Trumped! A Nation on the Brink of Ruin... And How to Bring It Back

by David Stockman

  Notwithstanding all of Wall Street’s crooked accounting and shrinking hockey sticks, one salient truth remains. Namely, that the Fed has not outlawed the business cycle, and this one is fast approaching its sell-by date.

  Stated differently, a PE multiple of 25.2X reported earnings is wholly unreasonable under any circumstance, but most especially at the tail end of a business cycle when profits will inexorably take a heavy hit.

  Consider what happened last time. Even based on Wall Street’s preferred “ex-items” accounting, profits peaked at $91.50 in Q2 2007 and kept falling until Q3 2009.

  They bottomed there at $39.60 per share, or 57% lower. And on a GAAP basis earnings actually dropped to $6.86 per share, representing a 90% plunge from the peak.

  But never mind. The sell-side’s projected 41% gain in GAAP earnings from current levels through the year ending in December 2017 does surely suggest that history is irrelevant. By the lights of Wall Street, the Keynesian nirvana of permanent full employment and ceaseless business expansion, world without end, has apparently arrived.

  That’s because by that point in time the current business expansion will be 102 months old. And even that unlikely outcome would surely end in recession and a cyclical collapse in earnings not long thereafter.

  Moreover, as shown below, there are only three business expansions since 1950 that are even in the 102-month ballpark.

  The first of these was the Kennedy-Johnson expansion of the 1960s, which started with Ike’s balanced budgets and William McChesney Martin’s prudent monetary policies and ended with LBJ’s guns and butter blow-off. The extended period of payback and the stagflationary 1970’s thereafter more than offset the 106 months of expansion.

  Likewise, the Reagan expansion lasted for 92 months, but as we have seen only because Volcker was fired in 1987 and replaced by the printing press policies of Alan Greenspan.

  Finally, the 120 month expansion recorded during the 1990s is no real record at all. It was fueled by Greenspan’s adoption of full frontal Bubble Finance in 1994 and was achieved by a massive build-up of household debt and the launch of the great housing and real estate bubbles that came crashing down a decade later.

  And it also came at the expense of a destructive domestic inflation that caused the off-shoring of a huge chunk of the nation’s breadwinner jobs, as we documented in Chapter 5.

  By contrast, these is virtually no prospect of either monetary or fiscal “stimulus” in the years ahead, while the headwinds from the end of the 20-year global credit and CapEx bubble will only intensify as time goes on.

  In short, what’s coming is not a 102-month or even 120-month scenario for a record business cycle expansion.

  Instead, what’s coming is a flat-out rebuke to the casino gamblers who were still drinking the Fed’s poisonous monetary Cool-Aid and valuing the S&P 500 at 18X a two-year forward earnings fantasy.

  Indeed, if charts could do a Jim Cramer imitation, this one would say, “Sell, sell, sell!”

  CHAPTER 13

  Busting the Banksters—the Case for a Super Glass-Steagall

  THE MAINSTREAM NARRATIVE ABOUT “RECOVERY” FROM THE FINANCIAL crisis is a giant con job. And nowhere does the mendacity run deeper than in the “banks are fixed” meme—an insidious cover story that has been concocted by the crony capitalist cabals that thrive at the intersection of Wall Street and Washington.

  That’s not to say that the Wall Street cover story is hiding anything. In recent months even the mainstream media has published stunning evidence of malefactions and abuse at the great megabanks—especially Bank of America (BAC) and Citigroup (C).

  Indeed, a recent Wall Street Journal exposé about the depredations of Bank of America shows that the latter is in a class all by itself when it comes to bankster abuse and criminality.

  Not surprisingly, at the center of this latest malefaction is still-another set of schemes to grossly abuse the deposit-insurance safety net and enlist the American taxpayer in the risky business of financing high-rolling London hedge funds.

  In this case, the abuse consisted of BAC funded and enabled tax-avoidance schemes with respect to stock dividends—arrangements that happen to be illegal in the United States.

  No matter. BAC simply arranged for them to be executed for clients in London where they apparently are kosher, but with funds from BAC’s U.S.-insured banking entity called BANA, which most definitely was not kosher at all.

