average national unemployment rose to 8.9%, the
highest since 1983. Some communities are just barely hanging on.
"There's an enormous impact of the foreclosure crisis and the unemployment
crisis on people of color," Rinku Sen, executive director of the Applied
Research Center, a public policy institute, told Inter Press Service.
"Because they were so concentrated in communities of color, the larger system
didn't pay attention. The banking system didn't send out any red flags, and
local and state officials didn't start looking into the crisis. There wasn't
the scrutiny there should have been, given the millions of people affected,"
Sen said.
Mortgage lenders and banks sought out people of color in particular, and
charged higher than average interest rates on loans with poor terms, according
to the National Association for the Advancement of Colored People, which is
suing some of the nation's largest banks - many the same ones that received a
bailout.
Under the bank bailout, nine big banks received US$125 billion, followed by
smaller banks, for a total of about $400 billion awarded to 586 banks, insurers
and auto companies. The US government received warrants to buy stock in the
banks, in a deal many economists say was a giveaway to the banks.
"Is it possible taxpayers will get their money back 10 years from now? Yes, but
it's not likely. It's clearly a massive subsidy," Robin Hahnel, economics
professor emeritus at American University, told IPS.
Larry Summers, the economic advisor to President Barack Obama, and US Treasury
Secretary Timothy Geithner are not doing right by US taxpayers, Hahnel said.
"My position is they are mismanaging this so badly they need to be fired
immediately. They are putting us at terrible risk," Hahnel told IPS.
"Some banks are in a position to repay because they've made money the
old-fashioned way, by borrowing at low rates and lending at significant
interest rates," said Timothy Canova, economics professor and associate dean at
Chapman University School of Law.
The banks borrow money from the central bank at nearly zero percent interest
and then loan it out at 5% or 6%, he said, adding: "That's a healthy spread."
The entities that took the Treasury money have had to comply with rules that
restrict salaries and bonuses to executives, and limit the hiring of non-US
citizens. The rules were enacted after public outrage over millions in bonuses
paid to individual executives.
"The main motivation for returning the money is that the bank officials would
like to be able to start rewarding themselves again with higher compensation
packages. They don't want the strings attached," Canova said. "We can expect to
see more paybacks. But we can also expect to see more banks that will need more
funding in future."
Nineteen big banks with more than $100 billion in assets recently conducted
financial reviews, called stress tests, at the request of the Federal Reserve.
The Fed announced that nine banks are in the clear and 10 will need a total of
$74.9 billion more, under a best-case economic scenario. Under the worst-case
scenario, they would need up to $600 billion more.
The reviews have been widely criticized by a range of conservative and
progressive economists for not being realistic.
Canova said even the worst-case scenario seems overly optimistic, predicting an
unlikely growth in the GDP.
"It's quite possible the GDP will continue to decline and then the banks may
need twice that amount of money," Canova said.
The stress tests were conducted by the banks themselves. The Fed asked them to
predict their own potential losses and liabilities under the two scenarios.
Banking supervisors chosen by the Fed met with bank management to evaluate the
estimates, all performed within 45 days.
The 10 banks that need cash can request a handout from the US Treasury, in
exchange for stock valued at a rock-bottom price, at slightly below what it
traded for in February 2009.
But more likely, they can get the cash from the private market, by selling
stock and seeking investors, Geithner said.
"If these institutions are essentially solvent, as Mr Geithner suggests based
on the stress test results, then it seems appropriate to put an end to these
taxpayer subsidies," economist Dean Baker told the Oversight and Investigations
Subcommittee of the House Committee on Science and Technology on Tuesday.
"Is there really a need for the special lending facilities that have been
created by the Fed and have more than $2 trillion outstanding in loans to the
banks and other institutions?" said Baker, co-director of the Center for
Economic and Policy Research.
In addition, in June, the US government will begin purchasing up to $1 trillion
of bad assets now held by banks, he said.
The stress test results immediately boosted the value of stocks at many of the
banks, and they wasted no time in taking advantage of their good fortune.
Within a day of the test results, Morgan Stanley sold enough stock to raise $3
billion after aiming for $1.8 billion, as called for in its stress test. It
will eventually need to give back about $10 billion in bailout funds to the
Treasury.
Many banks will continue to make significant money on credit cards, charging
interest rates of 21% or more, plus fees and penalties. The credit cards are
issued by many major banks, including Bank of America, Citigroup and JP Morgan.
A credit card reform bill is expected to be signed by Obama by the end of this
week.
According to recent hearings in the US House and Senate, 78% of all US
households have at least one credit card, and they have paid an average of $15
billion in penalty fees per year. The proposals in play would not go into
effect until 2010 at the earliest.
Edward L Yingling, president of the American Bankers Association, told
reporters this week that the industry would continue to raise interest rates,
this time on its best credit-card customers, to make up for the revenue it
expects to lose under the credit-card reforms.
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