“Be Nice to the Countries
That Lend You Money”

This talking-shop will raise expectations that are not going to be fulfilled.

There are three basic issues to be addressed:

1. The nature of fractional reserve banking makes it a systemic Ponzi scheme;

Fractional Reserve Banking

2. The lack of a barrier between 'high street' banking and investment banking;

Glass-Steagall Act

Gramm–Leach–Bliley Act

3. The lack of any linkage between money and wealth. (Fiat currency)

Fiat Money Systems

Since it is vanishingly unlikely that ANY of these issues will be addressed by the Commission, the likely focus on the populist issue of bankers' bonuses will generate much heat but no light. And therefore no change.

Can we have a new Glass-Steagall?

Big earners are still safe in their glass towers

The FSA may talk as if it's getting tough on the City, but it seems it has already run out of steam ...

In a detailed report, the FSA shows that of the 27 firms netted by its first regulatory trawl, 2,800 bankers got more than £1m, almost 90% of the total in bonuses.

Thousands more lower down the food chain also benefited from bonuses, usually worth at least 80% of their total income ...

Safe from the protests of ignorant consumers and from intervention by a government fearful of killing the golden goose, banks feel secure.

A little heat could be applied by the agents whom consumers pay to handle their money. Fund managers, pension trustees and independent financial advisers could exercise some control to the benefit of ordinary savers.

It does not happen and is unlikely to happen when this small and shadowy group are under instruction to maximise short-term profit for their customers.

They also benefit from fees and commissions that oil the industry's wheels.

The FSA chairman Lord Turner famously said that much banking activity was socially useless.

It's a pity the debate he sparked last year already seems to have run out of steam.

Guardian  29 July 2010    Commission on Banking    Wealth Log

Banks ignore pleas and cut loans to the real economy again

Almost 3,000 City staff took home more than £1m last year

Time for a credit squeeze on big takeover bids

... if Osborne and Cable want to ease credit, and prevent firms from gearing up too much, they should look at whether limiting the amount of debt a predator can raise to fund a bid would be a sensible alternative.

Many of the bankers and brokers I've talked to about this like the idea of some sort of limit on what proportion of takeover funding should be debt; around 25 per cent of the total purchase price seemed to be the consensus.

Such a restriction should certainly be considered as part of the City's review into how the machinery of takeovers can be made tougher following Kraft's successful bid for Cadbury, which caused such an outcry.

It also fits with what Cable told me in a recent interview that the real issue to be investigated is not whether a predator is foreign, that misses the point, but whether takeovers are value-enhancing.

As he said, in most cases they are not – and it's going to be fascinating to see how much support Standard Life gets for its brave stand against a bid for Tompkins.

Making firms fund their acquisitions with more of their own capital would be one way of ensuring that shareholders really understand the financing and the possible dilution ...

Independent  25 July 2010    Rebalancing the Economy

Watch out, the great £50bn property unload is about to begin

It is not so much "asset backed securities" which sunk the UK banking system, still less the domestic housing market – where default rates have remained remarkably tame.

Rather, it was the same as last time – good old fashioned commercial property lending.

According to a recent De Montfort University study, there is approximately £300bn of banking loans outstanding to the British commercial property market, of which approximately £50bn is in breach of covenant.

Yet despite the fastest and deepest commercial property slump since records began – a peak to trough fall of approximately 44pc – there has so far been only limited impairment applied to these assets.

That may be about to change ...

Telegraph  22 July 2010        

Santander faces doubts as it seeks greater growth

Too big to fail?

Over the past 10 years, the Spanish bank’s drive ... has translated into vast expansion.

Pre-tax profits have soared, nudging €12bn last year ...

Last week, it carried out its latest opportunistic acquisition – securing a bigger foothold in Germany, after buying 173 branches from a retrenching SEB of Sweden for €555m ($701m) ...

This month, Santander is expected to seal a similar branch deal in the UK, hoovering up 318 branches from Royal Bank of Scotland for between £1.5bn ($2.3bn) and £1.8bn.

It is also looking at a variety of domestic assets, including branches that are likely to be sold off by the troubled cajas, as well as a possible deal in Poland to buy Allied Irish Banks’ Zachodni.

All the while, Santander is preparing for another push in Latin America, after spending $2.5bn last month to buy out the 25 per cent minority stake of its operation in Mexico.

In North America, it is flirting with a deal to buy M&T, the Buffalo, New York-based group, although for the time being the two banks are only talking “in a very light way”, according to one person close to the project.

“There’s not really much acquisition activity in banking at the moment but Santander is the exception – they are constantly shopping for deals,” says one investment banker ...

FT  21 July 2010

Santander considers £3bn UK listing

Santander eyes £3bn UK autumn listing

Bungling Santander gave my sister my Isa

How can I get closure with Santander?

Hedge funds accused of gambling with lives of the poorest as food prices soar

• Commodity speculators push cocoa to 33-year high
• Bets 'risk the most vulnerable in the world starving'

The WDM's Great Hunger Lottery report says "risky and secretive" financial bets on food prices have exacerbated the effect of poor harvests in recent years. It argues that volatility in food prices has made it harder for producers to plan what to grow, pushed up prices for British consumers and in poorer countries risks sparking civil unrest, like the food riots seen in Mexico and Haiti in 2008.

Deborah Doane, WDM director, said: "Investment banks, like Goldman Sachs, are making huge profits by gambling on the price of everyday foods. But this is leaving people in the UK out of pocket, and risks the poorest people in the world starving.

"Nobody benefits from this kind of reckless gambling except a few City wheeler-dealers. British consumers suffer because it pushes up inflation, because of unpredictable oil and raw material prices, and the world's poorest people suffer because basic foods become unaffordable."

Guardian  19 July 2010

Food Speculation

Executive Summary

Take the highest stakes, riskiest economic behaviour ever devised, and marry it to the most fundamental basic need of humankind, and you have the subject of this report.

Over the past decade, the world’s most powerful financial institutions have developed ever more elaborate ways to package, re-package and trade a range of financial contracts known as derivatives.

A derivative is not based on an exchange of tangible assets such as goods or money, but rather is a financial contract with a value linked to the expected future price movements of the underlying asset.

Derivative contracts are traded on a growing number of underlying assets, from share prices, to mortgages, bonds, commodity prices, foreign exchange rates, and even index of prices.

Derivatives trading has been one of the most lucrative parts of the financial industry, but it is the increasingly complex, opaque and disconnected nature of these and similar products that ultimately triggered the collapse of the banks and the worst financial crisis in human history.

Of course, the financial crisis has been an economic disaster of seismic proportions for millions around the world, plunging many countries into recession causing millions to be thrown out of work, soaring public debts and cuts in vital public services.

But while betting on the value of sub-prime mortgages or foreign currency values undoubtedly leads to disastrous consequences, there is another area where the speculative behaviour of the world’s largest banks and hedge funds represents a threat to the very survival of people: food commodities.

In The great hunger lottery, World Development Movement has compiled extensive evidence establishing the role of food commodity derivatives in destabilising and driving up food prices around the world.

This in turn, has led to food prices becoming unaffordable for low-income families around the world, particularly in developing countries highly reliant on food imports.

Nowhere was this more clearly seen than during the astonishing surge in staple food prices over the course of 2007-2008, when millions went hungry and food riots swept major cities around the world.

The great hunger lottery shows how this alarming episode was fueled by the behaviour of financial speculators, and describes the terrible immediate impacts on vulnerable families around the world, as well as the long term damage to the fight against global poverty.

In the report we describe how the current situation came to pass, the risks of another speculation induced food crisis, and what specifically can be done by policymakers here in the UK as well as in the US and EU to tackle the problem.

But at its heart, The great hunger lottery carries a very straightforward message: allowing gambling on hunger in financial markets is dangerous, immoral and indefensible.

And it needs to be stopped before any more people suffer to satisfy the greed of the banks.

