At ProPublica, Jesse Eisinger writes of how the Fed shrugged off warnings and let banks pay shareholders billions, leaving the financial system, and the rest of the economy, vulnerable to as big a mess as the last crisis put us into. Who covers the banks’ liabilities? That would be the taxpayers.
In March 2011, the Federal Reserve green-lighted most of the top 19 financial institutions to deliver tens of billions of dollars to shareholders, including many of their own top executives. The 19 paid out $ 33 billion in the first nine months of 2011 in dividends and stock buy-backs.
The Fed allowed the largest financial firms to pay out $ 33 billion to shareholders last year, money they won’t have to cushion themselves if a new crisis hits.
That $ 33 billion is money that the banks don’t have to cushion themselves — and the broader financial system — should the euro crisis cause a new recession, tensions with Iran flare into war and disrupt the oil supply, or another crisis emerge.
This is the first in-depth account of the Fed’s momentous decision and the fractious battles that led to it. It is based on dozens of interviews, most with people who spoke on condition of anonymity, and on documents, some of which have never been made public. By examining the decision, this account also sheds light on the inner workings of one of the most powerful but secretive economic institutions in the world.
The Federal Reserve contends it assessed the health of the banks rigorously and made the right decisions. The central bank says the primary purpose of the stress test was to assess the banks’ ability to plan for their capital needs. The Fed allowed only the healthiest banks to return capital — and they are still not paying anything like the proportion of profits that they distributed in the boom years. And it says the stress test covered only one year. Regulators say they can revisit their decisions if the economic picture turns bleaker.
Most important, Fed officials argue that the biggest financial institutions still added $ 52 billion in capital to their balance sheets in 2011 despite raising dividends or buying back stock. The top 19 financial firms had a 10.1 percent capital ratio by the end of the third quarter of 2011, using the measure that regulators primarily look at, nearly double what they had in the first quarter of 2009.
But a wide range of current and former Federal Reserve officials, other banking regulators and experts either criticized the decision to allow dividend payments and stock buy-backs then, or consider it a mistake now. [...]
Blast from the Past. At Daily Kos on this date in 2011:
If Newt Gingrich wasn’t already having an awful week, the latest Daily Kos/PPP poll offers even more bad news for him: Of the major GOP contenders for the presidency, Newt is by far the least-liked candidate among Democrats. Yes, that’s right: Dems profess to like Newt even less than Sarah Palin.
By now, you are probably quite familiar with Newt’s recent travails. To recap briefly, on Tuesday morning, a senior aide informed the media that Newt would soon announce the formation of a presidential exploratory committee. Later that same day, a different adviser contradicted the first, saying no, there was no such committee in the works – not exactly the picture of a well-run campaign. Then on Thursday, Newt himself made a big speech, in which he had a chance to set things aright. So what did he do? He unveiled… a website, and one with a weird name, too (that’s already been spoofed). That’s it. A website.