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Bankzilla vs. The Rest of Us

Eric Ruder Jul 31, 2012

The year is 2009. Home values were in free fall, and tent cities were springing up in cities like Seattle and Reno as a wave of foreclosures began to wash over U.S. homeowners. The unemployment rate was shooting up, and anxiety stalked the lives of tens of millions of people who wondered if their job might be next on the chopping block.

Stock trader Steven Schonfeld, on the other hand, wasn't worried at all.

He told a Wall Street Journal reporter that he had "earned" $200 million the year before and his net worth was around $1 billion. He had just moved into a $90 million mansion near Long Island Sound, with its own nine-hole golf course. No one could use the golf course if he wasn't home. "It's not a private golf course," Schonfeld explained. "It's a personal golf course."

Schonfeld was making a few upgrades to the estate–like erecting a poolside cabana designed to look like the Cove Atlantis resort in the Bahamas. "I don't think it's putting anyone's face in it," he said. "I live in this house."

Welcome to the Great Recession–as in great wealth for the already super-rich, and the worst recession since the crisis of the 1930s for the rest of us.

A year earlier–while Steven Schonfeld was making $200 million–the entire world economy teetered on the brink of a financial meltdown brought on by the crisis of American banks. The U.S. and other power governments hastily assembled bailouts that they said would save the world economy.

The $700 billion Troubled Asset Relief Program (TARP) passed Congress with the support of then Sen. Barack Obama and the Democrats and was signed by then-President George W. Bush.

It's likely that only a few minutes passed before the titans of Wall Street began popping corks.

Mega-bank Morgan Stanley received $10 billion in TARP money. Its profits were down by 41 percent by October 2008–but it still managed to set aside $6.44 billion to pay out in bonuses for executives. Goldman Sachs also got $10 billion from TARP and paid out $6.85 billion in bonuses for 2008.

Sure, those numbers were down compared to the record-setting bonuses paid out in 2007, but at more than $200,000 per employee–and certainly far more for the top executives–that's pretty spectacular compensation for wrecking the global economy and the lives of tens of millions of people.

TARP funds were used to purchase toxic assets like subprime mortgage bonds, making the American taxpayer the proud owner of billions of worthless financial instruments that the risk-taking bankers had invested in. Still, the bailout was supposed to spur banks to begin lending again and get the gears of capitalism moving again.

To this day, Bankzilla continues to terrorize whole communities of homeowners while feasting on massive profits.

In May 2012, the Federal Deposit Insurance Corporation reported that U.S. bank profits were the highest in nearly five years–a total of $35.3 billion in the first three months of the year, which represented a $6.6 billion increase from the same quarter a year earlier and nearly double the figure from two years before.

And the "too big to fail" banks that got us into this mess in the first place just keep growing. In 2002, the 10 largest U.S. banks accounted for 55 percent of U.S. banking assets. Today, the top 10 banks control 77 percent of banking assets. The "big six" U.S. banks–Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America and Wells Fargo–control assets equivalent to about 60 percent of the entire annual economic output of the U.S.

But did the bailout at least get the economy moving again? Are the banks loaning out money again?

Nope. In the first three months of the year, JPMorgan Chase, Wells Fargo, Bank of America and Citigroup cut their lending by a collective $24 billion. That almost completely reverses the $34 billion increase in lending at the four banks in all of last year.

The slowdown was concentrated in the "consumer-lending sector"–that is, the rest of us. Credit card loans fell nearly 6 percent and home equity credit lines by more than 2 percent. While mortgage lending was up slightly, most of the increase came from refinancing by homeowners seeking lower interest rates, not new loans.

That's just one more sign of what most ordinary people recognize–that while those at the top might still be making big profits, the economy is still stagnant or worse for the rest of us.

A study by Northeastern University researchers found that during the first two years of the recovery following the official end of the recession in June 2009, "corporate profits captured 88 percent of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1 percent" of the increase.

It didn't have to be this way. Consider the fact that billionaire investor Warren Buffett, one of the richest men in the world, also invested $5 billion in Goldman Sachs–shortly before the U.S. Treasury gave Goldman $10 billion in bailout funds.

