It’s Not Just Big Banks That Panic In A Financial Crisis

Wall Street has many friends. Its recurring sins and transgressions are pervasive but tend to get a free pass because of the way our society worships markets. Somehow the big boys always tend to take care of themselves. What about the rest of us? In this dramatic economic downturn, can we be secure about our investments, retirement plans, and even the banks that hold our money?

Don’t think that you, me, or all of us won’t be affected by the financial disaster we keep reading about. For starters, the “experts” expect a 25% drop in housing value. Beyond that, a fall off in share price can put our 401k retirement packages at risk. Already an economist at the Bank of America says that the loss from subprime write-offs and declines in share value add up to $7.9 TRILLION. That estimate is already dated. That’s a lot of money!

I am not a financial advisor. Like most of us, I need advice. But when I read all the economists saying there won’t be a depression, I wonder if they are the same ones who said a recession was unlikely until it was undeniable.

What about the banks? How safe are they? Let me tell you a story.

Recently I heard a talk by Sheila C. Bair, the Chairman of the Federal Deposit Insurance Corporation. She spoke to a group of community activists in a Washington Hotel on the morning of Friday March 14th, on the day before the Ides of March, the anniversary of the death of Caesar.

Created during the depression, this agency was put in place in response to the bank runs that deepened the Great Depression of the 1930’s. Its role was to insure confidence in banks and the financial system. Without it, the economy cannot function. Its chairman is in the confidence business. If that sounds like a con game, it is.

“Don’t Worry Be Happy” could be the FDIC’s theme song. It’s mission?

“The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $100,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.”

At the time of her appearance, the industry she was overseeing was not doing too well. Bank profits had plunged 84 percent by the end of 2007, the lowest in 16 years. The banking system itself was under escalating stress as the credit crisis brought consumer lending and even bank to bank lending to a standstill. Last year, there had been a run on England’s Northern Rock Bank which forced the Bank of England to step in to guarantee deposits, a move that did not stop customers from queuing outside the bank and withdrawing £4 billion. The bank has since been nationalized.

The panic there sent shivers down the spines of regulators the world over.

Ms. Bair acknowledged part of the problem, namely that regulations had been slipping and had earlier spoken of “weaknesses and holes in our bank regulation … at the heart of the current mortgage situation.” When she was with the Treasury Department, back in 2001, she tried to get the companies making subprime loans to regulate themselves as the NY Times reported:

“In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of “best practices” and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.”

They told her to get stuffed. And she did!

Now, she was face to face with the National Community Reinvestment Coalition representing millions of Americans facing foreclosure from their homes, 45,000 every month. Most were not in a good mood.

Ever upbeat, as is her function, she noted that she saw a “silver lining” in the crisis because more and more people in the industry now recognized the importance of regulation. She announced her intent to press banks to give homeowners five years at their current mortgage rates to prevent them from being forcing out. She later admitted that she had initially favored restructuring the mortgages over 30 years but “had lost that fight.”

Her speech lacked all compassion for the suffering of so many, but in some way, you sensed she was actually one of the “good people” but powerless to go up against the power of the White House and its Treasury Department. She is there to defend bank customers; The Administration is more committed to defending the banks.

I asked a question, well actually two. One, how many banks did she think would fail? And secondly, did she support the FBI investigation of mortgage fraudsters. Would she call for the prosecution of the white-collar criminals who engineered the subprime scams that defrauded so many borrowers? She was, I think, startled to hear concerns raised that are usually not part of the ever so polite discourse in Washington where civility is the currency of conversation.

To my first, she acknowledged that the FDIC has a list of 76 “troubled” banks –but, given her professionally positive outlook, she didn’t expect any big disruptions.

How prophetic and how totally wrong!

Later on, on that very same day, we would learn that there was a run on Bear Stearns in New York.

No one in the room had any idea then of the depth of the crisis to come.

To my second, about criminality, she was silent. That’s not her job, she said. Obviously she hadn’t heard the slogan I heard relayed on the AMTRAK while training down to DC, “If you see something, say something.”

But the stench of the scheme behind the subprime scam is so strong that even the Justice Department has been forced to look into it. The Attorney General now says he is “gathering evidence to determine if it needs to create a special task force to investigate POSSIBLE (sic) wrong doing in the mortgage lending agency.”

Bush’s Attorney General Michael B. Mukasey announced this last Friday–they always announce important news late on Friday so it will be buried in the minimally read Saturday paper. A story about it appeared at the bottom of page C7 in the New York Times.

Mukasey is the former judge who refused to call water-boarding a torture technique–he is no doubt “gathering evidence” on that too. He said his department is trying to figure out “WHETHER THERE IS A LARGER CRIMINAL STORY TO BE TOLD HERE.”

Of course there is, but I doubt they want to figure anything out. So far the probes are so narrow that the real operators will be spared. They are looking into mortgage hustlers, not the operators on Wall Street who bought the toxic mortgages, securitized them, sliced and diced them into structured investment vehicles and then sold them off to unsuspecting buyers overseas.

These big fish are not under investigation. As a result, we, the small time depositors and investors, have a lot more to fear than we think.

– News Dissector Danny Schechter edits Mediachannel.org and directed IN DEBT WE TRUST (indebtwetrust.org) warning of this disaster. His book on the subject “WE ARE SCREWED” is searching for a publisher. Comments to This e-mail address is being protected from spam bots, you need JavaScript enabled to view it