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Mon November 7, 2011
A Look At The Reported Growth In Wall Street Profits
Originally published on Mon November 7, 2011 8:04 pm
GUY RAZ, HOST:
Now, if anyone is doing well in this time of economic uncertainty, it is fair to say it is the banks. Wall Street firms earned more in the first two and a half years of the Obama administration than they did during the entire presidency of George W. Bush. That's according to a story today in the Washington Post by reporter Zach Goldfarb and he joins us now. Welcome to the program, Zach.
ZACHARY GOLDFARB: Nice to be here.
RAZ: Let's be clear about what kinds of companies we are talking about. You're writing about banks, brokerage trading firms, right?
GOLDFARB: Right. We're talking about both, banks, the big ones you've heard of, Citigroup, Bank of America. These big banks have done well coming out of the crisis. The Wall Street firms most people haven't heard about, which are either independent companies or the securities arms of big banks, have done even better.
RAZ: So walk us back. How did these companies manage to rebound so spectacularly from the crash of 2008?
GOLDFARB: Well, there are a couple of reasons. The government, including the Bush administration, as well as other agencies like the Federal Reserve and the FDIC, unveiled policies that were extremely advantageous for banks. For example, government policies basically gave banks nearly free money, loans at zero percent or near zero percent and could then turn it around into investments and that obviously is an extreme advantage that almost nobody else has. So that's one way they were able to profit so much from the stabilization of the financial markets and the rebound in the economy, although a modest rebound, in 2009 and 2010.
RAZ: But wasn't that money restricted or supposed to be restricted?
GOLDFARB: There were very few restrictions on the money that the government gave the banks in 2008 and money that the Fed or others lent to the banks in 2008 and 2009. Why? Because the government didn't want the system to get gummed up, didn't want banks to waiver about taking the money. They wanted to stabilize the financial system as fast as possible.
This money was partly to stabilize the banks and partly to unfreeze the credit markets and restore lending to average people at the small businesses because lending had totally frozen up and that meant that the economy was freezing up and credit is the life blood of our economy.
But studies after the fact showed that banks did not increase their lending, particularly to average borrowers and small businesses, but rather used the money they got from the government and invested it in risky securities, stocks, bonds, exotic derivatives, other types of securities and investment products that could yield a quick return much more than giving, you know, a small business a 10 year loan.
So banks used the government's largess to benefit themselves, to increase their profits, but not to help the overall economy.
RAZ: Zach, let me ask you about the politics here because President Obama is gaining a reputation in some quarters as being anti-Wall Street, but clearly, I mean, the evidence shows that Wall Street has benefited from his policies. So how do you square those two things?
GOLDFARB: So in rhetoric and to a degree in policy, there's no question that President Obama has taken aim at Wall Street and tried to harness the public frustration we all have with the fact that the industry that was at the center of the economic meltdown of two and a half, three years ago has now prospered so much in the years following that meltdown. He's taken aim at specific banks, the industry overall with regulations, etc.
But the president has also refrained from taking some of the toughest actions that some economists and outside analysts would like him to have taken. For example, forcing banks or attempting to force banks to forgive the debts of homeowners, or partially forgive the debts of homeowners, or forcing banks to break up into pieces and end, definitively, the too-big-to-fail problem.
So in a sense, Obama has tried to strike a middle ground, harnessing frustration, sharing in frustration of the public regarding the financial sector, but not taking the fundamental actions that would radically restructure the financial industry and perhaps cause there to be more fairness across the country when it comes to the disparate treatment of Wall Street and the rest of the country.
RAZ: Zach, thank you so much.
GOLDFARB: Thank you.
RAZ: That's Zach Goldfarb. He's a reporter for the Washington Post. He joined us from the newspaper's office here in Washington, D.C.
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ROBERT SIEGEL, HOST:
This is NPR News. Transcript provided by NPR, Copyright NPR.