• Advertisement

Big Banks: Paying Billions (of Borrowed Money) to Stockholders

NASDAQ Watch Photo by Kowloonese used under CreativeCommons license via Wikimedia Commons

Photo by Kowloonese; used by CreativeCommons license via Wikimedia Commons


The “new economy” in a nutshell:
full-time employees need government assistance because their wages are so low. Businesses are shrinking, not growing. And corporations are borrowing money to pay it out to stockholders… because, well, that’s what the system is designed to reward.

The more I look, the more I see it. The same pattern, almost everywhere. It’s not limited to just a few rogue companies. It’s not limited to just a few industries.

And it’s not getting any better.

Here’s the view, from the financial sector.

Remember that study showing that almost one-third of bank tellers receive food stamps, Medicaid or other public assistance? The authors calculated that taxpayers pick up the tab for almost $900 million in government aid – just to bank tellers – each year. That study didn’t break those costs out by particular employer, but…

— — — —

Bank Teller Counting Money for Customer --- Image by © Duncan Smith/Corbis via Flickr

© Duncan Smith/Corbis via Flickr. Used under CreativeCommons license.

According to Glassdoor, Bank of America tellers receive an average wage of $12 per hour – or, just about poverty-line wages for a hypothetical full-time employee supporting a family of four.

And the corporation just announced another set of layoffs, bringing the total to

  • about 14,300 jobs eliminated in the past year
  • about 69,000 jobs eliminated in the past five years.

But owners of the bank’s common stock are doing OK. So far this year, the corporation has distributed $3.1 billion to shareholders, through dividends and stock buybacks. And there will be even more money going to stockholders in December.

Can’t help noticing, though… Bank of America has issued a lot of bonds this year – more than $25 billion. Which means the corporation now has more than $270 billion in long-term debt that it has to pay off between now and 2047.

Yes, Bank of America is borrowing money at the same time it’s paying money out to stockholders.

(Which, yes, is sort of like running up your credit card to buy Christmas presents for people who already have everything.)

Wondering how stock prices are affected by the amount of money paid to shareholders?  Last year, Bank of America announced it would increase dividends and start buybacks – but then discovered an accounting mistake and had to withdraw those plans. And stock prices fell by 6.3%.

Want to know why corporate executives care so very much about short-term stock prices?  Look at the way Bank of America compensates its CEO. On the 13th of every month, Brian Moynihan receives the cash equivalent of 17,747 shares of common stock. In August, the per-share price was $17.62; for 17,747 shares, that works out to a payment of $312,702. In September, the per-share price was $16.04; that works out to $284,662. In October, the per-share price was only $15.52; that works out to $275,433. Don’t you think CEO Moynihan notices, when his monthly payment drops by ten or twenty thousand dollars?

But there’s good news for him: this month – after that latest set of layoffs was announced – the per-share price is back up above $17.  (Even though the Bank is $270 billion in debt and its credit ratings are, ahem, less-than-stellar… and it borrowed almost another $3 billion since CEO Moynihan’s October payment.)

— — — —

bankerAccording to Glassdoor, J.P. Morgan bank tellers also receive an average wage of $12 per hour… which is still, yes, about the poverty line for a hypothetical full-time employee trying to support a family of four.

And the corporation is, ahem, “cutting costs” by eliminating another 5,000 jobs. (Last year, they cut 7,900 jobs.)

But… stockholders are doing OK. The corporation just raised its dividend and is buying back $6.4 billion worth of its own stock. (That’s in addition to almost $18 billion in buybacks between 2010 and 2013.)

And CEO Jamie Dimon just got tagged as “the Best Big Bank CEO, Measured by Shareholder Returns.” Between buybacks and stock dividends, Dimon has “generated a total shareholder return of 119.5%” in the last decade.

Even though… can’t help noticing… J.P. Morgan had, at last report, $434.4 billion in long-term debt (which was an increase of $8.3 billion from the previous quarter). And it will be paying off debt through 2049.

I’m sure somebody at JP Morgan can explain why it makes sense to pay billions out to stockholders at the same time the corporation is borrowing billions. (And I’m sure somebody at the Federal Reserve Bank can explain why regulators approved this plan.)

And yes, folks high up the corporate ladder are doing OK, too. Their compensation includes mechanisms like restricted stock units and stock appreciation rights, which ensure they’re paying attention to share prices.  For instance, Managing Director Mary Erdoes just received stock appreciation rights equal to 200,000 shares of JP Morgan stock… on a day when the stock closed at $67.39 a share.   (Yep, some people get paid according to how high the stock price goes.)

