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 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!

Like Dinosaurs

The rotten culture in banking has existed for decades. And elements of it will remain until all the people who were part of that culture have gone and the legacy they left has been forgotten. To be fair, the banks do seem to be making real efforts to reform from within. But re-education of staff and even elimination of those who don't share the new values, won't be enough. Nor will costly re-engineering of business models, improvements to financial reporting and replacement of legacy IT systems.
Culture in corporations is generational: managers recruit people who are like themselves and train them to behave in the same ways that they do.
It will be a long, long time before the desidered integrity really exists at all levels and in all areas of banking. But even that may not be enough. Trust is fragile. Once lost, it can never really be regained: some suspicion always remains.
The 2008 crash and its aftermath is already the stuff of legend and " evil banksters caused the crash" is rapidly becoming a folk meme.
Will people ever really trust banks again? Perhaps we need an even more radical transformation of banking.
Perhaps the banks we have now will, like dinosaurs, die out and be replaced with new, sleeker breeds better suited to the needs of customers in the twenty-first century.
Regulation cannot solve all the problems of banking. That will only come as a result of the long, slow process of culture change. Yes, they have betrayed our trust, but in trying to prevent them from hurting us again, we may render them completely useless.

Can it happen?

Given Biblical references to improprieties, the 14th century shutdown of Italian banks and bankers for a few hundred years, the Shakespearean references to "pounds of flesh" and the record of banks over the past three hundred years as presented on this site, there seems to be little hope that banking culture will ever change unless we develop a new breed of humans - something inocneivable on the face of this earth, saldeck.

I believe the point was made that while I was still a teenager, I'd received a lecture in principle - something that was once called an object lesson - which drove the point home that overlooking diligence and propriety at the cash register drawer of my employer was "taking my money from my and my family's pockets" as his actions described it without words.

Have bankers - except for a few saints (and, how frequently do they appear?) in the business - ever considered running their business in a way to earn trust from the public? A pile of money or a single coin is a temptation to too large a segment of the population, to the point where there is no room for people with purer thoughts in its presence; they would cramp the styles of others by example.

The two studies cited at the beginning of the Central Banks/Monetary Policy series should be enough documentation to point out the culture of bankers. By this time in our evulotion, human behavior should have been proven, and we should see it as inexorable. If that were not enough, other events prove that our culture is one where humans and money cannot stay separated for long when, for instance, tons of dollars disappear in the desert with no accounting and no lasting hullabaloo. Then, it seems, everytime the stream of money passes banks some of it works its way into pockets of well-dressed unproductive executives, nobody says a word, or billions of dollars disappear every year in credit card fraud and it's written off as an expense, not worth the effort to recover or prosecute the criminals.

Money is the "cause" of 99.99% crimes, passion causing the 0.01% others by O&G undocument figures. Most of the last group can be excused if we value passion.

Not much chance of changes occurring in banking. We'll have to grin and bear it as the charge card operators do.

It Can Happen

New players will enter the banking industry, especially online where entry barriers and costs are much lower. New initiatives to channel investment to businesses will appear. New ways of enabling people to save will be created. Even new ways of financing traditional purchases such as houses will be found. And the big bank's stranglehold on payments may even be broken: there are already ideas for the payments network to be made more accessible to smaller and newer players, and alternative ways of making electronic payments without going through banks.
In the end, banks as we know them may simple become redundant. In which case, do we really care whether or not they recover?
Maybe what we will eventually do is switch off their life support and let them die in peace.

These, And Other Hilarious Answers...

My father was fond of describing it this way--- great people pioneer and frontier to find the path over a mountain. Why? Because it is there and that is what they seem predisposed to do. Behind them are the settlers who make a path so that up and down the mountain gets easier each trip and these people know-- there will be many ups and downs. In carts pulled by slaves or donkeys are pariah. They do not pioneer or frontier anything. They do not make paths. They do not believe in down and are willing to kill off anyone who says otherwise. When the top of the mountain is there ahead, they kill off anyone anyway and run to claim it. They are on top and below is a well-worn path and nothing to slow or stop future pariah who achieve the peak faster and faster and faster but never better, wiser, able, capable or responsible. The whole rest of the world suffers when this happens but you know what? Sooner than later there are too many on top and no resources to feed or care for them in sight. Then they die there.

