From the article: "The problem with today’s banks is that those who accept the risks are no longer those who get stuck with the bill."
Much of the trouble comes from financial deregulation. There used to be laws in the US which forced considerable isolation between different parts of the financial system. There was the Glass-Stegall Act (1933-1999), which kept banks and brokerages separate. There used to be a separation between savings and loan companies and commercial banks. Savings and loan companies used to have to lend locally, and actually send people to building sites to see how construction was coming along before advancing more money. There was the Utility Holding Company Act, which limited public utilities to a tree depth of 3 in stock ownership, just so they could be regulated more easily.
With all that separation, parts of the economy could get into trouble without cascading. A stock market crash didn't affect banks much. The savings and loan mess of the 1980s didn't clobber the stock market.
2008 might have played out very differently if the former head of Goldman Sachs, Henry Paulson, hadn't been Secretary of the Treasury. President Bush was prepared to let banks and brokerages go bust, in keeping with his conservative principles of letting the market decide. Paulson was the one who pushed for a bailout. At the point Lehman went bust, Goldman Sachs was about a month from going bust, too.
I've thought for a long time - it doesn't matter if these banks broke the law - they tried to fly to high and broke a lot of citizens. I'm not a fan of government bailouts. But if it happens, they should split the bank up into smaller pieces; ban the management from working in the industry as management again, and give the new remaining company a bit of support to get going again.
Bailouts shouldn't come without a price to pay to the people involved.
"This Scandinavian nation of 9 million people has accomplished what the United States, Britain and Japan can only dream of: Growing rapidly, creating jobs and gaining a competitive edge. The banks are lending, the housing market booming. The budget is balanced." http://www.washingtonpost.com/business/economy/five-economic...
Do you have any other suggested reading on how Sweden go about doing this?
> The big banks have surely drawn a lesson from the crash and its aftermath: that in the end there is very little they will not get away with.
and it tells the story of our societies failure and the total failure of our political systems.
Maybe in the history books of the future, it will be written as the beginning of the downfall of our societies.
But one thing is sure, the next crash will not leave us behind with a blue eye only, because the western countries have nothing left, to back-up the gambling losses of the banks.
The wealth of our nations already have been wasted to those, which did not earn it and either a total crash will follow, or revolution or they (those that we let gamble with our money) will be the new aristocrats (or "oligarchs") of a new era of slavery.
And when the big crash comes, there will be enough time between the 2008 crisis and the next one for the general public to have no understanding of the context and causes. They will be unable to connect the dots. And in their confusion they will give the politicians carte blanche to solve it. The politicians will turn to those who gave them the most money, the banks and their lobbyists, the very people who are behind the crisis, and give them complete power. Then these people will squeeze even more wealth from the system to line their pockets. Rinse and repeat.
Exactly. After the 2ndWW the system had a chance to reboot and the previous governments have turned the rudder to more equality for all people -- thus we had two or three decades of wealth. But than the problems came and the politicians turned to the same old solutions and to the big money for advice.
Today, the money has the power and the politicians are mere puppets of the money. And we are all busy to survive ourselves and don't see how humanity and the whole planet is killed by greed.
The article doesn't mention a single time the word bail-in, which is the single most important change in banking regulation and what is likely to make bail out (i.e. tax payers recapitalizing a bank) unlikely.
A bail in is the power of the regulator to declare a bank non viable and to force losses on debt holders over a week end. This effectively auto-recapitalizes a bank without having the messy consequences of a bankruptcy, by forcing losses on creditors in the same fashion as a bankruptcy.
The article doesn't mention either that banks have more twice the amount of capital they held before the crisis and are required to hold massive amounts of liquid assets.
Great article. At the risk of fear mongering, the point about supermarkets was very powerful. "Greed is good" is fine until the money controls the entire infrastructure of society.
I live in Argentina, where so many factories were abandoned in our 2001 crisis that workers decided to re-open many of them. Would American workers have it in them if there were a serious liquidity crisis?
The problem with this is that a factory making stuff is useless if people don't want or can't afford the product. The Marxist labor theory of value asserts that value s created when something is made rather than sold, but 1000 pairs of shoes sitting in a warehouse miles away from any consumers who might want to wear them aren't making anyone better off.
More accurately its that the value is set by the labor required.
Beyond that for most people in a capitalist system, the basic process was one of commodity > money > commodity. Meaning that people made stuff to earn money, to buy more stuff.
But for the capitalists instead it was money > commodity > money+. Putting money into the production of stuff so as to earn even more money on sales.
Now where Marx went off the rails was with factory machines. He was sadly working under the preconception that workers were being exploited, and so ended up badly muddling the impact machinery has on the value definition.
>Would American workers have it in them if there were a serious liquidity crisis?
