Finance Sector and Economic Impact

August 31, 2009

By Padmini Arhant

When the Bush administration officially recognized the economic recession in late December 2007, the malignant cancer in the financial sector was widespread – originating from gross mismanagement, underhand dealings, some in breach of lenient SEC regulations… a scenario analogous to the health abuse by overindulging individuals submitting to a potentially terminal illness.

Upon diagnosis, the prognosis called for a radical treatment to prolong life. Hence, the former administration executed a series of financial bailouts commencing with Bear Stearns, AIG, including major and minor banks bailout to a tune of $700 billion TARP (Toxic Assets Relief Program) fund.

Incidentally, the former Treasury Secretary Henry Paulson bound by vested interest and commitment to his alma mater Goldman Sachs let the comparable investment group Lehman Brothers submerge into insolvency.

Is cherry picking a coincidence or key Treasury representative fulfilling obligations to the dominant force Goldman Sachs in the finance industry?

Please refresh your thoughts after reviewing the blogpost ‘Bailout Debacle’ March 22, 2009 listed under Economy and Business category at www.padminiarhant.com

In this context, the cited article revealing facts behind the bailout is attention worthy.

According to http://www.wsws.org/articles/2008/sep2008/paul-s23.shtml – Thank you.

Published by the International Committee of the Fourth International (ICFI)

Who is Henry Paulson?

By Tom Eley, 23 September 2008

“Henry Paulson rose through the ranks of Goldman Sachs, becoming a partner in 1982, co-head of investment banking in 1990, chief operating officer in 1994. In 1998, he forced out his co-chairman Jon Corzine “in what amounted to a coup,” according to New York Times economics correspondent Floyd Norris, and took over the post of CEO.

Goldman Sachs is perhaps the single best-connected Wall Street firm. Its executives routinely go in and out of top government posts. Corzine went on to become US senator from New Jersey and is now the state’s governor. Corzine’s predecessor, Stephen Friedman, served in the Bush administration as assistant to the president for economic policy and as chairman of the National Economic Council (NEC). Friedman’s predecessor as Goldman Sachs CEO, Robert Rubin, served as chairman of the NEC and later treasury secretary under Bill Clinton.

Since taking office, Paulson has overseen the destruction of three of Goldman Sachs’ rivals.

In March, Paulson helped arrange the fire sale of Bear Stearns to JPMorgan Chase. Then, a little more than a week ago, he allowed Lehman Brothers to collapse, while simultaneously organizing the absorption of Merrill Lynch by Bank of America.

This left only Goldman Sachs and Morgan Stanley as major investment banks, both of which were converted on Sunday into bank holding companies, a move that effectively ended the existence of the investment bank as a distinct economic form.

These bailouts have been designed to prevent a chain reaction collapse of the world economy, but more importantly, they aimed to insulate and even reward the wealthy shareholders, like Paulson, primarily responsible for the financial collapse.

Paulson bears a considerable amount of personal responsibility for the crisis.

Paulson then handsomely benefited from the speculative boom. This wealth was based on financial manipulation and did nothing to create real value in the economy. On the contrary, the extraordinary enrichment of individuals like Paulson was the corollary to the dismantling of the real economy, the bankrupting of the government, and the impoverishment of masses the world over.

Paulson was compensated to the tune of $30 million in 2004 and took home $37 million in 2005. In his career at Goldman Sachs he built up a personal net worth of over $700 million, according to estimates. “

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True Perspective: By Padmini Arhant

The entire economic meltdown ceremoniously attributed to the financial sector’s wayward unruly conduct in the absence of limited or no regulation. Typically, it’s a free market voluntarily surrendering to a free fall after skyrocketing profits in the pockets of privileged few in the society.

Who did the private enterprise otherwise the market system’s oligarchs approach for salvation?

It was none other than the taxpayers of the economy represented by the government.

It’s poignant to underscore the convenience for private sectors to seek the taxpayer i.e. government’s assistance when they are drowning and fleetingly dismiss the same government as an incompetent, redundant agency during the buoyancy like in the health care battle.

The day is not far when the health care and insurance industry configured to the obscene profit driven settings mimic their counterpart finance industry imploring the taxpayers/consumers bailout.

When the wealth management industry succumbs to their own greed ladened follies, can the health care and insurance industry sustain the malpractice at the economy’s expense?

If there is any respect for the laws of nature or ethical consideration, the key economic components such as the finance, health industry and others would realize that universally every substance has a limited potential to thrive and exceed performance level at any given time. The mankind periodically experienced catastrophic blows in the form of severe economic recession to ‘Great Depression’ due to the prevailing markets inertia.

Still, the lesson is never learned by the delusional segment forging permanency on this planet; choose to remain confined to the improbable cause in wealth amassment.

Now directing focus on the finance sector, the ‘artful dodger’, a nickname of the Charles Dickens’ melancholy character ‘Oliver Twist’ when turned down for more porridge, despite the courteous magic word ‘please,’ was never discouraged to maneuver the situation in personal favor.

