Bad bankers, bad debts and bad banks

In my last post (, I explained the demise of the UK’s Coop Bank from a bank that aimed to ‘serve the people’ with ‘ethical objectives’ to a failed toxic asset bank, now gobbled up on the cheap by American hedge funds, who coincidentally have now also got the largest equity share of Britain’s publicly-owned postal service, the Royal Mail, privatised at about one-third of its real value. This post now looks at the other end of banking spectrum: what the global universal banks are up to.

Well, despite the huge losses incurred to taxpayers in bailouts and the economy in general from the disastrous, reckless and criminal policies of the global banking system over the last six years, it’s business as usual.  As I outlined in a past post (, it’s a never-ending story of greed and criminality.

The bank that gained most from the global banking crisis was JP Morgan Chase.  It was able to buy the investment bank, Bear Stearns when it went bust, for just $1 and JPMt was provided with billions of dollars of guarantees from the US government to enable it to gobble up huge shares in the US banking sector to become the largest player.

But it has not been all plain sailing.  JP Morgan is now having pay the US government $13 billion in compensation for selling ‘toxic’ mortgage assets to Federal agencies, knowing full well that these mortgages were rubbish. The payment is in settlement to avoid criminal charges.  It includes $4 billion to settle claims by the Federal Housing Finance Agency that JPM misled Fannie Mae and Freddie Mac about the quality of loans it sold them in the run-up to the 2008 financial crisis, another $4 billion in consumer relief and $5 billion in penalties to be paid by the bank.  In a separate settlement, JPM also agreed to pay $100 million and acknowledge wrongdoing to settle allegations by the Commodity Futures Trading Commission related to its botched “London whale” trades.  And last month, the bank agreed to pay $920 million to settle similar charges with US and UK regulators related to that 2012 trade.  The great god of JP Morgan, CEO Jamie Dimon, is now looking less than great.

The latest settlement sounds huge, but it is not really.  JPM has got off lightly. The bank had already made provisions of $23 billion to cover these settlements.  If the Federal agencies and others had pursued their claims of misdoing to court, JPM was expecting to pay over $30 billion, wiping out the past six quarters of profit.  Instead it has got away with less than half that.  And no banker has gone to jail for knowingly misleading government agencies. One analyst reckoned that “JPM and Dimon are getting a pretty darn good deal from the government. I suspect when the settlement is actually disclosed, it will turn out that JPM’s payout for rep breach violations/FHFA stuff are actually lower than for other banks and lower than that BofA $8.5 billion settlement.”

And this particular calumny of selling toxic mortgages to US federal agencies has still to reach the door of other banks.  The FHFA also bought mortgage securities from the likes of Barclays Bank ($5 billion), HSBC ($6 billion) and the notoriously reckless British bank (now nationalised) RBS to the tune of $30 billion!   They face similar claims as JPM.

Andrew Haldane, the man at the Bank of England responsible for banking stability, has calculated that the major banks have only taken a hit equivalent to 1/20th of low-end estimate of what the banks ought to pay for all the damage they did.   If ever there were a case for the government on the behalf of taxpayers to take over private corporations without compensation to the shareholders or bondholders, it is the global banking entities.  Instead, they are escaping with the minimum of cost.  Even though all these major banks should all be in public ownership after the losses and damage they have caused to the people, governments are doing all in their power to support them even now with credit guarantees, and where public stakes were taken, to divest state equity as fast as possible, even at a loss.

The British Conservative government has already started to sell off its one-third stake in Lloyds Banking Group.  It sold a 6% holding for £3.2bn in September.  American hedge funds could hardly wait, gobbling up the shares at a price some 60% below the price before the banking crisis.  The taxpayer got 75p a share, just above the price it paid of 73.6p when bailing out Lloyds.  So the government’s profit was a tiny £61m after five years.  Since then, the price has risen another 7% – a nice little gain for the hedge funds.  Lloyds CEO, Horta-Osório, will now qualify to receive last year’s £1.5m bonus award, albeit after five years.  A second sale is planned for the first half of 2014, paving the way for the government fully to exit Lloyds by the end of next year.  And remember the ‘gain’ to the taxpayer of £61m over five years must be balanced against the huge credit guarantees and special terms handed out to the big five banks in Britain that also cost the taxpayer in extra borrowing and costs.  That cannot be recouped.

