Posts Tagged ‘banks’

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The Wall Street banks responsible for the spectacular crash of 2007-08 have mostly been let off the hook.

According to a review conducted by the Wall Street Journal, which examined 156 criminal and civil cases brought by the Justice Department, Securities and Exchange Commission, and Commodity Futures Trading Commission against 10 of the largest Wall Street banks since 2009,

In 81% of those cases, individual employees were neither identified nor charged. A total of 47 bank employees were charged in relation to the cases. One was a boardroom-level executive . .

Most of the bankers who were charged pleaded guilty to criminal counts or agreed to settle a civil case, with those facing civil charges paying a median penalty of $61,000. Of the 11 people who went to trial or a hearing and had a ruling on their case, six were found not liable or had the case dismissed. That left a total of five bank employees at any level against whom the government won a contested case.

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The United States still has the highest incarceration rate in the world—but the U.S. prison population doesn’t, and won’t, include the executives of Wall Street banks.

Here we are in 2016, almost eight years after the financial crash that brought the world economy to it knees (and ruined countless homeowners and threw millions of people out of work), and nothing has been done to solve the problem of Too Big to Fail banks.

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In fact, as everyone knows (and as Stephanie Fontana points out), those banks are now ever bigger and the financial sector even more concentrated.

A small number of massive banks dominate this powerful industry with the five largest banks collectively holding $6.9 trillion in assets – 44 percent of total U.S. bank assets as of the end of September.

So, where are we in the current debate? One major-party candidate (Donald Trump) simply wants to scrap the existing reforms to the financial sector (contained in Dodd-Frank). Another (Hillary Clinton) wants just to enforce the minor changes contained in the new regulations. Only the third candidate (Bernie Sanders) suggests we deal with the problem by breaking up Too Big to Fail banks and bringing back something like the Glass-Steagall Act.

Here’s the irony: the folks who run one of the bankers’ banks, the Federal Bank of Minneapolis, recognize that the existence of Too Big to Fail banks continues to be a problem. And conservative University of Chicago finance economist Luigi Zingales, in his talk at the Minneapolis conference, argues that Too Big to Fail banks have too much power, both economically and politically; the so-called Volcker Rule has been captured and rendered useless; and, belatedly, he’s become convinced that something like Glass-Steagall needs to be implemented.

I’m not arguing that breaking up the banks and implementing Glass-Steagall is enough. But shouldn’t that be the starting point for our current debate?

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Donald Trump is right—and his critics are wrong. (I’ll bet you never thought you’d read that on this blog.)

This one actually comes from a reader (ht: db) who wanted to know what I thought of the recent article by Ellen Brown on the debate concerning Trump’s “reckless” proposal to “print the money.”

First, though, a couple of key corrections: First, modern money takes the form of both bank deposits and currency (bills and coins).* Second, while sovereign governments (like the United States) can create money, they don’t print it (at least most of it). Instead, they create it electronically by purchasing financial assets or lending money to financial institutions (as with the various rounds of so-called quantitative easing, which increased the Fed’s holdings of mortgage-backed securities and other forms of bank debt and were purchased by new money that simply appeared on the banks’ computers).

Aside from that, Trump is right (as Brown explains), both historically and theoretically.**

The United States has long created money—to finance war, to purchase private and public debt, and so on—stretching back to Abraham Lincoln’s $450-million greenback program on up to the total of $4.2 trillion across three rounds of quantitative easing. In every case, it was money created by the government from nothing.

And, theoretically, that’s exactly how government money creation works. The only real distinction that needs to be made is between using the newly created money to purchase private debt and thus to create bank reserves (as was the case with quantitative easing) and using it to directly finance government deficits or to pay off government debt (otherwise known as monetizing the debt). The latter usually falls under the rubric of “helicopter money,” a term coined by Milton Friedman in his now-famous paper “The Optimum Quantity of Money”(pdf):

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.

The effects are, of course, different in those two different uses of government-created money but the basic idea—that a sovereign government can create money for many different purposes—remains the same. It’s simply not controversial—or at least it shouldn’t be.

The only real issues from the government creation of money are (1) timing and (2) who benefits. Obviously, creating more money under conditions at or close to full employment has implications that are very different from a situation characterized by less than full employment (as has been the case for the past eight years). If resources are not being fully utilized, more money (helicopter or otherwise) does not lead to hyper-inflation. So, the critics who claim that, under current conditions (with millions of people who are unemployed or underemployed), creating more money is inflationary are simply wrong.

As for who benefits, that’s the real controversy—and the issue that is rarely discussed. Creating money to finance purchases of private debt from banks obviously improves bank balance sheets (and the incomes of their owners and the power wielded by the boards of directors) but it doesn’t necessarily stimulate economic growth (if banks are unwilling to lend, because for them it’s not profitable), and it doesn’t help homeowners and others who are drowning in debt. In fact, one can argue, as former head of the Federal Reserve Bank of Minneapolis Narayana Kocherlakota recently did, that Federal Reserve’s policies after the Great Recession actually contributed to increasing wealth inequality in the United States.

That’s the real issue, as it is with all forms of government financing. Who benefits? Think about increasing taxes versus running deficits. Would wealthy individuals prefer to be taxed to finance government expenditures or, instead, do they want to be paid (via interest payments) for the privilege of lending money to the government? The answer is obvious.

