Bob Diamond, Barclays’ chief executive officer, no more said something as inflammatory as “drop dead” to the UK Treasury select committee yesterday than Gerald Ford did in a 1975 speech refusing to extend financial assistance to save New York City from bankruptcy. But the substance was every bit as uncooperative.
Despite its artful packaging, Diamond’s presentation was yet another reminder of the banking industry’s continued extortion game, namely, that they can take outsized, leveraged risks and when they work out, pay themselves handsome rewards, and when they don’t, dump them on the taxpayer. And they’ve only been encouraged to up the ante. Not only did they get to keep their winnings from their last “wreck the economy” exercise, no senior executive was fired, no boards were replaced, and UBS was the only major bank required to give a detailed account of how its screwed up so badly as to need government support. And before you tell me Barclays was never bailed out, tell me exactly how well it would have fared had any other major UK or international bank failed, or had the officialdom not provided extraordinary liquidity support when interbank funding dried up.
As we have noted often in the past, the very idea that employees of major banks are entitled to even as much as average wages is a stretch. If the true cost of their operations was priced in, they’d all be out of business. By any standards, they should be paying all the rest of us to be allowed to do so much damage with so little interference.
Andrew Haldane of the Bank of England goes through the math. In a March 2010 paper, he compared the banking industry to the auto industry, in that they both produced pollutants: for cars, exhaust fumes; for bank, systemic risk. While economists were claiming that the losses to the US government on various rescues would be $100 billion (ahem, must have left out Freddie and Fannie in that tally), it ignores the broader costs (unemployment, business failures, reduced government services, particularly at the state and municipal level). His calculation of the world wide costs:
….these losses are multiples of the static costs, lying anywhere between one and
five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.
Yves here. So a banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive.
The reality is that banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction. And pointing out in a more direct manner that banks should not be considered capitalist ventures would also penetrate the dubious defenses of their need for lavish pay. Why should government-backed businesses run hedge funds or engage in high risk trading, or for that matter, be permitted to offer lucrative products that are valuable because they allow customers to engage in questionable activities, like regulatory arbitrage or tax evasion? The sort of markets that serve a public purpose should be reasonably efficient and transparent, which implies low margins for intermediaries.
But note the clever positioning by Diamond, per the Financial Times
Mr Diamond acknowledged the public anger towards bankers and the emotion surrounding pay, and admitted he wished he could “make the issue of bonuses go away”.
But he argued it was not possible to stop paying bonuses without severe consequences for the business and the broader banking sector and said it was now time for the bonus debate to move on.
Yves here. This is priceless. Diamond wants the “issue”, meaning the controversy, over bonuses to go away. I’d love to see the “severe consequences to the business” of forcing lower pay on incumbents. Yes, a very few might find be able to raise money from investors. But as John Whitehead, a former co-chairman of Goldman said in 2006 when hectoring Lloyd Blankfein over the firm’s “shocking” pay levels, the firms could afford to lose them. But Whitehead missed the dynamic of the post-partnership era. The partners had every reason to keep pay in line; it was their capital at risk, after all, and overcompensating staff reduced their take. Now the top brass is aligned with the interest of the producers in taking as much from any source they can.
Back to the Financial Times:
“We can’t just isolate bonuses and assume it won’t have consequences,” he said.
“The biggest issue is putting the blame game behind us. The time for remorse is over.”
While Mr Diamond said he would “show any restraint possible” on bonuses, he would not commit to waiving his own personal award, as he and rival bank chief executives did last year.
Yves here. If you believe that, I have a bridge I’d like to sell you. And of course, the excuse is that CEOs like Diamond have no choice, they are forced to do so by competition. That logic sounds remarkably familiar:
For banks, the threat is that if anyone puts their finger on the pay dial, the business will be hurt and by implication shrink. But if you are talking about an operation that is destructive, that’s a good thing. The banking industry is bloated and cancerous, sucking talent and resources out of the rest of the economy and allocating capital poorly (examples include the series of bubbles and busts, the way it has become acceptable for bankers to suck so many fees out of deals that they cannot possibly make sense for investors, as in the case with Goldman in the Facebook funding, the destructive impact of turning commodities into an investment).
And don’t even try the defense that the industry is “innovative” As we wrote in ECONNED:
The dirty secret of the credit crisis is that the relentless pursuit of “innovation” meant there was virtually no equity, no cushion for losses anywhere behind the massive creation of risky debt. Arcane, illiquid securities were rated superduper AAA and, with their true risks misunderstood and masked, required only minuscule reserves. Their illiquidity and complexity also meant their accounting value could be finessed. The same instruments, their intricacies overlooked, would soon become raw material for more leverage as they became accepted as collateral for further borrowing, whether via commercial paper or repos.
But even then, the bankers still needed real assets, real borrowers. Investment bankers screamed at mortgage lenders to find them more product, and still, it was not enough.
But credit default swaps solved this problem. Once a CDS on low-grade subprime was sufficiently liquid, synthetic borrowers could stand in the place of subprime borrowers, paying when the borrowers paid and winning a reward when real borrowers could pay no longer. The buyers of CDS were synthetic borrowers that made synthetic CDOs possible. With CDS, supply was no longer bound by earthly constraints on the number of subprime borrowers, but could ascend skyward, as long as there were short sellers willing to be synthetic borrowers and insurers who, tempted by fees, would volunteer to be synthetic lenders, standing atop their own edifice of risks, oblivious to its precariousness.
Institution after institution was bled dry. Yet economists and central bankers applauded the wondrous innovations, seeing increased liquidity and more efficient loan intermedation, ignoring the unhealthy condition of the industry.
The firms that had been silently drained of capital and tied together in shadowy counterparty links teetered, fell, and looked certain to perish. There was one last capital reserve to tap, U.S. taxpayers, to revive the financial system and make the innovators whole. Widespread anger turned into sullen resignation as the public realized its opposition to the looting was futile.
The authorities now claim they will find ways to solve the problems of opacity, leverage, and moral hazard.
But opacity, leverage, and moral hazard are not accidental byproducts of otherwise salutary innovations; they are the direct intent of the innovations. No one was at the major capital markets firms was celebrated for creating markets to connect borrowers and savers transparently and with low risk. After all, efficient markets produce minimal profits. They were instead rewarded for making sure no one, the regulators, the press, the community at large, could see and understand what they were doing.
Diamond’s candy-coated defiance shows that three years after the crisis, nothing has changed.
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This post is straight clarity, and hits the points.
1. Yves here. So a banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive.
The banks are purely destructive. Their very existence is intolerable. (And all the Bailout’s legislation and other enabling administration should collectively be called the new Intolerable Acts.)
2. They’re not “capitalist”, but quasi-governmental and feudal. So even if their bare existence were tolerable, the continued extraction of private rents and personal “bonuses” is intolerable.
3. All of their activities are pointless and destructive, and so in detail they shouldn’t be allowed to engage in such practices. That’s in addition to their existential obscenity.
4. Their constant extortion threats and frequent intentional economic sabotage should also render them saboteurs and terrorists in our eyes.
The only point I’d add is that a government which has so completely melded with these criminal enterprises, a government which consciously sees its main purpose as to serve these banks (and other big corporations) and help them rob, destroy, and dominate, is a government which has abdicated all sovereignty and legitimacy. That’s true according to common sense and according to any classical political philosopher one cares to consult.
We cannot coexist with the banksters. They’ve proven their totalitarian intent. They’ve proven their absolute worthlessness and their absolute vandal nature. Either humanity or the banks must perish.
‘A banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive.’
Thank you!
It follows that the Federal Reserve — the quasi-governmental cartel which manipulates interest rates on behalf of the banking industry — is also purely extractive and value subtractive, as I have long maintained.
So we agree, I presume — ABOLISH THE FED!
