The past two years have been pretty good to bank and securities regulators, as well as state watchdogs like Attorneys General and Finance Commissioners. They’ve targeted big companies like JPMorgan, and wrung out multi-billion dollar payments as restitution for fraud committed during the housing boom.
The latest estimate I saw put the eventual settlement figure, from the latest round of civil action, at $50 billion. This is money that corporations will pay out of their coffers, which means that the companies will have fewer assets and lower earnings.
Demanding these windfalls of cash from private firms allows regulators to beat their chests, showing how tough they are on fraud and corporate malfeasance… but it’s a sham.
All they really do is get corporate managers to sign over some cash, then everyone in the room goes away smiling.
Which brings us to those corporate leaders…
They put on a brave face in public… they talk and talk about how they care so much about clients and would never cause harm to poor, pitiful people… they explain that they’re agreeing to make these payments so that they can get on with their business of company do-goodness.
But of course they don’t personally pay a nickel. Nada. Zip. And they certainly don’t spend a minute in a small room with a few guys who just got popped for armed robbery. Nope. These corporate leaders take their limos back to their offices, order a seared Ahi Tuna on arugula salad, and go about their day.
Beyond the regulators and state agencies, the recipients of the cash haul are the homeowners who bought homes using a sub-prime or Alt-A mortgage that one of those institutions originated.
To hear regulators describe it, these are sheeple (people who act like sheep), who were just walking down the street one day when a group of young loan officers nabbed them, threw them in a black van, and forced them to sign loan documents borrowing ten times their earnings and lying about their assets.
Never mind that there’s no evidence of coercion. There are no cases of force. It must have been this way, because everyone is financially cautious and does what is best for them… right?
And that brings us to the whipping post of the entire affair. That would be savers, who are also shareholders.
The people who actually pay for the corporate malfeasance are the shareholders because it is their asset — the value of the company — that is being dinged. These people get to watch their assets dwindle because their legal guardian, a.k.a. the boards of directors, is simply a lapdog of management, approving these huge payouts without demanding that heads roll.
Keep in mind who the savers/shareholders are.
They are the hapless band of people who didn’t over-leverage themselves.
They didn’t take out idiotic mortgages.
They didn’t engage in get-rich-quick real-estate schemes.
They didn’t squeeze every dime they could out of their equity through numerous home equity lines of credit (HELOCs).
No, this grim group was responsible. They saved. They lived within their means. They provided for themselves. And that was their downfall. Because now everyone else needs their money, and they’re getting it.
Let me count the ways…
As noted, savers tend to be investors, so they are the shareholders that are taking one (or 50 billion) for the team by watching a portion of their assets be wired to various agencies around the country.
Some of these dollars, as discussed, find their way into the coffers of regulators, who clearly regulated nothing, while some of the dollars are used as relief funds for homeowners who got in so far over their heads they couldn’t see the surface of the pool.
This comes on the heels of having the federal government and Federal Reserve bailout the lending banks using… of course… taxpayer (read: savers’) funds.
To top it all off, the Federal Reserve has kept interest rates below zero (short-term rates are lower than the rate of inflation) in order to help borrowers borrow even more, and to entice savers to spend, even if they don’t want to buy anything. The negative interest rates serve as an un-voted tax on savers.
This is what passes for regulatory enforcement, enhanced corporate governance, and modern monetary policy. It’s like heaping praise and rewards on the bad kids in the hopes of having them change their behavior. All it does is enforce the notion that being bad really does pay, and makes the good kids resentful.
As savers, we should all be very, very grumpy.
I keep waiting for the day when savers get a payment. When financially responsible people are held up as a group to be protected and rewarded.
I keep waiting…
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Ahead of the Curve
There are three trends that have changed the real-estate landscape. Last week, I spoke about the one I call the Blackstone Effect. That is, institutional investors are pouring cash into the real-estate market at an incredible pace. As I mentioned, a recent Goldman Sachs study I saw estimated that almost 60% of all real-estate transactions are currently conducted in cash. We’ll definitely be keeping a close eye on this.