From J.P. Morgan to Jamie Dimon

(This piece originally appeared in the New York Daily News, April 10, 2014): New York is a wonderful town — if you run a mega bank. Because for over a century, the Big Six banks and their leaders have dominated not just the U.S. banking industry, but American and global finance, traversing the power corridor between the White House and Wall Street to help themselves, their families and their friends in good times and bad, in partnership with the President.

But in the process of placing personal enrichment over the public interest and fair practices, particularly in recent years, they have created an atmosphere where the next big crisis is not a question of if, but of when. History has shown that absent true reform, those holding the power and the money can and will wreak havoc on the rest of the population.

For the first 80 years of the 20th century, four families largely controlled the nation’s top three banks: Morgan, Aldrich, Stillman and Rockefeller. National, financial and foreign policy was fashioned through personal connections to the Presidents — forged through blood, marriage, mentorships and connections made at Ivy League colleges, and through social activities like yachting, golfing, ranch barbeques and exclusive parties and clubs.

In October 1907, Manhattan was struck by a major bank panic. People from Fifth Ave. to Harlem rushed to extract their money from the Knickerbocker Trust Company because one of its leaders had made a horrendous bet on copper, which precipitated a wider panic. A fear of greater ramifications caused the “Trust-Buster,” President Teddy Roosevelt, to turn to the one man he believed could help — a banker, J.P. Morgan.

At midnight, Morgan and his entourage gathered at the Hotel Manhattan. With $25 million from the government to utilize as he saw fit, Morgan directed his financial friends to back the Trust Company of America, the “Too Big to Fail” firm of the time, embraced by the government and finance men who decided which banks lived and died — not the Knickerbocker Trust Company. President Roosevelt sat in Washington awaiting the results.

At 1 a.m., Frank Vanderlip, vice president of National City Bank (now Citigroup), informed reporters in the lobby that all would be well. And it was. New York papers sung Morgan’s praises. He had “saved” the city, the country. He was dubbed a “king.” The press omitted that he did it without dropping a dime of his own money.

Fast-forward through WWI and years of speculative buying and shady scams, and the stock market stood poised for collapse. In October 1929, it did.

Another meeting was called. The Big Six bankers gathered at the House of Morgan on 23 Wall Street before Thomas Lamont, acting Morgan Chairman. At his table were five other bankers: from National City Bank and First National Bank (both now part of Citigroup), from Morgan Guaranty and Chase (which, along with the Morgan Bank, became part of JPM Chase), and from Bankers Trust (which was controlled by the Morgan Bank). President Hoover sat in Washington awaiting the results.

The men hashed out a plan to boost the markets using their firms’ (or customers’) money. Each banker agreed to pony up $25 million. The stock-buying began. The mood and the markets were lifted. The media exalted. Nonetheless, over the next three years, the market lost most of its value, and a Great Depression ensued, crushing citizens.

Yet the Big Six survived, devouring thousands of smaller banks that failed.

Today’s Big Six banks are largely combinations (with additional members thrown in the mix) of the same Big Six banks that thrived through the Panic of 1907, Crash of 1929, WWII, the Bay of Pigs, the 1990s merger mania, and the recent financial crisis of 2008.

They now hold $9.4 trillion, or 84%, of FDIC-insured deposits, $12.5 trillion, or 85%, of all U.S. bank assets — and control 96% of all U.S., and 43% of the $693 trillion of global derivatives positions.

For the last 100 years, their leaders have collaborated with willing Presidents to run America. Given current global financial complexity, the Big Six chairmen have more economic control than Presidents, governments or central banks. We don’t elect them, but we do keep our money with them. We shoulder the cost of the risks they take.

With so much power in the hands of an elite few, America operates more as a plutocracy on behalf of the upper caste than a democracy or a republic. Voters are caught in the crossfire of two political parties vying to run Washington in a manner that benefits the banking caste, regardless of whether a Democrat or Republican is sitting in the Oval. Meanwhile, American inequality is reaching pre-1929 heights.

Mitigating the big banks’ power requires, at long last, breaking them up in such a manner as to split our deposits and taxpayers dollars from their speculative activities — by finally reinstituting the Glass-Steagall act of 1933.

In addition, we need to instill deposit and assets limits on these monstrosities to reduce the amount of control they have over America’s money. We need Congress to wake up to the looming mega-crisis around the corner that will happen without serious reform.

And, not least, we need a President who will get out of the bankers’ bed.

