Beware: the banking lobby is at it again.

We must remain vigilant about bankers

Never mind an end to bank-bashing. We need an end to watering down bank regulation.

 

A recent Slog piece took readers through the fairly obvious fact that banks are gradually becoming richer and more powerful than governments. Sometimes it’s easy to see conspiracies where there aren’t any, and sometimes whether it’s a conspiracy or not is pretty much irrelevant. But over the last few months, the only thing required to prove the banking lobby’s desire to get business back to normal is Google. Simply Google ‘stop bashing banks’, and 1.3 million results come up. Add the filter ‘News’, and you will discover the startling fact that, since December 13th, there have been 55 articles in the mainstream national press of the UK, EU and US, all saying ‘banks need your support, not more bashing’.

If ever a piece of bollocks needed deconstructing, this is it. The banks have got our support – to the tune of £740 billion in the UK alone, and that’s not counting all future liabilities. And banks have shown – before, during and after the crisis they inflicted on us three years ago – that they need bashing again and again and again before they get even a glimmer of how greedy and dumb they are.

But above all, banks need to be both bashed and regulated 24/7 in perpetuity because they are now very close to being in a position from which they could happily ignore all future attempts at bashing. Yesterday’s news of a massive Goldman Sachs investment in Facebook should be viewed for what it is: a disturbing, highly strategic move.

Simon Johnson is a former high-flier in the IMF. In May 2009, he wrote an article in The Atlantic magazine (a favourite haunt of mine) in which he outlined with commendable brevity just  much bankers have steadily gained freedom from regulation and surveillance over the last three deades. In a section called ‘Becoming a Banana Republic’, Johnson makes this telling observation:

‘Elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.’

Twenty months on, this allegation looks even more on the money than it did then. When you think about it, a Federal Government stuffed full of Wall Street grandees would be unlikely to behave in any other way. But when you think a little further, a Federal Government prepared to throw taxpayers at the problem come what may is, bizarrely, carte blanche for the banking sector to deliberately fail: it gets the bailout money, and the citizens (plus their Government) just keep on getting poorer. Until one day, you’re the only folks on the block with any money.

In 2008, Paulson blackmailed Congress into stumping up £780 billion. It was for recapitalising, and it entered the banking firms like they might have been a black hole. In reality, the money was used to do deals and make bigger profits. Within six months, the bonuses were back.

Throughout two QEs, US banks have ignored the socio-economic point of the stimulus, in favour of their own ends….and the further reduction in jobs via megamergers they daily underwrite. In the UK, they have piled up and reinvested bailout monies playing the Zirp strategy to their own ends. They have been warned and threatened about their behaviour over and over again by successive Labour and Tory Chancellors. But they have done nothing. Except hire PR agencies to secure placement of anti-bashing articles and OpEds.

As 2011 dawns, aside from higher capital requirements (still in my view nowhere near enough) nothing has changed. All Basle’s attempts to tighten things up have been diluted by furious bank lobbying. Yet a year before Simon Johnson’s piece, even the foolishly optimistic Jean-Claude Trichet of the European Central Bank was clearly outlining the requirement to clean up the banking act. Voted Banker of the Year (was this a prize or an insult?) Trichet made an acceptance speech in September 2008 which included several potent passages. The crisis had been caused, he blunty opined, by an

‘…inability to adequately assess the risks associated with the exposures they held…[and a] lack of transparency throughout the securitisation process that engineered the underlying mortgages into complex structured products made it difficult for market participants to identify where the risks were accumulating…’

Or in two words, reckless crookery. So it was that Trichet stressed how EU bodies were ‘about to finalise  guidance on Sound Liquidity Risk Management and Supervision….the regulatory framework should be revised so as to restrain the build-up of excessive risks during expansion phases.’

That was two and a half years ago. The banks fought this tooth and nail every inch of the way. They demanded – and got – quid pro quos, delays, dilutions and reduced capital reqirements. They lobbied every politician they could find. And they kept back a much smaller tide of reform until October 2010.

Note also how, in this speech, Trichet did not once mention the issue of Sovereign debt problems. To some extent this is because he hadn’t as yet fully appreciated how much Athens (and its advisers Goldman Sachs) had lied to the ECB and Brussels about the Greek Government’s domestic accounting. But primarily, this reflects that – as a banker himself – Jean-Claude doesn’t give a monkey’s cuss about anything except the survival of banks in general….and the continuing Franco-German EU leadership in particular. Observe his behaviour during the Irish crisis, and you will see what I mean: The ECB boss is quite happy to leave ‘peripheral’ Sovereign EU States out to dry. Only political pressure has forced him to buy their worthless bonds – much to the chagrin of his fellow bankers on the ECB Board.

