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Dr. Kalinda Rose Stevenson
Banks’ Self-Dealing Super-Charged Financial Crisis
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by Jake Bernstein and Jesse Eisinger ProPublica, Aug. 26, 10:09 p.m.
Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.
Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses:
They created fake demand.
A ProPublica analysis shows for the first time the extent to which banks — primarily Merrill Lynch, but also Citigroup, UBS and others — bought their own products and cranked up an assembly line that otherwise should have flagged. Read more
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Sphere: Related ContentTags: bank, bankers, banking, cdo, cdos, collateralized debt obligations, financial crisis, foreclosure, housing bubble, lending, money, mortgage backed securities, mortgage bonds, mortgages, subprime, subprime mortgage, Wall Street
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House votes to restrict Wall Street pay: Congress acts to end million dollar bonuses paid with bailout money
The United States House of Representatives passed a bill that restricts bonuses to bank executives.
Nothing has enraged ordinary people more than the idea that the biggest banks used bailout money to pay huge bonuses to their executives.
The House voted Friday to slap restrictions on how Wall Street executives are paid after nine banks that took government bailout money rewarded thousands of their employees with bonuses topping $1 million each. House Votes
In the same year the banks were failing, and taking billions of dollars in bailout money, the banks were paying their executives million dollar bonuses.
The core of the problem is the connection between reward and risk. Safe investments tend to be low paying investments. Often, the greater the risk, the greater the profit.
One of the reasons that the economic system got so out of whack is because the biggest banks found ways to make greater profit with riskier loans after the Glass-Steagall Acts were rescinded in 1999.
The Glass-Steagall Acts were passed in 1932-33 to prevent another Great Depression.
I wrote a report, “Why Banks Went Broke Making Money: The Money-Making Magic That Triggered The Global Recession.” In this report, I explain why the ability of banks to make more and more money with risky loans that violated every standard of responsible banking practices led to the financial crisis of 2008.
The real estate boom years coincided with successful political efforts to de-regulate the banking system. Based on the idea that government regulations limited free-market capitalism, Congress passed laws to set the banks free from all kinds of restrictions about what different types of banks could do, and significantly reduced oversight of banking.
Those who believed that “the best government is no government” argued that these restrictions and regulations were impeding free market capitalism. “The most notable results of this effort to set the banks free from government regulation were the repeal of the “Glass-Steagall Acts” of 1932 and 1933, and the enactment of the “Gramm-Leach-Bliley Act” of 1999.
“Glass-Steagall” required a clear distinction between investment banks and commercial banks, to separate risky ventures from ordinary banking services. “Gramm-Leach-Bliley” removed these restrictions. This Act allowed commercial banks to engage in speculative investment banking.
With new-found freedom from all kinds of post-Great Depression era regulations, the biggest banks threw caution to the wind, and created a dazzling array of paper instruments which allowed them to make massive profits. Kalinda Rose Stevenson, Why Banks Went Broke Making Money,
Without these restrictions, the biggest banks had great incentive to engage in risky banking. The riskier the banking, the greater the potential profit.
As the banks took greater risks, their actions also had the potential to create great harm to the economy. The “mortgage meltdown” and the bank bailouts are all the direct result of increased risks by banks.
According to Barney Frank, the banks realized that they would make great profits only if they took great risks.
Rep. Barney Frank, D-Mass., who sponsored the bill, said the extra regulation is necessary to ensure bankers and traders aren’t rewarded only if they take big risks. Under the provision banning risky incentive-based pay, regulators would be given nine months to dictate precise guidelines.
If a bet goes wrong, “the company loses money and the economy may suffer, but the decision makers do not,” he said. House votes
As the banks took greater risks, their actions also had the potential to create great harm to the economy. The “mortgage meltdown” and the bank bailouts are all the direct result of increased risks by banks.
The practice that has enraged ordinary people more than anything else has been the extremely generous executive bonuses paid to bankers who were running their banks and the economy into the ground.
