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Wednesday, January 13, 2010

Will Wall Street Executives be Forced to Give A Portion of Their Bonus Back to the Treasury, or Just Leave it on the Nightstand?

President Obama plans to announce measures to recover taxpayer money used to bail out banks on Thursday. The as of yet unspecified plan could possibly include a tax on bank bonuses. The fee would be designed to bring in as much as $120 billion. Billions of taxpayer dollars were given to banks in 2008 in an attempt to recover from the devastating financial crisis.

What caused the financial crisis? In the early 1990's banks began issuing loans to people with poor credit ratings or limited credit history. The majority of the individuals receiving these loans were lower income people who believed housing was a good investment. Many of these loans were stated income loans, where the borrower did not need to provide proof of the income they alleged on the paperwork. In some cases the borrower could even get around making a down payment using seller funded down payment assistance programs. This may seem like a risky practice for lending institutions. One would think that people with poor credit, who aren't providing proof of income and did not have to give any money up front may not be the most likely to keep current on their payments. As most people know, banks make money from lending money with interest payments. When one makes a payment on their home mortgage, a portion of the total goes toward paying down their loan, and a portion goes back to the bank as a fee for the service of issuing the loan. If a bank loans money to someone who is unable to make their payments then not only does the bank fail to make a profit but it also loses the money it lent. So why would a lending institution do this? Because they could have cared less if the borrowers paid the money back. In most cases, the moment the paperwork was signed, the bank took that loan, bundled it with other loans, and sold the bundle as an investment to another company. Individually, the risky loan may have been worth nothing, but when bundled with many other risky loans it became a money making opportunity. Of course the purchasers of these loan bundles bought in to this philosophy, because as everyone knows a sack of crap has far more value than a single turd.

Wanting to live the American dream, many borrows bit off more than they could chew, purchasing houses they couldn't afford to maintain with loans they couldn't afford to pay back. Struggling to make ends meet, people began making their mortgage payments later and later, often going several months without making any payments at all. Most loans have a per diem, or daily interest rate, which means that if paid on time every time, your loan will be paid off in a set number of years. If you make your payment even one day late, then the the way your payment is allocated may change. The later a payment is made, the more of your payment is given to interest, and the less is used to repay your loan. Even if you made the payment before you incurred a late fee, you could still be adding to the length of your loan. If one managed to keep their home until the loan was paid off, in this manner you would end up paying far more for your loan than you borrowed, even more than your property is worth. Eventually, most of these sub prime loans ended up in default, causing thousands of Americans to be displaced from their homes with major damage to their credit rating and deep in debt.

The banking system that handed out billions of dollars in loans without asking any questions was now billions of dollars in debt and on the brink of collapse. How did the U.S. Government respond to this disaster? By handing out billions of dollars to the banks, without asking any questions. The U.S. Government created the Troubled Asset Relief Program (TARP) which used tax payer money to rescue the banks. Why did American tax payers hand over $700 billion of their hard earned money to the failings banks that caused the second worst financial crisis in U.S. History? Former Treasury Secretary Henry Paulson has said the bailout was necessary to protect the taxpayers. According to Paulson we needed the bailout to save us from the fragile market. Basically, we gave the money to the banks so that the banks could loan the money back to us. Only the banks didn't loan the money back to us. After all, we are in the middle of the worst recession since the Great Depression, and with no legal requirement to lend, the major banks have decided it might be best to hold on to their money for a change. In fact, rather than lending money to tax payers in order to boost the U.S. Economy, many of the banks who received tarp funds have begun raising interest rates on credit cards already issued to financially desperate Americans.

Bank of America, Citi Bank and Wells Fargo began raising interest rates up to as much as 30% for any card holder who misses a single payment. JP Morgan Chase imposed a $10 monthly fee for any card holder who has had a large balance for more than a couple of years. This is a smart way for banks to make money. Knowing so many of their customers have been struggling to pay back home loans the banks gave them that they couldn't afford, there is sure to be a lot of people behind on their credit card payments. It's behavior like this that spurred groups like the folks at to recommended that Americans move their money to smaller local banks in protest.

The U.S. Labor Dept. reports the unemployment rate is remaining at 10% and 58,000 jobs were lost in the month of December. Even more frightening is the fact that 40% of the unemployed have been out of work for 2 years or more. Despite the dire situation American tax payers are in, tarp fund recipient Goldman Sachs reported a $12 billion profit for 2009 and bonuses for Wall St. executives are ranging between 6-8 figures. When questioned, Bill George of Goldman Sachs said the outrageous bonuses were necessary to keep from losing their employees. With more than 10 million people unemployed in the U.S., one would think they could easily be replaced.

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