This is a brilliant storyBasically, this guy claims to have defrauded several banks and Caixas (savings banks) of €492,000, purely in order to prove how easy it was to do. He used the money to publish 200,000 copies of his free newspaper, Crisi, which denounces the world financial system for inefficiency, dishonesty, living in a make-believe land and causing poverty and famine throughout the world. The money not spent on the Crisi newspaper project was given to charities and NGOs. And the author has also fled Spain (understandably) and will only return when his crimes have been pardoned.
The author couldn’t really have timed this better as the world’s financial markets are still reeling from the largest crisis since 1929, and the insurance giant AIG has just been nationalised by the US government (something they refused to do for Lehman Brothers just the other day).
Opinion is divided on who exactly is to blame for this calamitous situation. I think it’s obviously the bankers’ fault as they’re the ones playing with imaginary money, things they don’t own and other things which they invent the value of. Banking analyst, Diana Choyleva made the incredible claim on Monday’s Newsnight that central banks (and therefore, by extension, governments) were to blame for the crisis because they had allowed a long period of low policy (interest) rates to occur, they allowed a situation to develop whereby bankers felt almost obliged to take more and more risks. In other words, bankers are nothing but irresponsible risk-taking children with no control over their actions, who need to be reigned in better. I’m not sure how well that will go down with her banking chums.
Actually, there have been a lot of people who put this entire crisis down to poor or ineffectual regulation. Yes, the very same regulation which was previously railed against as strangulating and diametrically opposed to the ‘ethics’ of neo-liberal free market capitalism. Of course, the real problem is the system of so-called free market capitalism. From inventing vast amounts of ‘value’ where no true capital exists, to deregulating money markets, this socio-economic ideology has done nothing more or less than place the fate of pretty much every living person under the direct control of three unelected, practically unseen organisations. The International Monetary Fund, the World Bank and the World Trade Organisation are the tripartite leadership and main proponents of this ideology, and they are all wholesale controlled by the United States government.
If we are ever to escape this inherently unstable and totally illusionary cycle of boom and bust, it will not be, as Gordon Brown thought, via the means of free market capitalism which is, after all, the name of the problem itself.
The low interest rates argument is funny for other reasons too. If we go back a few years to the last crisis at the end of the Internet and telecoms boom, cheaper money was touted as being the solution to that particular problem. The true believers thought that all that had to happen was that Alan Greenspan needed to lower interest rates a bit and that would solve the problem. It didn’t, but it did help to create the platform for the speculative boom that is now coming to an end. The irony is that many of those who now criticise the role of low interest rates in that process were almost certainly amongst those screaming for it to happen a few years back.
Tom,
As someone that works in finance, and having seen this game from both the sell-side (investment banks in the past) and buy-side (asset management these days), I would like to add my tuppence worth.
First, I think this guy with the money and the paper has got the wrong target.
I would qualify the word “bankers”. There are many good bankers around. The Co-operative Bank, for example. Or even Airdrie Savings Bank.
The people responsible for this mess are the “investment bankers”. But do not worry. They are getting their comeback in a way nobody could have ever predicted. So far, Bearn Stearns, Lehman and Merrill Lynch are out.
But wait for this: Morgan Stanley is on the brink of going bust. Morgan Stanley. The Firm.
Let me repeat this: Morgan Stanley is about to disappear as an independent entity. I cannot believe I wrote that about my former employer.
In my view and in summary, some of the reasons behind this mess:
+ After 9/11, central banks kept interest rates were kept too low for too long. Governments were too easily persuaded by financial markets. With yields at record lows, investment bankers designed ever complex products that would yield over government bonds.
+ The use of these derivatives was quasi-imposed by government departments following change in pension regulations. Long-term liabilities (our pensions) have to be matched by long-term assets. Since the only long-term debt securities that meet this criteria are only issued by governments, and they are very expensive (very low yield), the investment bankers had a perfect excuse to come up with structured products that will ensure our pension schemes’ deficit is under control, or at least less subject to market volatility.
+ A lot of the buy-side got taken in and swallowed these new products. Many though remained unconvinced.
+ Shareholders in the investment banks turned a blind eye to the excessive gearing and risk taking, and the obscene payroll costs justified by the investment banks’ Boards.
+ The regulators make a huge mistake in Basel II. Allowing credit derivatives to reduce provisions on loans and debt held on balance sheet triggered an explosion of structured products whose price was derived from models provided by the sell-side. (Akin to a punter buying a car, and a monthly car value being provided by the dealership that sold the car in the first place, not a potential buyer).
+ If that was not bad enough, regulators allowed banks to have off-balance sheet vehicles. One honourable exception is the Bank of Spain.
I agree that bankers crying wolf during 9/11 and now have a cheek. They should be allowed to fail. But our governments are too weak and too feeble.
So in summary, yes the investment bankers have got us into this mess because they were too powerful, too convincing and too persuasive against governments that lacked the will or the intelligence to challenge what the investment banks were lobbying for.
Now, there is one thing were I disagree with your assessment. You mention that the root of the problem is free market capitalism itself. But what is the solution? Government intervention and regulation? Well, government intervention was the start of the crisis, when they ordered central banks to lower interest rates, and it is now a perverse influence, when they are ordering central banks and regulators to rescue firms deemed too big to fail.
Hopefully, one of the outcomes of this cathartic financial crisis is that we may end up with better (not more) regulation.
Something we may agree on: I am of the opinion that investment banks, insurance companies and anybody who has willingly taken risk positions, either in the balance sheet or in the trading book, should bear the consequences of their actions. Rescuing Northern Rock was a mistake. Rescuing AIG was a huge mistake. Why rescue a bank and not a manufacturing company?
This argument that we are hearing that this is done to prevent further market turmoil and to preserve market confidence, and therefore some firms are too systemic to fail is bogus. It is absolutely pants.
If one of these firms goes down, the first people that lose their money are equity holders. Then is unsecured creditors, then subordinated debt holders, then senior debt holders, then trade counterparties, then employees wages, then tax receipts.
There is a lot of capital cushion before a trade counterparty loses money, since most trades are collateralised. If equity holders or even senior debt holders lose money, that is how the system is supposed to work. These participants have taken uncollateralized risk positions for which they are getting paid a risk premia in terms of a spread over Libor rates.
But this nonsense that we must prevent debt holders from incurring capital losses otherwise the system will collapse is a lie. The current government intervention is only prolonging the agony, delaying the inevitable and costing us dearly. Therefore, I am not convinced that more government intervention is the answer.
Rab, stepping outside of the world of finance and looking at the bigger picture the question that occurs to me is why should any of us care if Morgan Stanley disappears? Have they done us any good, are our lives any better for the existence of this bank? Maybe if there are a few less people placing bets at the global casino then people’s prices and jobs may become a bit more stable than they have been in recent years.
Graeme,
Sorry if my post was not clear, just to clarify: I don’t think we (as a society) should care about Morgan Stanley or any other investment bank going bust. It is all part of the system.
Personally though, I am quite shocked as I used to work there when it was (perceived to be) indestructible and almighty.
But still I bought CDS protection last year and sold a bit yesterday at junk prices (very profitable if emotionally difficult).
The problem is not lack of regulation, it is the Capitalist mode of production.
The latest scam to attempt to get round the problem of surplus value was to lend the proles the profits skimmed off their labour to enable them to keep purchasing while the cost of their labour actually decreased. It has finally failed as society has exceded its debt saturation level.
The US government has stepped in a move which effectively means that the dollar is fucked, and that the whole of US society will be paying for the losses inflicted by its mongolic bankers.