- Could our society implode on the race issue?
- Business becomes the villain? Is Hollywood Making money from Financial Crises?
- Limited best seller Inside Job: The Looting of the American Savings and Loans
- Now, AT&T, the once proud flagship of American commerce uses outright fraud to boost earnings
- Another New Thought: Helicopter money and fiscal rules
Banks’ "culture" squeezing back into headlines.
Veteran Lender and Saldeck have been presenting thoughts on banks and their economic impact globally. Good reason is on their side. I culled through some of the papers of a few years ago and fell upon the Vicker’s Report of October, 2011 just about two weeks ago while moving one pile from one side of the room to another. The 356 paged report and responses seemed too timely a topic to call for mothballs, although it did rest undisturbed for a few years.
Monday, Charles Goodhart and Dirk Schoenmaker had an article published on the voxeu.org website, “The US is beginning to dominate global investment banking: Implications for Europe”, which referenced an article with a similar name, ”The united States Dominates Global Investment Banking: Does it Matter for Europe?” which they submitted to the Bruegel Policy Contribution publication and it appeared in the March 2016/06 issue. Referenced, of course was the 2011 Vicker’s Report which proposed “ring fencing’ to protect the UK depositors and taxpayers from the “Too Big” failures which burden the innocents. (Incidentally, the Goodhart, Schoenmaker paper introduced a new term to O&G, “bulge bracket “ banks in referring to the top five US “investment” banks which now include three formerly commercial banks JPMorgan Chase, Citigoup and Bank of America.)
Yesterday, March 31, Reuters money site had an unobtrusive article by Dan Freed, headlined, Wells Fargo plans quiet assault on Wall Street for glass tower, detailing plans for “the world’s most valuable bank” = which attained that distinction according to Mr. Freed, by not relying “on risky trades or complex derivatives to turn a profit”.
And, today to add affirmation to Veteran Lender’s post, “When corruption unravels” on the ”Interest rates, Money, Stalled Recovery and the Fed” thread It was revealed again on a Reuters site, “Business”, that Deutsche Bank and JPM Chase are in US government “crosshairs over dealings with Malaysia’s 1MDB”, whose “advisory board is chaired by Prime Minister Najiib Razak” who “denied any wrongdoing and . . has not taken any funds for personal gain. . .”
The Goodhart/Schoenmaker article comes into play by naming Deutsche Bank among others subject to the EU’s European Stability Mechanism which presents “limits to the mutualisation of losses. e.g., via deposit insurance” in the highly risky global investment scene. The entanglements could be heightened by the indistinct relationship of banks to the loose relation between banks and the varied sovereignties of the EU, now spotlighted due to the awkward financial/political net which leaves several questions of authority and empowerment unanswered in the EU mechanism. One suggestion cites a need to revisit the Maastricht Treaty; the flaws are of importance in view of the fact that any restrictions imposed on the four or five European banks in the now second tier of global banks headquartered in Europe may restrict the competitive opportunities of remaining European banks.
It would appear that eventually the UK would be involved in a quandary to one degree or another similar to the European position, despite the “ring-fencing” proposal in the Vicker’s report which 4 years later is in the making or possibly fully operational – O&G is uncertain of the current status. Risk would be assumed one way or another to affect the depositors/taxpayers.
An ongoing critique of the massive Vicker’s Report by Timothy Edmonds who reports that legislation was passed “in the form of the Financial Services Act 2012, establishing a “new regulatory framework for the industry. Despite the efforts of Parliament and the Vicker’s Report, UK banks have discovered certain stains on the bodice of the “high profile banking organizations" which prompted the formation of another body, the Parliamentary Commission on Banking Standards, to investigate among other things, banking culture (“morals” in Edmonds’ term). The Vickers Report had an effect on the subsequent “Banking reform act of 2013".
