Saturday, March 24, 2012

Big Banks Continue to Benefit From Never-Ending Stealth Bailouts

Source: Washington's Blog Open-Ended Bailouts Are Continuing We’ve previously documented the fact that bailouts of the big banks are continued in stealth mode up to the present day. True, the banks claim they’ve repaid the Tarp bailout funds … but nearly half of the banks “repaid” such bailout funds by borrowing from other government bailout funds (and the rest could only repay money by fudging their accounting and using stealth bailouts which are are a little harder to detect). Indeed, the government has decided on perpetual bailouts for the too big to fail banks. Some of the ongoing stealth bailouts include:
  • Obama’s erroneously-labelled “jobs” act
  • The mortgage settlement
  • Interest rate swaps
  • The Transaction Account Guarantee program, an extension of FDIC insurance coverage to all transaction balances
And the fed is going easy on the big banks in many other ways as well. But the biggest ongoing bailouts include interest rate spreads, interest on excess reserves and other constant streams of bailout revenue. *** The TARP bailout is peanuts compared to the numerous other bailouts the government has given to the giant banks [and even the numerous rounds of quantitative easing are a drop in the bucket compared to stealth bailout programs]. And I’m not referring to the $23 trillion in bailouts, loans, guarantees and other publicy-disclosed programs that the special inspector general for the TARP program mentions. I’m talking about more covert types of bailouts. Like what?
  • Mortgages and Housing
  • Derivatives
  • Foreign Bailouts
  • Toxic Assets and Accounting Shenanigans
  • Fraud As a Business Model
  • Settling Prosecutions For Pennies on the Dollar
  • Guaranteeing a Fat Spread on Interest Rates
Someone must be getting bailed out, right? Why yes, say critics of the giant banks. They charge that Monday’s rally-stoking mortgage-putback deal between Bank of America (BAC) and Fannie Mae and Freddie Mac is nothing more than a backdoor bailout of the nation’s largest lender. Freddie got a $1.28 billion payment out of BofA in exchange for relinquishing fraud claims on $117 billion worth of outstanding loans. “How Freddie can justify this decision to settle ‘all outstanding and potential’ claims before any of the private-label putback lawsuits have been resolved is beyond comprehension,” says Rebel Cole, a real estate and finance professor at DePaul University in Chicago. “This smells to high heaven and they should be called out.” According to Bloomberg, BofA’s Jerry Dubrowski said: “Our agreements with Fannie Mae and Freddie Mac are a necessary step toward the ultimate recovery of the housing market.” “This is a gift” from the government to the bank, said Christopher Whalen of Institutional Risk Analytics. “We’re all paying for this because it will show up in the losses from Fannie and Freddie,” he said. “The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks. It’s a transfer from savers to banks.” Congresswoman Waters said, "I’m concerned that the settlement between Fannie Mae, Freddie Mac and Bank of America over misrepresentations in the mortgages BofA originated may amount to a backdoor bailout that props up the bank at the expense of taxpayers. Given the strong repurchase rights built into Fannie Mae and Freddie Mac’s contracts with banks, and the recent court setback for Bank of America in similar litigation with a private insurer, I’m fearful that this settlement may have been both premature and a giveaway. The fact that Bank of America’s stock surged after this deal was announced only serves to fuel my suspicion that this settlement was merely a slap on the wrist that sets a bad example for other negotiations in the future." The Federal Reserve helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter. The latest quarterly reports from the big Wall Street banks revealed a startling fact: None of the big four banks had a single day in the quarter in which they lost money trading. For the 63 straight trading days in Q1, in other words, Goldman Sachs (GS), JP Morgan (JPM), Bank of America (BAC), and Citigroup (C) made money trading for their own accounts. Trading, of course, is supposed to be a risky business: You win some, you lose some. But these days, trading isn’t risky at all. In fact, it’s safer than walking down the street. Why? Because the US government is lending money to the big banks at near-zero interest rates. And the banks are then turning around and lending that money back to the US government at 3%-4% interest rates, making 3%+ on the spread. What’s more, the banks are leveraging this trade, borrowing at least $10 for every $1 of equity capital they have, to increase the size of their bets. Which means the banks can turn relatively small amounts of equity into huge profits–by borrowing from the taxpayer and then lending back to the taxpayer. This is a Suspicious News Brief. Read more at Washington's Blog.

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