It’s one thing to realize that the banks have been paying millions of dollars in bonuses to executives who were making such bad banking decisions. People were angry enough about that. What turned anger into outrage is the realization that the banks were continuing to pay generous bonuses after they received government bailout money.
At its core, the financial crisis is a banking crisis, brought about by risky behavior by banks and lack of regulation by government agencies. This action by the House is an effort to change the risk to reward ratio, so that bad banking is not so rewarding to the people who made the bad banking decisions.
Dr. Kalinda Rose Stevenson
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Sphere: Related ContentTags: bank bailout, banks, Barney Frank, executive bonuses, financial crisis, Glass-Steagall, House of Representatives, make money, recession, Wall Street
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How You Can Create Financial Freedom In A Time Of Financial Crisis
The financial crisis fills the news. Each day, we hear about more billions for stimulus packages to banks “too big to fail.” We also hear dire warnings about the collapse of major corporations, such as the Big Three auto makers in the United States. The crisis is real, as is spreads throughout our entire economic system, both nationally and internationally.
In all of this, we hear talk of Main Street and Wall Street. To this point, the rescue packages, the stimulus packages, the bailout packages, have gone to Wall Street, with very little directed toward Main Street—the small businesses and ordinary people who are being dragged down with little hope of immediate rescue.
What I want to focus on is the contrast between two types of stories. One story teaches us to hope for rescue. The other story teaches us to be heroic and rescue ourselves.
Let’s start with the stories that teach us to wait for rescue. From earliest childhood, we have been taught to hope for a savior. The movies and TV shows have taught us that rescue will come, usually at the last minute, in the nick of time. The cavalry will ride over the hill. Reinforcements will arrive. The knight in shining armor will show up and we will be saved.
The hope of being rescued touches a deep psychological need for all of us. We hope that someone will help. Someone will care. Someone will do something to solve the problem.
Christian religion has made salvation a central promise of the gospel message. You are lost. You are hopeless. You are struggling. God sends a savior, to rescue you, because you cannot rescue yourself.
Twelve step programs teach that we are incapable of saving ourselves from our addictions. We need help. We need a higher power. We need to be rescued.
In other words, we hope for a hero to save us.
In all of this, I don’t mean to undermine, diminish, or challenge the idea that sometimes we really do need help. We really do need rescue. We really do need to be saved. If you fall off an ocean liner, you will need someone to throw you a lifeline, to haul you back in.
But that fact that we sometimes need to be rescued, does not mean that we always need to be rescued.
In heroic stories, the hero is the one who finds a way to solve the problem. Sometimes the hero rescues others. Often, the hero has to rescue herself or himself. No one saves the hero. The hero is the one who does the saving.
And this leads me to my point. Especially now, when the economic crises pile up day after day. When things seem to get worse and worse, this is the time to be heroic about your situation. Rather than wait for rescue, resolve to find a way to rescue yourself.
The unofficial entrepreneur’s motto is: “If it is to be, it is up to me.” This single belief is the real distinctive of true entrepreneurs. They don’t wait for permission, approval, or help. If they are in trouble, they act to save themselves.
The real danger right now is for everyone in financial trouble—which includes millions of people—is to wait for the savior to come. These are tough times and they require commitment, determination, and a plan of action.
I wrote a book with a man who faced a financial crisis and did exactly that. He made a commitment to get himself out of his financial crisis, with focus, passion, and motivated action. In the process, he created a formula for the essential elements of financial freedom. Find out the formula that saved him from financial ruin here.
Maybe the government will find a way to bail out Main Street, and solve your financial problems. But don’t wait for it. Most of us do not fall into the category of “too big to fail.” This means that the only real salvation will come from saving ourselves.
Dr. Kalinda Rose Stevenson
One of the primary reasons for the economic crisis is that banks have abused their ability to create money out of thin air. Find out how banks create money in No Money Limits For Real Estate Investors: Discover The Money-Making Secret In The Real Estate Game That Transforms Your Money Struggles Into Financial Abundance, Winner of 2007 National Best Books Award in Business: Real Estate Category.
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