The Fed’s Employment-Taper Myth, Big Six Bank Stocks, and Downgrades

There is a prevailing, politically expedient myth that the Fed’s bond purchase programs are somehow akin to job fairs; as if there’s an economic umbilical cord stretching from a mortgage-backed security lying on the Fed’s books to a decent job becoming available in the heart of America. Yet, since the Fed began its unprecedented zero-interest rate and multi-trillion dollar bond-buying policies - the real beneficiaries have been the Big Six banks (that hold more than $500 billion of assets): JPM Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley.

The Big Six banks’ stock prices have outperformed the Dow’s rise by more than double, since early 2009. Moreover, low to zero percent interest rates on citizens’ savings accounts have catalyzed depositors, pensions, and mutual funds to buy more stocks to make up for low returns on bonds and money market instruments, further buoying the stock market.

Quantitative Easing ‘QE’ entails buying bonds, not creating jobs

No matter how many articles and politicians claim the Fed is buying Treasury and mortgage-backed securities (MBS) to help the a) economy or b)  unemployed, it isn’t true.

According to the Economic Policy Institute “the unemployment rate is vastly understating weakness in today’s labor market.” True, the official unemployment rate  (called ‘U-3’ on the Bureau of Labor Statistics reports) has inched downward from a high of 10% in early 2009 to 7%. But, that’s because people have dropped out of the hunt for jobs. The number of these ‘ workers’ as EPI calls them, has risen with the stock market’s rise; that’s not a sign of a healthier employment situation.

If those workers were still ‘participating’ in the employment-seeking crowd, the adjusted U-3 unemployment rate would have hovered between 10 and 11.8% since early 2009. It is currently at 10.3%. In other words, it’s still pretty damn high.

And that’s a more conservative estimate of unemployment than places like John Williams’ Shadowstats computes, which pegs the unemployment rate at Great Depression levels of just below 23%.

(The BLS’s estimate of the U-6 unemployment rate, which includes people who have briefly stopped looking (short-term discouraged or marginally attached workers) or found part-time rather than full time jobs, is at 13.2%. It has declined along with the official U-3 estimate, but does not account for the “missing” 5.7 million workers, either. Plus, the BLS long-term jobless figures have remained steady around 4 million people.)

Happy Hundredth Birthday Fed! (Bank to the bankers, not the people)

As I explore in greater detail in my upcoming book, All the Presidents’ Bankers, the Fed wasn’t created in the wake of the Panic of 1907 to help people find jobs. It was created to provide bankers a backstop to the pitfalls of risky bets gone wrong, and propel the US to a financial superpower position competitive with major European banks via supporting the US dollar.

As per its official summary in the Federal Reserve Act of 1913 (approaching its century anniversary on December 23, 2013), the Federal Reserve was formed to “provide for the establishment of Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.”

Besides, if the Fed really wanted to make a dent in unemployment today, it could have spent the nearly $1.4 trillion it used to buy MBS to create 14 million jobs paying $100K or 28 million jobs paying $50k, or funded the small businesses that the big banks are not. Equating QE with employment illogically equates offering the biggest banks a  dumping ground for their securities with middle and lower class prosperity.

QE is ongoing because the Big Six still hold crappy mortgages and like trading

According to the latest New York Fed's quarterly trends report; the Big Six banks’ annualized trading income, as a percentage of trading assets, is higher than pre-crisis levels, whereas non-trading non-interest income as a percentage of total assets is lower. That means banks are making more money out of trading post-crisis than pre-crisis relative to other businesses.

In addition, total non-performing loans, as a percent of total loans, is 4.75% (from a 2009 high of 7.25%) for the Big Six. This figure remains more than double pre-crisis levels, and more than double that of the rest of the industry (i.e. the smaller banks).

Nearly 10% of the residential mortgage loans of the Big Six banks are non-performing. This is not very different from the 11% highs in 2009 (compared to smaller banks whose ratios are 3.5% vs. 6% in 2009). In other words, the Big Six banks still hold near record high levels of bad mortgages, and in higher concentrations than smaller banks. That’s why the Fed isn’t tapering, not because it’s waiting for a magic unemployment rate.

QE Propels Big Six Bank Stock Prices

Since the financial crisis, the Fed has amassed a $3.88 trillion book of securities, or quintupled the size of its pre-crisis book. As of December 2013, the Fed owns $1.44 trillion MBS, many purchased from its largest member banks, the ones engaged in settlements and litigations over the integrity of similar securities and loans within them.

Since the Fed announced QE3, a $40 billion extension asset purchases per month (over the then-prevailing limit of $45 billion) on September 13, 2012,

the Dow has jumped 19%. BUT meanwhile - the Big Six bank stocks are up on average 53.5% (JPM Chase is up 43%, Bank of America 74%, Goldman 42%, Citigroup 57%, Morgan Stanley 77% and Wells Fargo 27%.)

