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<DIV style="FONT: 10pt arial">----- Original Message -----
<DIV style="BACKGROUND: #e4e4e4; font-color: black"><B>From:</B> <A
title=dlj725@hughes.net href="mailto:dlj725@hughes.net">David Johnson</A> </DIV>
<DIV><B>To:</B> <A title=dlj725@hughes.net href="mailto:dlj725@hughes.net">david
johnson</A> </DIV>
<DIV><B>Sent:</B> Friday, February 01, 2013 12:47 PM</DIV></DIV>
<DIV><BR></DIV>
<DIV><FONT size=2 face=Arial>
<H2 class=date-header><SPAN>Friday, February 1, 2013</SPAN></H2>
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itemtype="http://schema.org/BlogPosting"><A name=2551192233086598678></A>
<H3 class="post-title entry-title" itemprop="name">The never-ending banking
story </H3>
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<DIV id=post-body-2551192233086598678 class="post-body entry-content"
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<DIV style="TEXT-ALIGN: center; CLEAR: both" class=separator><A
style="MARGIN-BOTTOM: 1em; FLOAT: left; CLEAR: left; MARGIN-RIGHT: 1em"
href="http://2.bp.blogspot.com/-zvchpYIA_R0/UQvZQcuWmtI/AAAAAAAAG3c/vmjfMocgb14/s1600/banksters_n_government_public_serpents.jpg"
imageanchor="1"><IMG border=0
src="http://2.bp.blogspot.com/-zvchpYIA_R0/UQvZQcuWmtI/AAAAAAAAG3c/vmjfMocgb14/s320/banksters_n_government_public_serpents.jpg"
width=320 height=212></A></DIV><A
href="http://thenextrecession.wordpress.com/2013/02/01/the-never-ending-banking-story/">by
Michael Roberts</A><BR><BR><FONT size=4><STRONG>It’s a never-ending story.
The global banking sector remains deep in the sludge of scandal, corruption and
mismanagement. It continues to fail in its supposed purpose, namely to
provide liquidity and credit to households to buy ‘big ticket’ items (or even
cover monthly outgoings) and to businesses to enable them to pay for working
capital and investment to grow. And yet in 2012, bank share prices have rocketed
by over 25%, more than the booming stock market indexes.</STRONG></FONT></DIV>
<DIV style="MARGIN-TOP: 10px"><FONT size=4><STRONG>During the financial collapse
of 2008, the US banking industry wrote down $600bn in assets and its stock
market value plunged $1trn. However, the authorities (the Federal Reserve
and the Treasury), ‘on behalf of the taxpayers’, bailed out these errant banks
with cash, guarantees and loans worth well over $3trn. Now in recovery
mode, there are fewer banks but they are bigger and are up to their old tricks
just as much as before.<BR><BR>Take the UK banks: Barclays has been fined $450m
for its part in the so-called Libor scandal, where banks’ traders colluded to
fix the interest rate for inter-bank lending, which sets the floor for most loan
costs across the world. That rigging meant that local authorities,
charities and businesses ended up paying more than they should for loans.
HSBC was indicted by the US Congress for laundering Mexican drug gangs money and
breaches of sanctions on Iran (as was Standard Chartered). Lloyds Bank,
along with all the other banks, has had to compensate customers for misselling
them personal injury insurance to the tune of £5.3bn, money that could have been
better used to fund industry and keep loan terms down.<BR><BR>And there is
RBS. This British bank was brought to its knees in the financial collapse
by a management led by (Sir) Reg Goodwin, knighted for his services to the
banking industry (!). Goodwin was noted for his bullying and his penchant
for risk and huge bonuses. He left, but not without taking a fat pension
and handshakes from the RBS board, as have all the senior executives of the
banks when they have been asked to ‘step down’ following a
scandal. Nobody has been charged or convicted in a criminal court for any
actions by the these global banks since the scandals and illegal activities were
revealed</STRONG></FONT></DIV><FONT size=4><STRONG>(see my previous post, <I><A
href="http://thenextrecession.wordpress.com/2010/09/15/banking-as-a-public-service/"
rel=nofollow>http://thenextrecession.wordpress.com/2010/09/15/banking-as-a-public-service/</A>
</I>and <I><A
href="http://thenextrecession.wordpress.com/2012/11/19/marx-banking-firewalls-and-firefighters/"
rel=nofollow>http://thenextrecession.wordpress.com/2012/11/19/marx-banking-firewalls-and-firefighters/</A>)</I>.<BR><BR>On
the contrary, the banks have shrugged off all these scandals. JP Morgan
continued to run a risky trading outfit out of London engaged in outsized trades
in derivatives, the very ‘financial weapons of mass destruction’ (to use the
world’s greatest investor,Warren Buffet’s term) that triggered the 2008
crisis. The ‘London whale’, as it was called, eventually lost the
bank $6bn! And remember, this was in 2012, not 2008. The main
trader, Bruno Iksil, told his senior executives that he was worried about the
“scary” size of the trades he was engaged in. But they ignored him.
