You don’t have to be a Republican to sling some mud at our
lame duck president. Senator Kirsten Gillibrand (D-NY), dared suggest that
student loan rates should equal those charged to large banks, 0.75%; she’s
appalled by the “business-as-usual” mindset found in Washington.
After much haggling, Congress has passed a bipartisan
legislation that pegs student loan rates to the economy, hardly a comforting
compromise for the largest debt in the economy (around $1trillion in 2012).
Amidst the euphoria associated with a rare legislative agreement, the silly
idea proposed by the junior senator has been quietly laid to rest: how dare she
compare the mighty commercial banks to students?
Regardless of an estimated 8.7% drop in student
enrollment in 2013 (compared to 2012), and regardless of graduates’ economic
prospects in the new digital economy, let’s follow the mega commercial banks.
If you recall, the Emergency Economic Stabilization Act of 2008 gave roughly
$700 billion to banks to avert an impending economic catastrophe. Economic
historians will debate for years the effects of this Act.
Fast forward to 2013, and these same banks have done
tremendously well. Just look at their reports for the 2nd quarter of
2013: Bank of America’s revenue $22.9 billion, $4 billion net income ($97
billion bailout); Goldman Sachs’s revenue $8.6, $1.93 billion net income ($10
billion bailout); Citigroup’s revenue $20.5 billion, $4.2 billion net income
($220.4 billion bailout); JPMorgan Chase revenue $26 billion, $6.5 billion net
income ($94.7 billion bailout). You see the picture—the banks are doing
extremely well after a well-intentioned (but misplaced) taxpayers’ assistance. Couldn’t
this money have been given directly to homeowners to avoid foreclosures? Should
their “prime discount rate” be fixed at 0.75%, while ours is so much higher?
Given this collaborative relationship between banks and government
agencies that regulate them—bailouts when needed—you’d hope that banks would
behave like good citizens. Instead, these commercial
banks have been disregarding federal laws with a level of impunity not seen
since the Gilded Age.
The latest headlines are quite telling: “Lawyers
Present Closing Arguments in Former Goldman Trader’s Fraud Case,” “Ex-Stock
Analyst Charged With Insider Trading in Case Tied to SAC Indictment,” and “Morgan
Stanley Fined for Selling Exotic Funds to Unwary Elderly.” At least these cases ended up in court. Many, though, have been
settled out of court.
According to the New York Times, the Federal
Energy Regulatory Commission agreed to settle with JPMorgan to the tune of $410
million. The regulator accused the bank, and more specifically its senior
executive, Ms. Blythe Masters, of “manipulative schemes” that resulted in
charging more for energy than was warranted at the time (2010-2011). We should
leave the details of the facts in this case and its eventual settlement to
lawyers. But should we ignore the moral hazards associated with ongoing abuses
by bank executives, the beneficiaries of low borrowing costs and a federal
safety net if they fail?
The argument about a rogue trader here and
there that takes unduly advantage of unsuspecting investors or the public trust
is one thing; when it’s a systematic behavior that is condoned (because not
stopped) by CEOs and Board members, then American capitalism isn’t living up to
the promises its founders made for its integrity.
Large commercial banks, like JPMorgan Chase,
are public entities at least inasmuch as they collect individual deposits that are
insured by the FDIC, they are publicly traded (hence publicly owned), they
enjoy the largess of taxpayers (even though never consulted) when they are
about to fail, and they are regulated by the US government. They are private
insofar as their profits remain under the control of the management team whose
compensation packages don’t require public (or government) consent. The choice
of playing the public or private card is always at the discretion of these
banks.
What should we make, then, of the $410
million settlement? Defrauding customers apparently is the new normal. Getting
caught rarely happens. If it happens, fines are paid, and no one goes to jail.
Powerful Wall Street lawyers cut a deal that doesn’t ruffle any feathers: it’s
a win-win settlement (favorite cliché in Business Schools). Neither Ms. Masters
nor Jamie Dimon (the CEO) went to jail, and the fines JPMorgan paid will be
forgotten in the annual financial statement (which will amount, at this rate of
profitability, to 1.6% of $25 billion). Likewise, the Federal Energy Regulatory
Commission scored big in levying $410 million in fines in comparison to its
latest settlement with a bank of $1.6 million (NYT).
Have we lost our moral outrage? Have we
accepted financial scandals. We continue to deposit our paychecks in mega-banks
for 0.1% interest and pay 6.99% interest for small business loans. No wonder banks’
facades are made of marble.
Raphael
Sassower is professor of philosophy at UCCS; rsassower@gmail.com See also sassower.blogspot.com
