Oops! We Did It Again!

By Karen Rogers - June 26, 2012 | Tickers: BAC, C, JPM, MS | 0 Comments

• Email
• Print

If the definition of insanity is doing the same thing repeatedly while expecting a different result, then U.S. bankers are in need of many, many years of therapy.

Moody’s downgrade list as shown below reveals each bank’s old and new rating along with the additional collateral and/or termination payments the banks must pony up.  These amounts are taken from each bank’s 10-Q Filing for the quarter ending March 31, 2012.

Moody’s list contains some of the banks responsible for almost bringing down the entire U.S. economy a scant five years ago and today’s situation is eerily similar.  Interest rates are low but derivative interest rates, especially collateralized debt obligation (CDO) rates, are tantalizingly high. Subprime mortgages are bundled into CDOs along with slices of other questionable securities, and CDOs still remain unregulated.  So we have the same banks, same CDOs, same risk, so we should have the same outcome, right?

But just as in 2007, banks can’t gobble up CDOs fast enough in 2012.  On June 15, Citibank (NYSE: C) purchased one CDO with a face value of $1.44 billion from an auction conducted by the New York Federal Reserve Bank.  Bank of America (NYSE: BAC) bought a single CDO worth $896 million at the same auction.  The Fed acquired these CDOs from the AIG bailout.  Six days later both Citibank and Bank of America were downgraded by Moody’s.

On May 24, 2011, Citibank had the winning bid to purchase CDOs from the New York Fed, CDOs consisting of complex residential mortgages sliced then bundled together.  On May 11, 2012, Bank of America bought more AIG CDOs valued at $2.5 billion from the New York Fed.  These CDOs are sliced mortgaged-backed securities repackaged into new bonds with varying interest rates. On May 10, 2012, Barclays and Morgan Stanley (NYSE: MS) banded together to win an auction of CDOs sold by USB worth $1.58 billion.  Then in May, 2012, JP Morgan Chase (NYSE: JPM) admitted that the London office’s CDO trade had lost over $2 billion, a figure that may yet go higher.

It’s no accident that Jamie Dimon, CEO of JP Morgan Chase, is one of the most outspoken critics of the Volker Rule.  (Somebody please tell me why Jamie’s a Class A director of the New York Fed?  Isn’t this akin to the warden handing the prison keys to the inmates and expecting them not to escape?)  This portion of the Dodd-Frank Wall Street Reform and Consumer Protection Act restricts U.S. commercial banks from making specific types of investments that do not benefit their customers.  In other words, commercial banks cannot make proprietary trades using customer deposits for the bank’s own investing purposes and profit. 

Although the Volker Rule will be implemented on July 21, bank leaders have always stated they don’t expect it will make much of an impact on their profits.  Commercial banks can still invest in hedge funds, private equity funds, and continue their proprietary trading in Treasuries, bonds issued by government backed agencies including Fannie Mae and Freddie Mac, and municipal bonds. 

Although the Volker Rule doesn’t outright ban banks from using customer deposits to trade derivatives, it’s a long overdue start in the right direction.  Bankers are every bit as addicted to derivatives now as in 2007, and Moody’s bank downgrades should signal a red alert to Congress that banks cannot be trusted to regulate themselves.  A repeat of the 2007 banking industry meltdown will be too big to stop.  The banking industries’ lust for profits should not be allowed to put the U.S., and the world’s economies, at risk.

• Email
• Print
• Feedback