Market Based Solutions in a Messed Up Market

Senator Dean Heller (R-NV) and Representative Eric Cantor (R-VA) are fond of “market based solutions.”  Translation: A market based solution is simply the new GOP word for the discredited term PRIVATIZATION.  The market to which they refer is the financial market. When all features of American life are privatized, then the corporations offering the services (social security, Medicare, toll roads, prisons, police protection, etc.) will be successful, or not, according to the price of their shares in the Financial Markets.  It’s a lovely theory.  However, one of the problems with it is that The Financial Market is often irrational and sometimes incompetent.  Sometimes it’s hard to discern the difference.

Example JPMorganChase and the London Whale. After having been bailed out of the mess they made circa 2008, the bankers were ready to explain to the American public that they had learned their lessons about risky proprietary trading, and hence would be more responsible custodians of the nation’s financial wealth.  Surely, they said, we can now be trusted to regulate ourselves.  Not. So. Much. When CEO Jamie Dimon announced back in May 2012 that JPMorgan had lost $2 billion on a credit derivatives bet he was being rather optimistic — the losses are now estimated at some figure closer to the $6 billion to $9 billion range. [NYT Dealbook]

“More than profits are at stake. The growing fallout from the bank’s bad bet threatens to undercut the credibility of Mr. Dimon, who has been fighting major regulatory changes that could curtail the kind of risk-taking that led to the trading losses. The bank chief was considered a deft manager of risk after steering JPMorgan through the financial crisis in far better shape than its rivals.”  [NYT Dealbook]

In other words, the banking industry, as personified by Mr. Dimon, assured us that the provisions of the Dodd-Frank Act were unnecessary, and then proceeded to offer a classic living example of why they were.

Example: The Barclay Blunder.  Barclays Bank drew fire from members of the British Parliament and the FSA for manipulating the interest rates comprising the LIBOR.   The bank settled with officials, paying a $453 million fine.  The U.S. Department of Justice has offered that while the bank may not be the subject of criminal prosecution, such actions against individual bankers aren’t out of the question. [USAT]

The northern Atlantic Ocean isn’t going to protect us from the fall out from this blunder because also under investigation for the same financial ploys are Citigroup (USA), UBS (Switzerland), HSBC (UK), and the Royal Bank of Scotland.  [USAT]

Once again, we have the specter of a banker denigrating the necessity of banking regulation — There was a period of remorse and apology for banks and I think that period needs to be over. We need our banks willing to take risks … so we can create jobs.” Bob Diamond Barclays CEO, 17 months ago. [Daily Mail] — and then providing a real world example of why more oversight is absolutely required.  One reaction:

“Just when you thought bankers could sink no lower in public regard, they’ve done it. News that Barclays has been found guilty of repeatedly falsifying the interbank rate – sometimes for the personal gain of traders, sometimes to make the bank itself seem more creditworthy than it really was – tops off another calamitous week in the seemingly never-ending litany of banking misdemeanours. ” [Telegraph]

The examples haven’t quite stopped coming.

ExampleThe Interest Rate Swaps Sale.   Again, Barclays, HSBC, RBS, and Lloyds are facing official scrutiny for selling interest rate swaps to small business owners who were then “offered an umbrella and then when it stopped raining, the bank grabbed it back.” British authorities have been investigating these questionable deals for about two months:

“Poor sales tactics were uncovered including failing to provide sufficient information on the hefty exit costs involved, failure to gauge the customers’ understanding of risk and found rewards and incentives were a driver of these practices.” [Indpt]

Not to put too fine a point to it, but the polite paragraph above says that small business owners were sold financial products detrimental to their best interests because bankers wanted to earn better bonuses and compensation.   Worse still, business owners were threatened with a loss of credit if they didn’t participate in these swaps deals:

Aberconwy MP Guto Bebb claimed thousands of businesses lost large amounts of money after being mis-sold the complex products by their banks, and many were told that without signing up they risked being refused credit. He said many business people did not understand the deals but trusted their bank manager. In other cases, he said, businesses were offered only one product and the bank made no effort to provide a choice.

A survey by Bully Banks, which has been set up by alleged victims of swap mis-selling, found nearly three quarters of its members claim to have been forced to buy a swap by their lending bank as a condition of their loan.  [Indpt]

The British Bankers Association has issued the standard, “We Are Cooperating With The Investigation” press release.   Thus much for “creating jobs” and “benefiting small businesses,” amid the mess created by the “interest rate protection products” being hawked by the bankers.

It wouldn’t be amiss to ask if major banks in the United Kingdom and Germany are facing the wrath of small business owners and investors over the flogging of “interest rate protection products,” should American businesses and investors be looking to see if similar tactics were promoted by U.S. bankers?

Another reasonable question may have found an answer — Why do these scandals keep cropping up?

Why do we have such phenomena as the Flash Crash, May 6, 2010? Is all well now? Maybe not. [Forbes] Add to this the not soon to be forgotten failure of the Facebook IPO.   Sallie Krawcheck, former President of Merrill Lynch Wealth Management, may be on to something when she commented on the JPMorganChase mess:

“There’s no doubt,” said Krawcheck, “that these banks have taken more risk that we as a nation and we as an industry would like them to.” The amount of risk, she went on to say, is a problem because it seems no one can track it. “The size of the JP Morgan loss in some ways is no big deal, but the fact that they didn’t know about it…”  [BusInsider]

Let’s think about this statement for a minute.  For the sake of argument let’s assume that the Powers That Be at JPMorgan were unaware of some practices in the London offices.  That, in itself, is disturbing.  If we have “risk” in the financial structure no one can track, and management which doesn’t understand what is going on, then does that not describe a recipe for more problems?

This conclusion also raises the prospect that if the bankers (financialists) can’t chew what they’re already eating properly, then why should we give them more?

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