Sunday, March 17, 2013

Banking on America


A change of pace.  Senate hearings last week into the investigation by Senator Carl Levin into the $6.2 billion-dollar bumble by J.P. Morgan Chase when its English office -- the London Whale --decided to speculate in derivatives behind the backs of federal regulators.  The scandal points up how far our major banks have wandered back into the inviting swamp we innocent taxpayers assumed we had left behind after TARP and the passage of the Dodd-Frank legislation.

Newspaper coverage suggests that even now, after all the mayhem, the Morgan bank is servicing well over a trillion dollars-worth of derivatives and credit default swaps.  One insider familiar with the boardroom at J.P. Morgan remarked that even the glib Jamie Dimon, the chairman, doesn't really understand how the treacherous market for derivatives and credit default swaps actually works, or what the risks are.  I know I don't.  I suspect that prayer is routinely substituted for judgement once the bets go down.

All this might be of slight -- academic -- interest were it not for the suspicion that the deadlocked Congress and the banking lobbyists have moved in and paralyzed banking in America altogether.  The specific regulatory apparatus that Dodd-Frank was supposed to impose on the too-big-to-fail banks has not been incorporated into the law yet, presumably not an accident.  The artificially low -- barely discernible -- rates the Federal Reserve System has perpetuated and made available to the banks make it easy for big-league bankers to borrow for almost nothing and immediately turn the money around and buy government instruments that pay them several points more than their borrowing costs.  Why involve the citizens?

Nothing in the TARP legislation seems to prohibit the banking system from feasting on its own tail forever while ignoring the desperate need for secure loans small businesses all over the country are experiencing if they are to expand and hire more people.  Since most of the jobs in America are provided by smaller companies, mandating that the banks loosen up and lend out a substantial percentage of their capital to these secondary enterprises would without question help greatly in addressing the "jobs problem" the Republicans keep talking about but slide away from dealing with by legislatively pushing their contributors in the banking community to loosen up and lend a lot more broadly.  The Democrats aren't much better. Not to mention the Federal Reserve System.

I was reminded recently of how all this affects folks on the street like me when I tried to remortgage a property I own in which one of my children lives.  The place cost $340,000 and the principal has been paid down to $260,000.  It is now appraised at $290,000.  I wanted to remortgage the $260,000 at current rates.   I went to a local bank at which I have taken out, and paid off, two mortgages over several decades.  My credit rating is perfect.

The bank was willing.  All I would be expected to do was put $300,000 in a frozen escrow account in the bank, drawing essentially no interest, and leave it there while the new mortgage was in force.  Then I could get a $260,000 mortgage, at a high rate.  My $300,000 would be released to me at the expiration of the new mortgage.

Inexplicably, I turned my friendly neighborhood banker down.  I had a problem with the terms. Today, throughout America, there are probably millions of homeowners and small businessmen and young entrepreneurs eager to bankroll a startup who find themselves locked out of the system, competing with the federal government for the capital they have to have to survive.  Both political parties appear to be beholden to Big Finance in America; Congress is unlikely to act.  The way to salvation is unmistakable, if unlikely.

Occupy Wall Street had a point to make.  Occupy Main Street is overdue.  Petite Bourgeoisie of the World, Arise!

Happy St. Patrick's Day,

Burton Hersh