Big Banks: Why They Can’t Get a Break

Why the big banks in the U.S. just can't seem to get a break.The simple question: why haven’t jobs been created in the U.S. despite the trillions of dollars the government has thrown at the economy?

There are several answers to this question. There is also a new theory I have been working on, as to why jobs in this country have not been created, which I don’t believe you will read elsewhere.

Many of the actions at the government during the recession were targeted towards helping big business. During the credit crisis of 2008, the government handed out emergency loans to big banks and big companies. It did very little for the small-sized business, under 50 employees, which account for the majority of jobs in this country.

In all due respect, the government and Wall Street created the crisis. The government brought interest rates down so low in 2004 and consumers took the opportunity to buy bigger homes, second homes, even third homes. There was no government supervision over consumer qualifications for loans.


How could a government allow non-income-verification loans? The government failed miserably. A little oversight would have gone a long way towards cooling the real estate market of 2004 and 2005 instead of letting it become a bubble.

Wall Street, in its classic style, caught on real quick to the boom in housing. It was more than happy to buy residential mortgages, repackage them and resell them to investors. No doubt about it, Wall Street’s coffers took in billions during the real estate market boom. All we have to do is look at the massive earnings of the Wall Street firms during the boom days of 2004 and 2005.

But when the bubble burst, and Wall Street should have suffered, the government bailed Wall Street out because it thought Wall Street couldn’t take the hit. Unfortunately, the one investment bank the government should have helped, Lehman Brothers, was the one it chose to let collapse.

By keeping interest rates low, the Federal Reserve is really helping the big banks. Sure. If I was a big bank, I’d love to borrow from the Fed at 0.25% and buy a 10-year Treasury yielding almost 10 times that. But how does this help the economy? It doesn’t. If you are small business today, try borrowing money from a U.S. bank. From my experience, it’s next to impossible unless you have significant collateral the bank can secure.

If I were advising the government during the credit crisis, I would have made two recommendations:

The first would have been to do nothing. Long-term readers will know I was against the government throwing trillions at the economy in 2008, because I believed it would do nothing but increase our debt. Booms and busts are like Mother Nature—you need to let them run their course.

The government didn’t slow down the boom of 2004 and 2005, hence why did it interfere with the bust? The only way to get the entire system on strong ground again is to have it wash itself out. Painful, of course, but we would have been over it by now.

Imagine a U.S. today with the same national debt level we had when Obama took office; about $10.0 trillion instead of today’s $15.0 trillion. Imagine how much stronger this country would be.

Recommendation number two would have been to help small business and consumers. The government did very little for either small business or consumers. Instead, the government bailed out big business and Wall Street.

And this brings me to today’s point.

One of the reasons the U.S. job machine has stopped is because government has simply gotten too big. I see different parts of the government working independently without thinking through their actions or how they affect the objectives of other government departments.

The government wants a higher stock market. So does the Fed. A higher stock market results in higher consumer confidence, which results in consumers spending as opposed to saving—that’s what really gets the economy going. A higher stock market means Wall Street makes more money, the banks make more money, and the purses are loosened for small business loans again.

But the government, unwittingly and unknowingly, is punishing the stock market, consumers and investors. Friday, through the Federal Finance Agency, the U.S. government sued 17 banks for $196 billion, claiming the banks misled Fannie Mae and Freddie Mac over the soundness of mortgages underlying the securities that the banks sold to Fannie and Freddie.

The banks sued include Bank of America Corporation (NYSE/BAC), JPMorgan Chase & Co. (NYSE/JPM), and Citigroup, Inc. (NYSE/C). Let’s think this through. The stock market is very fragile. Bank of America stock was already down 50% for the year before the lawsuit was announced.

What is the government doing to big banks by suing them? It’s creating uncertainty for the investors and consumers who deal with these banks, it is sending the stock market down by lowering the valuations of these companies, and it is creating more job losses, as the these banks will now tighten their costs again as they deal with this latest claim. Haven’t the banks suffered enough? Haven’t they settled enough lawsuits?

The government needs to give the market, investors and consumers the right message. Right now its actions are creating more uncertainty.

Michael’s Personal Notes:

Now I remember why I usually don’t listen to CNBC…

Driving to work Sunday morning (yes, I work most weekends), CNBC had an analyst on the radio who was saying that gold was in bubble…that it was about to burst. The analyst compared the current gold market to the tech bubble before it burst in early 2000.

In this economist’s humble opinion, gold is nowhere near bubble status. I vividly remember 1999. Many of my friends at the time were jumping on the “tech bandwagon,” buying stocks of hi-tech companies with little to no sales. It was common for investors who knew nothing about tech to be buying tech stocks. It was very similar to the real estate days in the U.S. in 2004 and 2005.

The gold bull market is a totally different story. Ask 10 (non-investment-sophisticated) friends if they own any gold investments and about 90% will say no. Only a very small minority of consumers and investors have the foggiest clue that gold has been in a bull market for 10 years.

Sure, we all hear and read about gold moving from $1,500 an ounce to $1,600, $1,700 and $1,800…but how many investors are getting into the gold market?

Phase one of the gold bull market—that’s when the very smart money gets in—is definitely behind us. We are in phase II now when sophisticated investors are getting in. We are far from phase III—the period in which mass retail investors and equity funds jump on the bandwagon.

Sure, gold has run up very quickly in price—up $623.00 or 49% over the past 12 months. And a correction back to $1,600 or $1,500 is surely overdue. But the gold bull market, in my opinion, is far from bubble status.

Where the Market Stands; Where it’s Headed:

The market surprised me on Tuesday. On Monday the European stock markets took a beating, with the stocks of most big European banks down sharply. Being a holiday in the U.S. and Canada on Monday, I was expecting the fallout from Monday’s European rut to hit North American markets on Tuesday.

And while the Dow Jones Industrial Average did open down 2.5% on Tuesday morning, by the end of trading yesterday, the Dow Jones pared its losses and was down less than one percent for the day. This turnaround is a positive signal.

As far as I read it, negativity prevails amongst analysts and investors. The jobs (or, should I say, lack of jobs) report released Friday shows there is no employment growth in this country. In the short term, this is good for corporate America, as it continues to churn out great profits without new hires. Long-term, unless jobs start happening, consumers (who account for 70% of the economy) will pull back on spending and sales will decline for consumer goods and services companies.

Given the current backdrop of negativity but strong corporate earnings, I continue to believe that the bear market rally will ride the wall of worry higher.

What He Said:

“As a reader, you’re aware I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. “A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on over-extended consumers.” Michael Lombardi in PROFIT CONFIDENTIAL, March 26, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.