By Pam Martens and Russ Martens: May 15, 2020 ~
Following the Wall Street banking collapse in 2008, the then head of the Federal Deposit Insurance Corporation (FDIC) Sheila Bair wrote the book Bull by the Horns. She described how the Federal Reserve and the Office of the Comptroller of the Currency (OCC) had ignored the systemic problems at Citigroup and allowed this “sick bank” to continue paying out cash dividends. Bair wrote as follows:
“By November [of 2008], the supposedly solvent Citi was back on the ropes, in need of another government handout. The market didn’t buy the OCC’s and NY Fed’s strategy of making it look as though Citi was as healthy as the other commercial banks. Citi had not had a profitable quarter since the second quarter of 2007. Its losses were not attributable to uncontrollable ‘market conditions’; they were attributable to weak management, high levels of leverage, and excessive risk taking. It had major losses driven by their exposures to a virtual hit list of high-risk lending; subprime mortgages, ‘Alt-A’ mortgages, ‘designer’ credit cards, leveraged loans, and poorly underwritten commercial real estate. It had loaded up on exotic CDOs and auction-rate securities. It was taking losses on credit default swaps entered into with weak counterparties, and it had relied on unstable volatile funding – a lot of short-term loans and foreign deposits. If you wanted to make a definitive list of all the bad practices that had led to the crisis, all you had to do was look at Citi’s financial strategies…What’s more, virtually no meaningful supervisory measures had been taken against the bank by either the OCC or the NY Fed…Instead, the OCC and the NY Fed stood by as that sick bank continued to pay major dividends and pretended that it was healthy.”
In point of fact, the New York Fed did not just stand by. It secretly funneled $2.5 trillion in low-cost revolving loans to Citigroup from December 2007 through at least July 2010. The Fed battled in court for more than two years to keep its trillions of dollars in secret loans to Wall Street banks from public disclosure.
The U.S. Senate Banking Committee held a hearing with the federal regulators of banks on Tuesday of this week. Throughout the hearing, which was done virtually, there was an undertone of disgust on the part of the Senators from both parties with one regulator: Randal Quarles, the Vice Chair of Supervision for the Federal Reserve.
A key issue that Senators had with Quarles was that the Fed was allowing these same Wall Street banks that crashed the U.S. economy in 2008 to continue to pay out dividends today while laying off workers and getting cheap emergency loans from the Fed.
Senator Sherrod Brown of Ohio grilled Quarles as follows: “U.S. companies, as we know, are laying off thousands of workers while continuing to pay millions in dividends to Wall Street investors. Isn’t it true the Fed continues to allow the biggest banks to spend their capital on dividends to shareholders? Isn’t that the policy allowed.”
Quarles said that the largest banks had suspended share buybacks but Brown argued that it’s the Fed that has allowed them to continue to pay dividends. Quarles insisted that the Fed, under its rules, must wait for the outcome of its stress tests before it can order the banks to curtail dividend payments. The speciousness of that argument resides in the fact that the Fed is not allowed under statute (a law not a rule) to accept anything other than “good collateral” for loans but it has ignored that and is making loans with stocks being used as collateral under its Primary Dealer Credit Facility. The Fed, under statute, is only allowed to make loans, not purchases. But this week it started buying up junk-bond Exchange Traded Funds (ETFs) and said it will soon begin making outright purchases of both investment grade and junk-rated corporate bonds.
Brown scolded Quarles by stating that days after the stimulus bill known as the CARES Act passed in Congress, the funds that the Congress had allotted for small businesses under the Paycheck Protection Program (PPP) had run out so Congress had to rush back to Washington to approve more money for small businesses. “But it turns out,” said Brown, “loans have been going to the largest banks’ biggest corporate customers while at the same time executives of the biggest banks who make these loans continue to reward themselves with dividends. They should be using their capital for struggling small businesses and families that need help during this crisis. After the last crisis we see what happens when we reward wealthy Wall Street investors and you’re just letting it happen again.”