You bet. Abolish all large, centralized structures, since we know none of them do anything but rob and tyrannize.
You two better stay away from the Southern Poverty Law Center. Those paranoid conspiracy theories are going to force them to put bullseyes over you on GoogleEarth.
Blanket statements are always dangerous. Banks can and do provide valuable services. The biggest problems occur when they become so powerful that they can buy politicians in order to circumvent the safeguards in the system. When there is so little control of or oversite of politicians, and no consequences for their actions,; then the varrious sectorsd are certain to be corrupted.
I cannot believe that there has been so little outcry about small banks being destroyed while the TBTF are rewarded for much worse behavior. I suppose that is a consequence of guaranteed deposits. Nobody really cares if the local bank is gutted and turned over to Citi or BAC??
I figure it’s understood that I refer primarily to big banks.
But in fact capitalist banks of any size serve no ultimate purpose other than to further the ends of capitalism, which means in the end the interests of big banks. Small banks are certainly much less harmful than big ones, and given that we’re still mired in this system, to Move our Money from big banks to small independent ones is a progressive step.
But as far as what’s an affirmatively good thing, we should be thinking in terms of cooperative credit unions.
Absolutely. The best small banks are the best because *they are the most like credit unions*.
You can run a credit union primarily to benefit the borrowers or primarily to benefit the depositors. In the smallest banks, the stockholders are in a position similar to depositors.
In the big banks, any stockholders who aren’t also execs are laughed at, while the executives run the banks for their own personal benefit. This form of management capture *can* happen to credit unions, but democratic governance means that the depositors and borrowers can throw ’em out. Stockholders have no control over corporations, so….
The banks are running the show, and it is getting old.
I cannot understand how more people are not outraged by this situation.
I think it will take a dollar collapse to wake the masses. Interesting to see some US state legislatures beginning to put together plan B, with respect to money.
http://www.zerohedge.com/article/virginia-creates-subcommittee-study-monetary-alternatives-case-terminal-fed-breakdown-consid
Keep at it, Yves!
I had a thought yesterday. What relationship does US currency have to what’s in my pocket?
What’s in my pocket? A debit card & a $10 bill. The $10 I’ve set aside as I don’t have a use for it. I know! I’ll go to a gentleman’s club & use it for stuffing!!! Yes, Virginia, there’s still a cash economy out there!
I haven’t handled physical money in more than ten years. I run a mail order business. 98% of my income comes as 16 digit numbers with expiration dates. 100% of my expenses are checks or debit card transactions.
How would gold relate to this? Except as a token, or as barter, I can’t see that it can.
All my money is digital. Why not simply admit the banks are coining digital money & then pass a Constitutional Amendment relegating that power exclusively to the government?
In olden times governments made as many coins as they had physical stocks of gold & silver to make them with. But that hasn’t been true in the US since at least the Civil War.
What am I missing here?
Dave of Maryland asks: “Why not simply admit the banks are coining digital money & then pass a Constitutional Amendment relegating that power exclusively to the government?”
Could it be that this would eliminate the toll booth of the most politically powerful group of rentiers on the planet?
Yes, but if the government simply gave us all daily digital allowances (which is what it would amount to), what would that do for Puritans Striving to Get Ahead?
But then I think, we stopped being Puritan a long time ago. We’re all couch potatoes. What did Janis say? Dialing for Dollars is trying to reach us? Give Us Our Daily Allotment & Lead Us Not Into Gentlemen’s Clubs. I think that’s how the prayer goes. We’ve been chanting it for a long time. Doesn’t say anything about earning anything. The fisherman story was pretty explicit, too. For quality meals, fish, then eat. The IQF stuff doesn’t come close. Maybe the New Testament is finally here? Do you think that will make the fundamentalists happy? Will anything?
We need to update couch potato. We’e all Mindless Monitor Mavens. Or Bizarro Blackberry Bozos. Or Beastly Bluetooth Babies.
@Dave of Maryland says:’what would that do for Puritans Striving to Get Ahead?’
I believe I caught your satire but I’m not sure the following reader did. You are correct in implying that we had the idealistic concept of the so called Puritan (aka Protestant) Work Ethic ingrained into our minds and bodies during that highly regimented time of our lives commonly referred to as school years. And again this leads directly to Mr. Obama saying that folks in the financial sector who earn 50-150k/mo are deserving of what receive because they exemplify the meritocratic ideals of hard work, smart minds and a smart (for gamblers that is) attitude (with Other People’s Money or OPM). And indeed that’s what this whole scenario is about -OPM:
Mortgages–>OPM
Student loans–>OPM
Government debt–>OPM
——-> our children’s future
Granted, life goes around, since the creation of civilization, with the concept of flows around OPM.
But we have all of this debt – which as Nicole Foss at TheAutomaticEarth.blogspot.com is tirelessly pointing out-and it is nothing more than demands on capital-wealth. There is a finite amount of wealth and demands on it are averaging globally, approximately 30:1–>30 dollars of debt for every bit dollar of wealth. That average is increasing with the latest bit of bubble blowing by Bernanke, (look at this fawing bit by Slate.com when he was given the keys to the Bank http://www.slate.com/id/2128630/ a more realistic, although it is humorous, is here http://cache.dealbreaker.com/uploads/2011/01/Greenlight-Q4_2010-Letter.pdf ), Geithner, Obama, et al.
Bye the Bye, I posted the idea of the U. S. as an extractive society on my web site back in July 2010.
http://www.usaliberalism.com/Julyindex.html
Scroll down to the Sunday July 17, 2010 entry.
I have an excerpt from Extractive Economies and Conflicts in the Global South, by Kenneth Omeje which sheds a lot of light on this topic.
Uh oh. More paranoid conspiracy theories–plus, did I really just hear somebody say “Puritan”?
Gasp.
“What am I missing here?”
Yo, Dave of Maryland, here’s what you are missing — although you are certainly getting warm (last several paragraphs in second part of 4-page article total — read it, read it, read it — took me the better part of 35 years to understand what this fellow explains so very deftly in 4 pp.).
http://csper.wordpress.com/2010/08/12/monopoly-money-and-the-international-banking-cartel/
http://csper.wordpress.com/2010/08/20/global-empire-and-the-international-banking-cartel-part-2/
Great posting, Yves, heard Diamond before a questioning MP on CBC news the other day and they kept asking Diamond if he was grateful to the British taxpayer, and Diamond either kept refusing to answer the question head-on, or stated he was grateful to the central banks.
(Now that says it all…….)
Oh no, no–not “international banking cartel.” Forget it. This site is on The List.
I wonder if Yves had a different two words in mind to describe Diamond’s response to non-bankers, but decided that they weren’t printable in a Naked Capitalism headline.
(I certainly did).
Diamond is amazing. The lack of self-awareness is awe-inspiring. Revolutions have been started over less. But we shouldn’t just point at Diamond. He represents all that is wrong with the City, but a lot of people make that happen. You should have seen the Christmas lunches I had last month. 6 bottles of £80 wine for 6 people? No worries. Money is being thrown all over the place and no one cares. That same sense of 2007 (and 1999/2000) unreality has struck again. Too few people have trepidation in the City. We are walking on a tightrope that’s about to be cut.
There are many pissed off people in the UK about this. It certainly isn’t over, no matter what parts of the UK media and political parties (I include the big three – Con/Dem and Labour) want. I’m looking forward to the possible general strike in May. Hopefully the Unions and students can move that one up a bit. Enough is enough.
Focusing on bonuses is the wrong approach in my opinion and treats symptom as cause. The underlying problem is that the banks as an organization face asymmetric risk borne out of gov’t insured money and access to easy credit(i.e. Fed Funds, etc). The underlying problem is further amplified by the non-partnership structure of most banks, again the decision makers are essentially playing with other people’s money, and amplified again by a govt that allows a few banks access to better information and more legal protection than their customers.Faced with this huge bowl of candy what do bankers do? Exercise restraint or as Barry Ritholtz coined it “Bankers are like 5-year-olds ,if you leave them unsupervised with a bowl of candy, they will eat it all and throw up all over everyone”.
