Posts Tagged ‘Banks’
(UPDATE – A version of this editorial has been reprinted at Advisor Perspectives.)
I think we will look back in ten years’ time and say we should not have done this, but we did because we forgot the lessons of the past.
Senator Byron L. Dorgan on the repeal of the Glass-Steagall Act, 1999
Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to strict rules. To depart upon any occasion from those rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous and frequently fatal to the banking company which attempts it.
Adam Smith, The Wealth of Nations
Four years ago today, the financial crisis took the world’s economies to the brink of collapse. September 15, 2008, the day Lehman Brothers failed, sending global financial markets into cardiac arrest, was our wedding anniversary. My wife and I were celebrating on the Mediterranean coast of Turkey.
Although the nation survived the financial tsunami of 2008, our capital markets remain in precarious condition. Public trust, severely undermined by revelations of the reckless behavior, lax oversight, and the ensuing instability of our major financial institutions, has yet to be restored. This state of affairs is not good for investors or the nation.
The causes, both here and abroad, will remain a matter of debate, the answers often depending on one’s politics. From my perspective, there can be no doubt that major banks, insurance companies, and other financial players became shockingly over-leveraged in the years leading up to 2008. This dramatic increase in leverage (and the inevitable reduction in the systemic “safety net”) was intentionally obscured, invisible to both regulators and the public. In some cases, it was invisible even to the financial institutions themselves.
This outrageous expansion of financial sector leverage occurred on the heels of a program on Capitol Hill to weaken and dismantle regulations that had protected the industry from this precise crisis for more than 60 years. It was a bold policy experiment – to allow a critical industry, one with tentacles in every facet of our economy, to essentially regulate itself – and it failed in spectacular and costly fashion. Take away the traffic cop and some drivers will take liberties. Dismantle the entire the police force and the world quickly becomes very unsafe for the average citizen.
Practices that were once outlawed or highly supervised: i.e. excessive leverage, negligent lending standards, self-dealing, and proprietary trading (trading against one’s own customers) – became, and largely remain, the norm. If you are a taxpayer, saver, borrower, investor, a Republican or Democrat, you have every right to be appalled. While the egregious abuses that occurred are beyond remediation, we can once again take steps to insure that such excesses do not reoccur.
Yet the banking and finance industry has fought tooth-and-nail against the slightest attempt to re-regulate their broken industry. Simple regulations (and simple is the most effective) such as the Volcker Rule, proposed as a palatable alternative to a full restoration of the Glass-Steagall Act, are first obfuscated and then beaten back by the banking lobby’s pervasive influence in Washington. Glass-Steagall, recall, mandated a separation between commercial and investment banking and was part of a sweeping legislative response to the parallel excesses of the banks during the 1920s, excesses that led to the Great Depression. That prior framework successfully safeguarded the integrity of US banking and our markets until the regulations were gutted during the 1990s and 2000s.
For most of the 20th century, the US capital marketplace stood as the undisputed center of global finance. This was an envied position and one that provided exceptional benefits to our nation. Our stature was founded on a hard-earned trust, built on the qualities of transparency, fairness, and the rule of law throughout our markets – qualities now impaired by our failed experiment in financial sector deregulation. To regain that leadership, we must re-earn the public’s trust. And to accomplish that, some basic “rules of the road” need to be restored such that investors and other participants will not fear they are at a disadvantage in every transaction. “Caveat Emptor” should not have to be the inscription over the US Stock Exchange.
Get the full deck of cards here. My bet is that these will be THE Christmas present in in industry for 2012.
h/t Naked Capitalism
According to this Bloomberg Businessweek article, Wall Street banking is no longer the place it once was for young people seeking thrills and maximum risk-taking. I take this as unalloyed good news. Perhaps we will see a shift in the coming decades of the best, the brightest and the most ambitious going instead into fields that provide more social and economic return, say the sciences for one, than what should be the rather dull field of moving monies and risk from one pocket to another.
A global super-rich elite had at least $21 trillion (£13tn) hidden in secret tax havens by the end of 2010, according to a major study. The figure is equivalent to the size of the US and Japanese economies combined.
This from a BBC article on a recent study, The Price of Offshore Revisited, released by the Tax Justice Network.The banks with the most offshore assets are found to be UBS, Credit Suisse and Goldman Sachs.