Meanwhile… 5,000 JP Morgan employees will be looking for new jobs… and employees who still have their jobs get poverty wages and need government benefits to make ends meet.

— — — —

US states by poverty rate

States by 2013 poverty rate

And I’m betting that if I looked, most of the other Big Banks would show this same paying-low-wages-to-employees while cutting-rather-than-expanding-the-business while borrowing-against-future-revenues so they can pay-more-money-to-stockholders pattern.

It’s not just a few employers.

It’s not just a few industries.

Borrowing money in order to pay it to shareholders is the same basic thing Bain Capital was doing, back before journalists started writing about it, when Mitt Romney ran for President.

Only, this is on a bigger scale.

These are corporations that employ hundreds of thousands of people. And they’re borrowing against future revenue, in order to pay stockholders today.

While their executives rake in millions in compensation.

And their employees need government assistance just to get by.

— — — —

Read my last post, “McDonalds: Paying Billions (of Borrowed Money) to Stockholders” here.

Read my series about Verizon as a case study of what’s wrong with the economy, starting here.

 

On Fifth Anniversary Of Wall Street Reform Bill, Kelly Ayotte Still Working To Roll Back Reforms

Concord, N.H. – Today marks the fifth anniversary of President Obama signing the Wall Street Reform and Consumer Protection Act, and five years later, Kelly Ayotte is still working to roll back Wall Street reform and attack the Consumer Financial Protection Bureau. 

As Ayotte continues her long-standing opposition to the Consumer Financial Protection Bureau, a new report shows the CFPB’s enforcement work has secured more than $10 billion for consumers across the country.   

Wall Street special interests have also been some of Ayotte’s largest contributors throughout her career, and a report from National Journal showed that Ayotte received more than $100,000 for attending a recent New York City fundraiser co-hosted by Wall Street reform opponent and GOP mega donor Paul Singer, largely from employees of Singer’s own hedge-fund firm. 

“Since going to Washington, Kelly Ayotte has put her special interest backers first, working to roll back Wall Street reform and attack the Consumer Financial Protection Bureau at the expense of New Hampshire consumers,” said New Hampshire Democratic Party Press Secretary Aaron Jacobs. “It’s shameful that five years after the passage of a major Wall Street reform bill, Ayotte is still working to protect her special interest backers and undermine the new protections for New Hampshire consumers.”

 

Related Reading

The Securities & Investment Industry Is The Top Contributing Industry To Ayotte Over Her Federal Career With More Than $800k In Campaign Contributions. According to the Center for Responsive Politics, the “Securities & Investment” industry was the top contributing industry to Ayotte over her career as a Federal candidate. The industry has contributed $823,792 to her campaigns. [Center for Responsive Politics, Accessed 3/9/15] 

Ayotte Voted For FY 2014 Ryan Budget That Would “Roll Back 2010 Wall Street Reform Legislation.” “Ryan, chairman of the House Budget Committee, rolled out his new budget on Tuesday, a document reminiscent of his old budget that Democrats ran against in the 2012 election. It would partially privatize Medicare, slash Medicaid and food stamps by turning them into block grants, abolish the Affordable Care Act (“Obamacare”), roll back the 2010 Wall Street reform legislation, and throw open federal lands in all places to all kinds of drilling and gouging proposed by Big Oil and Big Coal.” [Seattle Post-Intelligencer, 3/12/13] 

Ayotte Voted For “A Wall Street-Supported Amendment Attacking The Consumer Financial Protection Bureau” That Would Let Republicans Slash Its Funding. According to the Huffington Post, “The amendment, offered by Sens. David Perdue (R-Ga.) and Pat Toomey (R-Pa.), is a resolution to move the CFPB’s funding away from the Federal Reserve and put it under the direct control of Congress through the appropriations process. This would not only give Republicans an opportunity to slash the bureau’s funding, but to leverage its budgeting control to pressure the agency against cracking down on lenders.  […] Three of the Republicans who voted for the bill are up for re-election in 2016 in swing states, including Toomey and Sens. Kelly Ayotte (R-N.H.) and Rob Portman (R-Ohio). “ [Huffington Post, 3/20/15] 

Ayotte Also Voted Against Confirming Richard Cordray To Be Director Of CFPB. In July 2013, Ayotte voted against confirmation of President Barack Obama’s nomination of Richard Cordray of Ohio to be director of the Consumer Financial Protection Bureau. [CQ; Vote 174, 7/16/13] 

The Consumer Financial Protection Bureau Had Received More Than 2,000 Consumer Complaints From New Hampshire Since December 2011. [Consumer Financial Protection Bureau, Consumer Complaint Database, Accessed 3/23/15]

Washington Post’s The Fix: Singer Was “A Vocal Opponent” Of Wall Street Reform. “Soon after Congress passed the Dodd-Frank bill — of which he is a vocal opponent — in 2010, he held a fundraiser at his house in Central Park West for seven senate candidates who had opposed the legislation.’” [Washington Post, The Fix 4/4/14]

Congressional House Members Split On Omnibus Bill

 

This week has been very busy in Washington as Congress created yet another manufactured crisis with threats to shut down the government over a divisive continuing resolution.

