Can you believe the banks? While the world economic crisis has deep underlying causes, it was precipitated by the collapse of the credit bubble that had been inflated by major banks in a frenzy of borrowing and lending.
Yet now, it seems, the banks are suddenly making pots of money again. “US Banks Unleash a Wave of Optimism” was the main headline in last Saturday’s Financial Times.
This came at the end of a week in which four major US banks – Goldman Sachs, JP Morgan Chase, Citigroup, and Bank of America – all announced they had made profits in the second quarter of this year.
Goldman’s, which along with JP Morgan has emerged as one of the big winners in the crisis, has also announced a return to the big bonuses of the bubble era. It has set aside $11.4 billion for employee compensation in the first half of 2009, implying an average payout of $770,000 this year.
Even more extraordinarily, the Washington Post recently revealed that the insurance giant AIG, whose collapse last autumn was one of the main moments in the financial crash, is in discussions with the US government.
AIG wants to pay out $250 million in bonuses to executives in its Financial Products Department. It was this gang’s trading in credit derivatives that forced the company into bankruptcy and the arms of the government in the first place!
Meanwhile the banks are flexing their muscles politically as well. Much of the hullaballoo for harsh cuts in public spending is coming from the City – even though the huge increase in government borrowing that is used to justify the calls for cuts is a result of the state-organised rescue of the banking system last autumn.
The banks are also dismissive of the fairly timid proposals to regulate them more tightly that are starting to emerge, for example, by Sir David Walker last week. Walker is hardly a hardened Bolshevik – he is ex-chairman of Morgan Stanley International – but the Financial Times headlined their report on the City’s response, ‘Bankers Hit Back at Walker Review’:
“Commenting on Sir David’s recommendation that financial groups should disclose, in a series of bands, how many staff earn more than the boardroom average, the chief executive of one investment bank said that Sir David had caved in to populist demands.
“‘What purpose does this actually serve?’ the CEO asked. ‘It is fundamentally wrong to whip up this hatred of bankers.’”
Whiners like him have no idea of just how widely hated they are. The current issue of Rolling Stone has an article called “How Goldman Sachs Blew Up the Economy” that describes the bank as a “vampire squid sucking the face of humanity”.
After having had an almighty fright, the banks are recovering their nerve and becoming as greedy and arrogant as ever.
But their apparent revival is an optical illusion whose real basis is the massive and continuing state support for the financial system.
Thus Citigroup and Bank of America are both desperately weak enterprises that only managed to record a profit by selling off valuable chunks of their businesses. Between them they owe the US government $90 billion that was injected to shore up their capital.
Even Goldman’s has profited from exceptional circumstances. As companies have rushed to raise more capital by issuing shares, Goldman’s has made money by underwriting them.
More fundamentally, however, an enormous effort has been made by the US and British governments and by the European Central Bank to shore up the financial system. Thus official interest rates are around zero.
This means that banks can effectively borrow for free – but, as everyone knows, they still charge heavily when they lend.
So the banks may be recovering their swagger, but they are being kept afloat on a huge pool of government money that comes from the taxpayers. The question is whether or not we are going to let them rebuild their power and profits at our expense.