WDM: Full Report .pdf  July 2010

Corporate Sociopathy    Economic Democracy    'Golden Sacks'    Wealth Log

WDM

Goldman Sachs

Goldman Sachs: Annual Report .pdf

Size isn't everything in banking

Banks invented a load of financial products and services that the world doesn't really need

... there is one area where [Stephen] Hester misses the point.

"It is a popular myth to believe that banking and financial services dominate the British economy and should be cut down to size," he told readers of the Times.

"Banks account for a far smaller proportion of the economy than manufacturing – 7.7% compared with 12.8%. Everyone wants to see growth in the manufacturing sector, but we need growth in banking too."

Curiously, this argument was omitted from Hester's related speech to the British Bankers' Association.

It is nevertheless a strange claim. Once upon a time, and for a very long time, the banking sector was about 3% of the economy.

If you are going to applaud the fact that it is now 7.7%, you must answer the charge that banks have simply sucked up talent and capital from elsewhere (like manufacturing) and become a drag on growth in general ...

Guardian  14 July 2010    Banking Commission    Rebalancing the Economy

Banks are carrying on while the rest of us pay the price

FSA chairman backs tax on 'socially useless' banks

The socially useless City

MPs launch inquiry into retail banking, as UK banks attack new bonus rules

• Treasury select committee to hold public inquiry into retail banking market
• EU bonus rules could see City losing business to US and Asia, banks argue ...

The committee will focus on the retail banking market and the arrival of new entrants on the high street.

Andrew Tyrie, chairman of the Treasury committee, laid out his plans as Britain's delegates at today's annual British Bankers Association (BBA) conference lined up to defend the sector against being forced to break up banks that are deemed "too big too fail".

Banks also hit out against new bonus rules being imposed by Brussels, warning that the City faced losing business to the US, Switzerland and Asia as bankers jetted out to countries with less stringent restrictions on high earners.

Acknowledging that the industry needed to do more to restore its reputation after the 2008 banking crisis, they also insisted it was time to stop blaming banks for the ensuing economic crisis ...

Guardian  13 July 2010    Banking Commission

Can Mervyn King save the UK banking system?

... a glance back at the Bank's half-yearly Financial Stability Report released in the summer of 2006 shows why a different approach is needed.

A full year before the crisis erupted, the FSR noted the widening global imbalances, the build-up in debt, and the expansion in bank balance sheets, reflecting "position-taking in risky and prospectively illiquid instruments including structured credit products".

It noted the herd behaviour of banks that, while aware prices of certain assets were too high, carried on trading for fear of harming short-term profits or losing market share.

It noted that heavily leveraged banks could no longer fund their activities from their retail depositors and were increasingly dependent on wholesale money markets, leaving them "vulnerable to falls in market liquidity".

It noted that the stability of the financial system relied on investors knowing what risks they were taking, and that the complexity of the instruments that were being traded made it "difficult for investors to determine precisely how exposed they are to particular risk factors".

It's all there, in other words. The Bank clearly identified all the ingredients that would form a toxic cocktail a year later, even if, at that stage, it did not envisage the biggest financial crisis since the 1930s. What it lacked in 2006 was the ability to translate misgivings about banks' activities into action ...

Guardian  12 July 2010

Force banks to bolster capital, says BIS

Tighter banking rules will drain £1tn from financial system

Dick Turpin rides again, only this time he wears a suit and drives a Merc ...

Britain's biggest banks will warn the chancellor that up to £1tn is poised to be drained from the financial system, hampering economic recovery and depriving households and businesses of loans and other forms of credit ...

Observer  11 July 2010

Banks tell G20 new rules on holding capital could push UK back into recession

Project New Bank

It was Paul Volcker, former chairman of the US Federal Reserve, who observed that the only useful financial innovation in the past 20 years was the invention of the ATM. It's a popular sentiment. So a cautious welcome, please, for Project New Bank, which proposes to offer a better level of service to customers and to empower managers to make decisions in the branches ...

simlmx
All fake, everybody who understands how the money supply is created from debt knows that until you do what the founding fathers of the united states of america did which is control and issue the currency instead of borrowing from the central banks then the slavery of the people to the bankers will continue and government debt will always be there. to do the same thing over and over again whilst expecting a different result is insanity. That's what these clowns are doing.

Guardian  08 July 2010

Sir David Walker and Lord Levene

Force banks to bolster capital, says BIS

Central bank's bank insists that industry revamp is urgent as campaigners voice anger that G20 failed to take harder line ...

Banks should be forced to bolster their capital cushions to aid economic recovery, a powerful group of central banks said today in an apparent contradiction of the G20's move to delay industry reforms.

As the Bank for International Settlements, known as the central bankers' bank, set out the case for a rise in historically low interest rates around in the developed world, it also argued that making changes to the financial system had "acquired even greater urgency".

"[The reforms] can provide the most immediate protection to the financial system in the event of a new crisis. Moreover, acting now to improve the capital base and the liquidity of bank balance sheets will not jeopardise the recovery. Rather – by making financial institutions sounder – those actions will promote a sustainable recovery," it said.

The comments in the BIS annual report came amid complaints from pressure groups that banks were being "let off the hook" by the G20 after intense lobbying by the financial sector led to a delay in introducing rules requiring them to hold more capital ...

Guardian  28 June 2010    G20

Banks win battle to tone down Basel III

British banks out of kilter

British banks are horribly out of kilter with the rest of Europe and the US.

They are too exposed to short-term funding pressures.

In the UK, the largest banks need to replace £750bn to £800bn of loans and assets by the end of 2012. That's £25bn a month and the banks are running at half that pace.

There is plenty of long-term money in the world looking for a home, especially in Asia.

At the moment, though, there's a stand-off. The banks don't want to pay inflated rates; investors think they will eventually and are prepared to wait. Buyers and sellers, one assumes, will come together but the Bank clearly wishes they'd get on with it.

"Disruption to key funding markets could heighten the significant refinancing challenge facing banks internationally," says the report.

Banks could, of course, do themselves a mighty favour by trimming bonuses. The most eye-catching graph in the report is (once again) the one that shows how much extra capital could be saved via lower "discretionary distributions," as the Bank describes dividends and compensation.

Last year British banks could have accumulated an extra £10bn, rather than £2.5bn, if compensation ratios had returned to levels seen in 2005.

It's not the Bank's job to prescribe lower bonuses. It's up to shareholders to demand it – they should wake up.

Guardian  25 June 2010    Banking Commission    

Banks win battle to tone down Basel III

Plans by global regulators to compel banks to set aside billions of dollars in extra capital to cope with future crises are to be pared back after intense lobbying by the industry ...

Proposed short-term emergency funding measures will go ahead. But the committee is likely to shelve the idea that banks should be forced to maintain a longer term “net stable funding ratio” that aligns the maturity of their assets and liabilities ...

Analysts had also calculated that the Basel III reforms, were they implemented in conjunction with new taxes around the world – such as the liability tax announced by the UK government this week – could have cut a typical bank’s return on equity from 20 per cent to 5 per cent ...

FT  24 June 2010    Banking Commission

Basel chief hits back at growth curb claims

Five percentage point rise in bank reserves 'would prevent most financial crises'

G20 delay on Basel III bank curbs

Can we bank on Basel?

Five Ways to Tame the Financial Market Monster

• Restore Glass-Steagall;
• Restore core capital ratio;
• Ban short selling;
• Force hedge funds to keep capital reserves;
• Government-run ratings agencies.

The authors tell us the EU requires a core capital ratio of 4 per cent.

According to the Wikipedia article on reserve requirements, the UK's was 20.5 per cent in 1968, but only 3.1 per cent by 1998.

Note that the issue of Fiat money is missing from this list.

The G-20 summit in Canada might offer the last chance to regulate the out-of-control financial markets. But it seems more than likely that the leading industrialized nations will once again fail to reach an agreement, even though it is already clear which five reforms are urgently needed to avert future crises ...

Until now, the politicians' victories in this duel have been nothing but a triumph of words. "Never again will the American taxpayer be held hostage by a bank that is 'too big to fail,'", US President Barack Obama thundered.

