Bankers Behaving Badly

Is anybody surprised?  No.  We know they behave badly. In the past week, though, we have learned of some previously unrevealed varieties of misbehavior.

In my day to day life, any time I've mentioned the London Interbank Offered Rate (Libor), I've watched the eyes of my friends and acquaintances glaze over.  In brief, though, it is the average interest rate at which major banks borrow from each other.  Other rates for consumer and business borrowing are derived from Libor.

To compute Libor, banks report their own borrowing rates.  Barclays' Bank, we now know, was reporting  lower rates than it actually paid back in 2008, because being forced to pay higher rates would have been seen as a sign of financial weakness.  As a result, Barclays' has paid a $450 million fine for fibbing (amounting to little more than a rounding error for a major international bank) and its CEO, COO, and board chairman have resigned.

Barclays' excuse?  "All the other kids were doing it!"

Indeed, that seems to be the case.  British and US regulators are investigating ten other large banks, including (needless to say) Citigroup and JPM.  A bit more distressing, though, is Barclays' claim that its regulators knew what was happening, and gave tacit consent.  Among those regulators was the New York Fed, at that time under the leadership of Tim Geithner.

"Well," I can hear the regulators saying should they ever be called upon to explain themselves, "we thought it would be better for market confidence if people didn't know just how fucked we really were back then."

Krugman's confidence fairy strikes again.

J.P. Morgan Chase, et al.

Here are a few initial premises you are free to accept or reject:

1. The only means by which investment firms succeed are dumb luck and/or insider information.
2. Given the nature of the normal curve, it is reasonable to suspect that the most successful investors depend on insider information.
3. Every once in a while, even the lucky and the insiders must fail.

Following on those premises, it is likely that Jamie Dimon genuinely believes he still is a financial genius when he assigns all blame to Ina Drew.  The lucky CEOs always believe they are geniuses, as do the ones who trade on insider information without getting caught.  (Of course, it doesn't take genius to capture the regulatory agencies — just enough money to buy the right politicians.)

J.P. Morgan got caught in it's own web.  From time time, even the lucky and the insiders must fail.

A restoration of Glass-Steagle is gaining some popularity of late.  If Bill Clinton hadn't been quite so beholden to Wall Street money, Glass-Steagle still might be the law of the land.  If any bill deserved a veto, it was Gramm-Rudman-Hollings.  We really need Glass-Steagle back again.

Personally, I'm of the "Dimon is just another asshole who got lucky" school of thought.  I don't blame Dimon — I blame Clinton (for his cowardice or his greed — who knows which?)  Dimon is incapable of recognizing what a turd he truly is — he's convinced (because he was lucky for a while at the right time) he actually knows more than the rest of us.  Well, apparently, he was wrong.

How bad is it, Ben?

Only that bad? Well, last year, I suppose, the biggest worry was confidence. If you'd told people we were up Shit's Creek and probably would have to paddle out with our tongues, who knows what might have happened to the economy? Hell, people might have thought all those sub-prime mortgage derivitives collapsing were a real problem, and then how could we have -- uh -- paddled our way out?

Okay, I get it. Fine. But just how bad is it?


Oh! A little worse than you told us, huh? Well, those write-downs by Citi sure had the markets nervous, but cutting the federal funds rate and encouraging even those banks having "no problems" to borrow money from the discount window really should have done the trick -- don't you think?

Except it didn't do the trick. Nobody much wanted to be seen bellying up to that discount window, and the federal funds rate doesn't make a damned bit of difference in a liquidity crisis. Okay, it does encourage certain idiot speculators to bid up stock prices, but that's just short-term action. A day or two later, the idiots are losers -- except for those who found even bigger idiots to buy on the bump. (Granted, some bargain hunters who are willing to hang onto their purchases for a few years might do quite nicely down the road. There's some really good value out there if you can separate the grain from the chaff.)

Okay, but I'm waiting for you to tell me -- how bad is it?


Hmm... You know, come to think of it, maybe it wasn't such a good idea to repeal Glass-Steagall after all. It just might have softened -- or even prevented -- the sub-prime mortgage mess. What was Bill Clinton thinking when he signed it? He was a Democrat, wasn't he? (Oops, I forgot! New Democrats are not all that similar to us Old Democrats -- those of us who still think FDR had a few damned good ideas!)

Well, Ben, it's not your fault. You're just out there trying to clean up the mess Greenspan left behind, and I honestly think you're doing pretty well, considering what a hell of a mess it is. I think it's great that you've dusted off the New Deal playbook -- and I don't mind at all that you made it possible for JPMorgan-Chase to pick up Bear-Stearnes at a flea-market price. If there's a "moral hazard" in your action, I don't see it. Those who invested in that nest of vipers were justly screwed, and those who led the company to its demise will plummet along with the value of their stock options.

The opening of a discount window for investment banks leaves me feeling a little queasy, but I guess it had to be done. Sunday's surprise quarter-of-a-percent cut in the discount rate, if we're lucky, might mean no further cut in the federal funds rate tomorrow -- no matter how pitifully Wall Street whines. If the idea is to get banks to use the discount window, keeping the discount rate lower than the federal funds rate seems like the best way to do it. Anyway, the dollar has fallen as low as it ought to go. If the dollar's current devaluation isn't enough to correct our imbalance of trade, the value of the dollar isn't the problem. The people of this country shouldn't have to see the value of their incomes and their savings evaporate so that a few speculators can turn a quick profit.

Maybe I'm deluding myself, but I think that you might be exactly the right person to be Chairman of the Fed in these difficult times. You know your history, you're willing to risk trying some new approaches to our problems, and you've arrived at a point where you can be impervious to political pressure if that's what you want. I think that's what you want -- that, and a strong shot at minimizing the pain of the god-awful mess we're in.

A good ninety-eight percent of America is economically illiterate, and a substantial majority of the remaining two percent is ideologically blinded. I think you must understand that there won't be a hell of a lot of support for doing the right thing, but that doesn't wipe out your obligation to do it.

So do it.

And tell me , how bad is it -- really -- and how bad will it get?



Yeah, I was afraid of that.