All the Presidents' Bankers (80 page)

The media reported the multibillion-dollar bank settlements as if they had far more meaning to the population than they actually did, especially considering only approximately $20 billion of them involved cash fines.

Relative to the Big Six banks’ assets of approximately $9.6 trillion and their profits over the years preceding the financial crisis, the figure was a drop in the bucket, and revealed a “let them shoot first, get questioned later” attitude on the part of the federal justice and regulatory system.

The Obama administration remained silent on what constituted, if even unofficially, mass organized crime, or at least gross incompetency and fraud (though not admitted) on the part of the banking system and its leaders. Moreover, even though most of these repercussions were related to the banks’ ability to issue, source, repackage, trade, and distribute complex mortgage and related securities from under one roof, there came no bold statements from the White House on resurrecting a Glass-Steagall act that would once again prohibit these joint activities within one bank. Neither the details nor the occurrence of the settlements and ongoing investigations served to shake the support, and thus the unofficial endorsement, of the Oval Office for the bankers’ power in the form of their overall structure or their Federal Reserve–backed status.

Though WorldCom CEO Bernie Ebbers and Enron CFO Andrew Fastow went to jail for their corporate misdeeds, no major bank CEO was found to have done anything criminally wrong while presiding over practices that caused great global harm, though some of their more junior staff took the heat. That too had historical precedent: bankers with tighter ties to the president or Treasury secretary tend to get passes. They control the money flow. If the “money trusts” back in the 1910s were powerful, after a century of Fed backing and tightening political-financial alliances, the millennial money masters of today are even more so.

The moral hazard of supporting their movements has become far greater. One major difference between now and then is that the control of finances by private bankers is far broader, the complexity of financial instruments greater, and the danger of a total systemic collapse more likely.

We Must Break the Alliances

In a November 2009 interview with London’s
Sunday Times,
Lloyd Blankfein, was asked about the size of his firm’s staff bonuses. He claimed that he was
just a banker doing “God’s work.” As for the economic disparities that “work” engendered, he said, “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all.” After all, he explained, Goldman Sachs is helping “companies to grow by helping them to raise capital. We have a social purpose.”
¹⁷³
His words, which he noted as tongue-in-cheek later, echoed so false against the backdrop of a deflated public economy that all manners of media slammed them.

But there was a kind of truth to what he said.

There have been times when the biggest bankers shattered public trust and times when the public believed that bankers’ interests somewhat aligned with their own. In those periods, bankers took public service roles that weren’t just related to the economy, and they didn’t flaunt their wealth. The Great Depression provoked a climate of social responsibility. Related bank regulation lasted for decades. During World War II, many Americans even equated bankers with patriotism.

Today, no such attitude prevails. Never before have the government and the Federal Reserve collaborated so extensively by propping up the banking system to the detriment of the population. Never has the world been so quick to push austerity on countries whose only crime was standing in the way of banker speculation. Never have bankers thought this was copacetic. Never have their political alliances been so widespread yet so impersonal. Never have their rewards been so high.

When money has no cost, the consequences of using it irresponsibly have no cost either. The bankers’ bets and actions crushed the global economy before, and they will again. The most powerful ones emerged unscathed. They had proven to be as influential, if not more so, than their alliances. But they cannot be allowed to continue. For absent a true shakeup in the structure of the financial industry and realignment of the power bankers wield over the general economy, we will surely face more financial crises in the years to come.

The nature of twenty-first-century political-financial alliances will reinforce and fortify the bankers’ power, even as bankers continue to behave in ways that will lead to more widespread economic pain. The reality is that financial crises will worsen and may spread to Latin America, the Middle East, and Asia, for the mechanisms of global finance are more destructive.

US hegemony and the strength of Wall Street have been closely aligned for more than a century, during which certain private bankers have achieved a position of greater power than the presidency (or central banks). The crises of the past decade were a manifestation of what happens when US bankers
operate beyond the control of government, often enabled by the highest political office in the world. Whereas the mid-twentieth-century ushered in a sense of humility and unity between private finance and public service, by the 1970s that ship had sailed.

There’s a reason that the Fed bailed out the biggest banks, that Dodd-Frank was toothless, and that Obama dared even to consider Larry Summers, a tried-and-true Clintonian Rubinite, to head the Fed after Bernanke. After Summers’s withdrawal, on October 9, 2013, Obama similarly opted for Janet Yellen—a former chair of Clinton’s economic council while Glass-Steagall was being dismantled and Fed vice chair beside Bernanke, who advocated massive subsidy programs to buoy the banking system.

It no longer matters who sits in the White House. Presidents no longer even try to garner banker support for population-friendly policies, and bankers operate oblivious to the needs of national economies. There is no counterbalance to their power. And since America’s latest elected leader pressed the pretense of financial reform instead of actually pushing for real reform, bankers can do greater damage than ever before. Bankers dominate the globe using other people’s money, and presidents gain command through other people’s votes, but in the ongoing game of influence and control, these are mere chips that grant players a seat at the table of power.

America operates on the belief that if its biggest banks are strong, the nation will be too. It is not US military might alone that evokes global trepidation; it is also US financial might, in the form of the alliance between the presidency and the major bankers.