Unlike the character ‘Oliver Twist’ a victim of severe socio-economic disparity…parallel to the modern twenty first century reality, the finance sector is well armed with tactics adherence to the rule of law in appearance but decisively biting the hands that feeds them, i.e. the consumers and taxpayers.

What are the latest strategies by the finance industry to clean up the mess on their balance sheets?

The current trend in the finance sector is adapting to the new age attraction i.e. presentation and mass appeal even if it is lacking in substance. If anything achieved from the domino effects by the financial sector, it is the mastery of unsavory techniques to impress shareholders at the consumers’ peril.

During the bailouts, both the prior and the incumbent administrations were unequivocally guaranteed instant revival of the lending activity, a predominant factor in the liquidity crisis exacerbating the economy until date.

It’s been nearly twelve to eighteen months since the infamous massive bailouts with no relief to the average citizen, retailers or the small businesses, crucial for the economic recovery. The economy deprived of the consumer spending flow because of the financial institutions’ stringent policy to hoard the taxpayers’ funds received in the form of bailouts at zero percent or nominal interest rate. Instead the taxpayer bailout is unabashedly used for extravagant bonuses to the architects of the financial calamity.

Although, the Obama administration recently capped the finance charges and interest rates on credit card borrowings to ease the extraordinary burden on average citizens, the industry leapfrogged Congress with discretionary interest rates not limited to atrocious 29.9% APR and threatening to increase further on default payments.

Another proactive measure by the banks in an effort to window dressing the balance sheet was minimizing risk exposure related to credit card and consumer lending. The industry defiantly targets the vulnerable groups like students, homeowners and the lower to median income consumers with abrupt cancellation of accounts in good standing.

The irony is noteworthy. It’s considered perfectly normal if the finance industry absconded their responsibility to the American taxpayers/creditors not barring any accountability to the oversight committee regarding the bailout investments. However, the then taxpayers/creditors as consumers/borrowers now subject to scrutiny and unprecedented means by the same financial institutions holding the mantle to lending and borrowing.

While the myriad of finance industry borrowed taxpayer funds at zero or negligible interest rate, the sector in return either withholding financing in most cases or lending at an exorbitant rate to the consumers who are also the creditors.

In the housing market, the situation synchronizes with the other lending areas such as credit card, personal loans etc. The reason for the agonizing slump in the real estate across the nation squarely falls back on the commercial banks reluctant to unleash the cash flow to qualified first homebuyers and responsible mortgagees/homeowners unable to purchase or refinance their homes. The stranglehold on consumer borrowing precipitates the foreclosures notwithstanding the vertical decline in home sales and values.

Again, the White House initiatives to restrain foreclosures and assist primary residence owners through TARP fund allocation need evaluation as the financial institutions are focused on ‘business as usual’ and not measuring up to the rigorous standard that exists for average consumers while the bailed out financial industry borrowers exempt from it.

The status quo is inadequate and compromises the high value homes in the government pursuit to rescue the conforming loans, i.e. Fannie Mae and Freddie Mac toxic assets. Fannie Mae and Freddie Mac, is a private company backed by government funds.

Not surprisingly, the illicit practice permeated to the commercial real estate affecting the prospects in that segment.

Home equity, the major and sometimes the only asset for overwhelming majority being inaccessible along with the spiraling health care and insurance costs for families, the overall economic impact is enormous forcing many to bankruptcy accelerated by the escalating unemployment rate.

Did the bailout beneficiaries show any evidence to qualify for funding?

Supposedly not, then why should they be allowed to run the economy into muck and handsomely rewarded with taxpayer bailout for the colossal failure in financial history?

Where are the taxpayer funds invested and why are they not held accountable thus far?
Is the financial market granted constitutional immunity?

And if not,

What is holding the legislators from intervening on behalf of the electorate to probe the public affairs maintained as private matter by the industry?

Meanwhile, the investment group, Goldman Sachs implicated for alleged insider information to high value investors through trade specialists deserve proper investigation and due process. The SEC regulations must apply to all without exception in absolute transparency.

With the holiday season approaching, the consumer spending is vital to expedite the stagnant economic growth. As stated above, the positive development in housing and job market intertwined with the investment pace, only possible through private sector faithful participation in lending and reactivating the economy.

Unless and until the finance sector across the board, the commercial, investment and insurance industries get their act together and relinquish the ‘subprime’ syndrome, the sagging economy will continue and eventually consume the source, the financial groups.

The financial sector is obligatory to the taxpayers as creditors and borrowers particularly with respect to the disproportionate bailouts.

Finally, with no further procrastination on the financial markets audit, it’s imperative for the Congress appointed oversight to obtain legitimate explanation on investments and lending abstinence. Any dissatisfactory response and non-cooperation by the industry must be pursued with mandatory judicial protocol.

Thank you.

Padmini Arhant

Written by Padmini Arhant · Filed Under Business, Economy, Featured 

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