100% of all financial law is enacted after the abuse and the exploitation is generally tapped. Pariah move on until there are no more resources. And then they die.

Online, Saldeck, pariah worshiping algorithms rule on top today. Algorithms are math that dull down every variable until broad predictable complacency exists. Then there are no more resources. In as much as financial pariah seem invincible, they too have run out of resources. There is good reason to tie these two sectors together, they will fall together. I would wholly doubt that "new" bankers will be any better because they don't know of the past and the Public is naive again. There is also no currency coursing anywhere. For the next 30-40 years, there will be great trials and incredible errors followed by woe because there are decades of people who are clueless about WHY there must be ups and downs. During those 30-40 years, there will be stealth growth caused mainly by very savvy people who do know history, are older, and more likely to strike like snakes than to broadly teach the masses. A wise person studies those strikes because they are executed more as art than war. Great burglars study stupidity.

I'm not being negative. History may very well become THE subject everyone must learn. For sure, banks will never be as powerful as they are today, nor self-destruct this violently. Ying. Yang. When out of sync go--- BANG. The overkill of algorithms will actually be a self-inflicted wound because ultimate complacency is a cemetery.

The Path Will Appear

Pariah's "safe path" but never better, wiser, able, capable or responsible. Failure of "safe path".

The story of the financial crisis is a story of the failure of safe assets. That is why it was so traumatic. People expect to take losses on risky investments. They don't expect to take losses on safe ones. Yet we are still trying to make the financial system "safer" and encourage investors to invest in "safe" assets. When we will learn that safest investment is a risky one, and the most dangerous investments are those that are believed to be completely safe?
And it is also a warning of the consequences of regulatory arbitrage. The fact that the US and European banks had different regulatory regimes created a golden opportunity for unregulated institutions to exploit, with catastrophic consequences. Yet the US, the UK and the EU are still devising their own systems of regulation with scant regard for international consistency. When will we learn that an international industry requires international regulation?

" Great people pioneer and frontier to find the path"

Change can come from anywhere where people are willing to take things into their own hands and catalyze it.
Take the End the Fed movement, for example. It has achieved nothing but hot air politically. But its anti-central banking dogma led to the creation of radically innovative technologies such as Bitcoin and the blockchain. And while I don't think Bitcoin alone will ever stand as a replacement for state fiat money currency, I do think that the technologies open up a whole new spiral of exciting new technological and social possibilities.
Computing has already done far more to transform the fabric of society in the 21th century than any government program or decision. People who wish to find the path and to see social change in the world, and particularly radical social change - from eradicating poverty, to curing diseases, to increasing community cohesion, to stabilizing and regulating the economy, to creating and improving infrastructure - will increasingly cease following political leaders and trying to win elections, and instead will start to code and build technological solutions to problems themselves.

The Powell Manifesto

Into the 1960s and 1970s, American government action on behalf of citizens, consumers and workers seemed irrepressible. But it swept resentement amongst multi-millionaires who felt unappreciated. Most top executives felt beleaguered. And something called Powell Manifesto inculcated conservative principles and thinking in all areas of American life and culture. It was the Revolution by and for the rich, the powerful forces that brought the gross inequality we are now seeing.
The Powell Manifesto turned out to be much more powerful and much more effective for crony capitalists than the Communist Manifesto was for workers. The latter was more of an idea, or philosophy. The Powell doctrine came to fruition with the use of obscene sometimes fraudolent profit, mainly through the exploitation of workers.
And the GOP continues to target immigrants and non-whites. You have to have scapegoats.

What Is To Be Done With Banks?

Just one of the many things:

Prohibit transactions with tax havens.

Banks must be prohibited from engaging in any transaction with a tax haven. Failure to comply with the prohibition must be subject to very heavy sanctions and heavy fines.

It is easy to get distracted by other important events in the last week by the enormity of the information that has been released in the so-called the Panama Papers, which document araund 40 years of secretive banking deals, tax dodging, criminal money laundering and political corruption. The information shows that "major banks are big drivers behind the cration of hard-to-trace companies" in tax havens and once again demonstrates the urgency of root-and-branch banking reform to wipe out their non banking businesses.

It is interesting but not at all mysterious that there are no Americans named in the Mossack Fonseca documents. I think the reason is simple. US law so cleary favors the rich that they have no need to go offshore to form shell corporations. No need to go to Panama or Switzerland. The US is now the best tax haven on the planet.

