THINKING FOR OURSELVES

Out of Control

By Shea Howell

Michigan Citizen, May 3-9, 2009

It is hard to believe that Wall Street does not recognize it has failed. This week major Wall Street firms announced that they have gone back to the bonus business. While GM and Chrysler are trying to stave off bankruptcy, six of the biggest banks set aside over $36 billion in the first quarter to pay their employees. Analysts predict that workers at many recently bailed-out banks will see their pay exceed what they earned before the crash. Much of this compensation will be in bonuses.

While auto companies renegotiate contracts, reduce health care and pension benefits, the wizards of Wall Street say, “Wall Street is being realistic. You have to retain your human capital.” This is the rationale Goldman Sachs invoked to set aside $4.7 billion for pay in the first quarter, positioning itself to provide $569,220 per worker this year, almost as much as people earned in 2007.

The only difference between the pre-and-post bailout bonuses is public understanding. Most people know that the unrealistic and skewed financial thinking of Wall Street is part of the reason we are in this catastrophe. The only people who seem to have not gotten the message are those running the banks.

Instead of rethinking their approach to business, Wall Street is continuing to follow the formula of paying about 50 cents for every dollar of revenue in compensation. Banks are following this even when they are losing money. Morgan Stanley, for example, had a terrible quarter, losing $578 million. Meanwhile they set aside $2.8 billion for compensation. Banks argue that part of the reason compensation has returned to such high levels is because they have reduced their work force. Citigroup, for example, has reduced its workers by 65,000 people since the start of the recession. It says it can pay the same to its remaining workers.

The inability of the Wall Street bankers to look reflectively at what they have done and why they did it, does not bode well for President Obama’s latest effort to corral greed. Last Thursday he met with thirteen bank executives to talk about credit card reforms. He said, "The days of any time, any reason rate hikes and late-fee traps have to end," Obama said. "No more fine print, no more confusing terms and conditions.”

President Obama pointed out to the assembled bankers that when the prime lending rate is 3.25 percent, double digit credit card interest is hard to defend. In fact, 1 in 5 Americans is paying 20 percent interest or higher on their debt. And that debt is massive. The average household today is carrying nearly $9000 in credit card debt.

But just as sub prime mortgages and derivatives were ordinary practice on Wall Street, pushing credit cards by banks has transformed the U.S. economy. Our collective debt now stands at $900 billion, an increase of 9000 percent over the 10 billion of forty years ago. Nearly one quarter of all Americans pay more than 10% of their income on credit card payments, and most of these payments don’t come anywhere near reducing the actual debt. Hidden fees, accounting tricks and changing rates combine to escalate the debt of even those who faithfully meet their obligations. These practices are enormously profitable for banks, as 75 percent of credit card profits come from people who make minimum payments every month.

Current efforts in Congress may limit some of the worst banking practices. Legal limits may be the only way to stop bankers’ greed. But the rest of us need to do some serious reflection on our own responsibilities for a financial system out of control.

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The Michigan Citizen

Detroit: City of Hope has a new website!! DCOH has recently designed a new website and a new logo. In addition to these new efforts, there are several accompanying T-Shirts to help spread the word about this organization, and, more importantly, inform others about creating sustainable communities. The website can be accessed here.