  As to the narrow offense involved—that is, the use of insured deposits to cheat the tax man—the one honest official to come out of Washington’s 2008–09 bank bailout spree, former FDIC head Sheila Bair, had this to say:

  I don’t think it’s an appropriate use . . . Activities with a substantial reputational risk . . . should not be done inside a bank. You have explicit government backing inside a bank. There is taxpayer risk there.

  She is right, and apparently in response to prodding by its regulator, BAC has now ended the practice, albeit after booking billions in what amounted to pure profits from these illicit trades.

  But that doesn’t end the matter. This latest abuse by BAC’s London operation is, in fact, just the tip of the iceberg; it’s a symptom of an unreformed banking regime that is rotten to the core and that remains a clear and present danger to financial stability and true economic recovery.

  And it’s not by coincidence that at the very epicenter of that untoward regime stands a $2 trillion financial conglomerate that is a virtual cesspool of malfeasance, customer abuse, operational incompetence, legal and regulatory failure, downright criminality and complete and total lack of accountability at the board and top-executive level.

  In short, BAC’s seven-year CEO, Brian Moynihan, is guilty of such chronic malfeasance and serial management failures that outside the cushy cocoon of “too big to fail” (TBTF) he would have been fired long ago. Indeed, it is hard to believe that he would have survived very long even running a small chain of car washes in east Nebraska.

  BANK OF AMERICA—THE $100 BILLION FINANCIAL MISCREANT

  Since 2009, in fact, BAC has been the number-one employer of criminal and regulatory defense attorneys in the USA and the armies of accountants, consultants, forensic specialists, etc. which support them. So vast is the dragnet of lawsuits and legal actions that have been brought against it that BAC’s defense team amounts to an entire industry that should have its very own SIC code at the Commerce Department’s data mills!

  Already BAC has agreed to a stupendous disgorgement of fines, settlements and penalties that totals upward of $100 billion.

  These stem not only from the mortgage abuses, where its Countrywide subsidiary was a lead perpetrator, but nearly every other aspect of its banking operations as well. The pejorative term “bankster” does well and truly apply perfectly to the BAC house of malfeasance and corruption.

  So the question at hand is not simply BAC’s dodgy dividend-tax-trading strategies or why Brian Moynihan still has a job. The real question is why a monumentally reckless, abusive and predatory behemoth like BAC even exists in the first place.

  In addressing those questions we get to the meat of the matter. That is, the urgent need to repudiate the “banks are fixed” meme and to replace it with a sweeping new regime based on a Super Glass-Steagall operational and regulatory framework.

  Moreover, this new deal must start with a macro-economic truth that is completely ignored and denied by the Beltway-lobby-driven narrative about the banking crisis.

  To wit, the U.S. banking sector is vastly bloated, inefficient, unstable and destructive owing to a government policy regime that subsidizes and privileges banks in a massive and plenary manner. Accordingly, there is monumental overinvestment and malinvestments in the banking system. BAC is only a leading poster boy.

  This truth is the very opposite of the erroneous mainstream predicate that ever more debt is the lynch-pin of capitalist growth and prosperity. By the lights of the Wall Street and Washington racketeers who dominate the debate, America
’s $18 trillion economy can’t do without cheap and easy debt. Indeed, Main Street jobs and prosperity purportedly require more and more of it each and every quarter

  In fact, the only reason that—eight years after what is claimed to have been a near Armageddon event—we are still plagued with TBTF, the regulatory monstrosity known as Dodd-Frank and the continuing tenure of the likes of BAC and Brian Moynihan is the tyranny of this wholly misbegotten “moar debt” predicate.

  In that context, it needs be further recognized that root-and-branch reform won’t hurt the Main Street economy in the slightest—notwithstanding the self-serving protestations of Wall Street princes like Jamie Dimon. To the contrary, it will liberate inefficiently deployed people, capital and technology for use in more productive parts of the economy.