"We can no longer accept a capitalist system without rules, without order and without norms," French President Nicolas Sarkozy fumed. "A system in which most of the money is earned through speculation instead of production -- that is not the kind of system in which I want to live."

These are grand words. But virtually nothing has happened to diminish the business of speculating in stocks and currencies, in the ups and downs of financial markets, the banks' practice of gambling with the minimum possible stake ...

The markets are growing and thriving as if the near-collapse of the global financial system had never happened.

In the first three months of this year alone, three major financial institutions, Goldman Sachs, JPMorgan Chase and Deutsche Bank, raked in $13.5 billion in profits ...

They continue to benefit from a financial system characterized by few rules and many loopholes. Hedge funds are subject to scant regulation, even though they are the ones that engage in particularly risky transactions.

Banks are not required to maintained sufficient capital reserves to cover the risks they are taking.

Finally, rating agencies continue to do business with banks whose products they then assign top marks to ...

The big wheel is still turning as if nothing had happened.

In fact, it is even being lubricated with the cheap money central banks pumped into the markets to minimize the consequences of the financial crisis.

As a result, those who helped create the crisis are now benefiting from government efforts to resolve it ...

Der Spiegel  2 June 2010    Banking Commission    G20    

Capital Requirement

Reserve Requirement

George Osborne's 'sweeping City reforms

Mr Hector Sants - failed FSA chief - "stays on to deliver financial shake-up"

Mr Osborne must be more radical

... it is rather a stretch to believe that had the Bank of England been in charge of regulation over the past 13 years there would have been no emergency in the first place.

And the Conservative Party's emphasis in recent years on the need to transfer regulatory powers to Threadneedle Street felt like a crude attempt to pin the personal blame for the financial meltdown on Mr Brown (who established the FSA in 1997) rather than a considered response to what went so disastrously wrong in the financial services sector.

It still smacks strongly of party politics now that they are in office.

And, looking forward, far more important than who does the job of regulating the financial sector, is what they do.

In one sense there is consensus on what needs to be done.

Banks need to be forced to hold more capital. The use of leverage must be much more restricted. Derivatives need to be traded on a central, transparent exchange ...

The new regulators need to regard themselves as gamekeepers, charged with keeping the poachers of the financial services in line, rather than facilitating cheerleaders of a national success story called the City of London ...

The case for a separation of retail banking from the casino operations of investment banking is already made, not least by the cross-party Future of Banking Commission, which delivered its report earlier this week.

Mr Osborne's decision to put this question up for a year-long review – despite advocating a split while in opposition – feels like an invitation for the still powerful banking lobby to exert its influence behind closed doors.

For all his stern words at the Mansion House last night, it remains to be seen whether Mr Osborne has made a decisive break from the servile attitude of the previous government towards the City of London ...

Independent  17 June 2010

Will the Bank's new financial toolkit be filled with blunt instruments?

trigano Mr. Prosser seems to be implying that there wasn't an explosion in suspect lending practices in the build-up to the credit crunch.

Well, he is wrong. Defaults on mortgage loans have been subdued due to the MPC cutting interest rate to a 300 year low of 0.5% and holding them there despite CPI inflation running well over the 2% target with the concomitant erosion of savers deposits (an acceptable sacrifice it seems though one I suspect they may come to regret in the long-term).

Therefore his thesis that lending was not out of control due to the paucity of defaults is flawed, the fact is that the much mooted funding gap between what the banks were lending out and their savers deposits had grown to enormous proportions which necessitated their resorting to the money markets to make up the shortfall which did for Northern Rock when the money markets siezed up at the inception of the credit crunch.

If the banks had not lent out recklessly pumping up asset prices (houses of course) above their fundamentals then the funding gap between the banks' deposit holdings and their lending would have been negligible.

The interesting things is that this situation remains unresolved with the banks in a curious "limbo-state" due to the intervention of the Government and the BoE with their stepping in to supply £300 billion of funding to the banks to plug the gap.

This support is supposed to be withdrawn between 2011 and 2014, if they do this with the money markets still in a state of siezure the outcome is obvious.... the funding gap returns which necessitates the falling of asset prices (houses again!) to a point where deposits and lending are more in equilibrium.

In the long term this would be a much more stable situation and certainly good for the economy but will the Tories have the courage to do this since it would entail much pain?

And if they don't will that £300 billion be added to the national debt (knocking up to near 90% of GDP) which also could have unpleasant consequences for the UK's AAA credit rating. Interesting times..........

Independent  17 June 2010

Osborne unveils sweeping City reforms

Osborne abolishes FSA

Osborne gives Bank huge new powers

Osborne reveals sweeping changes to banking system

FSA's Hector Sants stays on to deliver financial shake-up

Hector Sants resigns as FSA boss

Banks are carrying on while the rest of us pay the price

Despite their disgrace, the banks' well-oiled propaganda machines continue to spin their lines that the finance sector services the productive economy, is the major contributor of tax revenues to the Treasury, and that it is a significant engine of job creation.

But the Centre for Research on Socio-Cultural Change (Cresc) at the University of Manchester ... challenges each of these assertions.

Between 1997 and 2009, almost a third of lending was between banks. Half went to individuals, mainly on mortgages that fuelled the housing bubble; manufacturing received just 3% of the pie; other business loans accounted for only 17%. Since the crash, net lending to business has fallen by £40bn.

The Cresc research also shows that even in a finance-led boom the sector created no net new jobs. Direct employment in finance hovered around the 1 million mark, less than half that in a weakened manufacturing sector – and most of the jobs it does produce are concentrated in London and the south-east.

Neither can the finance sector credibly claim to be the major source of tax revenue in the UK. It contributed just 6.8% of tax revenues between 2002 and 2008, just over half the amount paid by manufacturers; the reason traditional industry generates more is because it is labour-intensive ...

Observer  13 June 2010    

Bank commission calls for 'profound reform' of banks

Risk-free "safe haven" accounts guaranteed by the government should be set up as part of a "profound reform of the banking system", a report says.

The Future of Banking Commission wants improvements in saver protection and restructuring of banks ...

The commission says its recommendations aim to put ordinary people at the heart of a reformed banking system.

They include reforms to the structure of banks so if they fail, depositors are protected, and the introduction of new competition and regulatory regimes that make bank boards responsible for both meeting customers' needs and for their own solvency.

Other ideas include an "ethical culture" which would see banks stop paying commissions to front-line staff ...

BBC NEWS  13 May 2010

Banks are carrying on while the rest of us pay the price

Another enlightened call for reform

We should back the Davis report, but ...

Commission Report

LSE chief attacks short-selling ban as 'misguided' and 'counterproductive'

The chief executive of the London Stock Exchange has launched a stinging attack on the German government's unilateral decision to ban so-called "naked" short-selling in some financial stocks and bonds.

In an interview with an Italian newspaper, Xavier Rolet described the ban as a "mistaken decision that risks having an effect which is the opposite of what is desired".

He continued: "I would, in fact, suggest to eliminate the ban. And then to construct market infrastructure that helps investors. Markets are global: you can't think of acting unilaterally because it would be counterproductive." ...

Independent  31 May 2010    Blog    Corporate Sociopathy    Economic Democracy

Banking split essential to avoid new financial crisis, warns OECD adviser

'We need to separate capital market banking from standard commercial banking. That's the most basic lesson of the crisis,' says Adrian Blundell-Wignall ...

Blundell-Wignall, speaking in a personal capacity at the OECD's annual forum in Paris, said one of the big obstacles to better global governance was "institutional capture" of policymakers by the leading global financial institutions ...

Blundell-Wignall, the OECD's deputy director for financial and enterprise affairs and a former investment banker, was critical of the reform proposals currently being discussed.

"How big a crisis is big enough? It seems as if this crisis was not big enough ... If we can't even do that, I'm very pessimistic about the future of capitalism. I'm afraid that governance will only be sorted out by another big crisis and it will probably be bigger than this one."

He added later that reforms of banking should also include common limits on leverage for all countries, so banks would be unable to circumvent attempts to clamp down on excessive risk-taking ...