No other country on the planet is driven by such a critical symbiotic and costly relationship. This is why US hegemony, from a financial superpower perspective, is not in decline. The most elite US bankers and government officials understand that their positions are mutually reinforcing, with the Fed serving as a support vessel in the middle. The US bank heads retain more influence over global capital than any government, and their unique alignment with the presidency is a force that will fortify America’s power, often at the expense of populations the world over.

Our choice is simple: either we break the alliances, or they will break us.

GLOSSARY OF FINANCIAL TERMS

All definitions include information obtained from Federal Reserve or FDIC reports,
www.investopedia.com
, and the author’s fifteen years of experience as an analyst, strategist, and senior managing director in the financial field.

Asset-Backed Security:
A financial security collateralized, or backed, by a pool of underlying assets that could be auto loans, leases, credit card debt, a company’s receivables, etc.

Balance of Payments:
The relationship between the payments and receipts of the residents of one country versus those of other countries. A surplus means one country has acquired more assets than another. A deficit means it has acquired fewer.

Bankers’ Acceptance:
A short-term debt instrument issued by a firm and guaranteed by a commercial bank, often used in international trade.

Bond:
A debt security through which a corporation or government borrows money from an investor for a fixed period of time at a fixed or floating interest rate.

Capital Market:
An open national or global market in which individuals and institutions trade financial securities generally underwritten, distributed, or sold by banks, companies, governments, or supranational entities to raise funds.

Central Bank:
An entity that oversees the monetary system of a nation (or, in the case of the European Central Bank, a group of nations). Its role could include overseeing monetary policy, issuing currency and maintaining currency stability, taming inflation and attempting to maintain
full employment, regulating commercial banks and the credit system, and acting as a lender of last resort. (Recently, the Federal Reserve and ECB acted in unprecedented ways to bail out the world’s largest private banks.)

Certificate of Deposit (CD):
A type of deposit account that usually provides a higher interest rate than regular savings accounts in return for keeping the funds “parked” for a specified period of time, which enables banks to use the funds for other purposes.

Collateralized Debt Obligation (CDO):
A financial product that pools together (or combines) various debt assets on which interest is paid (like subprime loans or corporate bonds) and repackages them into discrete slices called tranches—each of which has different risk attributes and can be individually sold to investors depending on their risk preference, as quantified by a credit rating (AAA is supposed to mean low risk; CCC is junk, or very risky).

Commercial Bank:
A financial institution that provides deposit and loan services, such as accepting deposits, extending loans and mortgages, and offering customers basic products like checking, savings accounts, and certificates of deposit.

Commercial Paper:
A short-term promissory note (with a maturity of 270 days or less) sold by large corporations to raise quick money, backed by their
promise
to pay the amount of the note at the end of its term, but not by hard assets or collateral.

Corner a Market:
To acquire enough of the available portion of a particular security, commodity, or other asset to enable price manipulation.

Corporate Trust:
See “Trust.”

Credit Default Swap (CDS):
A contract designed to transfer credit exposure or speculation over a default (on a country, corporation, group of subprime loans, etc.) between parties; the swap buyer makes payments to the seller until the maturity date of the contract. The seller agrees to pay off the debt underlying the swap in the event of a default. A CDS buyer believes, or bets, that the third party will default on the debt.

Credit Derivative:
A privately held and negotiated contract designed to mitigate exposure to credit default risk, or otherwise bet on the direction of credit spreads (the wider the spread of a corporate credit relative to a government security, the riskier it is).

Debt:
A sum of money borrowed by one party from another, generally with the stipulation that it will be repaid at some future date, with a certain amount of interest.

Derivative:
A security whose price is dependent upon, or derived from, the behavior of one or more underlying assets, depicted by a contract between two or more parties. Common underlying assets include stocks, bonds, commodities, currencies, interest rates, and market indexes.

Discount Rate:
The interest rate charged to commercial banks and other deposit-taking institutions on loans they receive from their regional Federal Reserve Bank’s lending facility (or “discount window”).

Equity:
An ownership stake in any asset or firm. Stocks are considered equity because they represent ownership in a company.

Excess Reserves:
The amount of capital reserves in excess of regulatory requirements, in the form of cash or other acceptable liquid securities, that banks choose to keep at a central bank for financial stability purposes.

Federal Reserve Bank Note:
A note issued and redeemable by each individual Federal Reserve member bank. These were phased out in the mid-1930s.

Federal Reserve Note:
Paper currency (dollar bills) circulated in the United States, printed by the US Treasury at the instruction of the Federal Reserve member banks.
Fixed Interest Rate:
An interest rate that does not move.

Floating Interest Rate:
An interest rate that moves up and down with the market or some other index or reference.

Future:
A financial contract obligating the buyer to purchase (or the seller to sell) an asset, such as a commodity or security, at a predetermined future date and price. Contains more leverage than simple stocks and bonds.

Hedge Fund:
Privately owned investment schemes that invest capital on behalf of so-called qualified investors (firms or people with a lot of money) speculatively to maximize returns in a variety of markets, deploying a variety of less regulated (sometimes unregulated) strategies.

Hybrid Security:
A security that combines two or more types of financial instruments or asset classes (debt, equity, foreign exchange, commodity, derivatives) into one security, whose price or behavior has links to each type. Hybrids can get so complicated that pricing them is difficult and information on them is nontransparent.