Banking Crisis: Money-Spinning Operation for the Financial Giants

It was the best con game in town: get paid well for selling vast amounts of risk, fail, and then have government fix the problem at the expense of the taxpayers who never saw a penny of shared wealth to begin with. And then these private and well-protected banks within the Federal Reserve system are able to snap up the failed banks at pennies on the dollar. U.S. financial giants: Bank of America, Citigroup, Wells Fargo, Bank of New York Mellon, Goldman, and Morgan.

According to the FDIC, there were 8,384 banking institutions with $13.6 trillion of assets as of September 30, 2008. Hank Paulson has dished out $180 billion to the largest 30 banks in the country in an effort to keep them solvent. It has now become quite clear that the largest banks in the country, with the "smartest" MBAs, took excessive risk, created and then bought their own toxic derivatives, and lied to the public and their shareholders about their true financial position. So, we had about 8,000 banks that loaned money to people they knew in their local communities, kept the loans on their books, and generally acted like George Bailey. A handful of large banks did all of the damage to our global financial system, and these are the banks who are receiving all of the TARP billions. Maybe just maybe we should be giving the TARP money to the 8,000 conservative banks run by George Bailey-type bankers rather than the horrible, too-big-to-fail banks run by Mr. Potter-type bankers. Badly run banks need to be replaced by well run banks. Every time a bell rings, another bad banker gets a billion dollars. I see many Potterville’s in our future. - James Quinn, Financial Sense, December 9, 2008CNN contacted the banks that were given the biggest chunks of the bailout (TARP funds): Citigroup, JPMorgan Chase and Wells Fargo each received $25 billion - the largest amount given to any bank; Bank of America received $15 billion; Goldman Sachs and Morgan Stanley (a spinoff of JPMorgan) received $10 billion each (which means that Morgan received a total of $35 billion).

The Wall Street Journal reported in March 2009 that about $50 billion of the more than $173 billion that U.S. taxpayers poured into AIG since October 2008 has been paid to at least two dozen U.S. and foreign financial institutions, which included Goldman Sachs, Morgan Stanley, Wachovia (now Wells Fargo), and Bank of America; therefore, these four banks received even more BILLIONS in handouts from taxpayers.

Pressured by the Bush administration to approve the money quickly, Congress attached nearly no strings on the $700 billion bailout in October 2008, which was supposed to be used to buy up bad mortgages ("toxic assets") but instead was "invested" in the banks (30 banks received the majority of the funds). And the Treasury Department, which doles out the money, never asked banks how it would be spent. There has been no accounting of how banks spent that money. The Associated Press contacted 21 banks that received at least $1 billion in government money and asked four questions: How much has been spent? What was it spent on? How much is being held in savings, and what's the plan for the rest? But no bank provided even the most basic accounting for the federal money. Some banks said they simply didn't know where the money was going.

Full List of Bailed-out Banks

Fed Tried to Cover-up Its Involvement in Bank of America-Merrill Deal

June 24, 2009

Reuters - The Federal Reserve sought to hide its extensive involvement and concerns about Bank of America Corp's acquisition of Merrill Lynch amid the latter's worsening financial condition, a top Republican congressman said on Wednesday.

"The committee has already learned that Ben Bernanke and the Federal Reserve made inappropriate threats to fire Bank of America management unless they went ahead with the 'shotgun wedding' that was the Merrill Lynch acquisition," Rep. Darrell Issa of the House Oversight and Government Reform Committee said in a statement released to Reuters.

"The Federal Reserve also engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other federal regulatory agencies," the statement said.

The committee has obtained a number of emails and documents from the U.S. central bank about its behind-the-scenes role in the merger, according to sources familiar with documents.

Congress Subpoenas the Fed Over BOA-Merrill Lynch

June 9, 2009

AP - House lawmakers on Tuesday said they have subpoenaed the Federal Reserve to hand over e-mails, notes and other documents related to its role in Bank of America Corp.'s acquisition of Merrill Lynch & Co.

The lawmakers' subpoena comes after claims that top government officials pressured Bank of America Corp. CEO Ken Lewis to complete the bank's purchase of Merrill Lynch, threatening his job security. Lewis has testified that he had been advised by the officials, former Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, not to disclose details of Merrill Lynch's difficult financial position, according to New York State Attorney General Andrew Cuomo.

The Fed and Paulson have denied pressuring Bank of America to buy Merrill Lynch. "We expect to respond completely and fully as requested beginning today," a Federal Reserve spokesperson said.

The subpoena by the House Oversight and Government Reform Committee comes as Bank of America's Lewis planned to testify on Thursday before the panel. In prepared remarks, Lewis said his company had considered stopping the deal at one point because of "significant, accelerating losses" at Merrill Lynch. The bank decided to move forward with the deal after the government offered to provide assistance, he said. "This course made sense for Bank of America and for its shareholders, and made sense for the stability of markets," Lewis said in prepared testimony. "We viewed those two interests as consistent."

Just a few weeks after the deal was completed, Bank of America's fourth-quarter earnings report showed the hit its balance sheet took on the Merrill Lynch transaction, making Lewis the target of shareholder anger. In January, Bank of America reported a $2.39 billion fourth-quarter loss and Merrill disclosed a more than $15 billion loss.