So whats the solution?
1)Break up too big to fail
2)Banks that get access to Fed Window and insured deposits have to engage in plain vanilla activities and function as public utilities with principal trading, M&A and such going to hedge funds and true private investment firms
3)Strong consumer and investor protection(I.E. PLAIN VANILLA mortgage contracts and clients pitched products are subject to fiduciary and not suitability standard with less products going private placement or 144, etc)
4)Exchange trading of liquid contracts(CDS?)
I have no doubt if the big boys and girls are forced to operate in an environment where they risk their own funds, have access to the same information as their clients, know they won’t be bailed out by the tax payer, face legal risk for pedaling unsuitable products, they will take prudent risks , do so with less leverage, expose the system to less overall risk. The natural result of all this will be compensation that is more in line with the service and value they provide.
“With the service and value they provide”?
After I get through rolling in the floor from laughter, maybe you can tell another good joke.
The frigging solution is Economic Democracy as opposed to capitalism, which has always been about monopolies on land, capital and knowledge.
Enough of this crap! Ha-Joon Chang completely demolishes Ricardo and Smith in his book, Bad Samaritan, as does many other brilliant, and real, economists, such as Michael Hudson, etc.
Yves,
You often write about “bankers” operating on the assumption that they would be bailed out by the taxpayer. Is there any pre-crisis evidence for this? I doubt it. I think that the complacent attitude of agent investors (including fund managers generally, as well as bankers risking their bank’s money) owed more to the asymmetric nature of their personal returns than an expectation of bailouts. Central bankers were sceptical about the boom, but expected it to end mainly in big losses for the principal investors according to the creditor hierarchy rather than a massive government bailout. I think central bankers saw such losses as the primary stabilising mechanism, rather than a need for them to take pre-emptive and possibly unwarranted intervention. I suspect that the main reason that the crisis ended in bailouts was that, when the crunch came, the authorities lacked the nerve to let the bust run that far before intervening. Note that Andy Haldane was involved in financial stability in the run-up to the crisis, and may therefore not be an entirely objective analyst.
RebelEconomist said: “Central bankers were sceptical about the boom…”
Really?
That’s certainly not the way I remember it.
Despite all the obvious warning signs, what I remember was a heady mood of “market triumphalism” and a great deal of boastful talk about “the Maestro” and “the great moderation.”
As Kevin Phillips wrote in Bad Money, it was “a perverse incarnation of millennial utopianism.”
In that same book, Phillips enumerates 12 separate times that the U.S. government intervened to bail out the financial industry in the period between 1982 and 2007. Given this 25-year history of the government rewarding the industry for its imprudent behavior, I think it’s entirely logical for the bankers to assume this is the way it would continue to work in the future, which of course it did, and still does.
You can’t avoid the permeating “revolving door” between financial world and political one….one permeates the other and the philosophies are operable to protect both.
So much of this is covered the “Pecora Report” done in 1934 derived from the “Pecora Commission”, the then US Senate Committee on Banking and Currency”.
“Banking” is no longer the financier of the “little guy” such as the banks of 50+ years ago. Yes, there are still local banks but they are being crushed by “competition” from the big ones that suck the wealth of individual communities from local credit card users to large locales like NYC or other central banks operating their collection services.
Glass/Steagal was finally destroyed in 1999. That was the end of “banking” in America. Ever since then it has debased into total greed. Banking has changed from a service to an “acquirer of collective wealth” that in too many cases profits only a small elite and following frightened stockholders.
TBTF has completely destroyed this country along with the handmaidens, “elected” politicians. That revolving door facilitated every step of the way. Anybody who doesn’t believe this is totally disattatched from reality.
Without (economic) Justice There Will Be No Peace.
Period.
“You often write about “bankers” operating on the assumption that they would be bailed out by the taxpayer. Is there any pre-crisis evidence for this? I doubt it.”
It was pretty clear during the crisis that they expected their counterparties to be bailed out. Not themselves, of course. They were all fine except for counterparties screwing up the books, and suddenly stingy competitor/funders that refused to roll over repos.
A lot of it is done by the Fed, but in the end if things went really pear shaped, the Treasury would have to bail out the Fed. (yes, there is that printing press, but…)
Then there was the Greenspan put, Bernanke put, S&L crisis, LBO crisis, Asian crisis, LatAm crisis and Mexico crisis which all contained some sort of behind the scenes bailout or sales of assets at cut rate prices to stronger surviving firms. Many smaller individual cases too.
Of course if the US ever actually got the tax bill concurrently with the bailout, then we would have a huge voter backlash to the system. But government is too clever for that. They just run a deficit to finance it and/or it shows up in inflation eventually. So we have US voters that are like the happy early cavemen* whom never understood the link between sex and babies.
* The Geico caveman gets it, however.
Read my book. The 1987 crash (a tidbit not in there: the Fed called the Bank of Japan to have them buy Treasuries big time because even the Treasury market was starting to freeze up. I was in Japan at the time, Sumitomo got the call and the explanation from the BoJ).
Greenspan engineering a super steep yield curve in the wake of the S&L/LBO crises of the early 1990s to rebuild bank balance sheets on the sly.
The Mexico bailout, which was a bailout of US banks (extra Constitutional abuse, Congress had refused to provide funding, Treasury raided the Exchange Stablization Fund to support the peso, when the ESF was solely to support the dollar).
Negative real interest rates in the wake of the dotcom bust (a clear violation of Taylor rule principles)
The Greenspan put generally.
And in reading her book, should you happen to be a Sherlock Holmes fan, you will find out the probable personage on which he was modeled (Hint: something to do with physics!).
I do agree about the Greenspan put – in fact I demonstrated its statistical significance in my blog before the demise of Lehman: http://reservedplace.blogspot.com/2008/06/greenspan-put.html By “bailout” I was thinking more of direct assistance to institutions in the form of expanded LOLR lending and capital replenishment.
Either way, I do think that asymmetric returns were key to the behaviour of agent investors – a bonus in the hand is worth two bailouts in the bush.
Having nearly finished Yves book, I can say about one half of the book is devoted to “looting” behavior of managers and traders and there are a few sentences about expecting bailouts or being a TBTF. So I don’t think you would get any disagreement that compensation practices are by far the bigger driver rather than believing the government will bail out the firm.
After all, if you can extract a few million (or much more) a year, what’s so bad about being fired after 5 years? Do you care that much if the USG saves your job? Would you opt for real people pay and take job security in return? Not likely.
Exactly. As the saying goes/went: IBGYBG (“I’ll be gone, you’ll be gone”)! Direct state intervention is a bit too uncertain to rely on. It might come (a) too late to save your job (b) too late to save your firm or (c) never. For example, a lot of pundits talk as if a bailout of Portugal is a near certainty, but I did not hear of many individuals buying Portugese government bonds when their yields hit 7%.
The appointment of Diamond itself was a slap in the face for anyone expecting reform after 2008. Here was a guy who was gung-ho to buy ABN-Amro in 2007, a bid which if successful, would most certainly have sunk Barclays being appointed as if he had shown prudence and good judgement.
Just shows that regulators, shareholders and government have no control over the bankers.
NYT is exactly right. Diamond got lucky numerous times and now sits there collecting rent and lecturing the proletariat on why we should be grateful. He scored big by stuffing Lehman’s creditors in the insta-bankruptcy, with Fed complicity.
Yves, this is a superb and penetrating short analysis. Thank you.
And since cultural issues seem to have more salience with Americans than economic issues, there’s also this tidbit from a former NC post about one of Barclay’s highly overpaid bankers that it acquired in the Lehman deal.
