Giant banks play Russian roulette with our future

Governments – particularly in the United States and the European Union – must start showing the intestinal fortitude to stand up against the banks. 

Nick Fillmore
17 January 2014

Five years after the Great Recession of 2007-08 destroyed the lives of millions of people and cost trillions of dollars to the economy, many of the big banks that caused the collapse are still involved in highly risky and sometimes fraudulent activities that could crash the economy again. Fear is ever present among independent economists because the giant private banks – particularly US banks – bet trillions of dollars that are not properly secured and could cause havoc if defaulted on. 

Efforts to bring the banks under control have had mixed success. Last December, after more than three years of wrangling with the big banks, US law makers approved the Volker rule. The intention was to lessen the possibility of another major crash, but critics say it will not make much of a difference. The billions of dollars US banks spent lobbying against the law paid off for them.

 “A resurgence of right-wing economics, driven, as always, by ideology and special interests, once again threatens the global economy - or at least the economies of Europe and America,” said economist Joseph Stiglitz, a Nobel Prize winner.

Millions of ordinary citizens who have their savings and investments tied up in big banks are unaware of the extent of the risks. In southern Europe, millions of people have not recovered from the 2008 collapse.

Crisis in the corner office

Multi-national banks – which of course have huge legitimate activities – employ “the best and brightest” minds they can find, and pay them big bucks to work out illegal schemes and find loopholes in government legislation that will make them even more rich.

Here are a few examples of some well documented fraudulent activities of some big banks since the crash: 

  • Bank of America: The Rolling Stone magazine exposed the “limitless criminal conspiracies” they’re involved in. 
  • Deutsche bank: Among many things, the German bank is paying $550-million to resolve a tax shelter fraud investigation. 
  • HSBC Bank: The bank paid a record $1.92-billion penalty in connection with a money-laundering scheme involving Iran and Mexican drug cartels.
  • JP Morgan Chase: The bank admitted to being involved in a number of criminal activities, including the fraudulent sale of unregistered securities.
  • Barclays Bank: They were hit with fines of $448-million for its “serious, widespread” role in trying to manipulate the price of crucial interest rates that affect the cost of borrowing for millions of customers around the world.
  • Credit Suisse: It was one of a dozen banks found guilty of fraudulently manipulating Libor interest rates to grab illegal profits.

Amazingly, despite all the criminality, not one executive of any giant international investment bank has gone to jail, or even been prosecuted.

Bankers use exotic instruments to get rich

The investment banks and traders use an array of dizzying financial instruments to make massive, often illegal profits. Included are derivatives, hedge funds, credit default swaps, reverse convertible bonds, and other exotic creations that promise either huge gains or disastrous losses.

Even before the big banks start their gambling, they have little room for any losses. As crazy as it may sound, some banks routinely have liabilities of perhaps 95 percent of its hard cash assets. This means that a medium size loss could put the bank in a near-bankrupt situation.

Even so, they are not afraid to gamble bigtime.

Derivatives, one of the main trading instruments, are a complex, extremely high risk transaction. As one example, two former JPMorgan Chase employees are facing criminal charges related to a derivatives trading scandal that cost the bank $6.2-billion. The bank ignored growing risks and hid losses from investors and federal regulators.

No one knows the exact value of derivatives that exist globally, but it’s at least an unimaginable $1,200-trillion, which is more than 20 times the size of the entire world economy. And the amount is still increasing.   

 “We can say this with virtual certainty,” wrote Steve Denning in Forbes magazine, “if we continue as now and ignore them [derivatives] again, the great white shark of a global financial meltdown will gobble up the meagre economic recovery and make 2008 look like a hiccup.”

Mega-banks fighting against being regulated

The mega-banks, headed by unscrupulous executives and with the support of thousands of lobbyists and hundreds of high-paid lawyers, are now defying efforts by authorities to stop them from engaging in their risky and often illegal financial dealings.

In Europe, the bankers won a significant victory in January 2013 when officials backed down and agreed to broaden the definition of the assets the banks can use to back up their loans. The governments also agreed to delay the start of the regulations to 2019.

Giant banks must be brought under control

Governments – particularly in the United States and the European Union – must start showing the intestinal fortitude to stand up against the banks. The way things stand now, the banks irresponsible behaviour could lead to another even worse crash.

First, for now, governments must urgently step in and get control of dangerous gambling instruments, such as derivatives. Banks involved with derivatives should put up billions of dollars to protect against unforeseen losses.   

Second, we must overcome the strong influence that banks have over governments and the general public. In southern Europe, banks have been so powerful that they have literally pushed aside the democratic process. Elected politicians have given way to appointed financial experts, and their interests are to ignore the social needs of the people while they make sure the banks get back all the money they had lent to governments.

Our world will not be safe until we start really controlling the power of the giant banks.  

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