Guardian  27 May 2010    Corporate State Britain

Investment banks likely to face competition review

Lazard man in Kraft spotlight is right to exit

Top policymaker says Britain risks copying Japan's lost decade

• UK banks may not have funds to boost economy
• Rates should have gone up in 2005, says Kate Barker ...

MPC member Kate Barker used a valedictory interview to admit that the Bank became too complacent in the run-up to the financial crisis, and probably should have raised interest rates higher in 2005 ... Barker said the MPC's focus on keeping inflation in check on a medium-term basis meant it did not pay more attention to underlying problems that were building up in the economy in the last decade.

"One disadvantage that I personally think arose is that it encouraged too much focus on exactly hitting the target at exactly the two-year horizon and I think that distracted us perhaps from wider strategic issues," said Barker, referring to the MPC's remit to keep the consumer price index close to 2% ...

Derv
24 May 2010, 5:42PM

CPI stayed close to the 2% target from 1997 until April 2007. This, Barker suggested, made it harder for the Bank of England to recognise problems "under the waterline".

Might have been hard for the BoE, but did CPI include property prices? I don`t think it did. So while MP3 players, laptops and mobile phones were falling in price (helping to keep CPI under 2%), the BoE thought that everything was fine.

Let`s face it, as long as you can get a cheap iPod, who cares if you can`t afford a roof over your head, or the financial system is heading towards a near disaster?

Come to think of it, you can afford a home, because those lovely people at Northern Rock will lend you whatever you need, and a bit extra!

Guardian  24 May 2010

Reforms put Wall Street in its place

The most important provision in the bill may be the Volcker Rule, which restricts the ability of banks to trade on their own account.

Goldman Sachs became the poster child for this kind of trading when it was revealed that the firm was selling mortgage-backed securities designed by an investment partner who was shorting mortgages ...

donoevil
21 May 2010, 5:26PM

My God, either you're a sucker or very easily pleased. Real reform comes when the power of banks to create money (via fractional reserve banking) is severely curtailed. That's when the market serves and does not command.

Hickory recently posted some interesting quotations which you might find instructive.

"The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity."

Abraham Lincoln

"Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money."

Sir Josiah Stamp, Director of the Bank of England (appointed 1928). Reputed to be the 2nd wealthiest man in England at that time.

"The powers of financial capitalism had a far-reaching plan, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. Their secret is that they have annexed from governments, monarchies, and republics the power to create the world's money."

Prof. Carroll Quigley (Harvard and Georgetown)

Guardian  21 May 2010

Obama gets his big bank reforms

... we can't yet be certain of the minutiae of the overhaul, because the Senate's reform package has yet to be reconciled with the House of Representatives. Here, in general terms, is what is likely to happen:

1) Most of the $600 trillion derivatives market will be forced through third-party clearing houses, to increase oversight of the deals and ensure participants in the deals put up sufficient margin or security against the risk of losses. As I've mentioned before, this will significantly reduce the profitability of derivatives trading for banks, because it will lessen their ability to blind gullible investors with the wizardry of their science.

2) Banks may be banned from proprietary trading or speculating for their own account.

3) An important part of banks' derivatives business, their swaps desks - which include the business of insuring loans through credit default swaps - may be walled off, or forcibly separated.

4) There'll be a powerful new consumer protection agency.

5) There'll be new powers for the authorities to seize control of large systemically important institutions that appear to be running into difficulties.

6) There'll be new powers for the authorities to break up troubled systemically important institutions in a supposedly orderly way.

7) There'll be new multi-authority oversight of the risks in the financial system.

8) In general, the Federal Reserve will emerge as the regulatory super-power, though the precise scope of its remit remains to be defined. ...

... there will be indirect implications for all big British banks, because where America leads in financial reform has a significant influence on the room for regulatory manoeuvre of the British government ...

Robert Peston  21 May 2010

Obama reasserts Volcker rule

Volcker Rule

US Senate approves sweeping reforms of Wall Street

Wall Street reform bill in detail

Key Points of the Wall Street reform bill

Banks warn Volcker rule will damage consumers

Investors must take care when playing in the Street

Information asymmetry in action

[Lessons] ... piled up over the years. Another involved the initial public offering of Lyondell Petrochemical.

Goldman aggressively marketed it as a “can’t miss” vehicle that would deliver large cash dividends over time, which appealed to me as I was then managing an income fund.

The stock went down 50 per cent in the first year, earning it a disparaging nickname and Goldman a black mark as far as I was concerned ...

Though my firm generated a lot of trading business and those on the sell side were adept at acting like intermediaries, their actions were often those of adversaries.

The firms ... often knew facts I didn’t or figured the odds better than I did. I expected that to be the case, since they were full of talented, well-paid hard-chargers placed perfectly at the centre of the flow of ideas and money.

What I was slower to understand was that, even as a big client, they were not going to tell me the whole truth if it meant extra profit for them ...

... the culture laid bare by the allegations is starkly familiar. It is the way business is done; it is in the DNA of the animal that brought us to the brink of disaster not that long ago and which continues to run amok ...

FT  19 May 2010

Information Asymmetries

Bankers plot guaranteed bonuses to beat budget tax

The City is lining up to defend itself from any further attack on pay, which bankers argue will kill London’s ability to compete as a global financial centre.

Senior bankers at a number of the City’s biggest institutions have started to work on plans to get round any new taxes.

If they offer legally-binding guarantees on bonuses before the new measures are announced the payments are likely to escape censure, the bankers believe ...

Times  16 May 2010

We need Roubini's brains if we want banking reform

Working out what our bank system should look like, and whether it should be split between narrow and casino banks, is so complex that we need brains like Roubini's to help see more clearly.

Reformers will also need to have pretty robust arguments because any attempts here and in the US to break up the banks will bring down the wrath of the most powerful vested interests in the world, who will fight tooth and nail to defend their privileges and their bonuses.

As his book warns, a return to some sort of Glass-Steagall structure doesn't go far enough.

He's right when he recommends breaking up the Too Big To Fail banks – Bank of America, UBS, RBS, JP Morgan, Barclays, Goldman Sachs and BNP Paribas for starters – with antitrust laws, just as the US did with the oil titans and AT&T.

That's why our new commission must look at whether the big investment banks are an oligopoly.

We need to know how the banks make so much money – whether from cartels that set underwriting fees or from colluding on advisory charges.

Indeed some critics even ask whether many trading profits are ficticious ...

... breaking up the banks will only work if there is global agreement, as John Kay, the champion of narrow banking, says, there are only one and a half countries which matter – the US and the UK ...

Independent  16 May 2010    Corp Sociopathy Log

Fiat Currency

No way back to status quo Cable tells banks

Banks warn Volcker rule will damage consumers

The same tired mantra from the banks: deregulation is in your interests. It's all about something called 'investment'.

Organisations lobby EU and US against regulatory clampdown ...

In their letter, the bankers made the point that the "health of our respective economies is inextricably connected, with trade and cross-border investment flows linking the transatlantic economies and capital markets".

Observer  09 May 2010

RBS chief calls for 'strong stewardship' of UK economy

Who caused the crisis, Mr Hester? And who ran up a mega-deficit bailing RBS out?

One of the first bosses of a major company to speak following the election which appears to be delivering a hung parliament, Hester said this morning:

"The politics of the UK is down to the voters of the UK. All that matters to us is whether there is strong stewardship of the economy because, as we see from Greece, getting the debt under control is very important."

Rioters have taken to the streets in Greece after the EU and International Monetary Fund bailed out the debt-laden country with a €110bn (£95bn) package that requires deep cuts to the budget. The bank has a £1.5bn exposure to Greece.

Hester said that the problems in Greece were a clear example of how important it was for nations to "get their finances under control" ...

Guardian  07 May 2010    

Dow Jones insanity shows the need to regulate the murky world of dark pools

We don't know all the causes yet of Thursday's bout of insanity on the Dow Jones Industrial Average, but this much is clear: regulators have lost control of the equity market ... big buyers can go hunting for sellers (and vice versa) without having to reveal their hand.

It makes a mockery of the claim that published stock prices reflect the balance of supply and demand at any given moment.