What does this all mean? Considerable risk is involved in the international investment scene and carryover to the smaller community banks are feared. As always, exchange rates are involved: with Japan and China trying to maneuver themselves into a favorable position unilaterally; the U$D slipping somewhat lately; and gold bouncing around in an uncertain way (although it is on an uptrend); and nothing at all certain about consumer sentiment, retail sales or international trade - there is reason for uncertainty. With such a threatening list, anything is liable to happen between production and the other end of the distribution/retail pipeline, which would leave a considerable commitment hanging in limbo, something the so labeled economical "soft patch" could not tolerate and bring on another taste of instability the globe could not handle. That threat is transferred, as always, to the innocents who should be protected from those unfavorable results of savage competition and the unending appetite for wealth that has become dominant to the point where governments could be losing control of their responsibilities, i.e., in currency, and the popular expectation of central banks protecting taxpayers and casual investors.
There is a fiduciary responsibility on the part of banks, who supposedly operate by virtue of a license issued by governments – which in turn conveys responsibility back to governments and ultimately the constituency – which everyone seems to forget In the blinding gleam of assets piled high and dull liabilities forgotten that cast banks in the dominant role when the issue of who can support whom arises in time of stress. For instance, should the big five be confronted with demands they are unprepared to meet. There is little likelihod the Fed would be able to rescue them or possibly the global economy. Global investments are of such a magnitude. Issues of jurisdiction also present, along with relative responsibilities – home country or the site of the difficulties, etc. Many of the international nations – potential investment opportunities - are unprepared to deal with slow-down or collapse. Should American depositors or taxpayers be held responsible for the risks facing Too Big To Fail? Should the US Treasury or the Fed accept any part of global responsibility as they did early on in the current yet unresolved crisis? What if US institutions failures exceed bail-in limits this time around? What is the likelihood of another multiple of fifteen or twenty trillion dollar set of QEs toppling the flimsy cart supporting the load?
Though the US, and other nations – Germany and the UK among them – have made attempts to backstop the “bulge bracket” banks, are they adequate? What steps have been considered for resolving legal issues and the stance of US chartered banks? Does each failure regardless of size then fall under the jurisdiction of the World Court? And, there will be failures – along with costs which will be passed along to depositors. We'll be back again discussing the need for resolving insolvency by way of resolution, breaking up the Too Big To Fail and the Volcker Rule. All of them a must scenario and neither exempt from the desperate need.
After Picketty, there should be little question who will benefit from the financial dalliance of US banks in global investments; and. no question who will be expected to finance the deficits. Add to this the prospect of continued derivative growth and the development, under way now, of blockchains, the replacement for derivatives should their growth slow a new generation of assignats and mandats as Veteran Lender implies in his post.
We should know now that these new devices are, at a minimum, as dangerous as derivatives, those contracts with no intrinsic value which allowed true currency to be extracted from circulation for use as collateral and deplete the means of patronizing retail, and suppling capital (so utterly deficient globally), to compensate dealers for their skullduggery, and thereby upset the required balance of circulating currency to be short-changed and effect all markets adversely. This is proven in reviewing the fluctuating value of bitcoins - from zero at inception to an exponential $1100+ somewhere before or at 2007. (Forgive me for not verifying the reference to that charted event; the document has been misplaced among growing mounds of literature.)
To the gamblers willing to counterfeit replacements for currency, going in to the adventure is exhilarating, as is escaping responsibility when the scheme collapses. But, it's an exhilaration without penalty for them. Not so for those victimized.
The mix we are approaching today was discussed some years ago in the tsunami when it was predicted that there would be a need for globally active banking, but the probability then seemed reasonable that US banks would not be among the candidates for the job. Big mistake in presumption on the part of O&G!! The possibility that the US would take over the lead in international finance was not considered since they behaved irresponsibly in the matter of derivatives and the clean up that followed. Apparently those involved in the fabrication, marketing and sales are not concerned inasmuch as they appear to be held safe from harm by not much more than the very arrogance that allows them to deal with economies anew armed with no more than the US banking cultural attitude (morals or lack thereof). This is a great lesson from economists rather than for economists! They deal with a blanket amorality on a daily basis that smothers defenseless truth!