The good news is that, for now, the government will remain open as the House passed a omnibus bill to fund the government for another year. The House also passed a two-day continuing resolution allowing the Senate time to pass the House bill. The omnibus bill created a whirlwind of controversy with numerous amendments that outraged millions of Americans. There is a very small possibility that the Senate will amend or reject the House bill over these controversial amendments.

There are three main amendments that drew the biggest scrutiny and threatened to kill the bill.

1) The Wall Street Rollback

House Republicans added an amendment written by Citi Group stripping regulations on derivatives trading. This is just another handout to the big banks on Wall Street, putting the taxpayers on the hook for billions – or trillions – of dollars.

“TBTF (Too Big To Fail Banks) are now worth $53 trillion,” wrote Liz Iacobucci “Do the math. If there is another Wall Street meltdown; and another bailout; and this next bailout also requires the government to borrow an amount equal to one-third of what TBTF institutions are worth now…”

This provision drew strong opposition from the AFL-CIO:

“The AFL-CIO strongly opposes efforts to make it easier for too-big-to-fail banks to use taxpayer-backed funds to make risky bets in the derivatives markets,” said AFL-CIO President Richard Trumka.

2) The Pension Reform Amendment

Labor groups were outraged that Republicans added an amendment that would drastically reduce pension benefits to millions of retirees.

“Today we have seen the ugly side of political backroom dealings as thousands of retirees may have their pensions threatened by proposed legislation that reportedly includes massive benefit cuts,” said Jimmy Hoffa, General President of the International Brotherhood of Teamsters. “Thousands of hard-working men and women deserve better than having their pensions slashed by a bill that can’t stand on its own merit.”

This provision would allow multi-employer pension plans to reduce payouts to retirees from and average of $50,000 a year to approximately $15,000 a year. The “unfunded liability” is largely due to the massive losses these plans took during the last two Wall Street crashes. But the underfunding will not become an issue for at least another ten years – so there is no need to rush this amendment through on a piece of must-pass legislation.

“Changing ERISA to allow cuts in promised benefits is a ticket to poverty and dependence on government asisstance,” IAM International President R. Thomas Buffenbarger wrote members of Congress last month.

“They’ve sneaked this in,” said Dave Erickson of Isanti, Minnesota. “They don’t have the guts to come out and tell us they’re taking our money. It makes me sick. The pension payment was something I counted on.”

(Read also: Another WIN for Wall Street… and a huge LOSS for the middle class)

3) Campaign Finance Reform

Campaign finance reformers were outraged when the bill was amended to allow millionaires and billionaires to push even more money into political campaigns. Currently a donor can give $32,000 a year to the party of their choice. The Omnibus spending amendment will allow wealthy donors to donate $777,600 per year or $1,555,200 in a two-year cycle.

“Another (amendment) would raise campaign contribution limits, giving a small number of wealthy individuals even more leverage to drown out our middle class voices,” stated Congresswoman Carol Shea-Porter, who voted against the Omnibus bill.

Neither party is taking credit for the campaign finance amendment that will benefit both parties. It is a win for the fundraisers – but a loss for working families, who are losing their voice in Washington to big money donors.

In a very close 219-206 vote the Omnibus bill did pass the House. The bill saw many Representatives from both parties oppose their own party leaders with their votes. Progressives were angered to see that 57 Democrats decided to support the Republican bill in spite of the “poison pills” in the bill.

The Congressional Representatives in my home state were split in their votes on the Omnibus bill. Both voiced their support for keeping the government open and stated their opposition to these amendments; however, they reached different decisions when it came time to vote.

“Of course Congress had to keep the government open, but it should have been done by passing a Continuing Resolution that funded the government, but didn’t contain these harmful provisions. I strongly opposed the CROmnibus bill, which would hurt working Americans by allowing big-money bailouts for banks and rolling back already-inadequate campaign finance laws,” said Congresswoman Carol Shea-Porter.

