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Stacy Mitchell

 By Stacy Mitchell
Senior researcher, New Rules Project’s Community Banking Initiative 

The New Rules Project, in partnership with HuffPost’s Move Your Money campaign, is using its Community Banking Initiative to get out the word that banking locally can put the power back in the hands of individuals and communities, rather than Wall Street’s CEOs.

Those who wonder whether public anger at big banks and the Move Your Money sentiment sweeping the country is substantial enough to impact these giants need only look at the banks’ own marketing over the last few weeks to see the proof.

In a spate of new advertisements and PR maneuvers, the nation’s largest banks are working hard to win us back. They are, in effect, standing on our doorstep, flowers in hand, trying to convince us they’ve changed.

They’re using words like “local” and “community,” because they know quite well that there’s a rival for our affections. A recent Zogby poll found that nearly one in ten Americans had moved at least some of their business to small banks or credit unions.

One jilted lover, Citibank, has launched a blog devoted to showcasing the “new Citi.” The site, which Citibank is promoting through newspaper and magazine ads, features a video statement by CEO Vikram Pandit, who offers a few vaguely apologetic statements before detailing how Citi is a changed bank.

We’ve given up boozing and gambling, Citibank seems to be saying as Pandit assures us that the new Citi has embraced “a culture of responsible finance.”

In his opening post, Pandit describes this as a “new chapter” and invites us to participate in a conversation. “We promise we’re listening,” he writes.

So far, many of the user comments, which are moderated, appear to come from Citibank investors, but a few disgruntled customers have managed to get through. “What Cit has done to ‘help’ me in the last year: interest rate increase to 29 percent!” writes Peter. “I have never been late with a payment… [You have] a total lack of caring toward your customer base.”

“No amount of empty words can help you guys,” comments another, now ex-, customer of Citibank.

The site makes rather conspicuous use of the words “local” and “community,” suggesting that Citigroup, which has assets of $1.3 trillion, knows exactly where its customers are moving their bank accounts. When you load the site, a pop-up window that fills the center of the screen describes the company as a team of “local community bankers.”

Citi is not the only giant financial conglomerate wrapping itself in the mantle of a local community bank. During the Olympics, Wells Fargo, which has $1.2 trillion in assets and some 10,000 locations, ran television commercials in which it described itself as “the nation’s leading community bank.”

Although there’s no set definition of a community bank, it’s commonly defined as a bank that is rooted in one place and has no more than $1 billion in assets. Wells Fargo is about 1200 times that size.

In a biting response to the commercials, Camden Fine, head of the Independent Community Bankers of America, warned, “Wall Street mega-firms better be careful what they call themselves lest they be confused with actual community banks that regulators allow to fail.”

It’s no surprise that big banks are grabbing onto words like “local” and “community,” says Tim Pannell, president of Financial Marketing Solutions, which develops branding and advertising for banks. “Big banks understand that those are the key words that are creating success for a lot of community banks,” said Pannell. “That’s what they’ve been hammered with in all these local markets, where the community banks have said, you don’t need a big bank, what you need is a local bank.”

Rather than pretending to be small itself, JPMorgan Chase has taken a slightly different tack. New print ads running in the New York Times and elsewhere present the bank as a generous financial backer of small businesses: “At JPMorgan Chase, we recognize that small businesses are critical to economic recovery and to building America’s future…. When creditworthy businesses come to us for help, we look to find every opportunity to provide the funding they need to grow.”

According to FDIC data, however, JPMorgan Chase is very much a laggard when it comes to small business lending. With just 16 percent of its commercial lending going to small business loans in 2009, Chase is not even remotely in the same league as community banks, which devoted more than half of their commercial loan portfolios to small business. But even more stunning is the fact that Chase even lags other giant banks (those with $100 billion or more in assets), which allocated an average of 19 percent of their 2009 lending to small business loans.

(Take a look at these graphs to see just how little support for small businesses big banks provide.)
All of this is just an early taste of what the rest of year is likely to bring. Nervous about customer defections and holding a lot more cash than they had last year, big banks are planning to spend big bucks on marketing this year. We should expect more speeches about how they’ve changed and more false claims about community and small business. But let’s not be seduced into taking these jerks back.

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Stacy Mitchell, who has tracked corporate “local washing” across a variety of industries, is a senior researcher with the New Rules Project and its Community Banking Initiative.

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Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

For some reason most of the discussion in Washington and the media of the bank bailouts is overlooking their central feature: taxpayer dollars are being used to sustain the income of incredibly rich bankers. The public should be furious over this upward redistribution of income.