Asian real estate tycoons would own the area before the workers could pronounce "transpacific capital monitoring". much less before they were told factory was being shut down.
All I have to say to that sort of apocalyptic scenario is that possession is nine tenths of the law. Hard for 'Asian Tycoons' to be absentee landlords, were they to try.
The last sentence of the article: "The big banks have surely drawn a lesson from the crash and its aftermath: that in the end there is very little they will not get away with."
It's a mistake to treat banks like a monolith. The banks making the worst choices really did pay the price. Three of the five biggest investment banks in the USA either went bankrupt or were sold off for pennies on their previous value. Fannie and Freddie were essentially bankrupted.
These companies share holders were wiped out. That's exactly what happens with other businesses in bankruptcy. Well, other than Bear and Merrill stockholders getting a small percent instead of zero. That was a necessity because an investment bank really can't operate through a traditional Chaper 11 bankruptcy.
So if you own a bank, you can't be confident that you'll get bailed out when you fuck up on a grand scale.
But there is an issue of industry wide fuck ups and their effect on everyone else. Banks have a very unique feature in that when their competitors falter, they falter with them. In 2008, you have banks with no exposure to the toxic assets having huge issues with liquidity.
The bail outs may cause moral hazard for that sort of counter-party risk. For example, if you are Goldman Sachs maybe you don't ask too many questions about AIG insurance because you figure the government will make good on it either way.
The banks loathe low rates.. They make most of their profits on interest margin which is greatly compressed in ZIRP environments.. Their margin is literally the lowest it's been since at least the early 1980's. [1]
It's no surprise then that bankers are the ones clamoring loudest for interest rate hikes. Bill Gross, Lloyd Blankfein, Robert Shiller, insurance & pension execs are all begging Yellen to raise rates while the people in charge of companies that actually sell physical goods are telling her to hold off.
Ah. And that explains why the BoE keeps threatening to raise rates even though none of the usual excuses apply - inflation has been close to 0% for most of the year in the UK.
As far as I know Madoff is the only one who went to jail, and he obviously didnt play a role in creating the crisis, he just was discovered because of it. The biggest offender that should absolutely be in jail in my opinion is Dick Fuld. If you dont know anything about it, read about REPO 105[2]. It is mind boggling to me that that guy didnt get 1 day behind bars, and from what I have read - he actually got to keep all his money made during years before when he was leveraged ???:1.
Matt Taibbi has written a lot of good stuff about this, as is Yves Smith, the blogger behind Naked Capitalism.
In general, banks that break regulations don't result in people going to jail because individuals take action to avoid personal responsibility for anything. There are literally hundreds of thousands of pagers of them, nobody really understands them, and regulators decide which ones to take seriously according to the political winds of the day.
At top banks a major purpose of the regulatory department is to make sure nobody can be blamed for anything. Banks would rather pay billions of fines because no executive is going into engage in a more coherent compliance regime if it means risking jail for something nobody understands. It is common at certain commercial banks to deliberately engage in ignorance, at the risk of being find very large sums, simply to avoid the discovery risk--of regulators being able to pin blame on someone who raised some concern.
Recently the regulators have been hinting executives will be held responsible for systemic failures in their bank. Bankers have been responding by ensuring full compliance with regulations. Just kidding, nobody knows how to fully comply with bank regulations. Bankers have generally responded by ceasing high-risk activity completely. For example, there are tens of thousands of Somali refugees in the US. To my knowledge there is no commercial bank that will help them send money home to their families. Somalia is simply too high risk.
>In general, banks that break regulations don't result in people going to jail because individuals take action to avoid personal responsibility for anything. There are literally hundreds of thousands of pagers of them, nobody really understands them, and regulators decide which ones to take seriously according to the political winds of the day.
It's more to do with a lack of prosecutorial oversight and a lack of political will than a lack of laws being broken. If Obama wanted to, he could toss Sarbanes-Oxley at the bank executives - they wouldn't even have to prove that they knew about the fraudulent and criminal behavior underneath in order to make those charges stick.
The mere fact that they turned a blind eye would be enough to put them in an orange jumpsuit.
The regulators have been talking about getting tough for two years but still show no signs of actually doing it (typical Obama play). I doubt they will unless Bernie enters the white house. Obama's not going to risk his cushy retirement of paid speaking gigs at Goldman Sachs.
> literally hundreds of thousands of pagers of them, nobody really understands them
BaselII[+] and friends are relatively clearcut and are designed to prevent credit meltdown. The rules and reporting requirements are baked into Bank software and dataflow. Auditors will spank you with fines, and will revoke your accreditation for serial offences. This can force an involuntary acquisition.
> there are tens of thousands of Somali refugees in the US. To my knowledge there is no commercial bank that will help them send money home to their families.