“In 2008, I voted against the bank bailouts and for policies that saved us from a depression. I am deeply concerned that this bill calls for a taxpayer-funded bailout for irresponsible institutions if they get themselves in trouble again. The bailout provision is just one of a number of special-interest victories in this bill. Another would raise campaign contribution limits, giving a small number of wealthy individuals even more leverage to drown out our middle class voices. Putting American taxpayers on the hook and gutting campaign finance laws is unacceptable, so I voted no,” concluded Shea-Porter.

“While I remain concerned about certain aspects of the so-called “CRomnibus,” including a troublesome campaign finance provision that increases the donation-limits for party conventions and political parties, I believe that first and foremost it is our responsibility as Members of Congress to work across the aisle to keep the government running,” stated Congresswoman Annie Kuster. “Last year’s government shutdown was devastating for Granite State families; it put approximately 800,000 Americans out of work and wasted tens of millions of taxpayer dollars. Congress should never allow politics to get in the way of doing what’s right for our constituents at home, so I’m pleased Democrats and Republicans were able to come together to pass this legislation and provide the certainty our country needs moving forward into the new year.”

I have – and will continue to – support Congresswoman Annie Kuster (and the other 57 Democrats); however, I completely disagree with her on this vote. I share her optimism that our elected representatives can put aside their partisan party politics and do what is needed for working families; however, this bill is not one of those opportunities. This bill will decimate what is left of our campaign finance regulations, and put the Wall Street gamblers in charge of our economy once again, using my taxes to hedge their risky bets.

If these 57 Democrats had voted against the bill, the Republicans would have had no choice but to remove these controversial amendments and offer the bill up for another vote. The Republican leadership knew the bill would not pass without Democratic support because the ultra-right wing (67 in all) planned to vote against it as well.

 *               *             *           *          *               *

Editor’s Notes:

Congresswoman Carol Shea-Porter’s strong leadership and dedication to working families will be greatly missed in Congress over the next two years. I hope she will consider running for the CD01 seat again in 2016, or even run against Senator Kelly Ayotte for a seat in the Senate.

 

There was one other little known amendment that was slipped into the omnibus bill that would reduce the mandatory rest periods for truck drivers – against Transportation Secretary Foxx’s strong opposition. The amendment reversed the required rest period allowing truckers to drive up to 82 hours a week.

Read more about this amendment, on Bloomberg.

ANOTHER Taxpayer handout for the Big Banks?

What’s going on in Washington, DC this afternoon?  According to media reports, the House of Representatives is about to use the latest Congress-created crisis to give Big Banks a free insurance policy.

One Federal Reserve economist estimated that these types of guarantees are worth between $450 and $900 billion (yes, “billion” with a B) a year (yes, each year) to the financial industry.

Yes, I’m repeating myself again.  Here’s my #dejavu post from January 13, 2014:

Fat Chance - Banks Take Responsibility for the Financial Crisis by Michael Smith via Flikr

$53 trillion.

More than THREE TIMES the entire federal debt.

According to Saturday’s New York Times, that’s the amount of money currently held by US-based “too-big-to-fail” financial institutions.

“Too-big-to-fail” has been around for a while. It dates back to the Reagan administration’s takeover of Continental Illinois National Bank and Trust Company, which was then the seventh-largest US bank.

And it’s been a growing problem ever since.

Here’s why: “TBTF” distorts the economy. In theory, in a capitalist economy, there should be a relationship between risk and reward. In theory, people who can’t afford to lose their money will chose “safe” investments, even though they have a lower rate of return; and even those people who can afford to lose money will take fewer risks.

But that’s only in theory. In reality, TBTF has separated “risk” from “reward”. The financial industry is now operating on the belief that if the loss is big enough, the government will step in.

It’s sort of like insurance… only, the financial industry doesn’t have to pay for it.

A year and a half ago, one Federal Reserve Bank economist estimated the TBTF effect is worth between $450 and $900 billion a year.

“The existence of the implicit subsidy enabled these companies to become larger and more complex than otherwise would have been the case. TBTF institutions respond to the subsidy by increasing their risk through either engaging in riskier activities or increasing their leverage. While these actions may be privately optimal, the response to the TBTF subsidy is not socially optimal, as it can pose huge risks to the financial system.”

(Gotta love that economist-speak…“Not socially optimal,” indeed.)

Even since the 2007 Wall Street meltdown, financial institutions have continued to take advantage of their TBTF status. TBTF institutions are still getting bigger and taking more risks. Here’s how Forbes described the situation last year: “Banks today are bigger and more opaque than ever, and they continue to trade in derivatives in many of the same ways they did before the crash, but on a larger scale and with precisely the same unknown risks.”

And now, a half-decade after the bailout, the TBTF institutions are worth $53 trillion.

So why am I comparing the size of the financial industry with the size of the federal debt?

