"Then it is dark; a night where kings in golden suits ride elephants over the mountains." - John Cheever

Sunday, March 15, 2009

Global banking fraud

Tom sent me this article by Patrick Wolf in the FT the other day, which is a pretty sobering assessment of the implications of the current financial meltdown. The era of financial liberalisation has resoundingly failed, and it's not clear what will replace it. Poverty and suffering is likely to increase on a grand scale, and there's a serious risk of geo-political instability, more wars, the rise of extremist politics etc. And this from a guy who wrote a book a couple of years ago on how anglo-saxon style liberal democracy was the inevitable model for the world. 

This morning I heard this guy - Max Keiser - being interviewed on Radio 5. He also does a show on the BBC World tv news channel, and on Resonance FM (which is worth checking out more generally, by the way).  Now, there's more than a touch of the blogging crank about him, but he was refreshingly angry about the whole economic situation and incredulous about how governments are dealing with it, and how we're all complacently going along with it. I checked out one of his slightly shrill podcasts, and beneath the bluster he makes a lot of good points (as far as I can tell). For instance:
  • Banks are effectively holding governments to ransom - give us more trillions or we'll blow up the economy. And we're going along with it. But while governments are desperately attempting to stabilise the situation for the good of their countries as a whole, the banks (and other large companies) are still motivated by corporate self-interest - they want the cash to continue to enrich themselves.
  • Similarly, a couple of pharma companies in the US got a massive chunk of Obama's bail out in order to do a merger, and promptly sacked 17,000 people (would need to check the facts on this one) - not really the rationale for giving it to them in the first place.
  • The whole 'toxic bank' model doesn't just get the bad assets off the balance sheet at vast expense for the taxpayer - it enables the banks to re-package the bad assets and sell them on (again) as commodities, and take fees for doing so. (This was part of what led to the problem in the first place: banks' liabilities - i.e. dodgy mortgage loans - were getting repackaged and sold on, so they ceased to be regarded as liabilities and instead became assets - and thus were not subjected to the same degree of risk analysis, as there were profits, commissions and bonuses at stake.)
  • He reckons that media reporting on financial markets should be approached in the manner of a scandal sheet - trying to uncover fraud and bad practice, which has always been extremely widespread, but is only now getting a lot of attention. His view is that in the last 25 years, the dubious practices of dodgy 'bucket shop' stockbrokers have become standard practice throughout the financial industries. There is sharp practice at all levels, but everyone with a stake has been complicit, but kept schtum for as long as they were making cash. For instance, execs at Citibank and Goldman Sachs or somewhere were selling their customers financial products, but taking short positions on the same products themselves because they believed they would underperform. Similarly, they were also shorting on their own company's shares - in order to make cash for the company. Financial institutions invested in Madoff even though they must have known what was going on, because they still made massive returns. And so on.
  • Quantitative easing essentially involves the government borrowing money to buy back its own loans. Hm... Historically, this kind of behaviour generally results in uncontrollable inflation. 
 I don't know how on the money his analysis is (to use an appropriate phrase), but he's certainly right that we should all be furious about what's going on and very politically engaged with it all. There's a lot at stake - and I don't mean wealth necessarily, but the state of society. But it all seems to complicated, and the sums of money involved so unreal, and nobody knows what the solution is, so we're just watching it all happen and hoping it will all turn out ok. 

By the way, he says buy gold. 


Colin said...

I guess my point is - we've got to make sure this results in a better, more honest and fair system emerging (as far as that's possible), and not let the very institutions who ballsed everything up dictate the terms of the response to it.

Colin said...

Oh, and to clarify - the Citibank guys were shorting on their own company at the same time they were accepting government bailouts. So they made £20m personally by shorting while at the same time announcing they were going bust and needed a bailout.

Tom said...

I guess the problem is that the banking system became so central to so much of the economy that it became in almost everyone's interests to keep the whole nonsense going, even if many suspected that something didn't feel right. Whether it was estate agents profiting from an unsustainable property boom, media companies with loads of financial services ads, senior members of government and civil service who then took lucrative advisory roles with banks (e.g. Tony Blair, John Major) or just people with pension plans, ISAs etc.

We should be angry with the banks and politicians, but I also think a lot of people should consider how complicit we all were in this.

Colin said...

I really don't think I was, unless having a pension counts.

Tom said...

No, I think all of the Fitz members are probably exempt! But I have been struck recently by people I've met who are furious about the bankers for causing the crash, and yet it would seem to me that much of their activity (property investment, public relations etc) was equally bogus and dependent on a speculative boom.