It is because of the sheer lack of transparency that these off-exchange trading platforms are called "dark pools". There are more than three dozen alternative trading pools in the US now ...

The traders themselves long ago stopped being actual humans. More than half of all share trades in the US are now done by computer programmes, and the proportion is rising exponentially.

These black-box programmes are designed to trade at very high frequency, using impenetrable mathematical models to spot supposed trading patterns and eke out tiny profits, multiple times a second ...

The SEC recently – belatedly – began (the) review of high-frequency trading and dark pools.

It is difficult to be optimistic that it will get its head round all these issues.

This is the same SEC that couldn't catch Bernard Madoff when he was using an archaic computer to fabricate thousands of trades ...

Independent  08 May 2010    Corp Sociopathy Log    Economic Democracy

Origin of Wall Street’s Plunge Continues to Elude Officials

Goldman Sachs boss faces an ambush at the AGM

In the absence of economic democracy, CEO's like Lloyd "I'm doing God's work" Blankfein can put two fingers up to "shareholder proposals" safe in the knowledge that fellow corporate investors will remain on side, on the understanding that the new "business standards committee" is empty corporate spin. This, after all, is the firm that worked both for the Greek government, and against it. All in the interests of corporate profit.

He once joked that Goldman Sachs was “doing God’s work”, but yesterday Lloyd Blankfein came face-to-face with the Lord’s representatives on Earth.

A stream of Christian shareholders held him to account at the bank’s annual meeting in Manhattan, exhorting him to work “for the many, not just the few” ...

In hopes of deflecting further criticism from shareholders and the wider world, which he knew would be watching the meeting closely, Mr Blankfein said that Goldman would create a new business standards’ committee to conduct a comprehensive review of business practices at the firm and come up with recommendations to the board ...

Mr Blankfein looked remarkably more relaxed throughout than he did during his recent grilling by the US Senate.

He responded politely but rejected all shareholder proposals.

By the end, he looked unbowed, but relieved all the same that he had successfully got through another day in the spotlight at the Goldman Sachs circus.

Times  08 May 2010        Corp Sociopathy Log    Economic Democracy    Goldman Sachs

Exodus? What exodus? Our tax system is not as bad as the critics claim

Never mind the effect of a hung parliament on the public finances and our AAA credit rating, some of those doom-laden warnings you're reading about the dangers of no party winning a clear majority may just be motivated by fear of what Messrs Clegg and Cable might have in store for the banking community.

Their proposals certainly go further than those of either Labour or the Conservatives.

Separating the banks' retail and investment operations – in the same way as the US has proposed – is just the start of it.

The Lib Dems would also introduce a 10 per cent windfall tax on bank profits and limit cash bonuses to a maximum of £2,500 a year ...

How disastrous would this programme be for Britain's financial services industry? Well, there would no doubt be a panic in the City, with dire predictions of a mass exodus of both the biggest institutions and their brightest talent. But whether the departures would really be so numerous is questionable.

For one thing, the Lib Dems' windfall tax no longer looks so punitive now that we have seen what the International Monetary Fund is proposing for the G20 as a whole ...

Independent  27 April 2010

Rating Agency Data Aided Wall Street in Mortgage Deals

One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good.

One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them.

In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees.

The major credit rating agencies, Moody’s, Standard & Poor’s and Fitch, drew renewed criticism on Friday on Capitol Hill for failing to warn of the dangers posed by complex investments ...

NYT  23 Apr 2010

IMF urges double tax hit on banks to refund taxpayers

In a report delivered to G20 nations on Tuesday, but yet to be published, the Fund has urged countries around the world to impose two new taxes on financial institutions: a "financial stability contribution" which levies a small charge on their balance sheets, and a "financial activities tax", which taxes excess profits, including bonuses ...

Telegraph  20 Apr 2010

IMF fastens the policy tightrope

The IMF has recently proved its worth by displaying a remarkably nuanced view of markets.

Far from the overly rosy view of deregulation the fund was once accused of, the report explains how “financial channels can amplify sovereign risk”.

That sovereigns usually do not have to post collateral for over-the-counter swaps, the IMF says, makes dealers hedge any perceived risks through credit default swaps rather than call additional “margin” as they would with corporate clients.

So worries quickly spread to a shallow and therefore volatile short CDS market, whose waves in turn can spill over to other assets.

Policymakers, then, confront two tremendous tasks. One is to make financial markets safer – reform is moving in the right direction, but too slowly.

The other is a fiscal balancing act to retain – or regain – credibility with lenders without cutting off lifelines to economies still in need of them.

Leaders must overcome short-termism and divisions to convince the public they will do what it takes to consolidate public finances in the medium term.

Fiscal statesmanship is now indispensable.

FT  20 Apr 2010    Fractional Reserve Banking    IMF

Revolving-door culture leaves government full of clever bankers

Should Goldman Sachs be sacked as a UK Government adviser in light of the charges brought against the Wall Street giant by the US Securities and Exchange Commission? Most people will probably wonder why a vested interest like Goldman was ever employed in such a capacity in the first place.

What those people don't grasp is the symbiosis between high finance and government ...

In 2008, Gordon Brown invited Win Bischoff, a former chairman of Citigroup and now chairman of Lloyds, to co-chair a Government commission on the future of UK financial services.

It came to the conclusion last May that "the international financial services sector has been a major contributor to the wider UK economy, and we envisage this remaining the case in the future".

How they must have loved that "business as usual" approach in the Square Mile.

For more than a decade ... it was said that what was good for the City of London was axiomatically good for the UK.

And even after all we have been through – the multi-billion pound bailout for the banks, the deep recession, the bonus rows – there are still many people who believe that to be true.

Some of them are in government. All their instincts scream: don't rely on the civil servants when it comes to questions of strategic economic policy, call in those clever bankers ...

Independent  20 Apr 2010

Goldman Sachs

Bank bailouts not the answer

The public will not stand for another taxpayer bailout of the banks and the government should consider radical action to overhaul the system, according to a House of Commons report out today.

Entitled "Too important to fail, too important to ignore," the Treasury select committee report says financial institutions should not depend on the state to rescue them if they run into trouble.

It calls for better risk management, effective supervision, more stringent capital requirements, a bigger role for auditors and making sure that firms can be run down and disbanded in an orderly fashion in the event of a crisis.

The report also says that Britain should not dismiss out of hand US plans to break up big banks by banning them from more risky operations. President Obama is preparing legislation that would force the banks to shed hedge fund, private equity and proprietary trading activities.

Proprietary trading is where banks trade off their own book rather than for clients ...

Guardian  29 Mar 2010

MPs back LibDems and Tories on fundamental banking reform

The latest report from the Treasury Select Committee, called "Too Important to Fail - Too Important to Ignore", says:

"The Government has ruled out structural reforms such as narrow banking in its changes to the regulatory structure of the financial system...The debate on banking reform should remain as wide as possible. Structural reforms should not be ruled out...Given the lamentable consequences of the previous regulatory approach, the Government should be prepared to embrace radical change, rather than settling for adaptation to an existing, failed model".    Robert Peston

At 02:06am on 29 Mar 2010, Leigh Caldwell wrote:

Narrow banking would not have prevented the financial crisis. Northern Rock and Bradford and Bingley were narrow banks - and the parts that brought down RBS and HBOS were the "narrow" bits, not the investment banks!

The problem is not even the size of the banks - though that does make a contribution. The real problem is something more subtle but, when you see it, much more obvious:

Knowing and Making

Banking reform called for by Treasury Committee

Fiat Currency

The Repo men must be stopped

The broad outline of what happened to Lehman has been in the public domain for more than a year.

The bank, under the leadership of Wall Street's longest serving boss, Richard Fuld, borrowed too much – it was, in the jargon, "overleveraged" – and made huge bets on the US property market.

When that market started collapsing, Lehman needed to borrow to meet its obligations – but credit had tightened up, and the bank went under.

But the report by Andrew Valukas ... shows the lengths to which Lehmans went to hide its problems – and the way in which its actions turn out, disturbingly, to have a British dimension.

