President Obama has called people who work on Wall Street “fat-cat bankers,” and his reelection campaign has sought to harness public frustration with Wall Street. Financial executives retort that the president’s pursuit of financial regulations is punitive and that new rules may be “holding us back.”
But both sides face an inconvenient fact: During Obama’s tenure, Wall Street has roared back, even as the broader economy has struggled.
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The largest banks are larger than they were when Obama took office and are nearing the level of profits they were making before the depths of the financial crisis in 2008, according to government data.
Wall Street firms — independent companies and the securities-trading arms of banks — are doing even better. They earned more in the first 21 / 2 years of the Obama administration than they did during the eight years of the George W. Bush administration, industry data show.
(See data in an Excel file here.)
Behind this turnaround, in significant measure, are government policies that helped the financial sector avert collapse and then gave financial firms huge benefits on the path to recovery. For example, the federal government invested hundreds of billions of taxpayer dollars in banks — low-cost money that the firms used for high-yielding investments on which they made big profits.
Stabilizing the financial system was considered necessary to prevent an even deeper economic recession. But some critics say the Bush administration, which first moved to bail out Wall Street, and the Obama administration, which ultimately stabilized it, took a far less aggressive approach to helping the American people.
“There’s a very popular conception out there that the bailout was done with a tremendous amount of firepower and focus on saving the largest Wall Street institutions but with very little regard for Main Street,” said Neil Barofsky, the former federal watchdog for the Troubled Assets Relief Program, or TARP, the $700 billion fund used to bail out banks. “That’s actually a very accurate description of what happened.”
Neither the Bush administration nor the Obama administration, for instance, compelled banks to increase lending to consumers, known as “prime borrowers.” Such a step might have spurred spending and growth, although generating demand for loans may have proved difficult in the downturn.
A recent study by two professors at the University of Michigan found that banks did not significantly increase lending after being bailed out. Rather, they used taxpayer money, in part, to invest in risky securities that profited from short-term price movements. The study found that bailed-out banks increased their investment returns by nearly 10 percent as a result.
“If the goal was to support lending, it would have been sensible to require a portion of the money to support credit origination,” said Ran Duchin, one of the finance professors who completed the study. “Lending to prime consumers was not the most profitable use of their capital.”
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