Destroying the Retirement Dreams of a Generation

Stocks had a rough go of it yesterday.  After recouping some of the day’s early losses the DOW ended the day with a 102 point loss.  One headline said it was Europe’s fault.  Another said it was Wal-Mart bribery in Mexico.

Here at the Economic Prism we don’t know what the reason was…we just hope no one lost an ear over it.  That does happen from time to time, you know.

Take Jerry Lee Ries of Los Angeles.  On the night of April 11, Ries and another man met near Parking Structure 10 in Santa Monica to conduct a business transaction.  Ries was, no doubt, clarifying the finer points of his program of debt collection when he pulled out a knife and sliced the man’s ear off.

The victim apparently owed Reis $400, but was only able to produce $360.  Then, wouldn’t you know it, Ries didn’t even keep the ear he took as collateral for the $40…he tossed it in a street corner trash can.

Unfortunately, the victim’s ear could not be reattached.  What’s more, Ries had to post $100,000 bail to get out of the pokey after being arrested and charged with mayhem and assault with a deadly weapon.  All for $40 bucks!

But Ries isn’t the only lender to have a deal gone bad…

Shareholders Say $20 Million is Inadequate

Back in September 2008, on the same weekend Lehman Brothers vanished from the face of the earth, Bank of America took over Merrill Lynch for $20 billion.  Later it was disclosed that Merrill Lynch would post $27.6 billion in losses that year.  While no one lost their ear over it – that we’re aware of –  the deal would’ve likely bankrupted Bank of America if they hadn’t receive an additional $20 billion TARP bailout, on top of the $25 billion they had already received.

Bank of America has since repaid all $45 billion back to the government.  Yet that isn’t good enough for some.  There are those out there who want Bank of America to give them lots of money for buying Merrill Lynch at the wrong time.  In fact, some folks in Delaware think Bank of America’s $20 million settlement is not enough, and have filed suit.

“The New York Times reported Friday that the Delaware plaintiffs objected to the April 12 settlement in New York as inadequate.”

We’ll be sure to keep you apprised of the situation following the court appearance of Bank of America directors on May 4, where they must defend the settlement.  In the meantime, the bank is doing just fine…

Last week Bank of America reported that first quarter profits increased about 40 percent to $3.7 billion – or $0.31 per share.  That blew the analysts’ estimate of $0.12 per share out of the water.  On top of that, year-to-date, Bank of America’s stock price has increased over 50 percent.

Thanks to the TARP bailout, Bank of America finds itself sitting pretty with $2 trillion in assets.  Moreover, they have the Federal Reserve behind them, inflating the money supply, and doing everything it can to push up the value of those assets.  This is adding quite a boost to Bank of America’s profitability.

For instance, sales and trading revenue, excluding accounting adjustments, more than doubled to $5.2 billion in the first quarter.  In addition, revenue from fixed income, currency, and commodity trading, excluding adjustments, increased to $4.1 billion in the first quarter.  If asset prices continue rising, pushing up profits, Bank of America’s stock price should continue to do well.

Destroying the Retirement Dreams of a Generation

We bring this to your attention not because we like Bank of America; rather we do so to highlight how the world works.  After being bailed out in 2008-09, Bank of America – and the other big banks – is now benefitting greatly from Fed money creation and bond market intervention.

Certainly, these are policies of mass inflation that work to preserve the banking system.  Obviously, this would be a great thing if it weren’t so destructive.  For these policies are eroding the wealth of savers and destroying the retirement dreams of a generation.

Here’s an example of how…

Bank of America Certificates of Deposit are currently paying an annual percentage yield of 0.35 percent.  Based on the latest Labor Department report, the Consumer Price Index rose 0.3 percent in March – or 3.6 percent on an annualized basis.

What this means is, in less than one month’s time inflation will wipe out almost the entire CDs annual real return.  Over 12 months the CD will yield a real return of minus 3.25 percent.

If markets were truly free, a CD with a negative real yield would be next to impossible.  Yet this transfer of wealth is happening in broad daylight for all who care to see.  And it’s made possible by the heavy handed intervention of the central bank into financial markets…for the benefit of the banks.

Remember this next time you pay a monthly service fee for the privilege of giving your money to the bank so they can loan it out to others at a 4 percent spread.


MN Gordon
for Economic Prism

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