Let's sum up my prior posts and try to make some sense of this whole thing with the Banks. By Banks, I mean large commercial banks like JP Morgan Chase, Citi, Wells Fargo, Bank of America and US Bank; you know the guys the government wants to tax to get back the TARP money lost by GM, Chrysler and AIG. I have referenced my prior post if you want to check back.
1. We now know that the Banks did NOT make subprime loans. Neither did Investment Banks. Those loans were made by unregulated or loosely regulated companies that are now all out of business. See Bernanke and Me and Who Dropped the ball? Posts.
2. The Banks did NOT sell those loans to Wall St. Same guys who made the loans did and they are now gone.
3. The Banks, along with Investment Banks, did engage in the issuance of securities that were backed by those mortgages; HOWEVER, it was the Banks and Investment Banks who actually BOUGHT those "toxic assets" based on ratings of AA and AAA, and thereafter LOST billions of dollars on them when the housing market crashed. The Banks were encouraged to buy them by government regulations. See discussion of Recourse Rule from Basel I
4. Quite clearly executive compensation ( which I too believe is way too high) had nothing to do with causing the whole financial crisis. The Banks have become the "whipping boy " for politicians and pundits who either don't know ( most politicians) or choose to ignore(some pundits like NTY) the facts. Further punishing them can only punish ourselves. See Bonus Madness post
5. Now we can't tax the housing industry.
6. The guys who made and sold the subprime loans are out of business, so we can't tax them.
7. Most of the guys who securitized the mortgages are also out of business-- Lehman Brothers, Bear Stearns, Merrill Lynch, Wachovia, Washington Mutual and Countrywide -- all gone or taken over at a fraction of their one- time value.
8. So let's tax the Banks and the Investment Banks who suffered all those losses to the point that the government had to step in and support them with loans, which have all been PAID BACK with interest and warrants.
9. In fact (hold on to your hats) an argument can be made that the Banks were actually victims in this crisis. While victims is too strong of a word, as I have learned in my reading, the Banks bought the mortgage backed securities at the "urging" of the government. Since they were rated AA or AAA ( Recourse Rule in Basel I)they were given favorable treatment by the regulators for purposes of capital and leverage. Oops !! When the "shit hit the fan" on subprime loans, the housing market crashed and the value of those "safe" securities plunged. The Banks lost Billions, at least on paper. So began the downward spiral That's what the Morgan Stanley guy so graphically and inartfully was tying to say when he said" we ate our own cooking and it choked us". See "Skin in the Game" post.
The Obama administration, The New York Times, among many others, feel the Banks and Investment Banks should be taxed, and taxed some more, because they caused this terrible crisis we are all suffering through. I know it feels good.
My problem is that they have assumed their conclusion. They are correct if their conclusion is correct. However, they assume that the actions of the Banks( the ones they want to tax) caused this crisis. As set out above, that's far from clear. I believe, as does Ben Bernanke and Shelia Bair , that the crisis was caused by SUBPRIME LENDING and the failure of regulators to enforce EXISTING regulations.
The crisis went viral because of the UNREGULATED Credit Default Swap market. As an aside Credit Default Swaps were illegal until the Clinton administration ( with Republican help) made them legal and did not allow them to be regulated. Recall as well that AIG isn't a Bank.
Too bad we can't tax the government.
Let's all remember that "saving" the banking system actually saved the economy, including most importantly main street, from an even deeper recession. Image if the Fed and the government had not taken the action it did. See Are You Happy Now? post.
While we definitely need regulatory reform that improves (not impairs) the banking system, it won't be accomplished by taxing big Banks and taxing won't create jobs.
By the way, as this goes to press, Bank of America and Citicorp announced Billion Dollar losses. Where are the wind fall profits to tax?
Eric
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