Going into the crunch, Lehman's staff needed to muddy the waters about how much money they had borrowed. They did this by hiding assets from the balance sheet.

Imagine if you wanted to conceal from your creditors just how much you'd borrowed. So you'd lend some assets – say, £100,000 worth – to a neighbour in return for the equivalent amount of cash, with a promise to take them back days after your creditors had finished looking over your books.

Your books, pumped with all that cash, would look a lot healthier.

The loaned stuff would still belong to you, and still appear on your accounts as assets.

This is called a "repo" deal, short for "repurchase".

But wait! What if you lent your assets for slightly less than they were worth – say £105,000 of assets in return for £100,000 cash ...

That's a Repo 105, named after the 105% assets swapped for 100% cash.

You could now book the deal as a "true sale", and make the assets disappear from your books.

Then you could take them back a few days later, and everything is peachy.

That is what Lehman's bankers did to make $50bn disappear into thin air ...

PeterGuillam
19 Mar 2010, 8:01PM

Thanks, John, you've written a lot of interesting things about the financial crisis, this included.

The issue, though, isn't rules per se, it is ideology.

There are plenty of commenters, especially from the right, who are wanting now to say that the crisis was caused by regulatory ineffectiveness. But those same commentators, had more effective regulation been proposed pre-crash, would have denounced it in the most extravagant terms as disastrous to competitiveness, why, as almost communistic.

We shouldn't forget that all the pundits (Gordon Brown included) lined up to praise all the now failed institutions from Northern Rock to Lehmanns for their 'entrepreneurial business models'; lined up to denounce any attempt to regulate them; just as they line up now to denounce those who did not regulate them; and (paradoxically) line up now to denounce those who propose to regulate their successors.

What has happened is only in a trivial sense a failure of regulatory arrangements addressable by technical amendments within the same ideological frame that the crisis arose, and so talking about it that way is trivial - which is why these are the only ways that the neo-liberal ideologues are willing to talk about it.

More profoundly, it is the failure of their ideological frame itself. And anyone who still entertains the notion that this is some sort of uninformed, lefty nonsense fit only for the Socialist Worker would be well advised to read Financial Times writers/editors such as Gillian Tett, Gideon Rachman and Martin Wolf on the topic.

Guardian  19 Mar 2010    Ernst & Young faces inquiry over Lehman audit

Poor RBS, poor Britain

The latest results from Royal Bank of Scotland show - perhaps even more than its calamitous 2008 figures - quite what a disaster this bank has been for Britain.

The operating loss of £6.2bn for last year was only a marginal improvement from the £6.9bn loss of the previous period.

But perhaps the most chilling numbers are these: we as taxpayers put in £25.5bn of new equity into this bank last autumn, the second instalment of the £45.5bn we have invested in total; but over the past year, the equity of this bank has increased by less than £16bn to £80bn.

So almost £10bn of the £25.5bn we've only just put into RBS has already been wiped out by losses ...

Robert Peston  25 Feb 2010

Stephen Hester ... circus messiah

Anger escalates over Royal Bank of Scotland plan to pay £1.3bn bonuses

Banks facing long road back to recovery

RBS makes loss of £24bn

Executive pay and bonuses

RBS

Bank of England chief Mervyn King calls for 'narrow banks'

Bank of England Governor Mervyn King called for ultra-safe "narrow" banks today in evidence to a cross-party commission on the future of the industry.

Mr King said the case for utility banks handling vital payments and retail deposit activities - backed by cast-iron assets - is "irrefutable" ...

Mr King said it was not good enough to "co-mingle" payments and deposits with riskier activities with the expectation of state support.

The governor said investors had been living in a "fool's paradise" and added: "What we can't carry on with is a system where the people providing the finance believe they are not taking any risk, but their money is being used for risky activities." ...

Independent  25 Feb 2010

Glass-Steagall Act

Bank levy wins global support

The prospects of a global tax on financial transactions were receding fast this weekend amid signs that countries were swinging behind an alternative plan to impose an insurance levy on banks.

Both David Cameron and Alistair Darling expressed support for Barack Obama's proposals to force banks to pay into a fund that would provide compensation in the event of the failure of a financial institution.

Cameron said at the World Economic Forum summit at Davos that he thought a so-called Tobin tax was unworkable because of a lack of international support, but said he would back an insurance levy if he became prime minister in this spring's election. "We would work for a new international levy on banks – one of the ideas being considered by the IMF – to protect the taxpayer from footing the bill for banking crises," the Conservative leader said.

The chancellor said he was working with the US on a permanent insurance levy, an idea the Treasury believes will win more support than a Tobin tax. "We are keen to work on a plan on this with other countries," Darling added.

Obama has announced plans to force banks to pay $90bn (£56bn)over the next 10 years, to meet the costs of government bailouts.

Global support for a transaction tax appears to be waning just as charities and churches in the UK prepare to launch a major, celebrity-backed campaign to back the idea.

Max Lawson, senior policy advisor at Oxfam, insisted a levy would be too modest to fill the gaping hole in the public finances blown by the financial crisis. "The only thing that would raise enough money to prevent cuts to public services and help poor countries is a transaction tax." ...

Observer  31 Jan 2010

FSA chairman calls for direct controls on the supply of credit

Britain's top financial regulator, Lord Adair Turner, said today there was a need for direct controls on the supply of credit to prevent the build-up of dangerous asset price bubbles.

Turner said policymakers needed more than interest rates to tame asset-price booms and urged the setting of a new macro-prudential body in the UK able to take pre-emptive action.

Speaking in Davos, the chairman of the Financial Services Authority called for a committee that would combine the insights of central bankers and regulators, with input from outside maverick economists to avoid the risk of "group think".

"It would meet twice a year to look in a really really detailed way at what is going on," Turner said.

"At the end of the day, the committee would decide whether to pull the necessary macro-prudential levers in a discretionary counter-cyclical fashion." ...

Guardian  27 Jan 2010

Bob Diamond attacks Obama's banking plans

Barclays' president, Bob Diamond, warned today that Barack Obama's plans to limit the size of banks would hit jobs, growth and global trade.

Speaking on the opening day of the World Economic Forum in Davos, Diamond said the growth in "large, integrated, universal banks" had been a response to market forces in the post-communist world.

"They [the big banks] fulfilled an important function in helping governments and corporates to transfer risk, particularly across borders," Diamond added.

"Did banks get big because they wanted to or were they following their clients, their customers and the markets? Was it for an economic purpose?"

Finding a way of preventing a re-run of the 2007 financial crisis is a key theme of this year's Davos forum and has been given added impetus by last week's White House announcement that the US would put restrictions on the size and the activities of Wall Street banks.

Diamond said there had been the failure of a "couple of banks" caused by poor regulation and ineffective management, particularly around management of risk ...

Guardian  27 Jan 2010

Bank of England backs Obama's banking reforms

Wall Street's $26m lobbyists gear up to fight Obama banks reform

Obama pushes new bank regulation

Barack Obama's speech on banking reform

... while the financial system is far stronger today than it was one year ago, it's still operating under the same rules that led to its near collapse.

These are rules that allowed firms to act contrary to the interests of customers; to conceal their exposure to debt through complex financial dealings; to benefit from taxpayer-insured deposits while making speculative investments; and to take on risks so vast that they posed threats to the entire system.

That's why we are seeking reforms to protect consumers; we intend to close loopholes that allowed big financial firms to trade risky financial products like credit defaults swaps and other derivatives without oversight; to identify system-wide risks that could cause a meltdown; to strengthen capital and liquidity requirements to make the system more stable; and to ensure that the failure of any large firm does not take the entire economy down with it.

Never again will the American taxpayer be held hostage by a bank that is "too big to fail." ...

His proposals are twofold: first to stop banks from proprietary trading – where a bank bets on markets with its own money – for their own gain and against their own customers; and second, to limit the pace of sector consolidation to ensure no one bank becomes too large.

Mr Obama said banks would no longer "be allowed to own, invest or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit unrelated to serving their customers."

