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.

Still "Too Big to Fail"

The TBTF [Too Big To Fail] institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism. It is imperative that we end TBTF. In my view, downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response. Only then can the process of “creative destruction”— which America has perfected and practiced with such effectiveness that it led our country to unprecedented economic achievement— work its wonders in the financial sector, just as it does elsewhere in our economy. Only then will we have a financial system fit and proper for serving as the lubricant for an economy as dynamic as that of the United States.

Now that post-dot.com and post-Enron financial regulations have been rendered largely useless by passage of the so-called JOBS act, we really should see what we can do about salvaging what we can of Dodd-Frank before the Wall Street lobbyists decimate what little good it can do. As you may recall, its original intent was to end the threat of "too big to fail," but somehow the biggest banks remain TBTF and only continue to get larger.

Hence, it is interesting to note that the quotation above is from Richard W. Fischer, president of the Federal Reserve Bank of Dallas — considered among the most conservative of the Fed branches. It comes from his introduction to the Dallas Fed's 2011 annual report, most of which consists of an essay by Harvey Rosenblum entitled Choosing the Road to Prosperity: Why We Must End Too Big To Fail— Now.

Download it here. It's neither too long, nor too technical. It's definitely worth fifteen or twenty minutes of your time.

Regulating Wall Street: things looking up!

Judging by how upset Barack and his Banker Buddies have been in recent days, the financial reform bill coming out of the Senate is likely to be a lot stronger than most of us expected. Sherrod Brown and Ted Kaufman's proposal to reimpose caps on deposits and liabilities a single bank can have on its books looks like it will be part of the final bill; and while Blanche Lincoln's proposal to force banks to divest themselves of their derivatives desks is far from a sure thing, it is doing well enough to make Tim Geithner squirm.

Most encouraging is that support for these and other new restrictions have bipartisan support, showing that members of both parties have noticed the popular rage against big finance, and are afraid to buck it. There is support on both sides of the aisle for the Volcker Rule, which would bar banks from proprietary trading; support on both sides for reinstating Glass-Steagall separation of commercial and investment banking; and an extraordinary alliance of the left and the right calling for expanding GAO powers to audit the Fed.

The bank lobby — with full support of the Robert-Rubinesque contingent of the Obama administration — is working mightily to construct "placebo amendments," substitute proposals senators could vote for that would make it appear they support reform while continuing to serve the plutocrats.

So, stay alert. As many have noted, we have a once-in-a-generation opportunity to rein in the banks. If it doesn't happen this time, it won't happen until the next mega-recession comes along.