And the US supervisors of the bank, the Office of Comptroller of the Currency,
supposedly now closely monitoring the banks, also did nothing. By March
2012, the trading losses were mounting and made public but still JP Morgan’s
chief executive Jamie Dimon said that the matter was just <I>“a tempest in a
teapot”.</I><BR><BR>This response was typical of bank management. Bob
Diamond, the former head of Barclays, eventually sacked over the Libor scandal,
but only because the Bank of England governor, Mervyn King insisted, made the
statement that “<I>For me, the evidence of culture is how people behave when no
one is looking”</I>. Exactly, and it is clear what the banking culture is,
namely to use customers money, taxpayers cash and guarantees and shareholders
investments to try to make huge profits through risky assets and then pay
themselves grotesque bonuses. And nothing has really changed. Only
this week, the head of Barclays’ private wealth management section was sacked
because of <I>“cultural shortcomings”</I> in his section. Apparently, a
secret report had found that the bank engaged in getting <I>“revenue at all
costs”</I> and employed “<I>fear and intimidation”</I> on staff to do so.
This report had been suppressed by the head of the division, who was a close
ally of Bob Diamond.<BR><BR>And that’s still not the end of it. It has now
been revealed that during the financial collapse when Barclays was threatened
with partial nationalisation, that the Barclays board loaned money to Qatar who
then invested in the stock of the bank to the tune £12bn. In this way, the
bank avoided state control by issuing more loans! It is still not clear
what “commissions” were paid to Qatari investors. Dexia, the Belgian bank,
eventually forced into nationalisation, also tried the same trick in 2008 and so
did the rotten Iceland bank, Kaupthing, which ‘lent’ money to a Qatari royal who
invested it back into the bank. The Qataris took ‘commission’ and if the
shares were worthless, it made no difference to them. It just added to the
losses of the bank and to the cost to the taxpayer in any bailout.<BR>Nobody has
been charged for these immoral and probably illegal activities. Instead, what
has happened is that rank and file bank workers, most of whom have not been
involved these scandals and risk taking ventures, but just do work in back
offices or at counters, have been sacked in their thousands to reduce
costs. And more jobs are going each month.<BR><BR>The extent and nature of
these continuing scandals have forced even supporters of ‘free markets’ and the
City of London, like former finance minister under Thatcher, Nigel Lawson, to
call for the full nationalisation of RBS! The bank is already 82% owned by
the taxpayer, but that means nothing because the taxpayer has no say in how the
bank is run, what bonuses are paid and what the bank does with deposits, loans
and investments.<BR><BR>That’s because the government does not ‘interfere’ and
stays at ‘arms length’, waiting indeed to reprivatise the bank as soon as
possible. It has not done so, so far, because RBS shares remain so low
that the taxpayer would lose something like £30bn on its original purchase of
shares. However, Lawson now says, that far from privatising it, the bank
should be fully nationalised and the government should intervene in the bank to
<I>“turn it into a vehicle for increasing lending to business”</I>. Lawson
went on to say that the banks ‘talk the talk’ about conducting themselves
properly from now on but behind the scenes they apply huge lobbying to avoid any
further regulation or increased liquidity ratios and risk control.<BR><BR>As we
have seen, that lobbying has worked, as the G-20 financial stability board has
backed down and relaxed and delayed tighter regulation (see my post
</STRONG></FONT><A
href="http://thenextrecession.wordpress.com/2013/01/07/banking-business-as-usual/"
rel=nofollow><FONT
size=4><STRONG>http://thenextrecession.wordpress.com/2013/01/07/banking-business-as-usual/</STRONG></FONT></A><FONT
size=4><STRONG>). Lawson commented “<I>I don’t think the government needs
to be frightened of the banks in the slightest. One hears from time to
time of threats that they will up sticks </I>(i.e. leave the UK)<I>, but that’s
a load of nonsense”.</I><BR><BR>Behind the scandals lie the more significant
questions of: what are banks for and are they adding any value or service to
society? This issue is hidden in a veil of complexity by bank
boards. They try to claim that they are such complex institutions that
only extremely highly paid and clever people can run them. Well
apparently, that has not worked out so well. The accounts of the major
banks are, in the words of one of the world’s leading banking analysts, Meredith
Whitney, <I>“incredibly hard to read”</I>. And yet as Whitney says, it’s
not really that difficult; <I>“after all, banks make money by selling products
and the margin on those products, same as any other business”</I>.
