How Badly Did Americans Suffer Due to the Wall Street Caused Financial Crisis?  So Bad That Food Stamp Usage Reached an All-Time High, Just a Few Short Years Ago

It was recently reported that food stamp usage “spiked” after the 2008 financial crash “when many Americans couldn’t find jobs and struggled to eat.  Nearly 48 million people relied on [food stamps] in 2013, an all-time high.”  It was less than 30 million Americans before the crash, which caused a 60% jump in food stamp usage. 

That shouldn’t be a surprise given the real unemployment rate hit 17% in October 2009, just 13 months after the failure of the Lehman Brothers investment bank almost exactly nine years ago.   That real unemployment rate, which affected about 50 million Americans, stayed at 17% for five out of the following seven months and remained abnormally high for years.  More than 16 million foreclosures were filed on American’s homes and more than 40% of the rest lost so much value that they were underwater (meaning the mortgage was higher than the amount the home could sell for, sometimes referred to as “negative equity”).  Altogether the crash and economic wreckage is going to cost the U.S. more than $20 trillion in lost GDP or more than $170,000 for every living woman, man, and child in the country. 

With all the talk in Washington of once again deregulating finance and Wall Street in particular, responsible elected officials, policy makers and regulators simply must remember that the 2008 financial crash was a horrific financial, economic and human catastrophe with incredibly damaging immediate and long term consequences.  Many Americans are still suffering from the economic aftershocks of the crash, including lost income, savings, careers and retirements, stagnant wages, sky-high student loan debt, underwater homes, destroyed credit histories and, even now nine years later, food stamp needs that are still almost 40% higher than pre-crash levels.  On top of that, the trillions of dollars used to bail out the banks and respond to the tragic human needs were trillions of dollars diverted from all of America’s other priorities like health care, education, science, housing and so much more. 

Yes, the financial system is much safer; banks are much more profitable; lending is up and increasing, but many of our neighbors are still struggling and suffering.  It simply must be a national priority to make sure that another financial crash doesn’t happen or that, if it does, the severity is dramatically reduced.  The American people deserve no less.  

Warren Buffett Makes Another Killing, Highlighting Taxpayer Bailout Loses & Wall Street’s Windfall

Headlines recently blared that Warren Buffett was becoming the largest shareholder of Bank of America because of one of the deals he cut for himself in or in the aftermath of the financial crash.  The other two – in Goldman Sachs and GE — were also fabulously profitable for Buffett.  In fact, Buffett’s returns were between 40% and 160%!  Contrast that to the return U.S. taxpayers received for bailing out the entire financial system (and enabling Buffett to make anything at all):  the taxpayers received a paltry return of less than 4%, meaning the bailed out banks received a subsidy gift from the taxpayers of more than 36% and actually much higher (as we spelled out  here on pages 66-69.)

With Bank of America, Buffett invested $5 billion in Bank of America’s preferred stock with an astonishing 6% annual dividend, which was $300 million annually, and warrants to acquire 700 million shares of common stock for $7.14 each.  Buffett made this investment in August 2011 when Bank of America was still limping along due to the damage from the financial crash and there was widespread concern about the bank’s fragile financial condition and viability.  While Buffett was getting huge returns, the bank was buying Buffett’s imprimatur, signaling the market that it was not in as much trouble as was feared.  

So, how did Buffett do on his $5 billion investment?  He pocketed a fortune; $1.7 billion in annual dividends and paper profits of about $12 billion on the increased value of the stock.  That amounts to a $13.7 billion return on a $5 billion investment or more than 160% return.  But, that’s not all.  Once he exercises the warrants, the common stock will then be entitled to dividends projected to be $336 million per year.

With Goldman Sachs, Buffett bought, at the height of the 2008 financial crisis, $5 billion of preferred shares that paid a 10% annual dividend ($500 billion) and warrants to buy $5 billion of common stock at a fixed price.  How did Buffett do on this $5 billion investment?  He made $1.75 billion in dividends and an early repayment penalty plus $1.35 billion on his stock options or $3.1 billion in just five years, a tidy 62% return.

At GE, Buffett invested $3 billion in preferred stock with a 10% annual dividend and warrants to buy $3 billion in common stock at a fixed price within five years (which was about 135 million shares).  When the GE redeemed the $3 billion of preferreds plus dividends and a prepayment premium in 2011, Buffett pocketed at least $1.2 billion for a 40% return and he still owned the warrants.

How did U.S. taxpayers do on their bailouts?  Taking just one small piece of the trillions in bailouts, the TARP investments from the $700 billion fund, the payments back to the government amounted to less than a 4% return.  That was almost the same return the U.S. received on its bailout of AIG, which was entirely separate from and in addition to TARP.  That means the US financial system pocketed a secret subsidy from taxpayers of more than 36%.

Remarkably, even today you can still hear the industry and its allies make the absurd claim that “the government made money on the bailouts.” This is one of the most misleading claims to come out of the financial crisis.  The government being repaid a penny more than the amount it gave a bank is not the same as making money and certainly not on a risk-adjusted basis, which is the standard everyone in finance determines what “making money” means.

Buffett made money on the bailouts; the banks made money on the bailouts; the taxpayers has unlimited exposure when the full faith and credit of the United States was put behind the financial system.  They did not make money on the bailouts.  They got the bill and Buffett’s returns prove that yet again. 

Better Markets Urges Changes to Exec Comp Rules to Protect Main Street from Wall Street Incentives for Unreasonably High Risk Taking

Wildly inflated compensation packages for CEOs and other Wall Street executives led to extreme, perverse incentives and unrestrained risk taking, which were at the heart of the many causes of the 2008 financial crash.  These short-sighted pay policies, fueled by misguided competitiveness and greed rather than principles of sound corporate governance, came at the expense of the long-term viability of those institutions, the entire financial system, and, ultimately, the U.S. economy.  As a result, the financial crisis of 2008 will cost over $20 trillion in lost GDP, in addition to the long-lasting suffering still being experienced by millions of Americans who lost their jobs, savings, and homes.  In the years since, Better Markets has repeatedly advocated for reforms and regulations to prevent corrupting pay practices as well as clawing back pay from high risk activities and misconduct.

Despite the important progress that has been made in the less than ten years since the crisis, the Wells Fargo fraudulent accounts scandal, which we just learned is even worse than previously thought with at least an additional 1.4 million more bogus accounts having been opened, illustrates that executive compensation rules still have a long way to go.  That is why Better Markets was pleased to submit a comment letter to the Financial Stability Board applauding it for adding consideration of misconduct risk to its Principles and Standards on Sound Compensation Practices.

The FSB, which promotes international financial stability by coordinating national financial authorities and international standard-setting bodies, identified a clear coverage gap in existing policy and is attempting to address it in an efficient and proactive manner. While we wholly support the purpose of the proposed guidance, Better Markets made a number of constructive suggestions that we think will strengthen the proposal including: empowering independent board members; placing all incentive-based compensation at risk of all methods of recovery; ensuring that adjustments to compensation provide adequate deterrence; and enforcing mandatory triggers for making adjustments.

Executives who engage in these improper activities simply shouldn’t be allowed to keep the riches they have pocked from those very activities.  If that is allowed, it incentivizes high risk behavior and misconduct.  That’s what happened before the 2008 crash and it must be ended.