For those over 50, when we think about banks, we think about our neighbor who operates the local bank that gave our neighbors mortgages. Not any more. Now we are dealing with huge multinational banking corporations. In 1989 the five largest firms controlled just 7% of the mortgage servicing industry; by 2007, the five largest firms controlled 46%.  The Nation tells us that after Bank of America merged with Countrywide, three banks, Bank of America, Wells Fargo and Chase controlled 48% of the nation’s $11.5 trillion in mortgages. These banks have become so large that any financial problems they meet will become the nation’s problems. And indeed that has happened. 

Banks became too highly leverage particuarly in the mortgage business. Until recently, homeowners were required to put 20% down on any mortgage they sought. However, terms changed as deregulation of the marketplace was encouraged after President Reagan was elected.  Banks began offering mortgages with little or no money down. This became true in other purchases as well.

Banks and other financial institutions in the US have usually kept their leverage ratios at about 10. International standards usually specify a maximum leverage ratio for financial institutions of about 12. During the boom years, large securities firms in the US had much higher leverage ratios. In 2004, the US Securities and Exchange Commission, which supervises these firms, approved a waiver for five large securities firms – Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers, and Bear Stearns. They promptly took advantage of the waiver. Leverage ratios of 30 and more were not uncommon. At these levels of leverage, a fall in asset values of about 3 – 4 % makes a firm insolvent. It was a disaster waiting to happen.

In and around 1997, the US Congress – supported by President Clinton – did two things. One was the real estate capital gains tax cut, which eliminated the capital gains tax on primary home real estate held over two years up to $250,000 for a single filer and $500,000 for a married couple. This may be the biggest tax cut ever, and it made real estate the most favored investment class. Small wonder, then, that real estate prices rose in an unprecedented manner for approximately ten years in a row. At some point, however, as in any bubble rising, it went too far. It became easy to see at some point after year 2000 when in many places it had become cheaper to rent than to own, pointing to over-inflated prices.

It wasn’t just the Republicans who were running amock, it was the Democrats. President Clinton did not have the backbone to fight the banking interests. It was easier to go along with his Republican Congress. We need to press Congress to pass banking regulation that reins in the investment community risk takers. The difficulty is how to defeat the powerful financial interests in this country who wish to continue deregulation.

Author Lynne Weikart is available for radio, television and print interviews on how the fiscal elite use access to capital to undermine the voters’ will. She puts a human face on each of New York City’s fiscal crises, analyzes their historical patterns, and compares the tenure of several mayors. This timely book, Follow the Money: Who Controls New York City Mayors, has become an invaluable book for those interested in the future of American cities during the nation’s severe financial crisis.

Through the history of politics, Weikart reveals how financial elites in New York City have exploited recurring fiscal crises and sharply curtailed the range of choices open to mayors in setting priorities and implementing budget choices. In the face of enormous pressure during a fiscal crisis to defer programs and compromise promises to constituents, however, committed mayors from Fiorello LaGuardia to Michael Bloomberg have at times managed to overcome obstacles and achieve their goals.

Weikart writes: “As the world center of financial services, New York City is an informative case study of the power that financial elites exert over the political leadership and how mayors can push back to assert their own political agendas. In the final analysis, although some mayors do achieve their own policy initiatives, their choices are significantly limited by these powers of the financial interests particularly during times of fiscal crisis.”

This book is available through SUNY Press.
See http://www.sunypress.edu/details.asp?id=61778

For more information contact Lynne Weikart
By Phone: 917-494-3231
By Email: lweikart@gmail.com

To read her current thoughts on the fiscal crises go to:
http://www.followthemoneyus.com/