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Wednesday, February 11, 2009

Bank Exec's Say Nothing

Listening to the Congressional hearings chaired by Barney Frank today just reaffirms to me that the banking executives are toying with Congress and the American public.

In their written and prepared testimony few facts of any relevance were given. Yes, they all did talk about how lending is up and how much money they have loaned out. Yes, they did say that they were making more mortgages. It all seemed like very carefully crafted statements - more propaganda in an attempt to lead people to believe that they were all doing the right thing with our money.

What the people of this country as well as Congress was looking for - at least I was looking for - was some admission of wrong doing, mismanagement or admission of ill conceived business plans. I want to see them take some blame for causing a worldwide crisis. What they did was not very different then what Bernard Madoff did. The banking ponzi scheme that even overshadows Madoff.

Yet no one ever asks the question, "what happened to all the money you made these past six or seven years?" Indeed there were billions of dollars made by all those institutions represented by their chief executives at the hearings. They were more profitable these past years then ever before in their corporate histories - so how come many of them were broke?

Bear Stearns- no longer represented as they are owned by J.P. Morgan was one of the leaders and innovators in sub prime lending. Merrill Lynch, also no longer represented as they are owned by Bank of America, was another leader and innovator. Where did all of their profits go?

The same holds true for the banks. All of them were generating record sales and profits. Washington Mutual, Wachovia and Indymac - all lending, buying and selling mortgages. Both were on the brink of disaster and had to be "purchased" (?) by other not so solvent banks.

I just don't get it. We are focused on what they did with all the government bailout money but shouldn't the question really be; "What did they do with all the other money - their record earnings?"

We are still being duped and going broke as a nation while these exec's fly in their private corporate jets, dine in lavish establishments, travel, vacation and continue the good life.

As to the new stimulus plan and the reported controls for the balance of the TARP funds - there is some merit - but not enough to help any of us in the short term. I believe it will be at least two years until we see some results. In the meantime the potential for another six million unemployed exists. (I base this on the average of 500,000 new unemployed for the past three months). In addition, foreclosures will continue to climb into the multi millions.

SOLUTIONS:

I am not an economist, a politial scholar, a professor or dean of anything. I am just your average American (not Joe the plumber) who sees relief only when and if those bailout dollars start hitting the street. I maintain that the first $350 billion would have been better utilized if it were counted out in one dollar bills and dropped by helicopter all across the country. We all would have picked some of it up and spent it on food, clothing, shelter, health care and other consumables. That would begin to circulate cash which is what is lacking from our economy now.

One thing, I, as an average person does know is that you cannot eliminate debt by creating or issuing more debt. If we are already overburdoned with debt, how does allowing us to go deeper in debt help solve anything? What will solve the problem is injecting cash directly to the consumer - us - allowing us to pay cash thus injecting and circulating this lacking commodity.

Another solution could be re thinking the prime rate. The prime rate is defined as the interest rate banks charge their larges corporate customer - primarily those multi national giants such as Exxon/Mobile. Then the rest of the small business community pays one or two percent over this rate.

To begin with, small business is, was and always has been the backbone of our economy. It produces more jobs then the large corporate sector, produces more goods and services and even accounts for the majority of funds deposited into our ailing financial institutions.

This being the case, loan small business money at the "prime" rate and let the large corporations pay the higher interest rates which they can most certainly afford. I have always believed the functionality of the prime rate was backwards.

Small business grows with this concept and small business will pick up the slack for any large or too large corporation upon their failure. Yes, I am prpoposing to let the giants fail just like we allow our small business to fail. Difference is that when giants fail smaller companies grow into larger companies.

Consolidation is not better. Bigger is not better. If GM fails then is it not possible that a GM split back into their original pieces could survive? Perhaps even better as the entrepreneurial spirit would return along with less overall costs.

This lesson was learned back in teh 1980's when mergers and acquisitions ran wild. Companies acquiring not only their competion but other non related companies as well. Eventually they found they were not as profitable or profitable at all and began their divestitures.

Now mergers and acquisitions are happening all over again.

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