Five years after the Great Recession of 2007-08 destroyed the lives of millions of people and cost the world trillions of dollars, many of the big investment banks that caused the near total meltdown are still involved in shady and sometimes criminal financial gambling schemes that could once again crash the global economy.
Independent economists warn that another meltdown could destroy the economy as we know it. Fear is ever present because the giant private banks – particularly US banks – bet trillions of dollars that are not properly secured and could cause havoc if defaulted upon.
“A resurgence of right-wing economics, driven, as always, by ideology and special interests, once again threatens the global economy – or at least the economies of Europe and America,” said economist and Nobel Prize recipient Joseph Stiglitz.
Millions of ordinary citizens who have their savings and investments tied up in big banks are unaware that their money and the entire economic environment around them is at risk.
Crime in the corner office
Multi-national banks – which of course have huge legitimate activities – employ “the best and brightest” minds they can find, paying them big bucks to work out illegal schemes and find loopholes in government legislation that will make the bank executives filthy rich.
Here are a few examples of activities of some of the big banks since the crash:
- Bank of America: Rolling Stone magazine exposed “limitless criminal conspiracies”.
- HSBC Bank: The bank paid a record $1.92bn penalty in connection with a huge money-laundering scheme involving Iran and Mexican drug cartels.
- JP Morgan Chase: The bank admitted to being involved in a number of criminal activities, including the fraudulent sale of unregistered securities.
- Barclays: They were hit with fines of $448m for its “serious, widespread” role in trying to manipulate the price of crucial interest rates that affect the cost of borrowing for millions of customers around the world.
- Goldman Sachs: A Goldman Sachs trader was found guilty of mortgage fraud that cost investors $1bn.
- Credit Suisse: One of a dozen banks investigated for allegations of fraudulently manipulating Libor interest rates to grab illegal profits.
Amazingly, despite all the criminality, not one executive of any international investment bank has gone to jail, or has even been prosecuted.
Bankers use exotic instruments to get rich
The investment banks and traders use an array of dizzying financial instruments to make massive, often illegal profits. Included are derivatives, hedge funds, credit default swaps, reverse convertible bonds, and other exotic creations that promise either huge gains or disastrous losses.
|US prosecutors charge two JP Morgan traders|
Even before the big banks start their wild gambling, they have little room for losses. As crazy as it may sound, some banks routinely have liabilities of perhaps 95 percent of their assets. This means they have less than five per cent of their assets to gamble with. A medium size loss could put the bank in a near-bankrupt situation.
Even so, they are not afraid to gamble big.
Derivatives, one of the main trading instruments, are a complex, extremely high risk transaction. Two parties make a bet on what will be the future value of some sort of asset that has a varying value. Analyst Alan Kohler says: “It’s a bit like betting on flies crawling up a wall, without having to buy the flies.”
As one example, two former JPMorgan Chase employees are facing criminal charges related to a derivatives trading scandal last year that cost the bank $6.2bn. The bank is reported to have ignored growing risks and hid losses from investors and federal regulators.
Had JPMorgan Chase’s loss been larger, and had there been other claims against the bank at the same time, it might have crashed, taking the investments of millions of people with it.
No-one knows the exact value of derivatives that exist globally, but it’s at least an unimaginable $1,200 trillion, which is more than 20 times the size of the entire world economy.
“We can say this with virtual certainty,” wrote Steve Denning in Forbes magazine. “If we continue as now and ignore them [derivatives] again, the great white shark of a global financial meltdown will gobble up the meagre economic recovery and make 2008 look like a hiccup.”
Another big crash can occur at any time if the wrong conditions come together – perhaps a combination of the collapse of a bank’s multi-billion-dollar derivative package, the bankruptcy of a European country, and the freezing of credit in many countries in the world.
The way things stand now, the banks irresponsible behaviour will no doubt lead to another even worse crash. It could happen tomorrow.
Not surprisingly, the pay is always good at the top of the heap of the Jekyll-and-Hyde world of high finance. In 2012, James Dimon of JPMorgan Chase carried away $42m, and Lloyd Blankfein of Goldman Sachs was awarded $21 million. Meanwhile, between 2009 and 2011 in the US, hourly pay for workers grew on average by just two percent per year.
Mega-banks fighting against being regulated
The mega-banks, headed by unscrupulous executives and with the support of thousands of lobbyists and hundreds of high-paid lawyers, continue to defy efforts by authorities to stop them from engaging in their risky and often illegal financial dealings.
In the US, powerful, multi-million-dollar lobbying by the big banks has prevented the government from enacting legislation that would prevent banks from gaining access to taxpayer funds if a super-bank was on the verge of bankruptcy.
The bankers have also stalled the implementation of legislation that would prevent them from using the savings and investments of everyday people when they engage in highly risky ventures for their own profit. Additionally, they are also successfully fighting off proposed legislation that would demand that banks put up more money to guarantee derivatives they wager upon.
Another instrument of the big banks, the Washington-based Institute of International Finance, is leading the fight to stop implementation of global, voluntary regulatory standards. Known as Basel III, the rules would make the banks increase the amount of back-up funding. Again, the banks say the regulations would not only be detrimental to them but also slow economic growth. Independent economists say the proposed regulations do not go far enough to rein in banks’ autonomy.
In January 2013, the bankers claimed a significant victory when Basel III officials backed down and agreed to broaden the definition of the assets the banks could use to back up their loans. Officials also agreed to delay the start of the regulations to 2019 – an absurdly long period of time.
Giant banks must be brought under control
Governments – particularly in the United States and the European Union – must start showing the intestinal fortitude to stand up to the banks. The way things stand now, the banks’ irresponsible behaviour will no doubt lead to another even worse crash. It could happen tomorrow.
Solutions need to be found that serve the interests of the public, not the interests of a bunch of out-of-control gamblers.
Governments must urgently step in and take control of dangerous gambling instruments, such as derivatives, so there is less risk of them blowing up. Banks involved with derivatives should put up billions of dollars to protect against any unforeseen losses, and then plan to end the whole derivatives fiasco by gradually banning them.
We must then remove the control that banks have over governments and the general public. This concerns the “too big to fail” problem. In 2011, 29 banks in the world were so large that, if even one of them failed, it would take a huge chunk of the global economy down with it. Because this fear hangs over the head of our governments, they are afraid to charge big banks with criminal activities. In addition, mega-banks are able to intimidate regulators when new banking laws are being negotiated.
Our world will not be safe economically until we eliminate the huge amount of influence the rogue and immoral banks have over us. The obvious way would be to break up the banks and control their size.
Nick Fillmore is a Toronto-based freelance journalist. He has worked for more than 25 years with the Canadian Broadcasting Corporation, including time heading CBC Radio’s Investigative Unit, and is a founder of the Canadian Association of Journalists. His blog can be seen at: nickfillmore.blogspot.com