Big Banks Face Another Round of U.S. Charges
dealbook.nytimes.com
dealbook.nytimes.com
Banks have way too much power in both our politics and economy. We have to change that.
* Banks that have been caught repeatedly both intentionally defrauding people and acting with extreme incompetence (and who knows who often they haven't been caught). Yet most customers, from individuals and to large corporations continue to trust the banks with their money and to take the banks' advice.
* They trust LIBOR and similar services as accurate and fair, when they've been tampered with repeatedly.
* They trust the financial markets as safe, fair places to invest, despite the problems above and others that pervert markets directly, such as high-frequency trading.
* They trust the 'Free Market', a good idea in concept but in execution appears to be a rigged marketplace, where the powerful win and if they don't, they get bailed out.
Do you still invest your savings in the financial markets? Do you have debts whose rates are tied to LIBOR? If Goldman Sachs offered to advise your company, would you trust them? Most people, knowing all of the above, still say yes. I think in part that's because there aren't many alternatives and in part it's due to lifetimes of of habit. These problems must be hurting trust and I imagine many people eventually will realize the disconnect at some point -- maybe in reaction to some big event -- and pull out.
The point of regulation is to make markets safe, which prevents fraud and attracts more investment. It's good for everyone. It seems like many in the financial industry, and the knee-jerk anti-regulation crowd, have lost sight of that.
- Use a local credit union as opposed to big national bank. Yes, there may be minor inconveniences in service, but in this day of online banking, they should be minimal.
- Invest with a financial advisor you know and trust, who will pick up the phone when you call and explain things to any level of detail you desire (or who will bring in experts to do so if you won't). Barring that, invest in index funds for broad asset class exposure with low fees.
- Don't believe / vote in / listen to anyone (economist, politician or otherwise) who touts "free markets" without further explanation of how that market's regulators & insiders will work.
Don't get me wrong, there's lots of market perverting going on, but HFT isn't party to it.
These "middle-men" are injecting themselves between buyer and seller to take their cut simply because they have the money, resources, and -- increasingly these days -- the geographic location to beat someone else to the punch.
What is often happening is Seller A wants to sell something for $10. Buyers B, C and D submit an order to buy it for $10. The computer sees this, knows that it might be worth more than $10, and while Buyers B and C get their orders through, the computer buys it out from under Buyer D because their computers are faster. Buyer D now gets a notice that "oh, sorry, that thing you wanted is now $11."
It's the same thing as you overhearing your neighbor saying the Apple Store only has one iPhone left for sale at the Apple Store and, because you have a faster car than your neighbor, you get to the store and buy it and then offer it for resale at a higher price. That's not facilitating a transaction, and it certainly is perverting the market. When the people with the fastest computers and best geographical location get items cheapest, that's not a 'free market'.
Middle-men have classically existed to provide a _service_, adding value to a previously less valuable or more difficult transaction -- wholesalers or retailers. Wholesalers existed to pare down which goods are offered, and existed primarily because smaller retailers couldn't afford to purchase in bulk. Most 'middle men' of these classes have gone away due to the digital age and/or conglomeration. Grocery stores or websites that provide value by having multiple items in the same place that you can pay for all in one financial transaction.
What if Buyer D isn't willing to spend $11?
"only serves to make a market more efficient"
I would say it's exploiting inefficiencies. That doesn't make the market any more efficient. In fact, given the sizable number of 'computer errors' leading to significant volatility when they occur, HFT is in fact a destabilizing force in the market at times.
If Buyer D isn't willing to spend $11, then he simply doesn't buy the item. The HFT took on risk by buying the item and needs to either find someone else willing to buy it for >$10 or lose money.
>I would say it's exploiting inefficiencies.
Exploiting Market Inefficiencies == A More Efficient Market. The whole idea of "buy low, sell high" is exploiting inefficiencies in pricing, which is all HFT's are doing. As a result, they bring the buy/sell prices closer together, making it easier to trade. In return for making the market more efficient, they get a profit, and everyone wins except those who are acting in an inefficient manner. (Remember, buying something for less than it's worth is ALSO an inefficiency!)
The point about volatility is fair, but that has to do with market stability, not market efficiency. The HFTs are HIGHLY incentivized to not destabilize the market because they stand to lose a LOT of money if they make a mistake. Now, it _is_ possible someone could concoct a scheme where they profit from a destabilization caused by faulty HFT, but HFT is the means by which that actor perverted the market, not the reason the market is perverted.
There's a difference between pricing inefficiencies and technology inefficiencies. In theory there should be equal access to markets. This is why SEC laws on disclosure exist. When people with greater technological ability can, in effect, toll everyone else, you are eliminating this idea of equal access.
> The HFTs are HIGHLY incentivized to not destabilize the market because they stand to lose a LOT of money if they make a mistake.