The basic story here is very simple. If we got the government out and left things to the market, virtually the entire banking sector would be bankrupt. Citigroup, Bank of America, Goldman Sachs, Morgan Stanley and almost all the other big banks, and thousands of smaller ones, would be out of business. (My bet is that even “healthy” banks like Wells Fargo would be in bankruptcy before too long. They hold plenty of bad debts, too.)

Most of the top executives of these banks would likely be sent packing, while those remaining would have their compensation (including “golden parachutes” and bonuses) set by bankruptcy judges who would be running the companies in the interest of the creditors, not the shareholders. The shareholders themselves would be out of luck for the most part. Many bank stocks have already lost 80-90 percent of their value over the last 18 months. Bankruptcy would likely eliminate what little remains.

However the banks are not in bankruptcy because the confused state of affairs and potential loss of creditors’ wealth created by large-scale bankruptcies in the financial sector would be a devastating hit to the economy. This is the rationale for the TARP, the various special lending facilities created by the Fed, and other measures to ensure the survival of the banking system.

The government has intervened in a huge way to keep the market from taking its course. But the key issue that has been buried in the debate in the media and political circles is the separation of the interest of the public in a functional financial system and the interests of bank executives in high salaries and shareholders in getting returns on their capital.

At this point, the banks are desperate — they would be dead without government handouts. This means that the government can set whatever terms it wants. And, for both economic and moral reasons, it has an obligation to set terms that do not reward the bank executives and shareholders.

The bank executives and shareholders took big risks that went bad. If they are rewarded with taxpayer handouts, then the message this sends to the financial sector is to keep taking irresponsible risks. The game becomes heads they win, tails we lose. If the bets pay off, then they are incredibly rich. When the bets go bad, the taxpayer gets the tab.

The moral reason for not rewarding executives and shareholders is that these rewards require the taxation of middle income people, like truck drivers and nurses, to transfer money to some of the richest people in country.

This sort of upward redistribution is difficult to justify. Usually people in the United States like to believe that the market determines the distribution of income. Many get outraged over the idea that a mother on TANF can get a check for a few hundred dollars a month from the government. In this case, the government is effectively handing checks of millions of dollars to bank executives who would be out of work if the market was left to run its course.

We have to keep the financial system functioning, but we can do this without transferring hundreds of billions of dollars from middle class taxpayers to the wealthiest people in the country. If the bailout conditions imposed by the Obama administration and Congress don’t effectively eliminate shareholder wealth in the bankrupt banks and bring compensation (in whatever form) of bank executives back down to main street levels then it is can only be explained by corruption. There is no excuse for this massive intervention to redistribute income upward.

Leo W. Gerard

By Leo W. Gerard

International President

Are you feeling depressed, dogged by daily bad news about the effects of reckless, unregulated Wall Street speculators sinking the economy? Well, U.S. Treasury Secretary Hank Paulson has decided to take this opportunity to kick you while you’re down. And use your money to do it.

Paulson cheated American taxpayers with his initial expenditure from that $700 billion Wall Street bailout fund – the $125 billion he gave to nine financial institutions.

That’s right. He paid twice what the securities were worth. That means he gave the CEOs and stockholders of these firms a $62.5 billion gift. From taxpayers.

Now Paulson is no rube. He’s a former Goldman Sachs CEO, who has surrounded himself with former Goldman Sachs executives for advice.

Oh, and by the way, one of the nine firms that received this gift from American taxpayers is Goldman Sachs.

You can find the financial analysis of Paulson’s deal here, on the USW web site.

I’ve written Paulson to demand an explanation for his profligate ways with taxpayer dollars. I’m copying it here to encourage you to write him as well. We need to stop him from spending the rest of the money as if he were still a Wall Street speculator.

October 28, 2008

Henry M. Paulson, Jr.

Secretary of the Treasury

1500 Pennsylvania Avenue, NW

Washington, D.C. 20220

Dear Secretary Paulson,

While I am sure that you face no shortage of advice regarding the crisis that continues to engulf the world’s capital markets, I did want to share with you some questions and concerns regarding your decision to invest $125 billion of the taxpayers’ money into nine financial institutions, including the securities firm which until recently you headed, Goldman Sachs.

While the media was filled with the usual breathless “behind-the-scenes” reports of your “High Noon” bargaining, what seems to have escaped their notice was your decision, on behalf of the taxpayers, to pay roughly twice as much as you needed to for the securities that you purchased.

To me, at least, this is far more important than whether you gave the assembled CEOs two hours, two weeks or two minutes to sign up; whether, as the New York Times helpfully tells us, you have seen “Butch Cassidy and the Sundance Kid”; whether you have worked long hours in the last few months; or what brand of cell phone you use.