I was trying to figure out the current level of taxpayer exposure, in this “not socially optimal” arrangement. In other words: if the financial industry implodes again, how much government money is it going to cost us? And I figured the best way to figure that out was to look at what happened in the most-recent TBTF bailout.

As near as I could figure, from what’s easily available on the Internet: back before the 2007 meltdown, TBTF institutions were worth a total of about $2 trillion. The 2008 bailout bill appropriated $700 billion to deal with the crisis — or, roughly one-third of the total value of TBTF institutions, before they started to fail.

The federal budget was already running a deficit. That means: in order to fund the bailout, Congress had to borrow an amount equal to one-third of the pre-crisis value of those TBTF institutions (using my “as near as I can figure” estimate).

But those TBTF institutions are bigger now; and that means if they fail, any federal government bailout would need to be bigger, too.

TBTF are now worth $53 trillion. Do the math. If there is another Wall Street meltdown; and another bailout; and this next bailout also requires the government to borrow an amount equal to one-third of what TBTF institutions are worth now…

Well…one-third of $53 trillion is…almost exactly the current amount of the federal debt.

In other words, the next financial meltdown could double the national debt.

Are you scared yet?

Worried About The Size of The Federal Debt? There’s Another Number That Should Really Scare You.

Fat Chance - Banks Take Responsibility for the Financial Crisis by Michael Smith via Flikr

$53 trillion.

More than THREE TIMES the entire federal debt.

According to Saturday’s New York Times, that’s the amount of money currently held by US-based “too-big-to-fail” financial institutions.

“Too-big-to-fail” has been around for a while.  It dates back to the Reagan administration’s takeover of Continental Illinois National Bank and Trust Company, which was then the seventh-largest US bank.

And it’s been a growing problem ever since.

Here’s why: “TBTF” distorts the economy.  In theory, in a capitalist economy, there should be a relationship between risk and reward.  In theory, people who can’t afford to lose their money will chose “safe” investments, even though they have a lower rate of return; and even those people who can afford to lose money will take fewer risks.

But that’s only in theory.  In reality, TBTF has separated “risk” from “reward”.  The financial industry is now operating on the belief that if the loss is big enough, the government will step in.

It’s sort of like insurance… only, the financial industry doesn’t have to pay for it.

A year and a half ago, one Federal Reserve Bank economist estimated the TBTF effect is worth between $450 and $900 billion a year.

“The existence of the implicit subsidy enabled these companies to become larger and more complex than otherwise would have been the case. TBTF institutions respond to the subsidy by increasing their risk through either engaging in riskier activities or increasing their leverage. While these actions may be privately optimal, the response to the TBTF subsidy is not socially optimal, as it can pose huge risks to the financial system.”

(Gotta love that economist-speak…“Not socially optimal,” indeed.)

Even since the 2007 Wall Street meltdown, financial institutions have continued to take advantage of their TBTF status.  TBTF institutions are still getting bigger and taking more risks.  Here’s how Forbes described the situation last year:  “Banks today are bigger and more opaque than ever, and they continue to trade in derivatives in many of the same ways they did before the crash, but on a larger scale and with precisely the same unknown risks.”

And now, a half-decade after the bailout, the TBTF institutions are worth $53 trillion.

So why am I comparing the size of the financial industry with the size of the federal debt?

I was trying to figure out the current level of taxpayer exposure, in this “not socially optimal” arrangement.  In other words: if the financial industry implodes again, how much government money is it going to cost us?  And I figured the best way to figure that out was to look at what happened in the most-recent TBTF bailout.

As near as I could figure, from what’s easily available on the Internet: back before the 2007 meltdown, TBTF institutions were worth a total of about $2 trillion.  The 2008 bailout bill appropriated $700 billion to deal with the crisis — or, roughly one-third of the total value of TBTF institutions, before they started to fail.

The federal budget was already running a deficit.  That means: in order to fund the bailout, Congress had to borrow an amount equal to one-third of the pre-crisis value of those TBTF institutions (using my “as near as I can figure” estimate).

But those TBTF institutions are bigger now; and that means if they fail, any federal government bailout would need to be bigger, too.

TBTF are now worth $53 trillion. Do the math.  If there is another Wall Street meltdown; and another bailout; and this next bailout also requires the government to borrow an amount equal to one-third of what TBTF institutions are worth now…

Well…one-third of $53 trillion is…almost exactly the current amount of the federal debt.

In other words, the next financial meltdown could double the national debt.

Are you scared yet?

  • Subscribe to the NH Labor News via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 12,542 other subscribers

  • Advertisement

  • Advertisement