Also interesting. . .

Mitt Romney ran for President even while he demonstrated lack faith in the US economic system by sending his couple of hundred millions to a safe haven outside the US. That, if anything, could sour enough voters to boost the other candidate into the oval office.

Now, if Trump jumps over the hurdle and qualifies for a run at the golden fleece and the oval office, and he, too, is revealed as a seeker of safe haven outside our borders. That would make two Repubicans in a row unable to show confidence in the country they seek to represent by abandoning it and seeking to do business elsewhere - even as they preach the hollow gospel of believing in America. Don't do as I do. . . Followed by those mocking hollow echoes in the empty hall.

The rest of us are urged to show our loyalty, while the top echelon totes their money bags elsewhere doing their darndest to escape unscathed.

If the wealthy keep it up, the American voter will have no faith whatsoever in people with money since those people have so little confidence or rspect in the nation from which they mined their wealth.

Missing the forest for the tree's

Yes, banks are/have been a problem for a long time.
Like most pandemics, it has spread to other sectors, and it has spread quickly.
This is no longer 2007. The amount of M&A activities that have occurred during the past 8yrs has no historical comparison.
We are no longer at the mercy of just predatory and reckless banks. The M&A terror that has resulted from easy nearly free financing will be a scourge for decades. Even if predatory banks were somehow instantly and miraculously reformed, the damage caused by creating these major conglomerates, that have little if any competition, have resulted in a market where they charge what they want for food, medical, and transportation (think UPS/FedEx for example). They have also have become so powerful as to demand that smaller companies that service them must "open their books" so that they can dictate what these small companies can charge them for the service they provide them.
This is not limited to a USA, European, Asian etc problem. Globalization has made it a planet wide problem.
Just look around. A mere 15 yrs ago I serviced ~30 independently operated hospitals. Today, ~80% of those facilities are owned by three corporations. Food manufacturing and chemical manufacturing are experiencing similar trends.
When a very few own everything, It doesn't matter too much to them if the economy sours. They may lose some wealth but much of that can be recovered by simply raising prices. Don't count on politicians to protect us.
Forget about the great economic works that were written in a bygone age. I doubt anybody alive today, whether they be 1yo or 90yo will find them useful.
If you must read something from a bygone era then read about the lost art of being self sufficient or having a marketable real skill that V_L has so diligently advocated. As he has repeatedly said, history has proven that this is your best hedge for survival. Knowledge about some 18th or 19th century macro economics professor, though interesting, will NOT feed your family.

Let Us At Least Survive

I can only agree with Veteran_Lender.

Lisbon, April 7 2016. Mario Draghi said:" Our economies are still marked by significant vulnerabilities which need to be swiftly addressed. One key issue in this respect is youth unemployment, as it prevents young people from playing a full and meaningful part in society. Indeed, despite being the best-educated generation ever, today's young workforce is without jobs. This seriously harms the economy, because these people who are willing but unable to work are being prevented from developing their skills. To avoid creating a lost generation, we need to act quickly".

A lost generation has already been created, Signor Mario Draghi. Let's take a look.

A third of Americans under 35 now live with their parents and half of them spend half of their incomes servicing debts. You are not likely to get married if you are living with mom and dad, that's for sure, but soon enough, we will see three generations under one roof again, out of economic necessity. We will also see more couples with kids all in one room. Poor people worldwide already live this way.

The crappy recovery is all part of the plan just like it is in Europe, just like it is in the US, just like it is in Japan, just like it is everywhere the western bank cartel and their globalist colleagues have extended their tentacles to expand their corporate extortionist empire.
Let's not dignify this phenom by calling it conspiracy. It is not a conspiracy, it is plain-old shock therapy, the likes of which the neoliberal economists and their miscreant IMF friends have been using for decades. Create a bubble with easy money and low rates. Burst the bubble and precipitate a crisis. Transfer more of the national wealth to the parasites at the top of the foodchain. Continue to move more of the wealth offshore to the Caymans without adding even one lousy dime to the public coffers.

The ruling elite and their political friends are waging a vicious class war against people whose only aim is to make a decent living so they can provide for themselves and their families and avoid spending their waning years in a makeshift tent under the freeway overpass.

Is that too much to ask? Let us at least survive.

We will do more than just survive...