In return for his investment, Buffett got a portfolio of preferred stock as well as warrants to purchase common stock in the future. The preferred shares pay a 10 percent dividend, and the warrants to purchase stock in the future would make him a windfall when Goldman's stock price rebounded.

About three weeks later, Treasury Secretary Henry Paulson forked over $10 billion of taxpayer cash to Goldman Sachs. But the deal that Paulson negotiated got only a 5 percent dividend and a fraction of the warrants–plus those toxic assets that the federal government was now responsible for.

Of course, it could be that Paulson just wasn't as shrewd an investor as Buffett. But a more likely explanation is the fact that Paulson himself made $37 million in 2005 as CEO of Goldman Sachs before becoming treasury secretary. Therefore, Paulson would have wanted a bad deal for taxpayers, which translated into a great deal for his friends at Goldman.

In fact, many mainstream economists thought the whole concept of TARP–handing mountains of cash over to banks in exchange for taking responsibility for toxic assets–was foolhardy. Many economists argued for a stock injection plan–the same kind of deal that Buffett got–instead of making the toxic assets the property of the Treasury Department.

The bailout bill passed by Congress actually gave Paulson the option of using the stock-injection approach. Not surprisingly, Paulson didn't exercise his "discretion" in this regard–and the main reason, according to economics correspondent Adam Davidson of National Public Radio, was opposition to the plan among powerful constituencies with a stake in the outcome.

One group is conservative Republicans. "They just don't fundamentally, in their guts, don't like the idea of the U.S. government owning shares of private companies," [Davidson] says. "It just smells like socialism to them and they can't support it."

Perhaps more importantly, banks really hate the idea. When the government took over insurance giant AIG, it essentially bought a huge share of the bank's shares and zeroed them out. All the shareholders lost billions of dollars and the chief executive of AIG was fired to boot.

Of course, the fate of AIG–whose gambling on esoteric investments pushed them into bankruptcy–is an example of how the free market is supposed to work, according to its defenders. They explain that their expertise and willingness to take big risks is what justifies their obscene compensation, and of course they insist that the essence of a free market is that bad investments should not be insulated from bad outcomes by non-market forces, including government bailouts.

But as the Wall Street bailout demonstrated, all this flies out the window when it's the bankers' necks on the line. Suddenly, the only "reasonable" approach is to push the losses off onto taxpayers–because the banks are just too big to fail.

This outcome wasn't left to chance, either. According to Richard Eskow, a senior fellow at the Campaign for America's Future:

The banks have paid Washington lobbyists $50-60 million per year for the last few years–and they've gotten their money's worth. The White House has yet to indict a single banker for the events leading up to the financial crisis, although billions have been paid out in settlement fees for criminal activity. When you look at it in context, $150-200 million over three years is one of the best investments Wall Street has ever made.

The same corporate criminality that plunged the banking sector into crisis five years ago continues unabated. The Libor scandal and the attempt by JPMorgan Chase to hide at least $2 billion in losses from investors are only the latest examples.

The story behind the scandals is that federal regulators and the political establishment continue to look the other way as the financial industry and its executives return to profitability–and turn institutional positions into private fortunes.

But apart from the criminality and cronyism, the latest economic turmoil is also being milked for another purpose–to bolster the dynamic of exploitation at the heart of the capitalist system.

Corporate profits are up 22 percent since 2007, while employers continue to shed jobs. This has created healthy corporate balance sheets–and unhealthy lives for workers.

Sylvia works in a massive warehouse in the middle of a California desert. In an interview with a reporter from Mother Jones, she described the conditions:

It's way bigger than a Wal-Mart, but with no air conditioning. Our temperature gets up to 115 degrees. Sometimes it feels so hot in there that you just can't breathe. You have a lot of people go home sick from the heat. To stay cool, people put towels around their necks. They go back and forth getting ice to chew on.

We're given orders by scanning our badges and totes into a computer system, which tells us what to pull and how quickly it has to be done. Back when I started in 1999, the rate wasn't so bad, but for about a year, they've been gradually ratcheting it up. Say the old rate was 100 orders a day. Now they're up to 160, sometimes even higher.