The US debt crisis, the eurozone crisis, and the massive UK banking bailout have all shown the banks to be uncaring about the effect on their fellow-citizens. We are to them irritating minnows getting in the way of their search for the next big slithery, leaping salmon to chomp on their hooks. As I wrote in October, the brass neck has now spread to Australia. There too, an asset bubble is being pumped up by reckless lending into a market where the average salary is already far too small to sustain a mortgage on the average price of a house. As I write, bank-owned insurance companies are scurrying around looking for reasons not to pay out on the policies of drowning Queenslanders.

To sum up, banks never learn. This is because some of their product-development folk (the ‘quants’) are maths nerds with no grasp of people or consequences. But it is primarily, based on the evidence, that they do not care to learn – any more than they care to apologise, stop paying bonuses, or look grateful for our help in their continued existence.

There is a cartel at the top of banking – most typified by the thoroughly objectionable Lloyd Blankfein – who sometimes give the impression that the end-game is to have every Government on Earth in their pockets, so they can hitherto plough ahead and do whatever they like in the pursuance of God’s Work. (A smart blogger confided to me last month that the reason most bankers hate George Soros is because he is alarmingly vocal about how this is precisely the strategy he has in mind – and this is the man, don’t forget, who 25 years ago very nearly broke the British Treasury).

Stop bank bashing? I won’t stop doing that until a lot more of them are behind bars…and their power is reduced. Neither should anyone else who cares about fairness and liberty.

But don’ t hold your breath either.

Related: The Banking elite – how it defrauded America

UPDATE: OBAMA CONSIDERS JP MORGAN CHIEF AS WHITE HOUSE COS

 

 

 

18 thoughts on “Beware: the banking lobby is at it again.

  1. AIG had 340 regulators worldwide yet they still didn’t see the bankruptcy!

    Each country has warehouses full of regulations yet none of them make a blind bit of difference.

    How much proof do people need that regulation, in any form, DOES NOT WORK.. EVER!!!

    Do the Laws on murder stop murder, or drug laws stop drugs?? Do the Police prevent crime? Do regulators stop inept or mal practice??

    The ONLY regulator that works is the free market. The only mechanism that works is the free market.

    The banks should have been left to go bankrupt, that is free market regulation. Instead Brown et al stuck a spanner in the works and bailed out the big bad banks at huge cost to our society.

    Iceland did the right thing. The UK, Europe, Japan and the USA did the wrong (Keynsian) thing. Failure and bankruptcy is an essential part of capitalism, as important as success and profit (wealth creation).

    Those who think more regulation is a ‘solution’ have not only zero historical evidence it ever works but mountains of evidence it doesn’t. When will we ever learn simple historical lessons????

    • Without the life sentence, how many murders do you think there’d be?
      1960-1984: massive regulation, one secondary bank collapse in 1972.
      1985….to present….skullduggery ever day.
      Sorry, but I don’t think your argument holds water. People are ruled by greed, and held back by fear: increase the fear of bankers, and they will cease and desist.
      Example: in France, writing a cheque for which you don;’t have funds is a criminal offence.
      Result: No bankers cards required and no dud cheques.
      It’s called regulation.

    • @ Velocity re: “AIG had 340 regulators worldwide yet they still didn’t see the bankruptcy! Each country has warehouses full of regulations yet none of them make a blind bit of difference. How much proof do people need that regulation, in any form, DOES NOT WORK.. EVER!!!”

      This is way too simple. Systemic leverage, or the amount of credit relative to bank capital, reached historic levels before and during the crisis because prior bank deregulation–including competitive deregulation between countries and regions–allowed it to.

      On a side note, AIG’s problem was risk, not bankruptcy per se. Under the new looser rules on capital, and operating in a novel and UNREGULATED area of the market, AIG was able to engagee in the derivative world’s equivalent of insuring the entire world against a systemic risk with pitifully inadequate reserves.

      If less regulation or the absence of regulation can lead to these results, what does it say about your assertion that regulation never “works” in any form?

    • @ Velocity re: “Do the Laws on murder stop murder, or drug laws stop drugs?? Do the Police prevent crime? Do regulators stop inept or mal practice?? The ONLY regulator that works is the free market. The only mechanism that works is the free market”

      What’s the purpose of regulation? To change human nature? I don’t think so. It’s to discourage people at the margin from behaviors that society deems undesirable and to prescribe certain remedies when they occur.