  At the end of the day, it is the false belief in the debt elixir of endless debt that undergirds the inexhaustible pettifoggery and cowardice displayed by Washington politicians and regulators alike when it comes to fixing the banks. The latter simply threaten a lenders’ strike, and any resolve to get to the root of the problem promptly dissolves.

  Nevertheless, direct evidence of the degree to which banking abuse and corruption flows from the current government policy regime can be found in the whistleblower’s BAC narrative pieced together by the WSJ. The offending activities took place at Merrill Lynch’s “prime broker” offices in London—and that kind of brokers’ office, of course, deals not with dentists and barristers but the billionaire titans of the global financial casino.

  The essence of the scheme was to scalp huge profits from BAC’s cheap insured deposits by transporting them across the Atlantic so they could be deployed in risky trades by the high-roller clients of its London prime broker.

  Moreover, the transport of these insured deposit based funds to London from an entity called BANA did not involve an innocent mix-up way down in the bowels of the bank. The funds were transferred on orders from BAC’s top executives at the holding company level. As the WSJ succinctly explained:

  One afternoon in February 2011, bankers, traders and others crowded into a Bank of America auditorium in London for a “town hall” meeting . . . [about] changing the way they loaned money to certain clients. . The money for the loans now would come through BANA rather than Merrill Lynch International.

  [Executives] told attendees that increasing the use of lower-cost cash (i.e. insured deposits) would give Bank of America a new edge over competitors . . . [T]he funding would allow the bank to extend more loans to more hedge funds, including those with hard-to-sell investments, in turn generating more profits for the bank, according to internal documents and people involved in the discussions.

  “. . . can we make sure all new clients, where possible, are loaded right on to BANA? Where we can’t I’d like to understand why,” a senior investment-banking executive, Sylvan Chackman, wrote in an email to employees in January 2012.

  Here’s the thing. Never, ever should an insured deposit bank be operating a prime brokerage subsidiary in the Wild West arena of the London financial markets. Stated differently, it is absolutely nuts that BAC even owns Merrill Lynch, and it is even more preposterous that it does so because its former executives were forced to acquire Merrill Lynch at the point of a gun in December 2008.

  The gunslingers, of course, were the two highest economic officials in the land, Ben Bernanke and Hank Paulson.

  And the latter were commanding this action in pursuit of a crony-capitalist scheme to rescue Wall Street and prevent economic justice and efficiency from happening. That is, the shotgun marriage of BAC and Merrill was designed to prevent Mr. Market’s determination to liquidate the utterly bankrupt and corrupt gambling house that Merrill Lynch had become in the run-up to the so-called financial crisis.

  Self-evidently, this latest BAC scheme to abuse and arbitrage the deposit insurance safety net would not have happened had Glass-Steagall not been repealed in the first place.

  Indeed, as we elaborate further on, the great financial statesman Senator Carter Glass had been totally opposed to deposit insurance owing to its potential for exactly this kind of abuse.

  Unlike the debt-enthralled statists of the present era—such as Bernanke, Paulson, Geithner and all the rest of the Obama entourage—Senator Glass knew that gambling and banking do not mix; and that an endless stream of Sylvan Chackmans would arise and order that “we make sure all new clients, where possible, are loaded right on to BANA [aka the U.S. taxpayer].”

  Actually, however, mere restoration of the old Glass-Steagall is not nearly enough. A banking regime that can produce $100 billion worth of sanctions against a single institutions needs to be replaced root and branch.

  If not, it is only a matter of time before the next contagion of London Whales and tidal wave of toxic products and trades arising from Wall Street’s financial meth labs triggers another financial panic and meltdown.

  CITIGROUP AND THE CROMNIBUS CAPER

  That’s because Bank of America is no outlier. The egregious gambling dens that have metastasized on Wall Street over the past three decades remain almost wholly intact, and Citigroup is another poster boy.

  At the time of the 2008 crisis, it was completely and hopelessly insolvent. Its giant web of holding company gambling and money-churning operations should have been put in Chapter 11, and the underlying insured bank should have been put into FDIC receivership. No insured mom-and-pop depositor would have lost a dime.