All of Wall Street has a massive bet that Trump won't win. Cruz cannot sit in the U.S. White House by Constitution. Clinton does not have enough actual voters to win and is a National Security threat if she does. Before the American elections will come the end of banks, stock markets and financial tyrants by their own doing. Millions of Americans were compromised by e-Bay's failed Spring Update (figure not validated just estimated). Changes favor the Chinese importers and block our arbitragers. Bizarrely, the move will collapse traditional retailers... Both e-Bay and big retail don't know who their customers are. The assault on Trump is only giving him more supporters. The assault on customers bites the feeding hand off.

The most important thing is not the history repeating but those who are aware of the history and those folks hedging in non traditional ways to counter any subsequent rekindling of new world order after it falls. Be realistic... Billions around the world know now how to make do in impoverished conditions, the rich do not. They will more likely attempt aggression met by survival. Survival always wins.

Historic day yesterday... Volcker Greenspan Bernanke and Yellen met together. The IMF is under too much pressure for Legarde to wiggle out of. The Panama Papers will pressure garbage leaders to be revealers, tuition repayment failure will rock governments. It's the wrong time to be claiming you are a global anything.

Sorry for the lack of input on here.... One saves his own skin so he has skin in the game. The rules changes, the skills haven't dulled at all. Perhaps some will say they are sharper now.

Mom, You Are A Bank

My mother is a bank. She really is.
Her day job is teaching piano, much of it to teenagers in secondary schools. These teenagers' lessons are paid for by their parents.
She invoices them for 10 lessons at a time and they are supposed to pay for the whole series of lessons before the series starts.
In practice, hardly anyone does. No doubt because of their own financial difficulties, the proportion of people who pay late is rising, as is the proportion of people who don't pay at all.
Every single one of the parents who pays late is expecting her to provide them with interest-free credit. Which is why I say my mom is a bank. But unlike a normal bank, she is expected to provide this credit interest-free. Parents get very angry if she starts imposing interest on late payments. If she upset parents, they may take their business elsewhere and student numbers are falling at the moment because poorer parents are finding it difficult to mantain their childrens' musical activities at the moment.
So she could end up even worse off if she insists that parents have to pay up front.
She is by no means alone in this. Most small businesses are forced to extend lines of credit interest-free to customers, particularly large and rich ones who have the leverage to sqeeze them out of business if they complain. The majority of small businesses, therefore, are unofficially acting as banks.

Businesses like hers depend on trust- trust from the parents that their child will be properly taught and trust from her that parents will pay in accordance with agreed terms and conditions.
If one side fails to abide by their obligations, that trust is broken. But my mother resists because she loves the work she does and believes that she delivers real value to her students.
The thing is she does not want to run a bank. She does not want to make money by borrowing short and lending long. She wants to teach piano and be fairly paid, on time, for what she does.

If the present trend-increasing volumes of late and failed payments continues, it will not be possible for her to continue.

The Forest Through The Trees

Lost on my children are the lessons drilled into me by my father. One is a very very very good one.

My father always said-- never judge a transaction or lack of one by the transaction itself. I was clueless as to its meaning until I became a lender. One time in the late 1980's... I noticed a trend in payments... 100% of them were the minimum. Now that may not seem important except that the portfolio was huge, so consistency was an anomaly and a flag. My boss respected me so I reported the situation and he listened. I suggested that to have 100% of payments all the minimum, that our best customers were hurting, our middle-grade customers were skirting and our worst were kiting. His reflection-- what then? I started making calls to our better customers and got disturbing replies. They were more than hurting... within two months the bankruptcy notices came. It was astounding-- great solid customers filing after tapping absolutely everything hoping to outrun prolonged stagnation. The crisis destroyed the portfolio and I went from a profit center to an allocated expense and legal.

IF I had collected as suggested, we would have lost the whole portfolio but I didn't do that. I accepted payments on principle outstanding and let those monies chunk down with making a penny off them. In fact, I incurred expenses for the handling. One day-- the economy turned and plenty of hurting damaged people suddenly found footing again. They came back to me and even though I had to charge some pretty high rates based on the condition of their credit, the mere fact that I had demonstration validated my approval to extend them credit again.

You should realize that we are at about 11:57 on the clock ticking away this corrupt era. The bottom falls out as the bell tolls on the criminal element. That will only leave victims. Be it credit borrowers who struggle but pay what they can or parents of piano students, demonstration is the key.