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Originally Posted by pjorourke
The good news is that the underlying business is pretty profitable so they usually survive.
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Yea Defense contractors do pretty good too when they are backed by taxpayers.
Two Fed subsidies:
The first has to do with the historically low Federal Funds rate, which remains at range of 0-0.25%. Very low interest rates allow banks and investment banks to borrow at 1% or less and invest in government guaranteed mortgage bonds that pay more than 4%. Leverage that 20 or 30 times, and it becomes a highly profitable no-brainer - to hell with lending to small business!
Normally, the risk that interest rates would rise would make this a losing proposition. However, with U.S. Federal Reserve Chairman Ben S. Bernanke
committed to low rates for an "extended period" and very likely buying more Treasuries in coming months, the risk of loss in this year's bonus period is negligible.
The second Fed subsidy, which also was contrived through loose credit conditions, is in bond markets. Record volumes of debt have been issued in the corporate bond market, and especially in the more lucrative junk bond market. These represent new attractive investment opportunities for the balance sheet, because with such low rates, the likelihood of default is slight. They also provide Wall Street with a massive amount of issuing and placing fees up front, fattening the bonuses further.
Quote:
Originally Posted by pjorourke
I'm not going to argue with the point about stupid management. Banks have historically gone, lemming like, from one "crisis" to another (e.g., foreign loans, oil loans, Commercial RE, credit cards, mortgages).
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Yes but Why do they do that? Oh wait because we BAIL THEM OUT and they know it.
You have fallen for the pretty and smart girl syndrome. You want to overlook her thieving habits as if there are no other smart and pretty girls that with proper oversight won't rob you blind and will show you a good time. Sounds like your banker is a Goddess! You keep believing how much better their vagina and brain is....
I yield to nobody in respect for the investment banking business - having served as an investment banker for 27 years - but these salaries and bonuses derive from U.S. Federal Reserve subsidies, and are mostly being taken out of the hide of the rest of us.
http://moneymorning.com/2010/10/26/wall-st-bonuses/
In other words, we are the ones financing Wall Street's profits, and the resultant bonuses it has paid itself. Yet if we hadn't had the Wall Street bubble, the recession would have been mild and we'd already be back to steady growth by now.
Now we are instead seeing more bubbles,
mostly in bond markets. At some point
inflation will arrive as a result of the Fed's money printing, and interest rates will rise. When that happens, the banks holding mortgage bonds will lose money and the bonds will decline in value (probably necessitating yet another bailout).
More dangerously, the junk bond companies that have borrowed too much will default, throwing their employees out of work and causing more humongous losses all over the system. Naturally, faced with this further crisis, the economy will collapse again.
And so Wall Street's 2009 and 2010 bonuses, just like its 2004-2007 bonuses, will end up being paid from the losses incurred by everybody else after the inevitable crash. And when we've dug ourselves out from the rubble, we will again be poorer than we were before - the U.S. economy's enormous competitive advantage of capital will have been further eroded.
That would be dangerous, because China now has lots of capital and lots of workers who are just as smart as Americans. So if the U.S. lacks capital there will no longer be any reason why Americans should be paid more than Chinese workers and U.S. living standards will decline drastically.
Fortunately there's a solution to this. And no, it's not to lynch all the bankers and close down the banks. It's to harass the Obama administration, Congress and the U.S. Federal Reserve to shrink the budget deficit drastically, reduce our need to borrow from the world, and raise interest rates to sensible levels - 5% or so - so it's worthwhile to save again.
