published Thursday, July 5th, 2012

Persistent bank scandals

Persistent lobbying by the U.S. banking industry against closer regulation of market trading continues to stall adoption of the Volcker rule. That restriction, named after its chief advocate, former Federal Reserve Chairman Paul Volcker, would bar speculative propriety trading -- banks' use of federally insured customers' funds -- to earn profits. Had the rule not been jettisoned when the Glass Steagall Act was repealed by Congress in 1999, it likely would prevented the massive speculative trading which led to the disastrous financial crash of 2008 -- and then to massive federal bailouts to prevent another Great Depression.

Ironically, the wrong-headed delay in re-establishing the rule has had at least one beneficial effect: It has provided ample time to showcase the need for even stricter oversight of banks' transparency and reserve margins than would be imposed under the contested regulations still being written to implement the Dodd-Frank banking reform legislation of 2010.

Consider the headline banking scandals and downgrades just in the past two weeks.

Widening trading losses at JPMorgan Chase, now estimated at $9 billion, include billions in losses of investor funds that would have been avoided under a strict Volcker rule. Those losses, in turn, pale beside the alleged rigging by England' global Barclays Bank of key interest rates used internationally to underpin approximately $360 trillion in loans, market trading, mortgages and financial contracts, many involving American homeowners, businesses and pension fund investments.

That broadening scandal, revealed when U.S. and British authorities announced a settlement with Barclays of $453 million in penalties last week, forced the quick-step resignations earlier this week of Barclays Chairman Marquis Aguis, Chief Executive Robert E. Diamond Jr., and chief operating officer Jerry del Missier. The settlement signed by Barclay officials cited admissions to fixing the benchmark London Interbank Offer Rate, known as the Libor rate, to boost trading profits and minimize losses over a five-year period.

The scandal may continue to swell. U.S. authorities are investigating whether other American banks, including JPMorgan Chase, Citigroup and HSBC, are connected to the case, since the Libor and the similar Euribor rates are determined using interest rate information from a dozen big global banks.

The troubling cases of Libor-related market-rigging and mounting trading losses come against the backdrop two weeks ago of sharp credit-rating downgrades by Moody's Investor Services of 15 major banks, including two-notch downgrades for JPMorgan, Citigroup, Bank of America.

American banks aren't alone in the spotlight of scrutiny and lower ratings that many merited years earlier, when banks like Goldman Sachs were devising risky, bound-to-fail derivative investments for their own clients, and then betting against them. European banks -- especially in the euro-zone countries needing bailouts from the European Central Bank -- and the euro-banking overseer, the European Banking Authority, are under fresh criticism for failing to stem banks' outsized leveraged and generally weakened conditions. The contagion of lax oversight extends to the International Monetary Fund, which took in and elevated Spanish banking officials who continued in their IMF positions to downplay the prospects of the deep crisis in Spain's banks.

The lesson to be taken from the continuing performance of Wall Street's, London's and the biggest European banks is that banksters look out first and foremost for their own fat zillionaire paychecks, especially if they see a political path to shake off regulators. Federal authorities investigating the Libor and other banking scandals should pursue them vigorously, and with voters' support.

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nucanuck said...

There will be no end to economic decline until the banksters of the developed world have been re-regulated and down-sized below the size of systemic risk. Oh, there may be moments of hope, but the depth of amoral corrupt debt products and leverage has to be reversed before we can heal our society.

The price rigging at Barclays bank is only the tip of the price rigging iceberg. We no longer have free markets.

July 5, 2012 at 1:02 a.m.
Leaf said...

Yep. It's laughable to think that bankers and stock brokers can regulate themselves. They are in the business of greed, for heavens sake. Why would anyone think they had an excess of morality?

July 6, 2012 at 9:50 a.m.
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