  Yes, the depositor payoffs would have been “costly” to Uncle Sam, but that cost was created long before September 2008. It was a product of the whole federal deposit-insurance scheme and its abuse by giant banking supermarkets that should never have been permitted in the first place.

  Unfortunately, insult has been added to injury by subsequent developments. To wit, the Washington and Wall Street policy elite has actually doubled down. They flooded the banking system with even cheaper money via ZIRP and QE, while establishing a regulatory counter-point under Dodd-Frank that is worse than useless.

  Needless to say, the hard-pressed taxpayers of America should never again be forced to bailout the crony capitalist plunder that was enabled by the Fed’s free money machine in the run-up to the 2008 financial crisis. Yet for eight straight years the madmen (and women) of the Eccles Building have pegged the cost of bank deposit money at essentially zero, thereby enabling the banks to earn spread profits on the backs of Main Street savers and retirees.

  At the same time, Washington has pretended to be fixing the banks via an opaque regulatory shitstorm called Dodd-Frank. The latter ignores all the underlying causes of the too-big-to-fail banks, and, instead, has blanketed the financial system in the kind of regulatory spaghetti that causes vast deadweight compliance costs, but does absolutely nothing to stop the Wall Street banksters from perpetrating their toxic schemes.

  Indeed, the reason that structural reform, including breaking up the giant financial conglomerates, is so imperative was crystalized two years ago by a naked Wall Street power grab in the congressional backrooms. It involved a Citigroup-drafted sneak attack on Washington’s tepid effort to curtail one of the more egregious gambling habits of some of the big banks.

  These incorrigible larcenists had been trying to gut the “push out” provisions of Dodd-Frank for more than three years prior to what became the Cromnibus appropriations bill in the lame duck congressional session after the 2014 election.

  The provision under attack boiled down to a simple and urgently necessary injunction to the banks. Namely, that you can’t roll the dice in the “derivatives” gambling halls with taxpayer guaranteed deposits.

  In light of the inherent dangers of what even Warren Buffet once called “financial weapons of mass destruction,” it is self-evident that no bank—not even the mighty Citigroup—should be allowed to bring these incendiary devices within a country-mile of the taxpayer-enabled FDIC guarantee program.

  So what Dodd-Frank proposed was actually quite sensible. It said to th
e giant Wall Street banks—go ahead and swing for the fences, but do it in a holding company subsidiary. If something subsequently goes boom in the night, it’s on your earnings and bonuses—not the taxpayers’ hard-earned bucks.

  If there was anyone left on Wall Street with a sense of decency and a modest comprehension of what free-market capitalism is about, they would not have been looking a gift horse in the mouth.

  The Dodd-Frank provision that came under its furious attack, in fact, was hardly a slap on the wrist. If Congress had really meant to fix the system that supposedly brought us to the cusp of Armageddon in September 2008, it would not have bothered with Dodd-Frank at all.

  THE ORIGINAL GLASS-STEAGALL AND ITS DEMISE

  Instead, Washington should have gone to the root of the problem and passed a Super Glass-Steagall that would have dismembered the giant banks by statutory edict, and kicked the Wall Street–based gambling houses like Citigroup out of the FDIC entirely.

  The fact is, deposit insurance has been coopted and abused by the Wall Street megabanks for decades. It now stands as a vast perversion of what had actually been intended—misguided or not—way back in the dark hours of 1933–34.

  Back then there were three people in Washington who counted when push came to shove—President Roosevelt, Senator Glass and Congressman Steagall. FDR was against deposit insurance because he thought it would be abused by Wall Street, and for once he was right.

  Senator Glass was against it, too. As one of the true financial statesmen of modern times he did well and truly understand the dangers of moral hazard and fractional reserve banking propped up by the state.

  Alas, Congressman Steagall was a demagogic foe of Wall Street. But he also wanted deposit insurance to protect the red-neck depositors of Alabama, who had been taken to the cleaners by banksters of local origin.

  So we got deposit insurance for the proverbial “little guy” and a sharp separation of banking and commerce at the insistence of Senator Glass. FDR went along for the ride after actually threatening to veto the bill on account of his belief that someday, in fact, it would be egregiously abused by the banks.