      That many of those behaviors (e.g., pretty much every one of the Ten Commandments) has conferred a selective advantage on past human beings, there’s no way that regulations will prevent such behaviors outright. Yes, poorly designed regs are sometimes worse than no regs, and competition can be effective in curbing certain behaviors in *certain* circumstances. But the “free market”, whatever one means by it, is not a panacea or a substitute for sound regulation. Not even close. Especially in a highly specialized and asymmetric world (what I like to call the Misesian paradox).

      Re: “The banks should have been left to go bankrupt, that is free market regulation.”

      With a lot of innocent bystanders taken out as well. Systemic fragility only reached the point that it did because *private sector interests* intensively lobbied govts worldwide to loosen regulations on the financial sector.

      Any free marketeer who doesn’t understand leverage and systemic risk is a danger to themselves and others. Study up lad.

    • I agree with your sentiments to an extent and I have always been in favour of small govt: alas, it has become way too big. And regulation that is both necessary and effective: alas, it has become progressively overloaded by socialists who use it as a mechanism of social engineering and control.

      However, as others have pointed out well, laws and regulation are a necessary part of a civil society.
      The secret is only having laws which are both necessary and effective. Nothing more.

      I would not wish to live in a lawless society where any whacko could murder another person without redress.

  2. The bailouts are wrong, but that doesnt mean that banker bashing is right.

    Your position is simply wrong.

    We have cosied up to the spendthrift bankrupt banks and invited them into our homes, now you wish us to throw out the competant money makers for daring to pay themselves?

    “People are ruled by greed, and held back by fear: increase the fear of bankers, and they will cease and desist.”
    Very True, but who fears regulation? Certainly not the cartels, they love it, raises the barriers to entry and secures their position.

    People are held back by fear, yet the government has removed fear of failure by bailing out the failures, but at the same time, it has made people afraid of success, by castigating and robbing the successful.

  3. Er, I keep seeing the argument: ‘We must be kind to bankers ‘cos they provide lots of revenue and if we tax them too much they will just go and ply their ‘trade’ (my inverted commas) elsewhere.

    So, if all countries brought into place the same level of taxes for bankers et al, to where would they flee?

    • 1.Heavily taxing the banks might make the political elites look macho and appear to be ‘on our side’ but would/will result in banks increasing their spreads, thereby passing the higher taxes onto customers.
      2.not all countries would introduce the same level of taxation onto banks, so some banks could up-sticks and go elsewhere. Therein lies the problem.

    • “So, if all countries brought into place the same level of taxes for bankers et al, to where would they flee?”

      They wouldnt, because the advantage is to always be outside a Cartel pissing in.
      Every nation in the world introduces these punitive taxes, except the Cayman Islands, which introduces a tax of 1/10th the global standard, every bank flees to the Caymans and the island gets the worlds highest GDP per Capita from this single low tax.

  4. As an ex-quant I am surprised to see I am being blamed for being a nerd and not caring about people. That is just dumb. What about all the people with MBAs in banks. I am sure they are so much more sensitive and caring.

    Sub-prime was not a quant area – it was mainly MBAs with basic cashflow spreadsheets showing scenarios rather than fancy correlation models as some have erroneously claimed. And in any case, the evil of sub-prime was not the structures per se but the conflicts of interest and the fraud.

    I do agree that some banks should have been left to fail. However the shock after Lehman went bust scared many. Also, letting the banks go down in 1929-32 is one big part of why the US went into a great depression. Bernanke knows this and did not want to be responsible for another great depression.

    What I did want to see – and we may still see this if Ireland breaks out of its current straitjacket – is for bank losses to be imposed on the bondholders of banks. It is unfair for the ordinary citizen to have to fund this debt. The bond holders in Europe knew there was a housing bubble in Ireland which was being fuelled by the banks and made a calculated investment. They made a bad call and should lose.

    I also admit that Blankfein saying they are doing the “will of god” is one of the most odious things I have ever heard since Goldman is a godless place (unless the god is money). It worships money like no-one else and is very good at it. It’s a great place but it has its fingers in so many pies that it should be reined in.

    I also think that commercial and investment banks should be split up as they were under Glass-Steagal. Investment bankers should not be able to access the cheap funding that ordinary deposits provide and depositors should not be exposed to the high risks that investment banks are inclined to take.

  5. My solution, as adumbrated here, is to abandon electricity, introduce ice as a worldwide currency, replace the mass media with drums, and introduce a government program by which ex bankers could be adopted by charitable families who would feed and housetrain them. If this solution appears less than convincing, blame it on Google Translator.

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