While Wells Fargo Chairman Kovacevich, who was forced to get by on only $300 million over the past ten years, may or may not have actually pretended to resist the deal, if he had in fact turned you down, he should have been fired, given the extraordinary deal he was being offered.

I have enclosed with this letter a copy of the analysis that we prepared which values the investment of the taxpayers’ money in Goldman Sachs at only 50% of what was actually paid. Perhaps one of your former colleagues at Goldman could take a minute away from their busy day shorting mortgages to see if we are correct.

Mr. Secretary, this analysis is not rocket science. Just twenty days before Goldman announced that it would “accept” Treasury’s investment, Warren Buffett invested $5 billion into Goldman Sachs and acquired the very same type of security – preferred stock – with the very same form of “upside” – warrants to purchase common stock. For some reason, however, per dollar invested, Mr. Buffett received at least seven and perhaps up to fourteen times more warrants than Treasury did and his warrants have more favorable terms. In addition, Mr. Buffett’s preferred stock has a higher dividend rate and can only be bought away from him at a premium, while Treasury’s investment of taxpayers’ money pays a lower dividend and can be repurchased at par.

Now I know that you have a lot on your plate, but I am sure that someone at Treasury saw the terms of Buffett’s investment. In fact, my suspicion is that you studied it pretty closely and knew exactly what you were doing. The 50-50 deal – 50% invested and 50% as a gift – is quite consistent with the Republican version of the “spread-the-wealth-around” philosophy that seems so much in vogue.

If the result of our analysis is applied to the deals that you made at the other eight institutions – which on average most would view as being less well positioned than Goldman and therefore requiring an even greater rate of return – you paid $125 billion for securities for which a disinterested party would have paid $62.5 billion. This means that you gifted the other $62.5 billion to the shareholders of these nine institutions.

This is no different than if you paid me $10,000 for a car for which no one else would pay more than $5,000. You bought it for $5,000 and gifted me the other $5,000. In my world such gifts are rarely offered to working people.

It’s hard to list all of the ways in which this is disturbing, but let me note just a few:

• If this deal is the model for how you intend to spend the whole $700 billion that you got from the Congress, then it would appear that you intend to reward the institutions that have driven our nation, and it now appears the whole world, into its most serious economic crisis in 75 years with a gift of $350 billion from the American taxpayers, who have watched 760,000 of their jobs disappear over just the past nine months.

• The recipients of the first wave of gift-giving include Goldman Sachs. It has been widely reported that you have surrounded yourself with former Goldman employees as well as individuals from other Wall Street firms. Yet it has never been revealed whether in fact you and they have fully divested yourselves of your Wall Street holdings. Doesn’t it seem just a wee-bit of a conflict of interest for those setting the price of the investment to be either so directly linked to the firms receiving the investments or, even worse, direct beneficiaries of the decision to overpay with taxpayer money?

• Your investments do nothing to deal with the causes of the current crisis. Now that even Chairman Greenspan has discovered a “flaw” in his theories, wouldn’t it make sense to have some reason to believe that the recipients of this government largesse won’t just take the money and do it all again? Perhaps there is some reason I do not understand that you have seemingly handed this chicken coop back to the very same foxes who have been pillaging it for the last two decades?

• It has been reported in the media that these firms have no intention of using this money for its intended purpose. Don’t we deserve a commitment that the money will in fact be used for either loans to the companies which are groaning under the weight of the credit crisis and being forced to shed tens of thousands of more jobs or to help the millions of Americans struggling with their troubled mortgages? Does it really seem too much to demand that we get a commitment that our gifts to these firms be used to help revive the economy that they have driven into the ditch?

• Your terms also undercut the more stringent restrictions that the Brits imposed, thus making it clear that not only are you fronting for American wastrels, but European ones as well.

Now I do not doubt for a minute that the irresponsible and fraudulent actions of Wall Street have indeed put the world financial system and now the real economy at grave risk. And I also do not doubt that the literally hundreds of billions of dollars of undeserved bonuses ($38 billion in 2007 alone), reckless speculating and dividends to shareholders have left many of these institutions woefully under-capitalized and in need of new equity dollars. Where I get a little lost is why you think that the system or the American taxpayer is better off if the government gets half as much for its investment as Mr. Buffett did.

Let’s agree that America’s nine largest banks need $125 billion of new money and let’s further agree that no one else, not even Warren Buffett, has that kind of money lying around. That still does not explain why our $125 billion should buy us securities worth half of what we paid for them. Nor does it explain why the nearly $25 billion per year that the firms pay out in dividends to their shareholders should continue. At current levels, dividends to shareholders will distribute all of our money that you invested in just five years.

Secretary Paulson, out in the real economy, the unbridled pursuit of greed that you and your friends on Wall Street have celebrated as a national religion has taken a terrible toll on ordinary Americans. Jobs with stagnant real wages have now given way to massive lay-offs, home foreclosures and real suffering.