So are all traders, but that doesn't stop things like Enron and Lehman Brothers from creating smoking holes in our economy. When you start creating legal fictions and technologies that are barely understood by those that create them, much less those that provide executive oversight, government oversight, or the general public, you are getting into very dangerous waters.
Software only works as long as the assumptions of the programmer stay valid. HFT quants are incentivized to make their companies money, not to protect the market at large. An application on a desktop computer crashing and exhibiting weird behavior isn't a big deal. A HFT process going rogue is going to cost a company millions or billions of dollars at best.
1) A powerful bad guy 2) A weak and ineffectual good guy
Most people will pick the powerful bad guy to protect their funds, advise their company and make decisions for them. We want the power, not the morality. These guys don't let their morality get in the way of winning.
Considering only self-interest, how do you trust the bad guy with your money, when they've lost other people's funds? How do you trust their advice when you know they've deceived other clients? How do you know they will act in your interest, when they've acted against clients in the past?
Furthermore, the settlements since 2008 have largely not precluded the banks from facing criminal charges[2]. The Justice department needs to get these initial settlements out of the way before they can pierce the corporate veil and pursue criminal action against individuals and these giant banks unsurprisingly have spent lots of money and lawyers dragging these investigations out for the last 6 years. I'm ever an optimist, but I think it's inevitable that some criminal charges are still coming. Those charges will likely fall on scapegoats, but still.
[1]http://www.masslive.com/business-news/index.ssf/2014/08/bank... [2]http://money.cnn.com/2013/11/19/investing/jpmorgan-mortgage-...
On your other point it would be interesting to see if a new Justice department under someone other than Holder does anything differently. Does anyone know the length on the statue of limitations of the sort of crimes they're accused of criminally?
Once we go through at least one round of these types of criminal investigations, any future lower level employees would be stupid if they didn't intentionally keep hard evidence against their bosses in their possession as a get out of jail free card next time the shit hits the fan.
All in all, splendid news.
http://blogs.wsj.com/moneybeat/2014/06/23/a-list-of-the-bigg...
Oh and in one final insult, the settlements with the banks will eventually be paid for out of bank revenues - which of course is generated by the public. I'm sure the bank execs are high fiving each other over that maneuver in the backyards of their private Connecticut uber-mansions.
Unfortunately most of what the banks did that caused the 2008 crisis was not against the law.
AIG had to lump it or leave it, because they didn't own the last three Treasury secretaries. GS should have been in the same spot. That they weren't, is the epitome of self-dealing. Fuck that.
Financial crimes are generally slow and difficult to prosecute because of the vast quantity of documentation that has to be sifted through for evidence, so when you look at the DoJ's financial fraud page you see a bias towards smaller firms - not necessarily because they're weaker legally, but simply because it's easier to pinpoint individuals (eg some of the insider trading prosecutions). Another issue specific to the financial crisis is that in some cases large firms erred by being negligent and/or overconfident in their market strategies, resulting in huge losses and/or bailouts, but they imprudent rather than mendacious and their conduct did not cross the line into criminality. In a normal market those firms would have gone out of business and things would have been resolved through civil lawsuits, which was what happened with Lehman bros. and Bear Stearns. But in the financial crisis so many institutions were over-leveraged, and so many markets were moving in sync with each other (eg Europe and US both having huge housing bubbles) that the options were government stepping in to backstop the financial industry as a whole or the collapse of the payment system, which would have been a disaster.
Getting back to politics, my read of the US landscape is that about 20% of the US electorate leans to the left and wouldn't object to hanging all the bankers. About 30% leans to the right, and they've convinced themselves that the whole financial crisis was caused by Those Bums on Welfare and the Democratic party who forced the banks to give money to TBoW. The other 50% of the electorate is more fact- than narrative-driven and while they have misgivings about who should bear responsibility for the crisis they're also more pragmatic and primarily concerned about economic stability. There's a danger in this, insofar as many of the socioeconomic conditions that led up to the crisis remain unresolved or have even worsened in some respects, which means greater political tension and potential for crises; on the other hand revolutionary change is notoriously difficult to manage which is why no developed country has so far attempted to grasp that particular nettle.
I don't really care about settlement amounts in dollars. I'd like to see criminals end up in jail.
I used to be more neutral till the secret recordings of Carmen Segarra came out - http://www.propublica.org/article/so-who-is-carmen-segarra-a...
The fed regulators in question were recorded being eager to be deferential to the very banks they were supposed to regulate, and the very banks that had caused this crisis. And oh, a surprising number of ex-regulators ended up working for the banks they previously regulated. What a coincidence.
This country is so screwed up. We send in a SWAT team when someone is growing okra in their backyard (apparently it looks like marijuana from a helicopter) yet let the rich and connected get off scot free after stealing billions of dollars.
Hopefully they offer extra credit for exposing C-Suite level involvement.
Also, where was this deal when the Fed was investigating toxic asset fraud?
This seems akin to the drug enforcement policy of targeting the users. Which has been shown to be completely useless.