The move threatens to hurt an area of business which has been highly lucrative for major investment banks in recent years, and could lead to the need for major banking conglomerates including Citigroup and Bank of America to hive off parts of their core business. Mr Obama's second aim, to limit bank size, will involve extending the current 10pc cap on the share of insured deposits to take into account what he called "wider forms of funding employed by large financial institutions." ...

Telegraph 21 Jan 2010

We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest.

And we cannot accept a system in which shareholders make money on these operations if the bank wins but taxpayers foot the bill if the bank loses.

It's for these reasons that I'm proposing a simple and common-sense reform, which we're calling the "Volcker Rule" ...

Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers ... these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people ...

Telegraph  21 Jan 2010

Can we have a new Glass-Steagall?

Obama talks tough on day Goldman reveals bonus pot

Only the US has muscle to make banks behave

Tories back Obama banking crackdown

Q&A: Obama's bank curbs

The ‘Volcker Rule’ as a modern-day Glass-Steagall

Obama declares war on Wall Street

Britain's banking system is to be investigated by a cross-party group of senior MPs which plans to draw up proposals to put the wider interests of society at the heart of a reformed banking sector.

The Future of Banking Commission is to include John McFall, Labour chairman of the Commons Treasury Select Committee, Vince Cable, the Liberal Democrats' Treasury spokesman, and the former shadow Home Secretary David Davis, who will chair the commission ...

The Future of Banking Commission, backed by the consumer group Which?, will stage a "big banking debate" in the new year to give ordinary people a voice, and will hold three public hearings to get the views of business leaders, trade unions, bankers, politicians and regulators, before drawing up a new blueprint for the banking system.

Other members of the commission include Philip Augar, formerly a group managing director at Schroders, Clare Spottiswoode, former director general of former Ofgas, David Pitt-Watson, chairman of Hermes Focus Asset Management and Roger Bootle, managing director of Capital Economics ...

Independent 30 December 2009

David Davis

When bamboozling spins out of control

Well done, Andy Haldane. The Bank of England’s financial stability chief said in a BBC interview that losing a few banks and bankers to overseas jurisdictions “might be a price worth paying” to protect the wider financial system.

His remarks drew the usual broadside from some in the City, who criticised Mr Haldane for damaging the Square Mile — anonymously, of course. The sense of entitlement of some of our most senior bankers is matched only by their reluctance to defend their industry in public.

Mr Haldane is right. Iceland was brought down by its bankers. Britain came dangerously close. This country’s banking sector has simply grown too big for the taxpayer base that is still obliged to underwrite it.

Banks have grown so large not because they are providing a good service to the world but for precisely the opposite reason. They earn abnormal profits and pay out abnormal bonuses not by helping their clients, but by fleecing them.

The usual discipline of market forces does not work in this world because it is controlled not by the clients but by their agents ...

Lord Turner ... was spot-on when he argued that some of what the City does is socially useless. In some ways, it is worse than useless, depriving other industries of our brightest and most energetic graduates ...

Times  19 Dec 2009

FSA chairman backs tax on 'socially useless' banks

The socially useless City

• ... The first, and perhaps most shocking to those in government who had not appreciated it, is that the state has absolutely no control over the payment mechanisms on which our fundamental economic order depends. We had no choice but to bail out banks because they were the only people who could actually facilitate the exchange of money in our economy. Social chaos and major economic turmoil, probably associated with a breakdown in law and order, would have occurred if the banks had not been rescued.



• Second ... the government has almost no control over the money supply in the UK. About 3% of the cash in the UK economy is actually issued by the Bank of England.
  
  The rest is electronic money (that) is created by the commercial banks and not by central government. The commercial banks do as a consequence take the profit from this activity.
  
  Unsurprisingly if they make cash out of thin air and then charge people for the privilege of using it they have, they do during a period of massive monetary growth maximise their profit by the creation of enormous quantities of new money through offering debt ...



• Third, as the banks have fallen over it has become very clear that we might end up with very few banks and a wholly uncompetitive market for their services. This seems undesirable to almost everyone.



• Fourth, and finally, it is very obvious that the banks have been unable to regulate themselves, whether that be with regards to capital adequacy ratios, the payment of appropriate incentives, the appraisal of lending, money laundering (to which many of their tax haven subsidiaries appear to have been oblivious) or any other issue.

Network Banking

... It seems to me that any reform of the banking system must achieve the following objectives:

• 1. The basic payment system must be under the control of the state;



• 2. The state must have control of the creation of all money and must profit from the creation of that money



• 3. There must be sufficient banks in the market to both offer choice to consumers and to prevent any one bank becoming so large that its failure could represent a fundamental threat to the economy as a whole



• 4. The banking system must be better regulated and monitored in the future to prevent a recurrence of the problems that have created the current crisis.

...

Tax Research UK 21 October 2008

"I believe that banking institutions are more dangerous to our liberties than standing armies.

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.

"The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

Written by Jefferson in a letter to the Secretary of the Treasury Albert Gallatin (1802).

Will you draw your own conclusion now!!!

Posted by ebbi | 26.09.08, 15:21 GMT

The Independent 26 September 2008

1. How fractional reserve banking creates money [Wikipedia]

2. The Reserve Requirement as a tool of Monetary Policy [Wikipedia]

3. Murray N. Rothbard's "Gigantic scam"

This article needs to be read in full. It describes how banking moved from the "non-inflationary" merchant banking of the Middle Ages, to the present fractional reserve banking:

... most commercial banking is "deposit banking" based on a gigantic scam: the idea, which most depositors believe, that their money is down at the bank, ready to be redeemed in cash at any time.

If Jim has a checking account of $1,000 at a local bank, Jim knows that this is a "demand deposit," that is, that the bank pledges to pay him $1,000 in cash, on demand, anytime he wishes to "get his money out."

Naturally, the Jims of this world are convinced that their money is safely there, in the bank, for them to take out at any time.

Hence, they think of their checking account as equivalent to a warehouse receipt.

If they put a chair in a warehouse before going on a trip, they expect to get the chair back whenever they present the receipt.

Unfortunately, while banks depend on the warehouse analogy, the depositors are systematically deluded. Their money ain't there.

Murray N. Rothbard goes to describe the "counterfeiting process" led by the Fed:

Let's assume that the Fed buys $10,000,000 of U.S. Treasury bills from some "approved" government bond dealer (a small group), say Shearson, Lehman on Wall Street.

The Fed writes out a check for $10,000,000, which it gives to Shearson, Lehman in exchange for $10,000,000 in U.S. securities.

Where does the Fed get the $10,000,000 to pay Shearson, Lehman? It creates the money out of thin air.

Shearson, Lehman can do only one thing with the check: deposit it in its checking account at a commercial bank, say Chase Manhattan.

The "money supply" of the country has already increased by $10,000,000; no one else's checking account has decreased at all.

There has been a net increase of $10,000,000.

Mr Rothbard goes on to describe how - because the reserve ratio in the USA is ten percent - Chase Manhattan:

... can create deposits based on these reserves, and that, as checks and reserves seep out to other banks (much as the Rothbard Bank deposits did), each one can add its inflationary mite, until the banking system as a whole has increased its demand deposits by $100,000,000, ten times the original purchase of assets by the Fed. ...

A purchase of assets of $10 million by the Fed has generated very quickly a tenfold, $100,000,000 increase in the money supply of the banking system as a whole.

Interestingly, all economists agree on the mechanics of this process even though they of course disagree sharply on the moral or economic evaluation of that process. But unfortunately, the general public, not inducted into the mysteries of banking, still persists in thinking that their money remains "in the bank."

Thus, the Federal Reserve and other central banking systems act as giant government creators and enforcers of a banking cartel; the Fed bails out banks in trouble, and it centralizes and coordinates the banking system so that all the banks, whether the Chase Manhattan, or the Rothbard or Rockwell banks, can inflate together. Under free banking, one bank expanding beyond its fellows was in danger of imminent bankruptcy. Now, under the Fed, all banks can expand together and proportionately.