But the part I found most intriguing about this sordid tale was this from The Daily Beast:
“…my sources tell me that a relatively unknown 49-year-old—Hugh ‘Skip’ McGee III, the former head of investment banking at Lehman Brothers—may now be the highest paid banker on Wall Street. He negotiated for himself a two-year, $25-million-a-year contract to remain global head of investment banking at the British bank Barclays plc, as part of the deal where Barclays bought (for a song) the remnants of Lehman Brothers’ U.S. banking business out of bankruptcy. ‘I’m feeling nauseous right now even thinking about McGee’s deal,’ said one of his former Lehman colleagues….
In addition to the sheer magnitude of the $50-million dollar deal—which feels wholly inappropriate these days—there is at least an appearance of conflict of interest: McGee was one of three Lehman senior executives—along with former Lehman president Bart McDade and Mark Shafir, the former head of M&A—who negotiated the sale of Lehman’s U.S. investment banking assets to Barclays, some six hours after Lehman Brothers Holdings filed for bankruptcy.”
Ah yes, the “run your bank into the ground then sell the map of where the bodies are buried to the highest bidder” strategy. Diamond is right. Nothing to apologize for.
According to Wikipedia, the Lehman acquisition was one of Diamond’s career highlights:
Diamond led the effort to purchase key assets of Lehman Brothers after its bankruptcy, instantly giving Barclays a key foothold in investment banking.
Indeed. McGee will never testify versus Barclays, or himself, of course. Effectively an obscenely well-paid silencing after the deed was done.
Cocoon of lawyers on hand to guarantee the metamorphosis proceeded undisturbed. How else, exactly, is this different than a mob deal?
With the mob you generally know who the top dog is. It is not in the publics interest to know who owns the banks, right? I am including the Fed, which is also private.
The likes of Diamond work for the people that own the Fed and the banks. These folks could chose to employ more humanistic and less sociopathic people like Diamond but they don’t on purpose. We need to take the power to decide who runs corporations and what their purpose is out of the hands of the folks that own the Fed and the banks.
psychohistorian, it’s simpler than you think. The megabanks are run for the benefit of people like Blankfein and Diamond. Whoever is listed as “owning” them doesn’t really own them in the sense of controlling them; control is in the hands of exactly these psychopaths, the executives. Nobody can take it away from them short of (1) an activist national government which isn’t under their thumbs, or (2) a mass bank run or currency collapse which reduces the value of their control to nil.
Ditto.
I agree with attempter and Will (yes, it really is old, centuries old — this battle has been going on for hundreds of years, as have such crises).
Isn’t this Haldane quote enough on its own?
“It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion.”
Why even discuss pay at all? Why play along with the very stalling-tactic the banks have foisted upon us via their media shills, when banks now need to justify their very existence to be allowed to carry on?
If we accept that perpetual GDP growth is an untenable driver of human society, why should we accept money created as interest bearing debt? What, exactly, is it delivering? Why do we need to grow in such a forced manner?
Why should arguments about offering liquidity and the ability to leverage savings for investment and development be relevant given we have the wrong model fundamentally?
We have been tangled up in the frills of bank-arranged window dressing, and do not apply enough effort to analyzing the core driving assumptions that sustain banking, finance and capitalism generally. The exact same crises of the past were survived because we, as a species, were not then at close to 7bn and rising. This crisis is but part of a repeating, oscillating pattern that we were happy to think of as natural, creative destruction, but this game has become very dangerous due to our numbers and productive powers. If memory serves we are already trashing planetary resources faster than the planet can renew them, which while impressive on the one hand, is obviously unsustainable on the other, not to mention stupid. Again, why cling to the model that forces us along a self-destructive path? Because it happens to be called “capitalism”? Because there is ‘no other way’?
Happiness flatlines at around $60K annually (according to Daniel Kahneman and others). $60K is simply a representation of a certain lifestyle, which is access to housing, transport, education, health, etc., of a certain quality. Humans don’t get ever happier the richer they get (above that level), so we have yet another reason, aside from planetary constraints, not to pursue economic growth. We don’t even want it.
Why should we prostrate ourselves before an insane economic engine, force ourselves through all sorts of societal contortions on its behalf, when it cannot even deliver what it’s supposed to; health and happiness?
I don’t believe we need banking in its current form, if at all. Perhaps the internet, if allowed, might provide an alternative; this is certainly the opinion of Austrian Professor of economics Franz Hoermann. There are plenty of interesting ideas out there that take sustainability into account, touted by various economics professors, businessmen, and others. Only the media, government, and finance won’t listen. They will not allow a genuinely open discussion of real alternatives. Consequently, the status quo is obliged to justify its existence, since it is self-evidently corrupt from top to bottom.
Suppose population growth saturates at 10 billion people. Based on US socioeconomics, 90% of world income will go to the richest 10%. Thus if the bottom 90% (9 billion people) are to average a relatively equal $60k/year — to make all the proles happy and healthy (with a shiny coat, too) — that means world GDP will have to grow to a staggering $5.4 quadrillion (it’s currently about $60 trillion). For example, for every 10 people, $5.4 million would be shared with the utmost fairness: $4.86 million would go to a rich elite, while his 9 underlings will share the remaining $540,000. Sit, Ubu, sit! …Good dog!
Which is why the system has to be changed from top to bottom, Anon. From top to bottom.
Money is not wealth, in the same way that inches are not distance. Therefore, the eye-watering dollar figures you quote aren’t really all that important (except perhaps for highlighting inflation!). What matters is how sustainably the benefits of human technology can be distributed in a democratic system. Money needs to be thoroughly demoted, such that under a different model environmental and societal health can be prioritized far above it. Then you and I would be discussing the energy and resources it might take to give the planet’s peoples access to a non-consumerism version of today’s $60K annual income, give or take. A revolution in transport, energy, city-design, housing, schooling, government, money, Law, finance, and so on, is an inescapable precondition for this.
Either that, or we destroy ourselves by refusing to consider viable alternatives. The planet’s ecosystems can only take so much of the abuse we are dealing it.
“Money is not wealth, in the same way that inches are not distance.”
Money is a measure of wealth used for accounting and economic transactions. I’m not concerned with the actual number 60k, but with the material lifestyle that it can purchase. The lifestyle itself, not the numbers game of money, is an unsustainable drain on our environment. Even if we greatly improve our technologies for resource management, agriculture, materials, fabrication, and construction, I think the bar on material happiness will simply inflate without limit. We need a cultural revolution that shifts our focus to non-material happiness among family, friends, and the arts and sciences. In the pursuit of love, skill, and knowledge, being insatiable is a good thing.
The amount of energy out there to tap is immense – there is enough energy to give everyone a “middle class” lifestyle. Our problem is that we currently lack the ability to tap it in a way that would fit with our current wants (not needs). Same is true about feeding 10 billion people – we can do it, though we would have to make certain choices (like caring a lot less about any species not directly linked to us either as pets or food sources).
Most of our constraints are not material but social/psychological.
I’m in 99% agreement with you, which is why I said “non-consumerism”. It’s also why I went to some lengths to represent the $60K as ‘access’ to particular services, rather than some pseudo-scientific measure of value and consumption. However, the money-system is in fact the main driver of our consumerist lifestyle, since money-as-debt can only be scarce and can only force growth, mathematically speaking. Right now calling money mere numbers does not do justice to its current role at the very heart of this ongoing crisis. It needs to become mere numbers.
What matters ultimately, as you say, is environmental and societal health, since these give rise to the health of the individual, and the wealth of us all. We need more love, more trust, more honesty, openness, and so on. Those should be our priorities, not money. Money needs to be redesigned to make this systemically possible.
The main point is that we’ve technically solved pretty much all material problems that relate to the basics. ‘Above’ that we have spiritual, psychological, and cultural challenges that are infinite in scope, so I believe our focus should shift to those things and away from money/materialism. The latter has taken us as far as it can, if not too far.