<BR><BR>But we also know that these overpaid bank executives have no idea of the
fire they are playing with when they push the resources of the bank into various
risky trades ans assets. The financial regulators try to work out how to
measure the risk involved in holding various assets like loans, mortgages, bonds
and the derivatives of these assets. But a new report by the world’s bank
regulators found that there was not just not enough information to judge whether
a bank has taken on too much ‘risk’ or not (</STRONG></FONT><A
href="http://thenextrecession.files.wordpress.com/2013/02/bcbs240.pdf"><FONT
size=4><STRONG>bcbs240</STRONG></FONT></A><FONT size=4><STRONG>). They
reckoned that banks’ risk measurements could be off by as much five times!
God help us.<BR><BR>Recently there has been a debate among mainstream economists
about whether the finance sector adds any value at all to an economy. In
the US, the finance sector ‘contributes’ 8% of all income in the economy.
In a new paper, two scholars charted the rise of the finance sector, which,
surprise, surprise, was not in more lending to industry or households, but in
creating mortgage backed assets and other exotic financial instruments to sell
toxic rubbish to each other (</STRONG></FONT><A
href="http://thenextrecession.files.wordpress.com/2013/02/growth_of_modern_finance.pdf"><FONT
size=4><STRONG>Growth_of_Modern_Finance</STRONG></FONT></A><FONT
size=4><STRONG>). What the study shows is that much of banking has not
been to help industry and households, but to engage in ‘trading’, which
basically means, in the words of Michael Lewis book, <I>Liar’s Poker</I>, the
<I>“ripping off of fools”.</I><BR>Financial markets are inefficient in
allocating credit and savings (<I><A
href="http://www.voxeu.org/article/why-financial-markets-are-inefficient"
rel=nofollow>http://www.voxeu.org/article/why-financial-markets-are-inefficient</A></I>)
and the finance sector is inherently unstable and liable to collapse (Minsky,
Shiller etc.). Above all, far from adding ‘value’ to an economy, the
sector reduces the available resources for productive (in the capitalist sense)
investment and instead channels surpluses into fictitious capital and much of
these capitals are ‘value destroying’ activities.<BR><BR>The neoclassical
economist, John Cochrane, has sort to argue that this is nothing to worry about
because eventually such investment is eliminated by the rational forces of the
market (</STRONG></FONT><A
href="http://thenextrecession.files.wordpress.com/2013/02/size_of_finance.pdf"><FONT
size=4><STRONG>size_of_finance</STRONG></FONT></A><FONT size=4><STRONG>).
The problem is, even if the market can allocate resources ‘efficiently’ as the
neo-classical school claims, the experience of the rise in the financial sector
in the last 30 years is that it can take an awful long time to do it. And
then it only ‘rationalises’ these fictitious investments ‘out of the market’ by
financial collapse and the ‘collateral’ destruction of productive capital and
labour too.<BR><BR>What the continuing banking scandals show is that the global
banking system has not really changed its culture or its <I>raison d’etre</I>
and it cannot. It must drive the bulk of its activities towards maximising
profits and that means towards areas that have higher risk and not towards ‘low
margin’ loans to industry of households. And the so-called regulators
cannot reverse this. They have been lobbied and badgered by the banks not
to ‘restrict’ their activities ‘too much’ or make them hold too much cash or
capital to cover losses because that will not make them profitable. And
commissions set up to recommend drastic restructuring of the banking sector
(Vickers in the UK, Volcker in the US), like breaking them up so they are not
‘too big to fail’, or dividing banks into retail and investment operations, have
been shelved or ignored. Nigel Lawson’s solution remains the only
practical and effective way of turning the banking system into a service for
society not a value-destroying monster. See the pamphlet by the UK’s Fire
Brigades Union on the arguments for the public ownership of the banks
(</STRONG></FONT><A
href="http://thenextrecession.files.wordpress.com/2012/11/s-time-to-take-over-the-bankslr.pdf"><FONT
size=4><STRONG>s-time-to-take-over-the-BanksLR.pdf</STRONG></FONT></A><FONT
size=4><STRONG>).</STRONG></FONT></DIV></DIV></DIV></DIV></FONT></DIV></BODY></HTML>