Monday, February 22, 2010

They might have things a little bit backwards...

Recently I've felt a little bit like a Marie Antoinette to Obama's French revolutionaries, or the Czar Nicholas to his Lenin. Being a former Wall Street-er and a current banker means that I've had to put up with a lot of crap from his administration about how greedy I am and how I've ruined the economy through my greed. Unfortunately for Mr. President (and consequently most of the American people) I don't think he understands quite how things work. In fact I'm going to say it plainly: I honestly don't think he has any clue what caused the economic mess we're in. He might have smart advisors, but for all their years of experience I'm not sure one of them has actually taken the time to explain to him how things work.

I'm going to discuss one thing for now- the president's claim that taxpayers are forced to bear the burden when banks take risks with FDIC insured deposits. In the government's made up world, all banks take deposits from consumers, and use them to invest directly in hedge funds and other risky things. When they do well, all the bankers receive huge bonuses. When the lose money the FDIC, is forced to bail them out and pay the public back for their deposits. The FDIC is funded by taxpayer money, so this is unfair to the people.

This is blatantly false.

If every driver with Allstate insurance crashed tomorrow, the company would go out of business. Why? because they wouldn't have enough money to pay for all the claims at once. This is essentially what is happening to the FDIC as more and more banks are failing. Why? Because they are an insurance company. That's it. The FDIC is 100%... I repeat... 100% bank funded. Just like any other insurance company, the FDIC collects premiums from its customers (banks) and uses it to pay for claims when they are made (such as when a bank fails). They are not funded by taxpayers at all.

How could the president go on national TV and claim that taxpayers insure bank deposits? I am not sure. Yes it's true that if the FDIC runs out of money, the government will likely step in and bail them out. But how is that the banks' responsibility? Just like any other insurance firm, the FDIC should charge higher premiums for riskier behavior. If you drive a red Ferrari, your insurance payments would be higher than if you drove a grey Volvo. The same should apply to banks... banks that invest in riskier securities should have to pay higher insurance premiums. Done. This is simply bad management on the FDIC's part. Currently, to be fair I guess, they charge all banks the same percentage of their deposits as a fee. While very egalitarian, this does not take any risk-taking into account and is, like I said, bad management. If you could drive a red Ferrari for the same insurance premium as a grey Volvo, wouldn't you? (assuming you can afford either car)

Now to move away from that particular comment - Obama often cites bankers' greed as the cause of our problems. And it's true that some bankers were greedy, although quite a small number relative to the rest of the financial professionals in the pool that is simply referred to as "bankers" (it's kind of like calling everyone who works at Ford a widget screw-er on-er). Here's what I have to say to that:

As long as you have druggies, you will have dealers. People often call bankers greedy for making subprime loans, but what are subprime loans exactly? They are loans made to people with no job, no employment history, and often no personal documentation to prove their identities. The people taking out these mortgages and home equity loans were just as greedy as the bankers underwriting them! Many Americans felt entitled to a big house, a nice car, and a PS3 even though they had no job, and were so greedy for more stuff that they took out more in loans than they knew they could afford simply because it was possible. During the early years of the subprime craze, Bush boasted that the national homeownership rate was the highest it's ever been. Did the banks get any credit for the loans, or did the government take it all for itself? Now that banks have foreclosed on people and basically taken back things they should have never given away in the first place, Obama is blaming the banks. I think the more appropriate thing to do here was to remind the American public that they shouldn't spend money they don't have (not that our government is an example to follow).

In an alternate world where things weren't backwards, I think it would be fair to argue the following: I, as a former Wall Street-er and current banker demand a new law to recoup money from anyone who defaulted on any of their loans so that I may be paid a larger bonus. This is quite fair actually, since I suffered a big hit to my bonus due to subprime losses, yet in neither of my "banking" jobs was I ever responsible for anything to do with subprime. Also, since my bonus (regardless of its dollar value) is taxed at a larger percentage than the regular income of said defaultees, the government will receive more in tax revenue with which to create jobs for the unemployed and fix the economy. How do you like them apples?

Unfortunately we can't do that, partially because my theory wouldn't entirely work (it's more of a joke) and partially because Obama's healthcare plan sucked so bad that nobody will vote for him or his party unless he rides all over the country on a big media horse yelling "the bankers are coming! the bankers are coming!"

Mo out.

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