The know-how is there for a very different way of life indeed, only our cultural beliefs and assumption-based ‘certainties’ prevent us from demanding a true debate of genuine alternatives (guaranteed income for example is gathering momentum in Germany, with a very famous and successful businessman/professor — Goetz Werner — championing the idea).
The final question is whether the environment is past the point of no return, and if humanity will be able to sustain any civilization at all should ecosystem collapse gather pace. In that case, all this debating is just so much hot air.
“why should we accept money created as interest bearing debt? What, exactly, is it delivering?”
To answer the question seriously, the only purpose of creating money this way — as debt with a time limit on repayment, and with interest, rather than as pure nominal money — is to allow money to be sucked out of the economy easily in case of an inflation crisis. This is *the* only reason.
There is never any reason for this power to be entrusted to private entities.
“Not only did they get to keep their winnings from their last “wreck the economy” exercise, no senior executive was fired, no boards were replaced”
Exactly. After 3 years there is little change! Even today should banks go down you can be sure Fed, Treasury and Congress will come rushing to save them .. ALL IN THE NAME OF SAVING THE MAIN STREET .. WITH A GUN “BAIL THEM OUT OR ELSE WORLD WILL COME TO AN END”
You need a revolution which overthrows these elites.. Till then we can TALK AND WRITE ABOUT IT!!
This hall of fame has many members like Robert Rubin of Citi, John Thain and Stanley O’Neil of Merrill Lynch, James Cayne of Bear Stearns, Richard Fuld of Lehman etc etc… extracting literally hundreds of millions of compensation as their companies were bled dry… Extracting the money both from their clients and shareholders.. We need clawbacks… I think that 95% of the people that work at these financial institutions do honest work, the top 5% need to be jailed and suffer severe financial penalties. The other 95% can be put back to work in restructured organizations…
My big question … so why doesn’t someone do something about this ? I feel like the country is living under a criminal mafia-type system……… THEY ARE JUST BANKS FOR HEAVEN’S SAKES !! REMEMBER WHEN WE WERE KIDS ? WHAT WAS A BANK ? ……… A BANK WAS A PLACE WHERE WE WALKED IN WITH MONEY WE’D SAVED OUT OF OUR PAYCHECKS; WE DEPOSITED THAT MONEY INTO A PASSBOOK SAVINGS ACCOUNT & WE EARNED INTEREST ON THAT MONEY !!!!! WHO ALLOWED THINGS TO GET THIS BAD ? ROBERT RUBIN ? CLINTON ? BUSH ? PAULSON ? CONGRESS ! ………. BANKS SHOULD BE A UTILITY WITHOUT SHAREHOLDERS.
Check out one or more of these books (there are many, many others):
The Lost Science of Money
The Grip of Death
Web of Debt
The Creature from Jekyll Island
Or google the work of Frederick Soddy, or Silvio Gesell, or C. H. Douglas, or Bernard Lietaer, or visit http://www.monetary.org, or http://www.ascentofhumanity.com.
Banking has never been how it seems to be, nor how it seemed to be. Indeed interest/usury itself is an enormous problem (see e.g. “Religion and the Rise of Capitalism”), and has been the focal point of battles between various factions across the ages, right back into antiquity. This is a very, very old story stretching back I believe to Sumerian times.
If we want a functioning democracy and distributed power, we cannot also have a money system in which money is created as debt in pursuit of profit. Money is a public good, not an industry profit-machine.
At this point, the overthrow of the TBTF banks requires the overthrow of the US government.
The current generation of leaders is gutless. They are gutless about banks,debts, immigration, morals, you name it.
If Cameron would stand up and fight the bankers, and be seen to do so, the incensed British population of all political persuasions parties would love it.
We should do what we believe is right and stop worrying about bankers moving elsewhere. We do not need them anyway. Let them go where they will.
We should force banks based in this country to do what we want not what they want.
If our capital requirements for banks were substantially higher than those of other countries and if we were ruthless in making them seperate their casino activities and we taxed remuneration heavily it would do our banking system no end of good.
The present bunch of cowboys does not want stability. It wants bonuses.
“Diamond’s candy-coated defiance shows that three years after the crisis, nothing has changed.”
Civilizations die because of the lies they tell themselves.
Its not that no one sees truth… but truth has little power when lies become the currency of power.
We’re not really facing a Left/Right or Democrat/Republican issue.
And the constant cramming of the debate into this mold is distraction from the real problem… and serves to perpetuate it.
ALL decisions made by a tribe, a nation or even a social club… involve a balancing of the interests of the individual vs. the group… and the weighing of the need for change vs the value of tradition. (these are the general ‘memes’ associated with each side)
A pragmatist will understand that neither side of that scale should always outweigh the other.
The growing alienation and division in this country are NOT because of a failure to follow one or the other of these polarities as political ‘religions’…
What BOTH Ron Paul and Ralph Nader fans (and increasing numbers in between) are beginning to realize is that there’s an Establishment GROUPTHINK embraced by BOTH parties that will doggedly refuse to look at what many of us are seeing as a fundamentally flawed path being taken in the areas of global finance and governance…
And that we have fundamental problems in the perversion of decision in BOTH BIG GOVERNMENT AND BIG BUSINESS! And both institutions are degrading the role of BOTH the individual AND the communities within which they operate.
Meanwhile much of the political ‘debate’ in this country is akin to the inane arguments that so many couples participate in prior to dissolution… the specifics of the argument have little to do with the real issues afflicting the relationship.
Congrats to Yves and Naked Capitalism for continuing to define the real problems… without which no solutions are possible.
Capability ENABLES Responsibility
http://culturalengineer.blogspot.com/2008/10/capability-enables-responsibility.html
You have to consider risk management from the banker’s point of view. From their perspective they have very effectively managed risk by simply transferring it to the public. An eloquent solution by way of it’s simplicity. Maybe it is clever solutions such as this that have led them to believe they have “earned” their bonuses. You have to admit, it works for them.
Of course, there’s a little public relations flak that goes with such a strategy, but banker’s are thick skinned, hard-nosed business people that live by another simple philosophy, “It’s better to be the stomper than the stompee”.
So pipe-down and suck it up folks. As we speak, our 2 competing one-size fits all political parties and the main stream media are building the case that anyone who objects and speaks out maybe a wacked-out, dangerous, “Jared Loughner type”. For example, media suggestions of tea party grandma and grandpa as unbalanced, violent revolutionaries. Many of them may be the proverbial “people you can trick all of the time” types, but I could say the same about Democrats and Republicans. Otherwise, we wouldn’t find ourselves in this mess.
Nice work, Yves. The most galling thing about Diamond’s “let them eat cake” comment is that the ripple effects of his (and his cohort’s) recklessness are still making their way through the world, and will be for years. In addition to those listed above please add millions of foreclosures directly attributable to the credit bubble Diamond and his ilk created.
Second most galling thing: I’m waiting for bankers to start claiming they are worried about a Tucson-like attack, and the peasants need to “tone down” the rhetoric lest they become the next victims of “senseless” violence. Watch for it.
In that case, poster killben above may want to think about changing his/her screen-name to something like HelloKitty
Yes, unless he wants the FBI knocking on his door some day soon.
It is obvious that the banks have taken the rest us hostage. The administration shows obvious signs of the Stockholm syndrome. It is particularly true about Obama. The acceptance of this situation as inevitable is wrong. Instead of occupying Iraq, we can declare war on the banks. It is not the case that a crazy armed banker can lead all of us by the nose; all we need is a president that puts an end to the hostage taker.
After all, the country is full of decent, well operating smaller banks.
And the new uber elites (bankers and others) philosophy is; austerity for you but not for me, debt for you but not for me, taxes for you but not for me, reduced wages and benefits for you but not for me. Amazingly, the people believe that this philosophy is in their best interests. Words and images have consequences and the ubers have most of the people all of the time.
