22 Jul 2009

Back to bank bonuses: crisis survivors

America’s banks rake in bumper profits just six months after they were on the ropes, begging for government bailouts. Faisal Islam went to the US to find out what the legacy of the banking crisis is.

The country’s biggest home lender and once the no1 subprime lender, Wells Fargo, one of America’s “big four”, announced yet more record profits in July 2009, although the number of bad loans also soared.

The following month Goldman Sachs announced massive quarterly profits, and a record bonus pot, despite taking billions of dollars in bailout cash last year.

But with four million Americans facing repossession and unemployment surging to almost 10 per cent, anger with the banks continued to grow.

Channel 4 News reported from Baltimore, once a property hotspot, now hit hard by the housing crisis.

“The banks got an amazing deal last September, they were rescued by the taxpayer, and then refloated themselves giving the taxpayer very little of the upside and now they are going to have very high profits and pay themselves bigger bonuses,” Simon Johnson told Channel 4 News, the man who was chief economist of the International Monetary Fund in 2008.

That America’s banks have carried off an “amazing steal” from the US taxpayer, he said.

David Rothkopf, a Bill Clinton appointee to the Department of Commerce, also told Faisal Islam: “The banks took the money they restructured, some of them fell, but those that stayed behind didn’t just have a bonanza, but one of the biggest bonanzas in their history.

“So people are asking: ‘were they telling the truth?’, and ‘where’s our share of the bonanza?…How can it be when they wreck the economy, we are responsible to these rich guys in their time of crisis, but they aren’t responsible to us?”

Blog: Faisal Islam on America's housing crisis

The banks are beginning to see the light at the end of the tunnel of the subprime crisis. The problem is that for ordinary Americans the crisis is undoubtedly getting worse.

Ordinarily the American dream endures a recession through internal migration. Go to California, find a job, and build your house. Now that dynamic is greatly undermined by the housing crisis. If you are in negative equity, or can't get a mortgage, it's rather difficult to move to the jobs.

In Baltimore, Pamela Ball looks wistfully at the now empty townhouse recently repossessed by Wells Fargo. "It sits here empty and it really breaks my heart", she says. Pamela Ball's American nightmare is a symbol of how it is no longer accurate to call this a subprime crisis.

It is a generalised housing crisis, with prices still falling. Prices had not fallen across America in the entire post war period. The uninterrupted run of rising house prices underpinned America's consumption economy, its role as the world's consumer-of-last-resort.

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‘Vampire squid’

“It is a form of compensation which rewards gamblers if they win – but with no loss if they lose,” the Bank of England governor Mervyn King said when denouncing bonuses paid to some banking chiefs and calling for tougher regulation.

But with a recovering banking sector came renewed bank bonuses. Goldman Sachs’ record bonus announcement in August 2009 had US voices questioning the influence of so-called “government Sachs”.

It was the rock magazine Rolling Stone that sparked the storm of attention to the Wall Street’s biggest player.

Writer Matt Taibbi argued that Goldman is a giant “vampire squid” wrapped around the face of humanity and responsible for no less than six disastrous financial bubbles.

Those words were dismissed as a conspiracy theory at Goldman’s current offices, but that article has spawned other accounts, denied by the company itself, of the panic amongst partners last autumn as a sharp share price fall threatened their financial ruin.

Blog: Goldman glow replaced by Goldman glare

"It's open season on Goldman Sachs, the high priests of high finance. Robert Shiller, probably the foremost housing economist in the world says he's worried about the "intensity of the anger" that it harks back to a desire for "simpler times".

"Now at GS towers I'm sure they'd prefer this than the fate that became of Lehman Brothers. They acknowledge the extra attention given to the remarkable fanning out of their alumni in the corridors of power.

For Goldman's part, it is damned either way. It has played the hand it has been given to perfection. Having survived the storm, it was facing much less competition for lucrative investment banking work, its margins on basic trading had shot up.

"In short, there was no need to help conjure complex financial products. Plain vanilla investment banking has been lucrative for any one still in the game."

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