Banking in America: 2009

Just weeks after announcing massive profits, it appears that the banking sector made them off of the backs of the taxpayer, NOT by increased lending or refinancing.

JP Morgan Chase, Bank of America, Goldman Sachs, and Citigroup alone announced profits totaling $13.6 billion for the second quarter, just 6 short months after losing a combined $20.8 billion. That is a net turnaround of $34.4 billion in half a year. If you were to step back even further, according to Presido, the 115 banks that participated in the TARP managed to turn their 2006 combined profits of $119.3 billion into a loss of $19.3 billion in 2008, totaling a net turnaround of $138.6 billion in 2 years. Over that same period, roughly 33% of CEOs and 40% of CFOs at these very same banks saw their direct compensation rise, primarily through increases in stock options of 71% for CEOs and 59% for CFOs. So not only did the banks destroy our economy, their executives got paid more to do it.

To make matters worse, New York State Attorney General Andrew Cuomo just released a report showing that in 2008 several financial institutions that received bailout money gave bonuses that greatly exceeded the amount of profit generated by the banks. For example, according to CBS News:

• Goldman Sachs, which earned $2.3 billion last year and received $10 billion in TARP funding, paid out $4.8 billion in bonuses in 2008 - more than double their net income.

• Morgan Stanley, which earned $1.7 billion last year and received $10 billion in bailout funds, handed out $4.475 billion in bonuses, nearly three times their net income.

• JPMorgan Chase, which earned $5.6 billion in 2008 and received $25 billion from the government, paid out $8.69 billion in bonus money.

• Citigroup and Merrill Lynch lost a combined $54 billion last year. They received a total of $55 billion in bailouts and paid out $9 billion in combined bonuses. ($5.33 billion for Citigroup; $3.6 billion for Merrill Lynch, which was subsequently acquired by Bank of America, which was just fined $33 million by the SEC for misleading investors about the Merrill bonus payments.)

According to a Wall Street Journal article from back in April, the major recipients of the TARP contracted their lending and refinancing by 23%, as compared to when the program began in October. The decline was so widespread that only 3 of the TARP's 19 largest beneficiaries had an increase in new loans and the total dollar amount lent declined in 3 of the first 4 months of the program. According to the Treasury Department (compiled by the Wall Street Journal), the decrease in lending per bank is as follows, with a median value of -2.2%:

Perhaps the banks have been failing to loan money because they were too busy refinancing delinquent loans through Obama's $75 billion Making Home Affordable program? Think again. Here are the percentage of eligible loans currently being modified, broken down by bank according to the Treasury Department:

• Wachovia: 2%
• Bank of America: 4%
• Wells Fargo: 6%
• Citigroup: 15%
• JP Morgan: 20%
• GMAC: 20%
• Aurora Loan Services (a former unit of Lehman Brothers): 21%
• Morgan Stanley’s Saxon Mortgage Services: 25%

So to summarize: over the last two years the banking sector managed to lose $140 billion while dramatically increasing executive compensation (to the point that, for some banks, their bonuses paid exceeded total profits and the ratio of CEO pay to worker pay is now between 300-400 to 1 on average ) and managing to receive a massive taxpayer bailout. Then, once they had the bailout funds, they cut lending even further and (because of a little known change in mark-to-market, fair-value accounting standards by the FASB) are drag their feet in helping their customers renegotiate their loan agreements.

What a system...