Lynda, you ask: “Who allowed things to get this bad?”
Well, our representatives loosened the regulatory controls. Sure, they were influenced by financial sector lobbyists wielding campaign contributions, but we elect them, and more importantly we return incumbents to office at such disappointingly high rates that comparatively few seats are even in-play at election time. “We, the people” bearing the consequences of the problem are ultimately responsible to correct it. Jefferson offers us some guidance: “But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new guards for their future security”
In my mind, the questions involve whether or not “We,the people” can unify in sufficient numbers to take effective action and if so, what will be the nature of such action.
The attempter, Will, and others have it right, the issue really comes down to the banks versus the survival of the human race. As to Will’s question why aren’t more people outraged by this, the problem of course lies with banker shills in the media controlling public opinion.
And to Lynda Scott’s question, “why doesn’t someone do something about this?”, I wonder if there might be some way to take the essential points from Andrew Haldane’s paper, and put this into much simpler terms, to reduce it to a soundbite that might resonate with a larger public (or at least larger than the readers of NC). We must find some way to counter the pro-bankster propaganda that is broadcast 24/7 with an anti-bankster message (supported by facts) that might resonate with a larger group of people who are never going to read Andrew Haldane’s paper. Something along the lines of “Which would you prefer: $1.5 trillion a year for bankers, or the survival of the human race?” (Just an example, and I’m sure someone could improve on this.)
Then if enough people could flood a select number of media shills with variations on this soundbite, through a coordinated email campaign, perhaps we could convince a few of them to side with humanity and against the banksters? Maybe two or three that have children, for instance.
Apparently after John Burns of the NY Times wrote an article that amounted to a smear job of Julian Assange’s character, he was shocked to receive thousands of negative comments directed at him, from people defending Assange, and said many of the emails came from places like Harvard, MIT, etc.
Whether or not this has had any influence on Burn’s writing, I have no idea, but perhaps a similar email campaign conducted against a few mainstream journalists *would* have some effect?
Obviously this is not a solution, but we have to start somewhere. And then if we could get enough people in the US pissed off about this, *and* organized, perhaps that could lead to a general strike in the US, as MintheCity is expecting in the UK and maybe even large numbers of people participating in non-violent acts of civil disobedience.
Because unless we can somehow find a non-violent way to stop the banksters, the path we are on is certain to lead to some kind of revolt from the right, a bloody and violent backlash as increasing numbers of well-armed American males lose their jobs and their homes and sink into poverty.
Karen,
I wish I could see an non-violent alternative, but there simply there isn’t one, manufactured consent in the USA is an extremely efficient mechanism for controlling the population. The revolt, if it comes, will come from the right, the same as it did in Nazi Germany and fascist Italy once those economies went to hell. It will not come from American liberals because they no longer stand for anything. And all it would take to tip the balance towards violence would be unemployment going up another 3 to 5 percent, along with $5 to $7 a gallon gas at the pump, and food prices, which are already up a lot, going up another 50 to 100 percent.
But at the first signs of revolt, the elites in this country will use brutal and overwhelming force to suppress it, which in turn will lead to increased rage and anger, as state violence causes people to see through decades of propaganda, and manufactured consent begins to break down.
Where it goes from there is anyone’s guess, but in the most optimistic case, perhaps once the right wing revolt is crushed by state violence, or manipulated back under control by corporate forces, perhaps this could lead to a genuine and radical left-wing movement in the United States. Once enough people see through the lies and understand what the elites have done to destroy this country. Then we might get somewhere, because as things stand now, I don’t see the liberal class ever revolting against anything.
Karen, I happen to agree with your views – and others commenting here who focus on the problems with understanding and communicating what is happening so that people with less interest, less time, (and possibly more trouble reading a lot of text) will grasp the really quite simple relationships.
FYI, Barry Ritholtz (listed at The Big Picture) on Yves’ blogroll, put up a report from the Florida AG on the topic of mortgage fraud that is one of the finest examples of information designed for the public that I’ve seen in some time. The link is: http://www.ritholtz.com/blog/2011/01/florida-attorney-general-report-on-fraudclosure/
Might give you some ideas.
And I see Dylan Ratigan at MSNBC attempts to distill the main points day in, day out, for those of us who are not economists.
Yves is essential, obviously.
I’ve made a squeaky wheel of myself bleating about the fact that I can’t understand why her publisher won’t make Econned available in audio, as a lot of the information needs to be aimed at podcasts, IMVHO.
Meanwhile, Yves offers Odiego audio feeds of her posts. This, in my view, is essential as many people simply have to get the info as sound; time constraints simply don’t permit everyone to have the luxury of spending the time reading and commenting.
I happen to believe, however, that you’re raising a key point.
(And “Inside Job” should be required viewing for any elected or appointed public official … not just in US, but all over the globe, IMVHO.)
Thank you, and I’ll check out the Barry Ritholtz link. I’m already encouraging as many people as possible to read Yves, watch Dylan Ratigan and to find some way of viewing “Inside Job”.
More and more people are beginning to understand these issues, just not enough and the message isn’t spreading fast enough. Nevertheless I’m hopeful we can keep finding new ways of communicating to a larger audience until we reach critical mass.
Actually, discussion of these blogs would make a good satelite radio program. I listen to NPR, but frankly don’t think it measures up that well. If a number of bloggers like Yves got together, I am sure they could create enough worthwhile programming to fill a channel: a no BS econ channel.
All of you just go back to sleep. You have never had a voice/vote in any of this, and never will. The game has been, and will continue to be, rigged by those who can buy the next vote, the next seat, the next appointment. Regulations, Tax Laws, and yes even Criminal Law is written by and for the Elite. They do not answer for the same things you and I do.
Get over it, and accept your place in the world.
“Give me control of a nations money supply, and I care not who makes it’s laws”
Amschel Rothchild
“I think that 95% of the people that work at these financial institutions do honest work, the top 5% need to be jailed and suffer severe financial penalties. The other 95% can be put back to work in restructured organizations…”
I’m not so sure about this. While the incentive structure at the top is appalling, it has also insinuated itself down to the bottom levels, to the tellers, for example. You cannot go to a bank without somebody to pressing you to open a checking account.
In my younger days, I was indifferent to business, even though I knew full well that the purpose of any job was to provide more value upward than it cost to get paid. My career has been pretty accidental, but probably more interesting than anything I would have chosen. That said, my light bulb went off as I realized how sales commissions generally seem to work. Used car salesmen make more than new car salesmen. Subprime originators make/made more than conventional loan originators.
It seems that a only a fairly small creative/imaginative/talented and intentionally-minded [elite][refusnik][alt] group has really figured out there might be alternatives to what seems to me, at least, a pretty ham-handed incentive structure that replicates itself all down the food chain (even literally, as Attempter frequently argues) – that gives off a stench everywhere you go. By now, I’ve seen it too many times. My experience is dealing with people selling financial products and big-ticket purchases, and my broad brush take away is, show me a top producer, and more often than not (a lot more often, IMO), I’ll show you someone who either is exceedingly adept at cutting corners, or doesn’t see them in the first place. In either case, there is a manager right behind him or her who is very pleased by his or her degree of separation from that piece of dirty work. Marginal producers are the foils/fools who get in trouble and are served up for maintaining the appearance of a clean shop.
IMO, the pre-crash FIRE economy provided an unprecedented number of absurdly high-compensating jobs for people who could make a go of living on commissions (that is, it wasn’t for everybody, but a lot of folks signed up and got paid well). While I don’t know this, I suspect similar things are true in medical sales, defense contracting, agriculture/food and other areas (certainly true in NY public bond issues). While it’s always been this way, I think it wildly accelerated as real estate money was sloshing around in amounts never seen before.
