BOSTON - Just months after getting a massive handout from Uncle Sam to prevent the collapse of Wall Street, big banks say they are back on solid ground and ready to repay the money.
The banks are selling stock and debt, and racking up excellent returns on mortgages, loans, high credit card rates and refinancings.
Three big banks, Goldman Sachs, JPMorgan and Morgan Stanley, say they are so healthy now that they can begin to pay back the billions they were given by the U.S. Treasury in December when they said they were on the brink of failure.
Meanwhile, home foreclosures in April were 342,000 -- the highest level yet -- and average national unemployment rose to 8.9 percent, the highest level since 1983. Some communities are just barely hanging on.
"There's an enormous impact of the foreclosure crisis and the unemployment crisis on people of colour," Rinku Sen, executive director of the Applied Research Centre, a public policy institute advancing racial justice through research, advocacy and journalism, told IPS.
"Because they were so concentrated in communities of colour, the larger system didn't pay attention. The banking system didn't send out any red flags, and local and state officials didn't start looking into the crisis. There wasn't the scrutiny there should have been, given the millions of people affected," Sen said.
Mortgage lenders and banks sought out people of colour in particular, and charged higher than average interest rates on loans with poor terms, according to the National Association for the Advancement of Coloured People (NAACP), which is suing some of the nation's largest banks -- many the same ones that received a bailout.
Under the bank bailout, nine big banks received 125 billion dollars, followed by smaller banks, for a total of about 400 billion dollars awarded to 586 banks, insurers and auto companies. The U.S. government received warrants to buy stock in the banks, in a deal many economists say was a giveaway to the banks.
"Is it possible taxpayers will get their money back 10 years from now? Yes, but it's not likely. It's clearly a massive subsidy," Robin Hahnel, economics professor emeritus at American University, told IPS.
Larry Summers, the hand-picked economic advisor to President Barack Obama, and U.S. Treasury Secretary Timothy Geithner are not doing right by U.S. taxpayers, Hahnel said.
"My position is they are mismanaging this so badly they need to be fired immediately. They are putting us at terrible risk," Hahnel told IPS.
"Some banks are in a position to repay because they've made money the old-fashioned way, by borrowing at low rates and lending at significant interest rates," said Timothy Canova, economics professor and associate dean at Chapman University School of Law.
The banks borrow money from the Central Bank at nearly zero percent interest and then loan it out at five or six percent, he said.
"That's a healthy spread," Canova told IPS.
The entities that took the Treasury money have had to comply with rules that restrict salaries and bonuses to executives, and limit the hiring of non-U.S. citizens. The rules were only enacted after public outrage over millions in bonuses paid to individual executives.
"The main motivation for returning the money is that the bank officials would like to be able to start rewarding themselves again with higher compensation packages. They don't want the strings attached," Canova said.
"We can expect to see more paybacks. But we can also expect to see more banks that will need more funding in future," Canova said.
Nineteen big banks with more than 100 billion dollars in assets recently conducted financial reviews, called stress tests, at the request of the Federal Reserve. The Fed announced that nine banks are in the clear and 10 will need 74.9 billion dollars more, under a best-case economic scenario. Under the worst-case scenario, they would need up to 600 billion dollars more.
The reviews have been widely criticised by a range of conservative and progressive economists for not being realistic.
Canova said even the worst-case scenario seems overly optimistic, predicting an unlikely growth in the GDP.
"It's quite possible the GDP will continue to decline and then the banks may need twice that amount of money," Canova said.
The stress tests were conducted by the banks themselves. The Fed asked them to predict their own potential losses and liabilities under the two scenarios. Banking supervisors chosen by the Fed met with bank management to evaluate the estimates, all performed within 45 days.
The 10 banks that need cash can request a handout from the U.S. Treasury, in exchange for stock valued at a rock-bottom price, at slightly below what it traded for in February 2009.
But more likely, they can get the cash from the private market, by selling stock and seeking investors, Geithner said.
"If these institutions are essentially solvent, as Mr. Geithner suggests based on the stress test results, then it seems appropriate to put an end to these taxpayer subsidies," economist Dean Baker told the Oversight and Investigations Subcommittee of the House Committee on Science and Technology on Tuesday.
"Is there really a need for the special lending facilities that have been created by the Fed and have more than two trillion dollars outstanding in loans to the banks and other institutions?" said Baker, co-director of the Centre for Economic and Policy Research.
In addition, in June, the U.S. government will begin purchasing up to 1 trillion dollars of the bad assets now held by banks, he said.
The stress test results immediately boosted the value of stock at many of the banks, and they wasted no time in taking advantage of their good fortune.
Within a day of the test results, Morgan Stanley sold enough stock to raise 3 billion dollars. It was aiming for 1.8 billion dollars, as called for in its stress test. It will eventually need to give back about 10 billion dollars in bailout funds to the Treasury.
Many banks will continue to make significant money on credit cards, charging interest rates of 21 percent or more, plus fees and penalties. The credit cards are issued by many major banks, including Bank of America, Citigroup and JP Morgan. A credit card reform bill is expected to be signed by Obama by the end of this week.
According to recent hearings in the U.S. House and Senate, 78 percent of all U.S. households have at least one credit card, and they have paid an average of 15 billion dollars in penalty fees per year.
The proposals in play, one passed by the Senate Tuesday, would not go into effect until 2010 at the earliest.
In the meantime, Edward L. Yingling, president of the American Bankers Association, told reporters this week that the industry would continue to raise interest rates, this time on its best credit card customers, to make up for the revenue it expects to lose under the upcoming credit card reforms.