Unless you just recently returned from a four-year vacation on the moon or have been trapped in a Massey Energy coal mine, you are aware that the American taxpayers have provided tens of trillions of dollars in direct bailout money and near zero-percent loans to the largest banks operating in the United States since 2008. While specific banks appear to have emerged from living for free in the American People’s pool house quite profitable and have regained their footing, several large banks remain on the verge of–or are currently operating in–insolvency.
Moody’s rating agency recently put nearly each of the large banks in the United States as well as several international banking behemoths on its watch list for a potential downgrade. Bank of America for example, reported first quarter revenues this year nearly $1.4 billion less than last year’s first quarter revenues of $2 billion. The primary reason for the decreased profitability is a new rule that prevents the bank from reporting junk loans as performing loans.
Moody’s Investors Service has announced a review of 17 banks and securities firms with global capital markets operations. Underpinning this review is Moody’s view that these firms face challenges that are not fully captured in their current ratings. Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions. These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms.
The New York Times ran an earlier story on this development at the large banking conglomerates in late May. In the report, the Times also uncovered a major concern for the large banks: The largest mutual fund players may seek to renegotiate contracts with certain banks or walk away from the relationship entirely in search of more financial stable partners. Without these trading contracts with the mutual fund companies, further stress with beset the overall profitability of the banks.
Nearly four years after the largest financial institutions in the world were bailed out by the American and European taxpayers, the very same banks are hat in hand demanding more assistance. Perhaps most importantly, the sheer magnitude of the bailouts and loans fail to capture the entirety of the destruction supervened upon the people. Budget cuts and ensuing layoffs, unemployment, trillions in lost home value and investment value, higher education and public school cuts, public park closures, unanticipated bankruptcies, infrastructure funding cuts, public health and assistance cuts, just to name a few. This entire adventure illustrates precisely why it is bad policy to allow any industry group to blackmail a government into action. It never ends, and eventually the crook comes banging at the door for more, and more, until policymakers are forced to act responsibly, as they should have from the very beginning. It is at this point that the industry is forced to take its medicine. It is time for the Obama administration to follow through on its first failed attempt to break up one or more of these large banking leeches and sell off the parts to smaller community banks rather than to continue to throw good money after bad. Maybe this time Timmy Geithner and company will do as their told. Or maybe we’ll continue down the same failed path.