All this said, I fully realize that nobody gets paid until the product gets sold, and I have yet to see a product that truly sells itself at a profit.
As for revolution, I pulled this quote from Toby’s site:
“Decadent times demand steady bridge-building, not mud-slinging.”
I feel fortunate that I can at least imagine an alternative to the Onion headline “Americans demand new bubble to invest in.”
Yves, what bugs me about the “salary excuse” is that apparently salary constraints are okay for the auto companies but not the banks. A few weeks ago wasn’t the CEO of GM saying the salary restraints were hurting his company? Yet those comments were swept under the table. GM needs to hire good CEOs and good accountants and good engineers and reward them for success. But we have the gov’t putting fascist wage restrictions on them while at the same time encouraging other wards of the state to pay out generous bonuses to people who do not produce anything.
Well why doesn’t the CEO just leave GM and go somewhere else where he will find better compensation?
Attempter pretty much gets things right, but as a teacher of Early Modern History I have to get all pedantic about one point. The privileged treatment ladled out to banks isn’t “feudal” in nature. If there’s an historical parallel, it’s with the 17th century economic policies that are usually labeled “mercantilism”.
The grants of patents and monopolies by the early Stuart kings are one example. Another would be the French General Farm: a financiers’ syndicate empowered to collect specified taxes and to keep a percentage of the proceeds. In both cases the aim was to preserve a financial basis for the existing political order (divine-right monarchy)without submitting to substantive fiscal and economic reforms(which would have involved accepting a greater degree of representative government). I need hardly add that both regimes ended with headless monarchs.
When I say feudal I mean the following broad sense:
A calcified ruling elite, based on rents, warfare, looting, and police repression, rules over a serf class indentured to the land and/or job.
http://attempter.wordpress.com/2010/07/05/part-4-the-full-fury-of-the-new-feudal-war-the-intended-end-state/
I don’t know how much the details of medieval feudalism will also be replicated, but I refer to the same general system of vassalage (in this case radiating out from Wall Street) and (debt-enforced) serfdom.
To me the question is: What gives someone or the right to complain about bank pay? Or government the right to regulate pay?
Answer: Deposit insurance and bailouts and the Fed
I think its about bankruptcy law for financial institutions. If you can restructure a bank so that the depositor takes no haircut, the swaps and derivatives, prime broker arrangements, etc..are ahead of the bondholders and every other security holder does take a hit first then maybe banks are not too big to fail.
I don’t have the solution but deposit insurance creates all kinds of bad incentives for banks and government regulators.
It strikes me that banking and brokerage together is a bad idea as well. People who work at brokerage firms are in the business of making money not widgets. You may not like that idea as a liberal flake but that’s what they want to do. Letting them do that with too much money create bigger explosions…
But, even so I think banking is an unstable business that implodes in long cycles. This has happened for hundreds of years is my take. Deposit insurance, federal bailouts and regulations make it worse. Banks pick up nickels in front of steam rollers – that’s their business. Take aways CDO’s and all that stuff and banks still make loans with other peoples money as levered entities. The “safer” the loans get the more the risk grows for banks. I mean – mortgages were really safe loans until they were not – right?
All this discussion becomes delusional if you don’t talk about the group of people that own the Fed, the banks and all the multi-national corporations.
THOSE PEOPLE decide who is hired to run all the aforementioned institutions as well as most government positions, elected or otherwise.
THOSE PEOPLE decide how the political economies around the world will evolve with THEIR investments. We have more wars and haven’t gone to the stars because THEY did/did not not invest their money accordingly.
THOSE PEOPLE need to be removed from decision making power in our society if we are to evolve.
“I don’t have the solution but deposit insurance creates all kinds of bad incentives for banks and government regulators.”
I guess that explains the chronic instability that plagued the nation’s banking system after 1934.
“It strikes me that banking and brokerage together is a bad idea as well.”
Messrs. Glass & Steagall would certainly have agreed with you. But then they employed (gasp!) legislation to remedy the problem which thankfully was repealed, leading to the present stable and solvent state of affairs we enjoy today.
Snark off.
Its hard to tell if we agree or not. I’m just saying as someone who works in the shadows of finance that banking is unstable as a business so deposit insurance and bailouts put the taxpayer on the hook for an unstable business. These things make an unstable business even more unstable. Which makes everyone including this blog and goverment want to apply more regulation and bother my right to make money for the sake of making money for me and my clients.
Banks blow up, which is a pain in my ass.
People who work at brokerage firms are hard driving, agressive and want to make money. The more money you give them to do this the more they will spend. Banks have plenty of money to spend. Get it?
People in investment and fund management become associated with this mess because its a financial field and we get regulated even when we do right by our clients. If you have survived in my business for a long time its because you client’s money is the most important thing in your professional world.
Fooking banks…
I agree with the sentiment in this post but I have a quibble. I think the former heads of Lehman, Bear Stearns, Merrill (both O’Neal and Thain), Citi (Prinz), GMAC, AIG (if we can lump them in), Northern Rock?, RBS?, Bradford and Bingley? Fannie, Freddie, etc. would be surprised to hear that no bank CEO’s lost their jobs…
Jamie Dimon (JPM) is still there. As is Lloyd Blankfein (GS), John Mack (MS), John Stumpf (WF), and Vikram Pandit (Citi). BoA lost Ken Lewis. Most of the others are gone because their companies crashed and burned, or due to power struggles. Nobody I know of lost their job because they were held accountable for their crimes or as a part of reform. And of course it is not just the big names but everyone else and the corporations themselves. There has been no real accounting. There may have been some shuffling of deck chairs but the officers and crew of the good ship Titanic, and their pay and bonuses, remain intact.
Fannie and Freddie, GMAC , and AIG are not banks, so they don’t go on the list.
The bit re CEOs being fired follows the comment re dumping risks on the taxpayer. So this would apply to bailed out firms, the failure of regulators to discipline management of firms they rescued. The contrast between Fannie, Freddie, GMAC, AIG versus BofA, Citi, JPM and Wells (I don’t buy the canard that JPM and Wells were materially stronger than BofA and Citi, see Chris Whalen in particular on JPM, he’s long held them to be the weakest of the that three) actually proves the point.
Thain was not a CEO when he was fired.The CEOs of acquired firms generally just get golden parachutes, it was predictable that he would not last long, despite the BofA noise to the contrary.
Then there was Countrywide CEO Angelo Mozilo. He got a $300M golden ‘chute, was fined by the SEC $67M but had an clause in his employment contract that the company picks up the tab for any fines, so BofA paid that.
Why on earth would you fire someone who does exactly what he/she is hired to do? They were paid to take their banks into an untennable position. To accumulate so much capital that the banks were a threat to the economy, and to accumulate so much debt doing it that ever hung in the balance. If the banks were allowed to fail or worse yet taken over by the government, then the economy would collapse. The ultimate wet dream of every parasite. The host cannot survive without the tapeworm.
Jonesey posted this a few days ago. It is so relevant
http://www.youtube.com/watch?feature=player_embedded&v=OzZzl6FwGfo
It astounds me that whoever Diamond was speaking to failed to burst out laughing in his face and explain that ‘banks’ are no longer capitalist entities.
But part of what also astounds me is the failure of Diamond and his brethren to comprehend, let alone articulate, the value of public goods — and how they have blurred the line between public goods (ie, roads, bridges, law and justice, clean air, clean water, postal deliveries…) and private goods — his bonus is actually derived from **public goods**, rather than from private goods.
I assume that he uses the old saw about the banks having been so ‘innovative’ as a way to excuse his intellectual cowardice. But this is also not true.
As near as I can fathom, in the 1970s, the mathematical calculations developed for heat transfer in mechanical engineering — measuring heat flows — began to be erroneously applied to finance. Then along came computing, then the Internet, and globalization took wing: fueled by the calculations developed for matrix analyses of heat flows inside of engines, but misapplied to create the basis of ‘securitization’.