Brown had said that the banks were paying out millions in dividends. We checked the recent dividend payouts at just six Wall Street banks. Since the beginning of this year, just those six have paid out $11.7 billion. The breakdown is as follows: JPMorgan Chase made a payment of $5.49 billion consisting of two dividend payments: one on January 31 and one on April 30. We counted only one dividend payment from Citigroup, which it made on February 28 for $1.06 billion. We did not count the dividend that Citigroup must pay in the same amount on May 22 because its record date for payment of May 4 has already passed. We also counted only one dividend payment of $2.09 billion for Wells Fargo which it paid on March 1. It is set to make another dividend payment in the same amount on June 1. Bank of America paid a $1.56 billion dividend on March 27. Morgan Stanley has paid two dividends totaling $1.1 billion. The dividends were paid on February 14 and May 15. Goldman Sachs paid a dividend of $429.86 million on March 30. We did not count the dividend it is set to pay on June 29 in the same amount.
How is that enriching the billionaire class on Wall Street? Something not mentioned at the hearing was that since January 1, JPMorgan Chase Chairman and CEO Jamie Dimon, who owns 8.9 million shares of the bank with his wife and in his various trusts, has received more than $16 million in cash dividends on JPMorgan Chase stock. The bank has admitted to tapping the Fed’s Discount Window for super cheap emergency loans. Dimon became a billionaire from the obscene stock compensation he has received from the bank as it pleaded guilty to three felony counts over the past six years and is currently under another criminal investigation for allowing its precious metals desk to be turned into a racketeering enterprise, according to the U.S. Department of Justice. The Fed has allowed Dimon to remain at the helm of the bank despite a crime wave that is unprecedented in U.S. banking history.
Senator Brian Schatz of Hawaii asked Quarles why banks in the U.K. and European Union have suspended bank dividends. Quarles said that their systems are very different from ours. (Actually, their global banks are on the same list of dangerous, globally systemic banks as the U.S. Wall Street banks.)
Schatz said that the current rate of unemployment is likely to double from what is contemplated in the current stress test of the banks here in the U.S., asking what’s the upside to allowing U.S. banks to continue their dividends. Quarles began a long-winded explanation as to how this year’s stress test will look into additional factors but was interrupted by Schatz who asked: “Don’t we kind of have to throw all of that in the trash can,” adding “whether you’re a bank or an institution or a family, any analysis that you did three months ago pretty much belongs in the trash can, doesn’t it?”
Quarles said new factors are currently being considered in the stress tests and a decision on the dividends will be made before the next dividends are to be paid out by the banks. In the case of Citigroup, that would mean a decision would have to come before May 22, which is just one week from now.
Senator Pat Toomey of Pennsylvania asked Quarles to clarify if the taxpayers’ money ($454 billion handed over by the Treasury to the Fed, which will then be used as equity in Special Purpose Vehicles set up by the Fed and leveraged up to $4.54 trillion to make loans and purchases of toxic assets on Wall Street banks’ balance sheets), is in fact going to be used to absorb losses on what the Fed is taking off the balance sheets on Wall Street. Quarles responded as follows:
“The Treasury has the fiduciary responsibility, if you will, to the Congress for the use of the funds that are appropriated to it. So I wouldn’t want to speak for them as to how that equity should be handled. But it is true that in the construction of the 13(3) facilities [Fed’s emergency programs] that use Treasury equity, the Treasury equity is there to insure the Fed, which statutorily cannot take losses, has to be sure that it won’t, is there to insure that that cushion exists for the funding portion of the facility.”
Fed Chairman Jerome Powell has already admitted that the $454 billion is to be used to absorb losses that it anticipates it will take.
Once again, the speciousness of Quarles’ argument resides in the fact that no such loss absorbing capital was demanded by the Fed from the taxpayer from 2007 to 2010 when it made $29 trillion in secret loans to bail out Wall Street.
Senators Kyrsten Sinema of Arizona and John Kennedy of Louisiana separately took issue with Quarles on the current structure of the Main Street Lending Program. That program has been earmarked by the Fed to make $600 billion in loans (using $75 billion of taxpayers’ money to absorb losses). While called a “Main Street Lending Program” to help the Fed in its public relations efforts to not look like a captured regulator of the one percent, the program currently sets a minimum $500,000 loan amount and allows loans to businesses with up to $5 billion in annual revenues and 15,000 employees. It also requires that businesses have a credit rating from a major credit rating agency, something that few mom and pop operations on an actual Main Street in America have.
Under these criteria, Sinema said small businesses in Arizona will be seriously disadvantaged. Kennedy echoed the same concerns and asked Quarles to change the terms of the program.