Continually raising the specter of deficits and debt keeps the debate within their purview. Their real opposition to creating money is based on the fact that they’d have less control over the amount and kind of government expenditures that might be made. Things might get out of control—not the price level (that’s just a scare tactic, which too many people fall for), but the mass of ordinary people. They’re the ones who could demand and who would benefit from new schools and better-paid teachers, clean drinking water and more drug clinics, programs that offer jobs as well as assistance in forming worker-owned enterprises, and so much more through the expenditure of government-created money.

That, of course, is not what Trump (or, for that matter, Clinton) is proposing. But it’s the issue that really should be at the center of economic and political debate in the United States.

 

*When a bank makes a loan, a deposit is created in the borrower’s bank account. Thus, new money is created as a bookkeeping entry, with the loan representing an asset and the deposit a liability on the bank’s balance sheet. Thus, for example, the total amount of U.S. money (defined in terms of M1) at the end of April 2016 was $3,184.9 billion, the major components of which were currency ($1,365.9 billion) and bank demand deposits ($1,298.4 billion). Currency is an even smaller proportion of “near money” (defined as M2), which totaled $12,659.3 billion at the end of April.

**At least right now, unless and until Trump changes his mind and announces a very different approach.

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It’s been more than seven years and yet we’re still haunted by the spectacular crash that took place on Wall Street.

The big banks have been fined but no one, at least at or near the top, has been prosecuted let alone gone to jail.

The question is, why?

We know why the Eric Holder and the Justice Department didn’t go after the top executives: they were afraid of undermining the fragile recovery.

What about the Securities and Exchange Commission (which, remember, was set up during the first Great Depression to stem the fraud and abuses on Wall Street)?

We now know, thanks to Jesse Eisinger (based on a treasure-trove of internal documents and emails released by James A. Kidney, a now-retired SEC lawyer) that in the summer of 2009 lawyers at the SEC were preparing to bring charges against senior executives at Goldman Sachs (over a deal known as Abacus) but they never took the case to trial.

He thought that the staff had assembled enough evidence to support charging individuals. At the very least, he felt, the agency should continue to investigate more senior executives at Goldman and John Paulson & Co., the hedge fund run by John Paulson that made about a billion dollars from the Abacus deal. In his view, the SEC staff was more worried about the effect the case would have on Wall Street executives, a fear that deepened when he read an email from Reid Muoio, the head of the SEC’s team looking into complex mortgage securities. Muoio, who had worked at the agency for years, told colleagues that he had seen the “devasting [sic] impact our little ol’ civil actions reap on real people more often than I care to remember. It is the least favorite part of the job. Most of our civil defendants are good people who have done one bad thing.” This attitude agitated Kidney, and he felt that it held his agency back from pursuing the people who made the decisions that led to the financial collapse.

While the SEC, as well as federal prosecutors, eventually wrenched billions of dollars from the big banks, a vexing question remains: Why did no top bankers go to prison? Some have pointed out that statutes weren’t strong enough in some areas and resources were scarce, and while there is truth in those arguments, subtler reasons were also at play. During a year spent researching for a book on this subject, I’ve come across case after case in which regulators were reluctant to use the laws and resources available to them. Members of the public don’t have a full sense of the issue because they rarely get to see how such decisions are made inside government agencies.

Goldman ended up paying a fine of $550 million in 2010, and agree to another $5-billion fine in a separate case with the Justice Department earlier this month. But no Goldman executive has ever been brought up on charges.

Kidney’s own view is that

the SEC, its chairman at the time, Mary Schapiro, and the leadership of the Division of Enforcement were more interested in a quick public relations hit than in pursuing a thorough investigation of Goldman, Bank of America, Citibank, JP Morgan and other large Wall Street firms.

Although the emails and documents I produced to Pro Publica stemming from my role as the designated (later replaced) trial attorney for the Division of Enforcement are excruciatingly boring to all but the most dedicated securities lawyer, even a lay person can observe that the Division of Enforcement was more anxious to publicize a quick lawsuit than to follow the trail of clues as far up the chain-of-command at Goldman as the evidence warranted.  Serious consideration also never was given to fraud theories in any of the Big Bank cases stemming from the Great Recession that would better tell the story of how investors were defrauded and who was responsible, due either to dereliction or design.

All of which gives lie to the idea that the Obama administration has been tough on Wall Street. According to Kidney,

The large fines obtained by the Department of Justice, while a short-term pinch, are simply a cost of doing business.  Relying on fines to penalize rich Wall Street banks, which, after all, specialize in making money and do it well, if not always honestly, is like fining Campbell Soup in chicken broth.  It costs something, but doesn’t change anything in the way of operations or personnel.

Despite billions in fines representing many more billions in fraud, the enforcement agencies of the United States have been unable to find anyone responsible criminally or civilly for this huge business misconduct other than a janitor or two at the lowest rung of the companies.  Nor have they sought to impose systemic changes to these banks to prevent similar frauds from happening again.

Yessir, according to the Obama administration, Goldman Sachs, JP Morgan, Bank of America, Citibank and other institutions made their contributions to tearing down the economy, but no one was responsible.  They are ghost companies.

And that’s why we’re still haunted, more than seven years later, by the crash of 2008.