Published CommPRO.biz 2013.10.03

Wall Street Ethics

Mid-September (2013.09.15) marked five years since Lehman Brothers, one of the largest investment banks ever, filed the largest bankruptcy ever, sending sky rockets up all over the world and marking the beginning of what we’ve come to call the “Great Recession.” Lehman’s implosion triggered a serious of herculean bailouts of the rest of our banking sector by the American taxpayers.

Hank Paulson, who became Treasury Secretary after a career at Goldman Sachs, saw a danger of another depression if the banking sector collapsed. He hurriedly threw together the bailouts. However, he failed to impose the controls needed to keep the banks from abusing these funds, leaving them free to award themselves over the top bonuses. The Federal Reserve kicked in billions more, throwing open the doors to the risky gambling (see London Whale) that caused the collapse.

Lehman wasn’t the only bank gone wild; all of the dozen or so monster banks were behaving badly. Lehman was just pushing the limits of the regulation-free climate the banking lobby created over the preceding two decades. Repo 105 was the accounting gimmick of choice at Lehman. The tricksters there would sell off billions of their really bad stuff before each quarterly reporting period, making their books look as though they were sound when in fact they were anything but. Emails, written just before the bankruptcy, show that senior management pushed their subordinates to cover their tracks.

On May 18, 2008, almost exactly two months before the bankruptcy filing, Senior Vice President Matthew Lee had a letter hand delivered to four of Lehman’s top executives with a copy to their house counsel. In it he detailed these practices and questioned both their legal and ethical grounds. Management responded by firing him. Later, Lee identified Repo 105 as one source of the collapse for the federal investigators. Matthew Lee is still out of a job today; nobody on Wall Street has hired this honest man.

Not so most of the schemers who played fast and loose with the financial facts at Lehman. According to a Huffington Post tally, three quarters of the Lehman folks -47 of 63 involved in the Repo 105 scam- are employed in the financial world and doing just fine thank you. In fact, while most Americans are struggling to recover from the crash and millions are unemployed, the Wall Street banksters are fine.

And why shouldn’t they be –aside from ethics and stuff like that– the banks know if they overplay their hand again, Repo 105 or whatever, a taxpayer bailout is just around the corner. So they gamble with your savings, secure in the knowledge that the FDIC will cover their losses and that we’ll loan them whatever they need to get back on their feet. Just don’t ask them to support the small businesses that create jobs or anything like that. Leave that to the suckers who run the regional and community banks.

Published 2012.01.30 in CommPRO.biz

Too Big To Loan?

Earlier this month (2013.01.16) the president of the Dallas Federal Reserve Bank, Richard Fisher, delivered a speech worthy of a Texas straight shooter. It was followed up the next day by a 30+ page report supporting the need to deal with the danger a handful –about a dozen- Too Big To Fail (TBTF) banks present to our economy.

These are the same financial monsters whose reckless actions pulled the rug out from under the world economy and brought about the 2008 crash. The folks who put millions of people out of their homes, crippled small businesses and drove the unemployment numbers in America sky high. The same handful of reckless banksters, who rolled the dice, lost and left the rest of us with no alternative but to bail them out.

In an effort to avoid a repeat of this disaster the Congress passed the Dodd-Frank Act. In the end the TBTF banks’ lobbying efforts allowed them to stay focused on risky speculative (AKA gambling) deals, knowing full well that contrary to its intent, Dodd-Frank does nothing to protect against another taxpayer bailout. Mr. Fisher concedes there’s little chance that we can rein-in their reckless behavior in the short term. He does, however, offer an escape hatch to take the taxpayers off the hook to some degree.

If he had his druthers, Mr. Fisher would slice the monster banks into separate entities, none large enough to destabilize our economy. He would peel away all of their financial activities that fall outside the banks’ traditional role. While that remains the long-range goal laid out in the Dallas Fed’s report, their short-term goal seems to correct much of the problem.

Mr. Fisher points out that the insurance protection created in 1933 –The Federal Deposit Insurance Corporation (FDIC)– was intended to cover our hometown and regional banks. The 98.8% we ordinary folk are used to dealing with, not the 12 monster banks, the 0.2% who hog nearly 70% of all banking assets. Assets we furnish them with to make small business loans and create jobs. But that’s not what the use it for. Instead they use the free money we furnish to make wild bets, secure in the knowledge that if they lose, we pay.

Restricting FDIC protection to its intended role would roadblock moves like the one Bank of America made the first of this month (January 2013). They moved derivative contracts worth $15 trillion from their broker-dealer division to their insured depository institution. Guess who’s on the hook if those puppies go bad?

It’s past time that the low interest cash we provide the banks goes to the 98.8%, the regional and Community Banks who will provide small business loans. If the monster banks -the 0.2%- want to gamble, let them do it with their investors’ cash. And make sure those investors know that their funds will not insured by America’s taxpayers.

