You Got Fleeced and You Don’t Even Care
10/23/2013 § 2 Comments
The principals behind banks are something everyone can understand. They hold your money for you, and pay for the privilege, current interest rates not withstanding. The banks that service checking accounts for most people are retail banks, and they are strictly regulated and heavily insured, an important by-product of the disaster of the Great Depression. But how many really understand the Credit Default Swap scandal of the last 7 or so years?
Other less regulated banks are investment banks, these banks are a bit freer to take bigger risks with the potential for more profit. When retail banks start doing things like take those same risks things like the Great Depression happen, which is why the Glass–Steagall act was born. This legislation strictly separates the activities of investment banking from retail banking; when an investment bank sinks it hurts investors that had the money to blow anyway. When a retail bank goes down, it takes people like you and me with it.
Interestingly, starting from the ’60’s on legislators started chipping away at Glass-Steagall, culminating in the Gramm-Leach-Bliley act of 1999, also known as the “Financial Services Modernization Act of 1999″, intended to address the cloudy “realities of modern finance”, and the most sweeping blow to the protection of Glass-Steagall to that time. Banks starting dabbing their collective kerchiefs into the risks and rewards of investment banking with plain account holders money. All three congressmen who introduced the bill were republicans by the way.
Because of the rendering of the Glass-Steagall act into a gutless cube of butter something interesting in the real estate market started happening; because banks were able to dabble in investment banking they were able to create “investment packages” that they could sell off to other institutions, and some of those packages started including real estate loans. There is no downside to this for the banks at all as the loans go completely out of their hands. Buyers of these “investment” vehicles don’t have a real issue with them; if the bundle contains a few bad loans, so what? Besides, these “bundles”, or Mortgage-Backed Securities could be re-sold, usually for a huge profit, and re-sold, and so on. As the immediate downside for the banks was none and the profits were many, there was little problem (as far as they saw it) to shoveling mortgages out the door by the truckloads masked in these so-called “Securities.” But to make mortgage-backed securities, you need real estate loans. Queue the Subprime mortgage crisis of 2007-08. “Give the people loans”, said representative Barney Frank of Massachusetts, so the banks complied by giving anyone a real estate loan, and covering their asses by selling off the loans in these securities.
Its difficult to believe the officers, CEOs, CFOs, and other higher-ranking officials of the institutions didn’t know exactly what was going on. But the pure profits were too difficult to ignore, obviously. By the way, not one of these men and women have been indicted or made to feel any effects for causing the biggest financial disaster since the Great Depression. Not one that I’m aware of by the way.
But the biggest insult came when Obama decided the thing to do was send truckloads of money to the very banks that initiated the crisis. Billions in bailout tax money, your money, was handed over to the banks that were most exposed to the credit default swap scandal, as its come to be known, with the understanding that these banks would start making loans again. But they didn’t, they sat on the money. Its your scandal, you paid for it, you enjoy it.