The bank received $20 billion from the federal government in January after Lewis requested it to help offset mounting losses at Merrill.

Lawmakers say they are unconvinced that the Fed didn't take an active role in pressuring Bank of America to follow through with the deal and keep quiet about its worsening terms. The panel, led by Rep. Edolphus Towns, D-N.Y., has been investigating the matter, as well as the $20 billion in taxpayer money provided to complete the acquisition.

"The marriage between Bank of America and Merrill Lynch was a shotgun wedding pushed by the Federal Reserve," said Rep. Darrell Issa of California, the panel's top Republican.

In April, Attorney General Cuomo confirmed reports that Lewis had told him that Paulson and Bernanke had pressured him to go through with the deal.

The government helped orchestrate the acquisition of the investment bank during the same weekend in September that another investment bank, Lehman Brothers, went under, setting off one of the most intense periods of the financial crisis.

Bank of America completed its purchase of New York-based Merrill Lynch on Jan. 1.

Lawmakers had asked the Fed to release the some 6,000 documents involved in the case, but the Fed has expressed concern that information was confidential.

10 Big Banks Get OK to Repay $68 Billion in Bailout Money

June 9, 2009

AP - Ten of the nation's largest banks were given the green light Tuesday to repay $68 billion in government bailout money, freeing them from restrictions on executive compensation that they say are making it hard to keep their top-performing executives.

The Treasury Department said the banks had been approved to repay the money they received from the Troubled Asset Relief Program created by Congress in October at the height of the financial crisis. Experts say allowing 10 banks to return $68 billion in bailout money shows some stability has returned to the system but caution that the crisis isn't over. And some fear the repayments could widen the gap between healthy and weak banks.

All eight banks that took TARP money and last month passed government "stress tests" confirmed they received permission to repay the bailout funds. They are: JPMorgan Chase & Co., American Express Co., Goldman Sachs Group Inc., U.S. Bancorp, Capital One Financial Corp., Bank of New York Mellon Corp., State Street Corp. and BB&T Corp.

Morgan Stanley did not pass the government test, but on Tuesday said it had raised enough capital quickly and was approved to repay its TARP money. Northern Trust Corp. was not among the 19 banks subjected to stress tests, but the company said it also had received permission to repay the bailout funds.

Speaking at the White House, President Barack Obama welcomed the news but said "this is not a sign that our troubles are over -- far from it." Stocks zigzagged after the Treasury's widely expected announcement. In afternoon trading, the Dow Jones gained about 20 points. Broader stock averages also edged up.

Some analysts questioned whether the repayment of TARP money obscures dangers in the broader banking industry. Smaller banks are still saddled with billions of dollars in risky commercial real estate loans. And large banks continue to hold the toxic mortgage-backed assets at the heart of the financial crisis.

More than 600 banks have received nearly $200 billion in TARP money, and 22 smaller banks already have repaid their funds.

The 10 banks are set to return money from a $200 billion program the government created as part of the $700 billion financial rescue package. The money initially was used to buy preferred shares in the banks -- which are investments that pay regular dividends.

Officials insisted the money was an investment in the companies. The government would receive dividends and warrants, which allow it to buy shares of the banks at a set price over the next 10 years.

Critics have fretted that taxpayers may never see much of the money. But Tuesday's news makes clear that at least for this program, repayments could yield some profits for taxpayers. Obama said he's happy that people are beginning to see "an initial return on a few of these investments."

Money from the $700 billion fund used for other programs will be harder to recover. And some of it, such as the $70 billion used to wind down failed insurance giant American International Group Inc., ended up in the pockets of relatively healthy banks including Goldman Sachs. That means taxpayers are unlikely to recoup the entire $700 billion, even with profits from the banks.

Bank analyst Bert Ely called the repayments a positive sign for the banking sector but not a reason to celebrate. He noted that three of the nation's biggest banks -- Citigroup Inc., Wells Fargo & Co. and Bank of America Corp. -- are still tied to the bailout.

Even the banks permitted to repay the bailout funds are still dependent on government support, including debt guarantees from the Federal Deposit Insurance Corp. and credit lines from the Federal Reserve...

The amounts the banks could repay are:
-- JPMorgan: $25 billion
-- Morgan Stanley: $10 billion
-- Goldman Sachs: $10 billion
-- U.S. Bancorp: $6.6 billion
-- Capital One: $3.6 billion
-- American Express: $3.4 billion
-- BB&T: $3.1 billion
-- Bank of New York Mellon: $3 billion
-- Northern Trust: $1.6 billion
-- State Street: $2 billion

...Geithner cautioned senators Tuesday that Treasury still needs flexibility to inject money into the financial sector and did not guarantee that the paybacks would be used to reduce government debt.

Lawmakers, particularly Republicans, have been insisting that any repaid bailout money be used to reduce the deficit. But Geithner did say that the repayments made it less likely that the administration would need to seek additional money from Congress. The administration had included up to $750 billion in additional bailout funds in its budget proposal.