Akst: Banking ... what a racket!

Daniel Akst is a member of the Newsday editorial board.

Psst! Over here!

I've got a sweet little business proposition for you: Uncle Sam will see to it that you and I can borrow all the money we want, interest-free. Can you believe it? Then we lend it out at rates ranging up to 18 percent, maybe higher.

Do you think we could possibly make a go of this? It won't be easy, of course, so we'll need a seasoned executive to run the thing.

To get the kind of person I've got in mind, we'll have to pay him, oh, $7 million in cash. Come to think, that would never be enough. Let's promise a salary, a bonus -- and stock plus options worth maybe $16 million, much of it based on the kind of squishy performance measures that let him know -- wink, wink -- the money's in the bag.

For that kind of money we could get somebody really good -- somebody like Vikram Pandit, who happens to have made just such a deal for himself at Citigroup, it was announced last week.

Pandit would be perfect, because Citigroup, like the other major American banks, uses the very same business model I just described. With the Federal Reserve keeping interest rates near zero, after all, any bozo with a bank charter can get money by the carload essentially for free.

Where does it come from? Well, the Fed has been pumping out cash to stimulate the economy, and the resulting low rates enable banks to pay next to nothing for deposits. Don't tell anybody, but this is basically a tax on savers. Elderly Americans are thus forced to let banks use their nest eggs free of charge. The same is true of anyone else who's parked some cash.

The banks then take this money and lend it out. By buying Treasuries, for instance, they can lend it back to Uncle Sam at 3 percent, risk-free.

Or they can skip the middleman and lend it directly to the taxpayers, one at a time, at much higher rates. On the Citi cards website, for example, you can get the Citi Thank You Premier credit card, which thanks some customers with a 21.99 percent interest rate. Such gratitude!

I don't mean to pick on Citigroup, which wasn't the only bank requiring a bailout and isn't the only one making money on this kind of deal. They all are.

Pandit, moreover, didn't arrive at Citi until mid-2007, at which point the crisis was already gathering steam, the result of bad decisions made before he got there. On the other hand, one of Citigroup's bad decisions was buying the hedge fund he co-founded for more than $800 million -- only to close it a year later when investors pulled their money. Pandit's share of the sale price was reportedly $165 million.

What should be clear is that the troubles of Citigroup and the other big banks were of their own making, and in a properly functioning economy, such outfits go out of business as part of a bracing process known as "capitalism." But the government couldn't let the banks fail for fear they'd drag down the rest of us. Pandit simply hung on long enough to surf the tsunami of cheap money that followed the financial earthquake Citi helped cause. For this, his employer will bestow millions upon him.

Distasteful though they may have been, the bailouts were unavoidable. So was an extended period of low interest rates. As a result, the global economy didn't collapse. The banks have since repaid the bailout money.

But they've done so thanks in part to the dough they're making on Granny's life savings, which is why giving credit to bank CEOs for the turnaround is like giving yourself credit for the dawn because you got out of bed.