Wall Street’s resurgent prosperity frustrates its claims, and Obama’s
By Zachary A. Goldfarb , Sunday, November 6, 1:30 PM
President Obama calls people who work on Wall Street “fat cat bankers” and his reelection campaign will try to harness public frustration with Wall Street . Financial executives, for their part, say the president’s pursuit of new financial regulations are punitive and “holding us back.” But both sides face an inconvenient fact. During Obama’s tenure, Wall Street has roared back even as the larger economy has struggled. The largest banks are larger today than when Obama took office and are returning to the level of profits they were making before the depths of the financial crisis in 2008, according to government data. Wall Street firms — either independent companies or the high-flying trading arms of banks — are doing
even better. They’ve made more profit in the first 21 / 2 years of the Obama administration than they did during the entire Bush administration, industry data show. ( See data in an Excel file here. ) Behind this turnaround are government policies that saved the financial sector from collapse and then gave banks and other financial firms huge advantages on the path to recovery. For example, the federal government invested hundreds of billions of taxpayer dollars in banks , money that the firms used for risky investments on which they made huge profits. Reviving the financial system was necessary for preventing an even deeper economic recession. But the Bush administration, which first moved to bail out Wall Street, and the Obama administration, which ultimately stabilized it, took a far more tepid approach to helping ordinary Americans, critics say. “There’s a very popular conception out there that the bailout was done with a tremendous amount of firepower and focus on saving the largest Wall Street institutions but with very little regard for Main Street,” said Neil Barofsky, the former federal watchdog for the Troubled Assets Relief Program , the $700 billion fund used to bail out banks. “That’s actually a very accurate description of what happened.” Neither Bush nor Obama, for instance, compelled banks to increase lending to ordinary businesses or consumers, known as “prime borrowers.” A recent study by two professors at the University of Michigan found that banks, instead of significantly increasing lending after being bailed out, used taxpayer money to invest in risky securities to profit from short-term price movements. The study found that bailed-out banks increased their returns by nearly 10 percent as a result. “If the goal was to support lending, it would have been sensible to require a portion of the money to support credit origination,” said Ran Duchin, a finance professor who completed the study. “Lending to prime consumers was not the most profitable use of their capital.” Some of Wall Street’s success has moderated in recent months, mostly reflecting the slowdown in the
U.S. economy earlier this year and the European debt crisis buffetting global markets. But representatives of the financial industry say regulations included in last year’s Dodd-Frank legislation, which Obama strongly advocated and signed, have also crimped bank profits. The legislation, for instance, requires banks for instance to maintain a greater capital cushion to withstand losses during bad economic times. The bill also created a regulator whose sole purpose is to police lending to ordinary Americans. Many analysts credit the Dodd-Frank law overhauling financial regulations with making the financial system much more stable than in the past. Many of the bill’s most significant measures have yet to be put into place, and their ultimate impact on the bottom line remains unclear. Financial firms have raised major concerns about one of the largest structural changes made by the bill, the so-called Volcker Rule. This measure would bar banks from engaging in trading and other speculative activity on their own behalf rather than to profit customers. But the rule’s impact could prove limited because of loopholes and exceptions allowed by both lawmakers and regulators working to implement it. One of the main reasons that Wall Street rebounded so quickly from its lows is government support. Most of this was not Obama’s doing. Even before Obama took office, the Bush administration pumped hundreds of billions of dollars into banks with few restrictions. The Federal Reserve, which is independent of the administration, lowered interest rates, allowing firms to borrow money cheaply and trade with it, booking massive profits. The Fed also unveiled lending programs that bolstered stock and bond markets and paid banks that kept reserves with the central bank. The Federal Deposit Insurance Corp. guaranteed bank debts, making it easier for the firms to attract private investors. “The too-big-to-fail banks got bigger profits and avoided failure because of trillions of dollars of loans directly from the Federal Reserve,” said Linus Wilson, assistant professor of finance at University of Louisiana at Lafayette. “Today their profits are boosted by lower borrowing costs because their managers and creditors expect a Fed lifeline when markets get jittery.” Banks have also benefited from the massive increase during the recession in unemployment insurance, which is a joint federal and state program. Increasingly, banks offer debit cards to the unemployed to collect their benefits . These debit cards carry a range of fees that bolster bank bottom lines. What’s more, states, their budgets shattered by the financial crisis and recession, have increasingly been moving to enroll new employees in private retirement accounts rather than government pensions. That’s more lucrative for Wall Street, which can charge bigger fees for investing the money of individual retirees rather than one big retirement fund. Since Obama became president, the largest, $100 billion-plus banks, which were at the center of the financial crisis, have grown in size by 10 percent. As banks get larger, they can become more profitable. This is because investors tend to be more willing to lend them money at interest rates lower than those other banks are charged . There is a common perception that big banks are less risky because he government will still step in to save them if they get into financial trouble. Profits have rebounded. The largest banks, which include Bank of America, Citigroup and Wells Fargo, earned $34 billion in profit in the first half of the year, nearly matching what they earned in the same period in 2007 and more than in the same period of any other year. Securities firms — the trading arms of big banks and hundreds of other independent firms — have
fared even better. They’ve generated at least $83 billion in profit during the past 21 / 2 years, compared with $77 billion during the entire Bush administration, according to data from the Securities Industry and Financial Markets Association .
Compensation at these firms is also near highs. Financial firms paid about $20.8 billion in bonuses for work done in 2010, according to research by the New York State Comptroller . In New York City, the average Wall Street salary in 2010 grew 16.1 percent to $361,330, 51 / 2 times the average salary of a private-sector worker in the city.
By contrast, millions of Americans continue to face economic difficulties. That is fueling broad public anger at Wall Street and has given rise to the “Occupy” movements demonstrating in New York City and elsewhere across the country. Obama’s advisers say they plan to harness this frustration in the upcoming presidential campaign by drawing a contrast with Republican presidential candidates who favor rolling back the Dodd-Frank legislation. “One of the main elements of the contrast will be that the president passed Wall Street reform and our opponent and the other party want to repeal it,” Obama senior adviser David Plouffe told The Washington Post last month. The president, however, has not shunned Wall Street. He has actively courted financial executives for campaign donations, including inviting them to a campaign gathering at the White House . He has attracted more money for his campaign and for the Democratic National Committee from financial firm employees than all of the GOP candidates combined — a total of $15.6 million. Obama has also adopted a friendlier tone this year toward Wall Street and corporate America in general. Obama hired a J.P. Morgan Chase banker, William M. Daley , as his chief of staff.
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