How the banks ignored the lessons of the crash
theguardian.com
theguardian.com
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.
Bailouts shouldn't come without a price to pay to the people involved.
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.
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.
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.
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?
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.
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.
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?
Kid: (Smirking even more) yeah, I understand.
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".
"Banks ignore lessons politicians tell voters that the banks should have learned, while remembering the lessons the politicians actually taught them"
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.
This is a very complicated issue.
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.
That is: Your post assumes that (unnamed) people broke the law. Let's not assume that. Let's either prove it, or not throw innuendo around.
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?
Matt Taibbi has written a lot of good stuff about this, as is Yves Smith, the blogger behind Naked Capitalism.
[1] https://en.wikipedia.org/wiki/Richard_S._Fuld,_Jr. [2] https://en.wikipedia.org/wiki/Repo_105
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.
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 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.
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.
http://www.vanityfair.com/news/business/2012/02/jon-corzine-...
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.
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.
So, what's the problem?
http://projects.propublica.org/bailout/entities/8-aig
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.