How do Wall Street banks make their money?

March 2, 2010 | By | Reply More

In the March 4, 2000 episode of Rolling Stone, Matt Taibbi answers a question on many peoples’ minds: To exactly does Wall Street make so much money that it could hand out multi-billions of dollars in bonuses last year and this year? The story of Taibbi detailed article is that the Wall Street banks use at least seven major scams to make their money, and most of them involve taking advantage of American taxpayers. The seven scams can be summarized in one principle: “the answer . . . is basically twofold: they raped the taxpayer, and they raped their clients.”

Taibbi’s entire article is available online. If the extremes, the corruption and the opacity of Wall Street have angered you, you’ll appreciate Taibbi’s facts, as well as his colorful descriptions.

The first of the seven major cons described by Taibbi is the “Swoop and Squat,” by which Taibbi is referring to the fact that AIG should not have been able to hand over big chunks of cash to a single creditor like Goldman when AIG was about to go belly up. Taibbi correctly refers to this maneuver as a “fraudulent conveyance.” That money accounts for $19 billion in cash that Goldman would not have had without the massive intervention by the United States. As Taibbi asks: “To is that $13.4 billion in 2009 profits looking now?” Taibbi cautions that these numbers don’t even include the direct bailouts of Goldman Sachs and other big banks.

I’ll mention one more of the seven major Wall Street cons described by Taibbi: “The Dollar store.” Less than a week after the AIG bailout, Goldman and another investment bank, Morgan Stanley applied for and received permission to become bank holding companies, which made them available for increased federal financial support. Why would they do that? You probably won’t read this anywhere in your local newspaper, because it’s real news.

Institutions that were, in reality, high risk gambling houses were allowed to masquerade as conservative commercial banks. As a result of this new designation, they were given access to a virtually endless stream of “free money” courtesy of unsuspecting taxpayers. The $10 billion that Goldman received under the better-known TARP bailout was chump change in comparison to the smorgasbord of direct and indirect aid it qualified for as a commercial bank.

When Goldman Sachs and Morgan Stanley received those expedited federal bank charters, they were given permission to go to the Fed to borrow huge amounts of money at 0%. Taibbi points out that without this federal gravy, these banks would’ve totally collapsed, because they had no other way to raise capital at the time. Consider what the banks did with this taxpayer money, however.

Borrowing at 0% interest, banks like Goldman now have virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they brought from the government at 0% and went it back to the government by buying treasury bills that pay interest of three or 4%. It was basically a license to print money–no different than attaching an ATM to the side of the Federal Reserve.

Taibbi writes that that “The Dollar Store” goes a long way to explaining the enormous profits of Goldman Sachs last year.

The entire article is well worth reading. Taibbi has once again done a terrific job of describing the corrupt ways of Washington and Wall Street.


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Category: Corruption, Economy, Politics

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

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