As Europe’s governments attempt to throw a life ring to failing banks, the European Union lawmakers overwhelmingly voted today to cap bankers’ short-term bonuses from next year.
Like the U.S. Government did under The Troubled Assets Relief Program (TARP), signed by President George W. Bush, we rescued failing financial institutions; Europe’s banks have been bailed out by their governments as well. TARP allocations of $700 billion toward bank bailouts have been partly successful. The larger banks have repaid their funds, and so far, the repayments made have exceeded what has been loaned. Smaller financial institutions are still in recovery mode, but by the end of May 2010, a total of $190 billion had been loaned under TARP, and $194 billion had been repaid.
In February of this year, at the Greater Omaha Chamber of Commerce’s annual meeting, Henry Paulson, former U.S. Treasury Chief, and Warren Buffett, investor billionaire, said America will recover every cent paid out to banks, and we may even turn a profit. Paulson went on to say that the United States is better off today than most countries. “Every other major economy has many more significant challenges than we do,” Paulson said. But he said several significant challenges remain. Paulson’s 500-page book, “On the Brink: Inside the Race to Stop the Collapse of the Global Financial System,” chronicles his account of the rush to prevent an economic disaster as Lehman Brothers and American International Group (AIG) spun toward collapse in September 2008. Paulson served as Treasury Secretary from June 2006 to January 2009. I’m glad they are optimistic.
Parallel to what occurred in our nation, large annual bonus payments to bank executives drained much of a bank’s capital, and now the European governments have said, “Enough”. Capping of bankers’ bonuses by the European Union is sure to have the other European leaders following quickly in line. Starting in 2011, bankers will only be able to get part of their yearly bonuses in cash upfront. The other seventy percent will be kept in reserve, and will only be paid out if the bank performs well. Also, European banks will be required to keep a minimum amount of capital to ensure they are covering risk from their trading book and complex security investments (like mortgage-backed securities), to avoid a repeat of what occurred worldwide during the financial meltdown. Many European financial institutions are not taking a liking to these requirements, because it could force banks to hold three to four times more capital against their trading risk than they do presently.
Similar to what occurred in the U.S., there is now public outcry over the amount in bonuses paid not only to bank execs, but over the hundreds of millions of dollars lost due to the Goldman Sachs fraud case. Inflated prices, bad investing decisions and marketing—all on the part of Goldman, has caused an uprising not only in the United States, but in Europe too. Britain’s Prime Minister, Gordon Brown, has called for authorities there to investigate the “moral bankruptcy” of the public by Goldman Sachs. Germany has also said they will follow suit, as both their government and Great Britain lost millions on investments marketed by Goldman. In Britain’s case, the Royal Bank of Scotland paid Goldman $841 million to unwind ABN Amro transactions. Like many U.S. banks, the Royal Bank of Scotland is now 84% owned by its government due to propping up by “bailout money”. ABN Amro, a Dutch bank, which from 1991-2007, was one of Europe’s largest banks operating in 63 countries. Now, after the financial crisis and bad investments made by Goldman’s marketing, is now owned by RSF Holdings BV, comprised of the Netherlands government, the Royal Bank of Scotland Group, and Banco Santander (made up of a consortium of a banking group in Spain).
And let’s not forget Greece’s problems. Due to a massive cover-up by their government to soften the blow of the financial meltdown for its inhabitants, riots have occurring in Athens, killing several people and injuring many others. In order to reduce massive spending, cutting of funds for programs and services have occurred, forcing people to protest—because they are angry how the financial crisis will affect them. Tax payers are objecting to their government’s plan to get Greece’s economy back under control. It includes a freeze on public sector pay, raising the tax on fuel, and cutting pensions. So much for a government attempting to save face…
The World Bank, an international financial institution that provides leveraged loans to developing countries for capital programs, plans to grow its domestic demand, but certainly could be derailed by other worldwide economic factors. The uncertainty of sustainability of financial positions in their high-income European countries and while some areas have recovered slightly, it is still tight and they could still see further fallout from the European nations. World Bank authorities state, “Should the crisis in Europe worsen, global growth could be, lower by between as much as 0.7 percentage points and in the case of a crisis, a double-dip recession in high-income countries may not be avoided. An aggressive fiscal consolidation response would prove to be win-win for both high-income and developing countries. Long-term growth and poverty reduction in low-income countries could be affected if bilateral aid flows fall as they have during previous recessions.”
So, there you have it, the debt crisis and the threat of bankruptcy fuels economic reform in Europe, and we now find out last Thursday that in 2008 the Federally owned funds, which at the time were investment quality acquisitions, are now worth much, much less. Apparently, when the U.S. government purchased tens of thousands of dollars in assets to rescue the Bear Stearns Companies, it included collateralized debt obligations and mortgage-backed bonds. The U.S. government became the owner of Maiden Lane, $16 billion in credit-debt swaps, which wound up being high-risk, high yield junk bonds. Oh yeah—great.
According to White House official, Treasury spokesman Andrew Williams, he has a glimmer of hope: “It is hardly surprising or particularly newsworthy that the value of” the Maiden Lane “portfolio deteriorated in the midst of the worst financial crisis in generations, but it is unlikely that the taxpayers will lose a dime on the government’s loan,” he wrote. The Congressional Budget Office estimates the Federal Government will make $200 million on Maiden Lane from inception through 2020.
(Note: “Maiden Lane” comes from the name of a street which borders New York’s Federal Manhattan headquarters. This headquarters was created to hold the assets the central bank acquired to facilitate JPMorgan Chase & Company’s purchase of Bear Stearns. Maiden Lane II LLC is a limited liability company created when American International Group Inc. (AIG) was taken over by the U.S. government in September 2008. Since AIG’s subsidiaries hold a great many Residential Mortgage-Backed Securities (RMBS) that are very risky, Maiden Lane II LLC was formed to purchase these RMBSs. On December 12, 2008, the Federal Reserve Bank of New York began extending credit to Maiden Lane II LLC. On the Fed’s Balance Sheet as of May 6, 2009, net portfolio holdings of Maiden Lane II LLC are 180.16 billion dollars. Maiden Lane III LLC is a holding company created when American International Group Inc. (AIG) was taken over by the U.S. government in September 2008. The Feds disclosed the Maiden Lane holdings in March after Bloomberg News went to court using the Freedom of Information Act, and the U.S. District Court in New York held that the Feds should release documents related to Bloomberg’s request.)
Republican leader, John Boehner (R-Ohio) recently spoke to an interviewer about the financial crisis by stating, “This is killing an ant with a nuclear weapon. There are faults in our regulatory system, some in terms of transparency, most as a result of ineffective enforcement by the bureaucracy who have no idea what these financial products look like today. That could’ve been fixed, but that’s not what we have here.” An ant? Really?! Could have fooled me! I’ve personally lost thousands of dollars in investments and it’s been the worst financial crisis since the Great Depression—in total, Americans have lost over 8 million jobs and $17 trillion in retirement savings and net worth. Let’s not trivialize this situation, Mr. Boehner. President Obama has fired back comments, and the GOP leader, Michael Steele has returned a clarification of Boehner’s statement. It really doesn’t matter what was said. Find solutions to the economic meltdown. I still feel like “an ant buried below ground under sediment”. Let’s continue on the road to recovery, put appropriate regulations in place, limit government spending where we can, and hold back bank and Wall Street bonuses. Then someday, hopefully in the not-too-distant future, my kids can eventually find full-time employment instead of being part of the 9.5% currently unemployed, and all of us will feel a lot less pessimistic about the worldwide economic situation. ‘Nuf said.
The Smart Alaskan 