Claiming that this is ‘innovation’, particularly by anyone taking the kind of obscene pay that Diamond accepts, is delusional, IMVHO.
I’ve been around a few ‘innovators’, and they are relentlessly curious people – and a number of them actually devote a lot of resources to Open Source or public-spirited innovations (think Wikipedia, although I don’t personally know Jimmy Wales). The ‘innovators’ that I’ve been close enough to watch are also relentlessly curious people, with generally far more humility than I’ve seen exhibited by any of these banksters.
One more point: the genuine innovators that I’ve known would have asked question, after question about the CDOs, the CDS’s: how were they constructed? Why were they built that way? What’s Li’s number? Where is it used? How does this all work?
Yet, we see not an iota of that kind of thought process among these banksters, who because they are moving money internationally, often via offshore vehicles, have no particular interest in politics, government, nor public goods.
There is a terrifying disconnect here:
We allow people who are **NOT** innovators to get by with referring to ‘financial innovation’, and that is sloppy of us. We should mock, ridicule, and expose their pretenses and show this is mere ego.
Their inability to recognize that banks are **NOT** capitalist entities at this point should also be called out – the media loses credibility by failing to make this clear to a sullen public.
The bankster inability to assume that ‘public goods’ (i.e., taxpayer revenue) is theirs to claim as private wealth is flat embarrassing. I can only assume these people are clueless about how stupid and amoral they appear.
They’re not innovative, they’re certainly not capitalists, and they have no clue about the value of public goods.
As near as I can fathom, it’s going to take more international financial ‘cops’ to clear up this mess, because nation-states are the things these people eat for breakfast, lunch, and dinner. The longer the politicians continue to argue with one another and fail to coordinate, the longer they play in to the banksters fantasies about who really runs the show.
This strikes me as a political tragedy, an economic disgrace, and a symptom of the disconnects between economic and political power in the early phase of globalization.
“It is purely extractive.” Ding. Hello, looting. Hello, kleptocracy.
Whether it is an ATM fee or one on a CDO, whether it anything to do with a sale of a house from origination to foreclosure, whether it is stock markets or commodities markets dominated by machine trading with trades being held only a few seconds, whether it is the failures or the bailouts, it is a system whose only purpose is theft.
We are in late-stage kleptocracy. The looting has infected every segment of both the private sector and government. The structures of government are falling apart from bridges and schools to its legal and regulatory systems.
Diamond is just another of the arch-criminals. He will keep saying this stuff until he is in prison, a day from his point of view which will never come. But kleptocracy is unstable. It will fall. It may not be replaced by anything better, but when it does fall, Diamond will fall along with it.
Good post. “Purely extractive” sums it up.
One observation: Banks haven’t been private enterprises since the institution of central banking. They are public-private partnerships. This generates moral hazard.
Therefore, banking needs to be treated entirely different from private enterprise, where stakeholders shoulder the risk. This has allowed the big banks to game the system to their advantage and to the disadvantage of the public. They have done this by capturing the apparatus of the state. It’s all about rent-seeking and other forms of extraction (parasitism) instead of actual banking, i.e., intermediation, that facilitates productive activity.
Yves,
The Flip Wilson video puts it into perspective. We give too much respect to outrageous claims by men in suits. They are just a bunch of protesting old hens driven by the Devil.
This is an outstanding post that I will be sending to many friends that have basic intellect. I look forward to grabbing a copy of Econned when it is published in paperback.
After having to sit through multiple ass-kissings of Bob Diamond when I was a student at the UConn Business School (Diamond got his MBA at UConn), it is nice to see a wonderful critique of a typical banker trying to deflect criticism and accountability when there has been nowhere near enough of each in the first place. I’ll continue to keep my fingers crossed that these scumbags face their overdue karma, but will most definitely not hold my breath.
@ reader of Tea Leaves.
You are quite right that these banksters eat nation states for breakfast, lunch and dinner.More’s the pity that this country has not got the guts to stand alone as it did so magnificently in 1939. Yes the short term price might be heavy but longer term we might recover some self respect. I suspect other coutries would follow rapidly and the banksters would fold without much of a fight.
By the way I have not seen “Inside Job” advertised anywhere in the U.K. yet. There are plenty of people here who would like to see it. I agree with you that it needs to be seen right round the world.
I’m sure that the Arizona shooter would like the “controversey” over his actions to go away as well.
If you ask any civilian in the UK what they think of banks I guarantee the first word they will say is ‘Bastards’.
So, we’re going to take a made-up crisis cost number on the one side of the ledger, and…a zero on the other? Gosh, why does anyone do business with a bank, anyway?
Yo ! Yves.
Classroom material.
The root of that destructive power of ‘leveraged’ capital, where money is created as a book entry by privileged private interests, is almost out of the bag.
Under the shadow-banking Trillionaires are the commercial banking Billionaires who issue credits to themselves, and debts to the rest of us.
Abolishing that system of debt-money that we call fractional-reserve banking is one major step in the proposal by Congressman Dennis Kucinich to reform the financial and monetary system of the country.
His National Emergency Employment Defense (NEED) Act of 2010 puts an end to the money and currency leveraging powers of shadow banking.
The perverse economic risks that are embodied in the shadow-banking gameplan, free capital markets that can threaten the entire operation of the national economy, serve as a guidepost on the limits of llaissez-faire money.
Don’t politicians of all stripes on both sides of the pond realize that their slavish submission to the banksters shall be their undoing?
Plus, are politicians REALLY at the mercy of the banksters?
Gimme just another banking crisis, *which is pretty inevitable given the extreme instability of the system as it is) and that’ll be it! Dictatorship everywhere in the Western World or the current crop of politicians and banksters will be crushed…as they should be.
Now Francois…You ask too much of politicians. They are hedonist, term limited, sound bite creatures. One cannot expect too much introspection from them. It would interfere with their chances of getting elected.
Western politicians personify the old song..”..we’re here..for..a good time..not.. a..long time..so..have a good time.”
I doubt they even consider being the sacrificial goats for the manipulators.
Why should bankers change? What possible reason or incentive do they have to change? They almost can’t lose. In fact, the only way for bankers to lose is to have a year in which they earn nothing and lose nothing (though guaranteed bonuses still exist).
As long as they win big or lose even bigger, they are sure to come out ahead. It makes one long for revolution, kangaroo courts, and summary executions, n’est-ce pas?
“What possible reason or incentive do they have to change?”
“It makes one long for revolution, kangaroo courts, and summary executions, n’est-ce pas?”
There you go. Even short of that, mass bank runs would destroy their wealth.
Any bankers who think long-term would look to history — Russia 1918, France 1789 — or even the UK 1832 — to see why they had better change, and make themselves socially useful and popular, if they want to keep their health and wealth.
But they *don’t* think long-term, they don’t think further ahead than three months.
They should just take Mr. Diamond out and drown him off the coast of the Isle of Man and take his estate when his talent runs Barclays off the next economic cliff. The US is running an extra $1.5 trillion in annual deficits over the mismanagement of banks. These guys stand like the Sun King, who bled his country dry.
The Sun King had an exquisite sense of timing, dying prior to the shit hitting the fan. Somehow, I doubt that all of these bankers will die soon enough to avoid the pain.
The greatest Era of Extraction ever known is upon us. It prances and gambols in time and step with the passing of once mighty sovereign governments.
By chance, or by circumstance? Does it matter? For the countries formerly known as the “industrialized nations,” utter lawlessness is the only guiding principle now. Centuries in the creation; Western Civilization is boiled down to Dodge City in a tick and a wink.
And into this turbid mix strides confident China, a nation moving with focused and ominous sovereign purpose. Toss Peak Oil into the roiling brew, and the future for us? It’s a tad uncertain…