While the amount is contested, the breathtaking scope of the sums involved does explain the intensity with which the Treasuries of the US and UK in particular are pursuing banks in such well-known tax-havens as Switzerland and Lichtenstein. Let’s see, a conservative back-of-the-envelope calculation would see nominal income of $1T, in investment of $21T at 5%. Lost taxes on that amount, at say a 30% tax rate, would equal $300B, every year, and compounding.
In a survey of 500 senior executives in the United States and the UK, 26 percent of respondents said they had observed or had firsthand knowledge of wrongdoing in the workplace, while 24 percent said they believed financial services professionals may need to engage in unethical or illegal conduct to be successful.
Matthew Yglesias asks “Do you have to be unethical to succeed” in the financial services? Certainly has seemed that way from the unceasing stream of revelations concerning financial services malfeasance. If anything, I would say the 26% cited above understates the reality as individuals are generally reluctant to admit, or to face the fact, that professional integrity has been compromised. Readers should expect the latest Barclay’s LIBOR scandal to get a lot larger before all is said and done.
Gillian Tett does a takedown of UK banks, and Barclays in particular, over the LIBOR price fixing scandal in the Financial Times.
Most notably, in recent decades large investment banks in the City of London and Wall Street have increasingly wrapped their activities with an evangelical adherence to the rhetoric of free markets; whenever they have wanted to justify sky-high profits, wacky innovations or, most recently, the need to prevent a new regulatory drive, they have invariably cited the ideals of Adam Smith…
A bank is a place that will lend you money if you can prove that you don’t need it.
I thought of this quote as my wife and I slog through the seemingly endless process of obtaining a mortgage to purchase a new home. A realtor commented that the experience was akin to the maximum treatment afforded by the TSA, body cavity searches and all. As if we were all terrorism suspects. I guess this is just the payback for the prior years of excess.
Stories such as this one on alleged insider manipulation of the Facebook IPO or the feckless risk-taking by JP Morgan, an institution that we the taxpayers are guaranteeing against failure, are just the most recent indications of a capital market system that has been captured for its own benefit by the largest players. Enron to Madoff, Long Term Capital to Lehman Brothers, individual investors are wholly justified in questioning whether the playing field is so tilted against their interests that it is just not worth “playing.”
For the better part of 17 years, my job has been to help clients plan their finances and make prudent investment choices, be those equities, fixed income or other, based on a fundamental trust in the fairness and transparency of the US capital markets. I cannot today offer those assurances so readily. Four years after the abuses of the prior years nearly brought down the global system, our once robust regime of investor protections has yet to be repaired.
Capital investment, innovation and a fair legal and regulatory framework went hand in hand to foster America as the great financial and societal success story of the past 100 years. From my perspective, job number one is restoring the integrity that was once the hallmark of the US system. There are days when I am not so sure this can happen without a further crisis.
(Addendum: Just as I was about to post this, I read Out of Stock, an analysis of the fall from favor of equities at major UK institutional investors. My favorite quote: “the cult of equities is dead.” Not quite the bullish indicator that this headline would be had it appeared on the cover of Time. But for a contrarian, it is a small clue that the process of investor fatigue that typically presages the next great bull market may finally be starting. Please note that I said “starting;” this has always been a long process.)
Dimon repeatedly insisted that the whole operation is Volcker-compliant, and JP Morgan is describing the operation as an effort at hedging gone wrong. Nobody knows exactly what happened, but in general if you just lost $2 billion that’s a good sign that you’re not hedging. The idea of hedging is to accept a small cost in order to insure yourself against the risk of a big loss. Two billion dollars is a big loss even for JP Morgan. So why call it hedging? Presumably because the Volcker Rule allows proprietary trading for the purposes of hedging. This turns out to be a big loophole. As it happens in this case JP Morgan has a big enough capital buffer to eat the loss and they only lost $2 billion rather than $20 billion. But nothing was stopping them from screwing up even worse.
The too-big-to-fail banks have spent the last three years making enemies of their customers and the American public (who, as if we could forget, saved their b***s in 2008). Someone has taken their anger and frustration and turned it into this masterpiece, Your BoA. With friends like these, as the saying goes.