I've talked to some of the coordinators who add up the numbers at night. They've told me that it's impossible to meet the rate that they want with the amount of people that we have. So we have to work longer. We already worked 10 hours a day. Now we work another hour or two hours overtime, sometimes with last-minute notice. If we refuse to stay longer, we get disciplined.

This same intensification of work–falling on the people who still have jobs–is true across the economy, whether in blue-collar occupations or the service sector or in highly skilled professions like doctors.

According to an air traffic controller named Steven:

You make a thousand decisions a day. Any one of them could not only cost you your job, it could cost lives or money…Now with all the publicity about fatigue issues, more facilities are doubling up on controllers. Well, where did that second person come from? They don't have enough guys, so some other shift is now short to backfill the midnight shift. For some people, it has made an unsustainable situation even worse…

I can't tell you about all the suicides and the accidental deaths where I work. One year we lost more than a tenth of our controllers due to burnout. One guy was 38. He went home after a really long day, poured himself a drink, sat down in his armchair, and died.

Stress hurts your body. When my dad retired in his late 50s, he looked like he was 90 years old. I'm only 45, and when I visit old friends they go, "You look from a distance like you are physically healthy, but when I see you up close…" And it bothers me because I love the job, and I've made this commitment that I'm going to see through to retirement, I hope. But at what cost?

As far as Corporate America is concerned, this is the new normal–lay off workers and get the remaining employees to do the work they used to do.

According to economist Brad DeLong:

[It used to be that] businesses would hold on to workers in downturns even when there wasn't enough for them to do–would put them to work painting the factory–because businesses did not want to see their skilled, experienced workers drift away and then have to go through the expense and loss of training new ones. These days firms take advantage of downturns in demand to rationalize operations and increase labor productivity, pleading business necessity to their workers.

From the Con Ed workers in the private sector to Chicago teachers in the public sector, the pressures to do more for less are relentless. Needless to say, the surge in productivity hasn't translated into higher wages. If median annual household income had kept pace with the economy since 1970, it would now be nearly $92,000, not $50,000.

Instead, those gains have gone to the top of the income scale. Between 1979 and 2007, income growth for the top 1 percent of U.S. households was a jaw-dropping 390 percent, according to the Economic Policy Institute, but only 5 percent for the bottom 90 percent.

And even this slim increase in income for the rest of us has been more than offset by the massive destruction of wealth–in home values and retirement accounts, for example–since the onset of the Great Recession.

According to Christian Weller, a public policy professor at UMass-Boston:

American families lost a total of $19.4 trillion (in 2010 dollars) in household wealth from June 2007 to March 2009, when the stimulus started to take hold. First, it was the housing market, and then it was the housing and the stock market together that tanked. American families lost $6.4 trillion in home value during this period.

Trillions of dollars are sometimes hard to grasp, so think of it this way: One complete house (at 2008 prices) was lost every 1.7 seconds during the Great Wealth Destruction. And this doesn't even count what happened to American families' rainy day funds and retirement savings.

This completes the story of the great bankers and bosses' robbery–of how Bankzilla made out while we lost out. We're the ones who must tell it because it's seldom told in the mainstream media.

Instead, when it comes time to find blame for the nation's economic woes, the media tells us to blame ourselves for not working hard enough–while CEOs who do nothing constructive pay themselves millions of dollars.

We're told to blame "greedy" public-sector workers–instead of the greed of the bankers who manipulated the Libor rate to make handsome profits for themselves, and in the process drained billions of dollars in fraudulent interest payments from municipalities now struggling to make ends meet.

And we're asked to blame the unemployed–instead of the bankers who shifted their losses onto taxpayers while keeping the profits for themselves.

One of the greatest indictments of capitalism is fact that while people are unemployed, while millions desperately need goods and services, while factories and offices lay empty, corporations are sitting on a record $1.7 trillion of cash that they won't invest to put people to work.

No wonder most people think the system is broken. It is–for them. But the system is working exactly as it's supposed to for those at the top. Capitalism puts profits and power ahead of all other considerations. We need a different system altogether–a socialist society that puts the lives of working people ahead of profits.

This article was originally published by Socialist Worker.

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