That is the result of draconian anti-terrorism laws and has nothing to do with regulations around credit reserves.
You seem to be concerned around over-regulation, however the article is clearly arguing the opposite: "Deregulation has allowed perverse incentives into the very fabric of global finance."
I was replying to the poster who was wondering why people don't go to jail when banks break the law.
I was making the charitable assumption he was talking about banks that were breaking laws. Most of the significant regulatory actions taken against banks do not involve Basel capital requirements. With regards to the financial crisis, simply being bad at running a bank isn't a crime.
While we're on the subject, political leaders and voters do not really understand the distinction here either. Capital requirements are separate from, for example, anti money-laundering, but in the eyes of voters it's all more regulation against the evil banks.
Those who control the laws, don't usually break the laws.
For example, when you write your own game, you can come up with any rules you want. You want goats to fly -- sure, you got flying goats. Some characters have more stamina than others? -- just tweak some config file.
Well, it is not dissimilar for those in power -- they are making the rules. If they stop liking the laws, they'll just lobby to change them. Therefore asking "but how many of them are in jail" doesn't make much sense. Why would they put themselves in jail?
All right, but in order for an investigation to be reasonable, there needs to be a basis for accusation, or something. We don't just say "AnimalMuppet must be guilty of something; let's start an investigation to find out what."
The article was calling for that kind of comment. However, there is still a good point in there.
Since last time the general public have taken the brunt of the crisis, what kind of lesson did we want the bank to remember ? The article should really be titled, "7 years after the crisis, how the public and politicians ignored the lesson of the crash".
Or at a meta level: "Politicians ignore lessons citizens tell politicians that they should learn, while observing that the citizens continue to vote for them."
Angry, ineffectual parent: You haven't learned your lesson son. You remember last time you messed up and got away with a bunch of stuff (stuff you made lot of money off of)?
Kid: (Smirking) yeah
Parent: You remember I almost punished you real bad?
Kid: (Smirking) yeah
Parent: Well, you fuck up again. I might almost punish you even worse. I might almost make you really sore. You understand?
Someone correct me if I'm way off, but I've been thinking that leveraged markets and margin trading have more of a negative effect than just creating risk of a domino effect. They also resist change (change that is sometimes needed).
If tons of huge banks have tons of money on the line in leveraged crude oil futures, then there would be resistance to global movement away from fossil fuels. Larger financial markets should in theory provide oil to the gears of the economy, but I think that if the industry becomes so bloated it will actually cause additional friction.
Please point me in the right direction if there is anything written on this topic.
This is an excellent article that gets to the crux of the issue: other people’s money.
And, I can't help but delve one level deeper.
Who's money were the banks playing with? Pension funds, mutual funds... in other words, funds in which the ordinary taxpayer had his/her money.
Whom did the taxpayer bail out? His/her own money - which they "invested" in these funds/banks for safekeeping without sufficient knowledge of the risks.
Unfortunately, we haven't learned our lesson either. We still like to allow others to manage our money and risks for us.
The lessons of the crash were: absolutely no one went to jail, and every banker involved made nearly as much money during the worst years of the crash as during any other year.
Ultimately so did the taxpayer. Those bailout loans everyone likes to complain about were some of the best investments the federal government has ever made.
I doubt those loans had anywhere near the ROI of, say, the land grants for the transcontinental railroad, the Louisiana Purchase, or the Alaska Purchase.
Actually, the government did very well considering that the loans (especially the AIG loan) were short term and fully repaid. The government made $5.6 billion on $67.8 billion loaned, the Federal Reserve made a profit of $17.7 billion.
The Louisiana and Alaska purchases didn't turn a profit for years, and took a substantial amount of additional capital. AIG is back to relative stability and pays taxes.
Much of the trouble comes from financial deregulation. There used to be laws in the US which forced considerable isolation between different parts of the financial system. There was the Glass-Stegall Act (1933-1999), which kept banks and brokerages separate. There used to be a separation between savings and loan companies and commercial banks. Savings and loan companies used to have to lend locally, and actually send people to building sites to see how construction was coming along before advancing more money. There was the Utility Holding Company Act, which limited public utilities to a tree depth of 3 in stock ownership, just so they could be regulated more easily.
With all that separation, parts of the economy could get into trouble without cascading. A stock market crash didn't affect banks much. The savings and loan mess of the 1980s didn't clobber the stock market.
2008 might have played out very differently if the former head of Goldman Sachs, Henry Paulson, hadn't been Secretary of the Treasury. President Bush was prepared to let banks and brokerages go bust, in keeping with his conservative principles of letting the market decide. Paulson was the one who pushed for a bailout. At the point Lehman went bust, Goldman Sachs was about a month from going bust, too.