Since its March 2009 lows, the Dow is up 142%. BUT - the Big Six bank stocks are up on average 324% or more than twice the level of the Dow. (JPM Chase is up 258%, BofA 396%, Goldman 122%, Citigroup 499% (accounting for its 10 to 1 reverse stock split in March 2011 - it was trading close to a buck on March 6, 2009) Morgan Stanley 80%, and Wells 408%.) Yes, they were near death, but you can’t argue the Fed’s policy helped the broad economy as opposed to mega-disproportionally helping the banks. These numbers don’t lie. And help from the Fed won’t stop with a new Chair.

Yellen to the (bank) rescue?

In her statement to Obama on October 9, 2013, Janet Yellen said “thank you for giving me this opportunity to continue serving the Federal Reserve and carrying out its important work on behalf of the American people.”

A month later, she told the Senate Banking Committee, “It could be costly to fail to provide accommodation [to the market],” underscoring her support for quantitative easing and zero-interest rate monetary policy (and Big Six bank stock prices).

In its latest FOMC meeting release, the Fed reiterated, “the Committee decided to await more evidence that progress [in the economy] will be sustained before adjusting the pace of its purchases.” It says the same thing every month, with slightly different wording. Every time the market wobbles on ‘taper’ fears, it jumps back, because professionals know the Fed will keep on buying bonds, because that’s what the Big Six banks need it to do. To analyze taper-time, look at the banks’ mortgage book, not the unemployment rate.

Resolution Plans and Downgrading for the Wrong Reasons

On November 14, Moody’s downgraded 3 of the Big Six banks - Goldman, JPM Chase, and Morgan Stanley - and also Bank of New York a notch each because “there’s less likelihood in the future that these banks will be helped by the government” in a financial emergency. Moody’s has the downgrade right, but for the wrong reasons.

The big banks had to present ‘living wills” as the media calls them, or Dodd-Frank Title II required resolution strategies. They amount to the big banks selling whatever crap they own in an emergency and dumping whatever remains of their firms on the FDIC. 

I examined the plans submitted to the Fed on October 30.  They aren’t long. The ones for JPM Chase and Goldman Sachs, for instance, tally 31 pages each, of which 30 pages discuss their businesses and just one page - resolution strategy.

The FDIC basically would get the toxic stuff unsellable by the ‘troubled’ bank and place it in a newly established ‘bridge bank’ before the ‘troubled’ bank finds another buyer or declares bankruptcy. Which is exactly what happened with IndyMac and other banks that were ‘taken over’ by the FDIC and then resold to private equity and other firms.

If all else fails, each firm would undergo bankruptcy proceedings, in an “orderly” manner and “with minimum systemic disruption” and “without losses to taxpayers.”  Or so the process is characterized by JPM Chase and the others.

Goldman Sachs also waited until page 31 of 31 to present its main resolution idea, consisting of  “recapitalizing our two major broker-dealers, one in the U.S. and one in the U.K., and several other material entities, through the forgiveness of intercompany indebtedness...” This amounts to massaging inter-company numbers if things go haywire.

But banks oozing eloquences like “orderly market” or ‘minimum-disruption” bankruptcy and the reality being so, are two different things. Lehman Brothers tried most of these methods and still catalyzed a widespread economic meltdown. Bear Stearns didn’t declare bankruptcy, but the Fed and Treasury still conspired to guarantee its assets in a sale to JPM Chase. Technically, politicians and bankers argued no taxpayer money was used in that scenario because the guarantee wasn’t part of the TARP funds, but it was a government guarantee all the same so the distinctions amounts to splitting political hairs.

There is simply NOTHING NEW in these plans, no safety shield for the world. The problem remains that the FDIC can’t handle a systemic banking collapse, which is a threat that the Big Six banks, in all their insured-deposit-holding-glory still pose.

If all of the banks implode on the back of still existing co-dependent chains of derivatives or toxic assets or whatever the next calamity delivers, even if the Treasury Department doesn’t get Congress to pony up funds to purchase preferred shares in the big banks, and even if the FDIC creates bridge banks to take over trillions of dollars of bad assets - which it can’t afford to do, the Fed would simply enter QE-Turbo Mode.

It doesn’t matter if bankers and politicians don’t consider this a ‘taxpayer-backed’ bailout as per the lofty aspirations of a tepid Dodd-Frank Act. Because whatever subsidies are offered in that case, we will all still be screwed, and we will all pay in some manner. The Fed’s balance sheet and Treasury debt would bloat further. The cycle would continue.