Editorial: 'Heads I win, tails you..."

Political cartoonist Jeff Danziger nailed public sentiment recently when he captured the outrage Uncle Sam, and the nation’s taxpayers, feel after bailing out the largest national banks and financial firms only to now see them wallowing in obscene profits. The cartoon shows a fat-cat banker sporting a sinister grin with his arm around Uncle Sam’s shoulder and a coin poised on thumb and forefingers ready to flip the coin. The caption says: “C’mon… You’re a sophisticated investor. Heads I win, tails you lose…”

Uncle Sam’s expression is flushed with frustration and the T-shirt he’s wearing says, “I bailed out a bunch of billionaires and all I got was this lousy t-shirt.” The newspaper he’s reading in his hands reflects the recent headlines about Goldman Sachs record profits.

The financial firm made a record profit in 2009 of $13.4 billion; profit for the first quarter (pre-tax) in 2010 is reported to be $3.46 billion, up from $1.81 billion a year ago. Revenue has increased 36 percent, to $12.78 billion, up from $9.43 billion in the same period a year ago

But how is it that the nation’s biggest banks are miraculously so profitable so soon after the banking crisis of 2007-2008? How were they able to pay off the federal government loans (with interest that lead to a net profit for American taxpayers on those accounts), and still post record gains?

The answer is that the system is stacked in the favor of big banks. Special rates by the federal reserve to the nation’s biggest banks allows them to reap billions in profits for no more than turning around and making that money available for lending at a significant premium. The result has seen a concentration of growth in the nation’s biggest banks. In 1995, the assets of the six largest banks were equivalent to 17 percent of G.D.P.; now, 15 years later, they amount to 63 percent of G.D.P. Meanwhile, the share of all banking industry assets held by the top 10 banks rose to 58 percent last year, from 44 percent in 2000. In 1990, the banks only had 24 percent of the assets. This isn’t because the bankers at these firms are any smarter, just that their lobbyists have done a good job at modifying legislation (during the Bush years) that dramatically favored their growth and profitability.

As a consequence, Democrats in Congress are now trying to draft a financial reform bill that will impose limits on how big banks can growth (the too big to fail provision), putting in place regulation to restrict derivatives (complex stock deals that allegedly prompted the banking crisis of 2008), and potentially add consumer protection provisions that would prevent the kind of fraud that Goldman Sachs is currently being investigated. Republicans have been delaying action, but a crack in their united front is beginning to form under pressure from voters.

As Congress studies financial reform measures, the public needs to push legislators for what could amount to a complete overhaul. As New York Times columnist Paul Krugman wrote Tuesday: “The fact is that much of the financial industry (among the nation’s largest banks and financial firms) has become a racket — a game in which a handful of people are lavishly paid to mislead and exploit consumers and investors. And if we don’t lower the boom on these practices, the racket will just go on.”

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