Mr Rothbard then moves on to "Deposit Insurance" - a matter of direct relevance to the Northern Rock fiasco:

But even with the backing of the Fed, fractional reserve banking proved shaky, and so the New Deal, in 1933, added the lie of "bank deposit insurance," using the benign word "insurance" to mask an arrant hoax.

When the savings and loan system went down the tubes in the late 1980s, the "deposit insurance" of the federal FSLIC [Federal Savings and Loan Insurance Corporation] was unmasked as sheer fraud.

The "insurance" was simply the smoke-and-mirrors term for the unbacked name of the federal government.

The poor taxpayers finally bailed out the S&Ls, but now we are left with the formerly sainted FDIC [Federal Deposit Insurance Corporation], for commercial banks, which is now increasingly seen to be shaky, since the FDIC itself has less than one percent of the huge number of deposits it "insures."

Clearly Messrs Brown and Darling have not Googled "fractional reserve banking" or they would have come across Murray N. Rothbard's wisdom - which ranks second behind Wikipedia's entry - and, perhaps, the scales might have fallen from their eyes.

Perhaps not.

If necessary the whole system would be propped up: Rover_2005 was one thing; Northern Rock threatens the whole rotten structure.

FED's Capacity to Boost Money Is Factor of Ten

An electronic entry credits the member's account at the FED. The entry becomes part of the member bank's required reserves backing up its demand deposits, which are usually checking accounts.

The transaction starts a chain reaction. The member bank can lend 90% or $9,000 of the $10,000, because the FED's current deposit reserve regulation is only 10%. On other types of bank customer accounts, such as time deposits or CDs, the central bank of the US requires different reserves.

Fractional Reserve System Creates a Multiplier Effect for Money Supply

When the member bank lends up to 90% or $9000 of the new loanable reserves, a principle known in economics as the Multiplier Effect kicks in. Next, recipients of the $9,000 lend out 90% or $8,100 in new deposits, which can be used by yet other banks to lend $7,290; and so on, until the original $10,000 FED injection of reserves has increased the money supply in the banking system ten times or by $100,000.

On the other hand, the Fed can reverse the process by selling a Treasury note or bond to a member bank. To pay for the purchase, the member's reserve at the Fed is reduced by $10,000, thus diminishing its reserves for lending by $9,000. This sucking in of reserves reduces the nation's money supply as loanable funds contract throughout the economy, in a negative Multiplier Effect.

The amounts used in these examples are minuscule, in the Federal Reserve scheme of things. Actually, the system moves millions of dollars about, sometimes billions, in their stratagems to stimulate or slow down the economy; so, when the central bank acts incorrectly, the mistakes are financial Godzillas.

economics101  05 October 2009

For economists, it is nothing more than a tool of exchange that makes economic life more efficient. Just as an axe allows us to chop down trees, money allows us to have markets that, traditional economists tell us, dispassionately set the price of anything from a loaf of bread to a painting by Picasso.

Yet money stirs up more passion, stress and envy than any axe or hammer ever could. We just can't seem to deal with it rationally... but why? ...

As we come to understand more about money's effect on us, it is emerging that some people's brains can react to it as they would to a drug, while to others it is like a friend.

Some studies even suggest that the desire for money gets cross-wired with our appetite for food. And, of course, because having a pile of money ... is virtually synonymous with status - so much so that losing it can lead to depression and even suicide ...

In reality we are not that rational.

Instead of treating cash simply as a tool to be wielded with objective precision, we allow money to reach inside our heads and tap into the ancient emotional parts of our brain, often with unpredictable results.

To understand how this affects our behaviour, some economists are starting to think more like evolutionary anthropologists.

Daniel Ariely of the Massachusetts Institute of Technology ... suggests that modern society presents us with two distinct sets of behavioural rules. There are the social norms, which are "warm and fuzzy" and designed to foster long-term relationships, trust and cooperation. Then there is a set of market norms, which revolve around money and competition, and encourage individuals to put their own interests first ...

New Scientist 18 March 2009

Larry Elliot

AS GOVERNMENTS struggle to prevent the global financial crisis turning into a deep worldwide recession, attention is also turning to the longer-term problem: how to avoid a similar crisis happening again. When politicians meet in Washington DC in December they are likely to agree that the "loose touch" approach to financial regulation of the past two decades will have to give way to tighter controls. But the global financial system now operates at a level of complexity no one has ever tried to tame. How do we re-engineer it so breakdowns don't happen again?

One place to start is the science of complexity itself. We now know that large interconnected systems, such as the weather, can behave in unexpected ways: for example, small changes can trigger fundamental shifts. New understanding of the principles governing such complex systems offers hope that the global financial system can be got under control. The snag is that politicians will have to accept that costs are likely to be involved ...

Days before winning the 2008 Nobel prize in economics last week, Paul Krugman of Princeton University published an analysis which concluded that the rapid increase in cross-border investments since 1995 is what allowed a local shock - the collapse in inflated US real estate values - to propagate globally, especially through highly indebted investment firms that can respond to a loss of money in one place by pulling back credit anywhere in the world. Krugman noted that "these channels are not yet part of the standard analysis". This is exactly the kind of linkage that the complexity theorists say economists have been missing ...

... In 2007 the Federal Reserve Bank of New York published a study, based in part on testimony from ecologists and engineers specialising in complex systems, which concluded that while vast sums were spent assessing the risks of individual investments, almost nothing was being spent on systemic risk - which could be much more grave.

"It is really frustrating to me and others that the warnings were not heeded," says ecologist Simon Levin of Princeton University, who was one of those who testified - all the more, he points out, because increased connectivity doesn't just propagate trouble, it makes the whole system less diverse and more vulnerable to dramatic shifts ...

According to Rockström, one of the key ways in which diversity was lost arose from the uniformity of criteria that have been used to judge economic success. One example of this is value-at-risk (VaR), the measure used by banks to report their potential losses from trading financial instruments.

Since the late 1990s, it has been standard practice for banks to publicly report VaR measurements. When use of this measure was proposed, critics argued that this would encourage herd behaviour, with banks rushing en masse to sell off assets that were depressing their VaR numbers, but their concerns were ignored ...

Bar-Yam thinks models of complex relationships such as those between predators and prey can help prevent such systemic problems, and show regulators how they can modulate market behaviour in a more sophisticated way. "We haven't had the scientific tools to do this for very long. But we can now model the global system and capture the key collective behaviour that causes collapse."

"At its core the science of complex systems is about collective behaviour," Bar-Yam points out. "The invisible hand of the market is collective behaviour." The problem till now, he says, has been that economic policy has failed to take into account the complexity and consequent unpredictability of such behaviour. In the absence of testable models, people "try to believe what they know really isn't true", he says - for instance, that real estate values always increase.

The remedy Bar-Yam proposes is to subject economic policies to verification with the same sort of rigour that is normal in science. That has never been done. "But with recent scientific advances, I believe we can now truly inform policy."

New Scientist 22 October 2008

"Greed really has become a part of America’s value system.

"Get as much as you can, while you can, and don’t worry about the other guy.

"Corporate greed often exploits the poor for greater profits.

"Political greed makes promises never meant to be kept in order to achieve position.

"Personal greed sets us free from a sense of responsibility to the community, and establishes love of self as the greatest commandment."

Joe Thorn.net

Alan Greenspan

Credit Crunch Explained

Loss of liquidity, not insolvency

Men and testosterone

Ten people most responsible for the recession

The causes of the Credit Crunch

The Depression of 2010

What is Humanity’s worst Invention?

What caused ... global credit crunch?

Who was to blame for the credit crisis?

Traditional neoclassical economics literature assumes that markets are always efficient except for some limited and well defined market failures; Stiglitz et al. more recent studies reverse that presumption: it is only under exceptional circumstances that markets are efficient.

Stiglitz (and Greenwald) show that "whenever markets are incomplete and /or information is imperfect (which are true in virtually all economies), even competitive market allocation is not constrained Pareto efficient".

In other words, there almost always exists schemes of government intervention which can induce Pareto superior outcomes, thus making everyone better off.

Wikipedia

Information asymmetry