The Clock is Ticking

If ever there was a moment illustrative of the need to restore Glass-Steagall, enforce the Volcker Rule, and repeal the foolish gambling exemption Congress gave Wall Street, it is now. JPM Chase CEO Jamie Dimon’s culture of Wild West saloon gambling was outed when the loss side of the bank’s bets was exposed by a huge bet gone bad in their London trading office (AKA gambling hall). The $2 billion loss is quickly ramping up and will likely be double that or more.

Fast forward to the JPM Chase annual meeting last week (05.15.12) where we find a visibly irritated and agitated Dimon facing questions on the multi-billion dollar losses and a shareholders’ challenge to his dual role as both Board Chair and CEO. He managed to hold on to his grip at the top with 60% of the shares voting to defeat the move to unseat and replace him as Chairman. While that sounds good, you must keep in mind that prior to corporate meetings companies routinely include as part of the meeting notice a request to hand over the voting rights to the management if you do not plan to attend and vote in person. Most shareholders comply and so you can figure that Dimon walked into the meeting with the votes in his pocket. You can bet he was shaken by the margin; to have 40% opposed is too close for comfort in that game.

Turning to the “snake eyes” that is piling up billions in losses, Dimon, according to the New York Times, came up with this gem: “We are going to manage it to maximize economic value for shareholders.” That has to be one of the wildest -let’s flip the conversation to my favorite subject- “Shareholder Value” moves in history. We’d guess that Dimon’s point is that shareholders benefit from the JP Morgan Chase gambling hall because they win more often than lose, and besides in the unlikely event that we drive off the cliff we are “too big to fail” and so the suckers (that’s us, taxpayers) will bail us out again. There’s no way we can lose.

Shareholder Value -as former GE CEO Jack Welch pointed out- is an outcome; as a strategy Welch famously dubbed it, ”the dumbest idea in the world." Dimon and his ilk love it as a strategy; it enables them to parlay their gambling culture into monster bonuses, with the ultimate backup, taxpayer bucks. Shareholder Value is a meaningless term the way Jamie Dimon and others use it these days. And it will come around to bite the taxpayers unless we force the too-big-to-fail banks back into their corners. We need to get them out of high stakes gambling. We need to make them choose: either create capital as an investment bank, or take deposits and make loans as a commercial bank. Anything less leaves all of us outside the game at their mercy. It’s time for Congress to act, restore Glass-Steagall, enforce the Volcker Rule and repeal the foolish gambling exemption Congress gave them. 

They’re Back – 
Run For Your Lives!

What do you think our leaders would do when confronted by the imminent collapse of a sector of our economy whose assets are equal to 56% of our GDP? Given what they did in 2008 –properly we think– we can safely assume they would prop up the institutions at risk. Are you surprised that five of the banks we rescued in 2008 now have assets equal to 56% of our GDP*? In 2006 -before the collapse- these same five banks’ combined assets equaled 47% of our GDP*.

Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, and Wells Fargo, five of the players whose reckless actions drove the world economy off the cliff, are lined up to do it again. Their assets grew more than 40% from 2006 through 2011*. Why? That’s no mystery, the banks know and investors know that if there’s another collapse we will bail the Zombies out again. With the taxpayers on the hook, big banks are gambling with the same risky stuff that led to the 2008 collapse –derivatives, swaps etc., the stuff the bankers refer to as “crap.”

If it goes all wrong, the bankers and their investors have the taxpayers ready to bail them out again. Where else would investors put their bucks, high returns no risk? Published reports say all three rating services along with a covey of regional Federal Reserve presidents, see a bailout for the Zombie Banks down the road. Meanwhile, your neighborhood community bank –the bank down the street on the corner– doesn’t have an investment (AKA gambling hall) division; putting them at a distinct disadvantage in finding investors and customers.

We know how to solve this problem, been there, done that. Eighty years ago when the wheels fell off our economy our nation faced the same dilemma. They busted up the big banks and made them choose the sector of the banking world in which they wanted to operate. The Glass-Steagall Act separated investment banks from the regular commercial banks that we ordinary folk deal with.

During the 1990s’ deregulation frenzy the investment banks –Goldman Sachs in particular– pressed hard to break down this wall. In 1999 they succeeded Glass-Steagall was repealed. Then they convinced the Congress to exempt them from the gambling laws and they were off to the races. Take any risk, bet on any crazy thing, as long as you could call it an investment – it is legal. Within a few years they distorted the derivative and commodity markets turning them into Zombie bank gambling halls. Here’s the catch. They know they can’t lose. They know the suckers (AKA customers) take the losses. Worse comes to worse the taxpayers will be stuck with the mess. The bankers and investors will be just fine.

We all know what happened in the decade following the repeal of Glass-Steagall. We had to bail the banks out and now they are fine; back doing the exact same things that drove us off the cliff. Meanwhile the rest of America –and the world– is working its way out the hole they left us in. They are not doing anything illegal; however, ethically it stinks. It’s time to break up the Zombie banks and put them back in their cages, investment banks on one side of the business and commercial banks on the other. If not, we’ll be bailing them out again. They are counting on it

 *Bloomberg 04.19.12