Business as usual

Wikileaks gave us yet another gem this week, this time on the nature of the bailout of the global financial sector during the Great Recession.  According to the US Ambassador to Kazakhstan in his report on the attitude of the politicians there:  “The Ambassador asked if the corruption and infighting are worse now than before. Idenov paused, thought, and then replied, “No, not really. It’s business as usual.”

Idenov brushed off a question if the current maneuverings are part of a succession struggle.  “Of course not. It’s too early for that. As it’s always been, it’s about big money.  Capitalism — you call it market economy — means huge money.

Listen, almost everyone at the top is confused.  They’re confused by their Soviet mentality. They’re confused by the corrupt excesses of capitalism. ‘If Goldman Sachs executives can make $50 million a year and then run America’s economy in Washington, what’s so different about what we do?’ they ask.”

At the same time, the US Federal Reserve Bank was forced to publish how much financing support it had given to the world’s banks during the financial collapse.  Globally, the total was near $9trn.  Of course, much of this was overnight lending that was paid back or then rolled over for another period.  What was astonishing was that it was not just US financial institutions that received help, but just about every bank in Europe.  Such is the interconnection of the financial system and the ‘diversifying’ of risk through asset-backed securities, credit default swaps and other ‘financial weapons of mass destruction’.

The Fed’s largesse started in March 2008, with banks such as Bear Stearns, Countrywide and Lehman Bros tapping Fed cash.  Subsequently, all these banks bit the dust.  The real payouts came after 14 September 2008 when the Fed loosened its collateral requirements (i.e. what security in assets the banks put up for the cash).  Basically, after September 2008, the Fed was willing to take any sort of rubbishy financial instrument as collateral for cash, with hardly any discount.  Immediately, the banks started using the Fed’s ATM big time.  It was virtually free cash to use as they wished.  JP Morgan got $3bn on the 15th; Citigroup got $2.75bn that day; Goldman Sachs went for $2.5bn; Credit Suisse dipped its toes in for $1bn; Morgan Stanley received $4bn; and Lehman Brothers went for $28bn! Merrill Lynch sought $4.7bn on the 17th; Bank of America went for $500m on the 18th; Daiwa tried $440m and Mizuho a mere $42.5m, also on the 18th.  Barclays Capital went for its record $48bn loan that same day and the day after the British bank agreed to buy Lehman Bros, which had filed for bankruptcy on the 15th!

The real scandal is that the validity of the collateral offered by the banks for these loans was decided by a tripartite committee composed of America’s major clearing banks.  That meant that JP Morgan and Bank of New York Mellon were in charge of actually valuing and selecting appropriate haircuts for the collateral for their own loans!

As Citigroup economist, Willem Buiter put it at the time: “this arrangement is an invitation to the primary dealers and their clearers to collude to rip off the Fed by overvaluing the collateral, including using false markets and/or arbitrary internal pricing models as part of their range of pricing services’ . They can then split the difference. ”

The Fed would not have imposed deep discounts on these loans anyway.  So what took place in 2008 was a massive ‘shadow’ bailout of the financial system. Was it right for these banks to be bailed out?  The Fed’s answer is that without doing this,the global financial system would have gone into meltdown and taken the real economy with it.  And anyway, all this emergency lending was paid back in full with interest.

But it’s one thing to avoid the total collapse of the financial system with emergency cash; it is quite another to hand over free money without any real collateral in return so that favoured banks could buy up other weaker banks; and so that many banks could just use the cash to lend at higher rates and carry on ‘business as usual’ without any ‘interference’ or control by the state.

Moreover, it is not true that all this money has been paid back.  AIG, the world largest insurance company, still owes over $80bn, which will never see the light of day (much of this was passed onto to Goldman Sachs and JP Morgan as debt).  The government-backed mortgage agencies, Fannie Mae and Freddie Mac, have so far sucked out more than $200bn from the Fed and the public purse and are still not regarded by the US government as state-owned enterprises.

And then there are all the special guarantees that the Fed and the US treasury gave to borrowing by the likes of Goldman Sachs and Morgan Stanley so that they could raise cash cheaply in the markets and use it to buy other banks or make new speculative investment (particularly into commodities).  Those guarantees are not even covered under the Fed’s liquidity programme.

At the same time that Wikileaks showed that most corrupt governments in the world consider that what Goldman Sachs gets up to with the agreement of the Federal Reserve is pretty much the same as their own behaviour, the Bernie Madoff fraud scandal has taken another turn.

The Madoff Ponzi-type scheme cost investors (mostly rich ones) about $50bn.  Madoff’s main banker was… JP Morgan.  And now Madoff investors are suing the bank for failing to warn them of  Madoff’s fraud when they must have known what was going on.   Investors argue that JPM was “wilfully blind to the fraud, even after learning about numerous red flags surrounding Madoff.”

Other Madoff investors are going one step further, it seems.  JP Morgan has had to warn the police in the UK that some ‘Swiss’ investors who bought Madoff products from JP Morgan sent a message to the bank’s employees saying that “the value of the funds in question must not fail, as we know who you are and where you live/work”. Apparently, these Swiss investors come from Colombia.

As Kazakhstan’s Idenoff said: ‘it’s business as usual.’

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