Out in the real economy, we need to once and for all bury the philosophy that worships only business, free markets, deregulation and free trade, and replace it with an economic program that restores the balance of power between workers and business, rebuilds the middle class and curbs corporate excesses.

Out in the real economy, we need our government to invest in creating sustainable shared prosperity – not play Santa Claus to the scoundrels who have laid waste to the American Dream.

I eagerly await your response.

Sincerely,

Leo W. Gerard

International President

Robert Borosage

By Robert L. Borosage
Co-Director Campaign for America’s Future

Focused on the election? Might be a good idea to watch your pockets at the same time. Here’s a glance at what’s happening to the Wall Street bailout.

Hank Paulson is, no doubt, the most impressive of the Bush administration cabinet members, (admittedly not a high bar.) He made hundreds of millions on Wall Street, ascending to be the head of Goldman Sachs. Now, as Treasury Secretary, he has brought in colleagues from Goldman to help manage the $700 billion bailout of Wall Street banks that are in trouble, including Goldman, and… Wait one minute. Doesn’t something ring false here? Hank Paulson no doubt is honorable, but even he has conflicted interests.

When the bailout bill was before Congress, a number of outside groups — including the Campaign for America’s Future which I head — pushed hard for the bailout to be managed by an independent agency, with an empowered board that included independent representatives of workers and consumers. Whatever the form of the bailout — Paulson’s initial demand for $700 billion left that undefined — it was vital that the transactions be accountable to more than once and future bankers.

And know we know why. After initially proposing to buy toxic securities from the banks at inevitably elevated prices, Paulson sensibly decided to follow the British model and inject capital directly into the major banks in exchange for equity. $125 billion is going into the first nine — Goldman Sachs, Morgan Stanley, Merrill Lynch, Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, and Bank of New York Mellon and State Street Corporation. This plus a guarantee of new debt over the next three years is designed to reassure other banks of their solvency, and hopefully get them to resume lending to one another and to businesses.

But Mr. Paulson didn’t exactly cut a great deal for taxpayers. He didn’t get the terms that Warren Buffett demanded, putting up a lot less cash, to invest in Goldman Sachs. And as the New York Times editorial complained, he made government a passive investor, leaving in place the boards and the directors that led their banks into crippling losses.

He made no demands that the banks begin lending again, instead of just hunkering down, girding for future losses. And remarkably — unlike the British — he didn’t demand that the banks stop paying out dividends to shareholders. Nor is it clear that bank regulators will perform the triage needed, merging and purging the banks of excess capacity.

That failure is likely to be very costly to taxpayers and very generous to the very folks who led us into this mess. In a New York Times op ed, David S. Scharfstein and. Jeremy C. Stein show that, if paid at the current levels, the dividends will redirect more than $25 billion of the $125 billion to shareholders in the next year alone. One in five dollars will go out the door, and thus be unavailable to plug the large capital hole on the banks’ balance sheets.

Will those dividends be paid? Most likely, since the directors and officers of the nine banks are leading shareholders. Scharfstein and Stein estimate their personal take will amount to $250 million in the first year, nothing to sneeze at.

Worse, Paulson does nothing to curb the bloated compensation levels that characterized Wall Street in the days of debauch. Jonathan Weil of Bloomberg News shows the effect. Morgan Stanley, for example, gets $10 billion in taxpayers, dollars. Yet this year it has racked up $10.7 billion in employee compensation — the vast majority not yet paid out — even as its stock market value plummeted lost 34.7 billion since the beginning of the company’s fiscal year. With taxpayers help, Morgan Stanley may well pay those bonuses.

Weil reports that the ” five families of Wall Street” — Goldman, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Sterns — lost about $83 billion in stock market value from the start of the 2004 fiscal year. At the same time, they reported about $239 billion of employee compensation. For every dollar of shareholder value destroyed, the employees pocketed almost three. And that was before they got taxpayer money.

No one doubts that the bailout is needed to prop up the global economy. But under Paulson’s plan, we may end up, in Weil’s words, “throwing money at an industry that pays too many people more than they’re worth, to perform services the world has too much of already.”

What’s needed is an independent agency with summary powers and an independent board, to work with the FDIC and other agencies to sort out the solvent banks from the broke, those that need to be saved from those that should fail. And, as in the Chrysler bailout, a suspension of dividends to shareholders until the government has been repaid.

Now maybe Paulson is making the best choices possible given the extent of the crisis. He’s got more information and is far better banker than the rest of us. But with $700 billion in taxpayers’ money at stake, surely it would be wise to have an independent board that can hold him accountable.