The right-wing UK government is also trying to sell off its huge 81% stake in RBS.  The government plans to break the bank into two, creating a ‘bad bank’ with all the toxic assets that RBS holds, which will remain the liability of the taxpayer, while selling off the good part of the bank back to the private sector.  The taxpayer will have $81-97 billion of bad assets on its hands. The sell-off of the good bit is, however, unlikely before the next British general election in 2015, because, as the British Chancellor, George Osborne put it: “RBS was a much more complex bank. It was a bank that was in a lot more trouble. The clean-up job has been more difficult”.

And so it goes on.  It’s the same story in Italy.  There, the criminal activities of the very venerable Siena-based bank, Monte dei Paschi, led to it going bust, well after the global banking crisis. The bank is Italy’s third-largest lender by assets.  It received 4.1 billion euros in special state loans earlier this year after a toxic derivatives scandal brought it to its knees. The EU Commission is opposed to this bailout for two reasons: one, it wants bank bondholders to take a hit; and two, it does not like the government having shares in the bank.  But there may be no way around part public ownership if the private sector won’t step up to the plate with new funds.  In the meantime, ordinary bank workers are taking the hit. Monte dei Paschi has already cut 4,600 jobs and shutting 400 branches.  But the EU wants more.

Indeed, there is much worry that other Italian banks are still hiding a load of nasties on their books.  The IMF wants these ‘bad debts’ identified and separated off into a national ‘bad bank’ for the taxpayer to take on as a liability perhaps of about 15-20 billion euros.  That may not be anywhere near the amount that will eventually be needed to ‘clean’ up Italy’s banks.  My own estimates (no space to explain how my calculation is worked out) suggest more like 60-70 billion euros of losses in Italy alone.

But capital is not really worried.  The state stands as a backstop to bail out the banks, to support them with credit guarantees and taxpayers’ money, and then to sell them back to a new set of private owners (hedge funds etc) at bargain prices.  After all, we cannot have a publicly-owned, democratically-run banking system, can we?

Macrobusiness commenter Gunnamatta helpfully provided a partial transcript of some real zingers. Here it is:

‘The financial sector in the modern western world does not lend for business – business lending is almost insignificant. Its principle job is to leverage up property assets – mostly household but also commercial property – and in the process generate, when you think about it, a massive rise in real prices of this stuff, and massive increases in household debt.’

‘At this point intelligent economists would say ‘This wouldn’t have happened if they had used their money wisely.’ This is perfectly true. But as I have already told you, they didn’t, they put it into housing. And housing is really not a very good asset to back foreign borrowing against, because it’s completely non-tradable unless you intend to sell all the houses to Chinese people.’

‘There is a simple solution for the US housing problem – allow a hundred million Chinese people to come to America and buy the houses. And since they paid for them anyway, why not?’

‘And what we had was a situation in which the emerging world as a whole became huge net creditors of the developed world. We borrowed all this money – and we threw it away. Very very simple. Colossal wastage of this capital. And now they want their money back. And the answer of course is that they will get it back, in depreciated dollars.’

‘My basic rule is when the government tells you there is nothing to worry about, the thing you do is you take your money out.’

‘The Eurozone was created and the net flows across the Eurozone just exploded. And Germany was the dominant creditor. It went actually from a small deficit to a gigantic surplus, it’s the second largest surplus country in the world, by the way. And then there are a few other surplus countries of which the most important is the Netherlands. And down below you get these absolutely enormous deficits, by far the most important was Spain. But a number of countries, Spain, Portugal, Greece are the most important were running current account deficits of 10% of GDP for roughly a decade, their net external positions went to about 110-120% of GDP and all this stuff was invested wisely and sensibly in in overpriced houses. It is not surprising that we ended up in a very very large mess.’

(of nations in Eurozone with net government debt of more than 100%) ‘And they are all going to default. We just don’t know when.’

‘In essence we have the same financial system as before, except that the banks are bigger and more concentrated, and more diverse, and they are very marginally less leveraged – but they are less leveraged, as I put it in one thing it is the difference between being unbelievably over-leveraged and merely being extraordinarily over-leveraged, so basically the leverage ratios have halved but they are still very very very high. The interconnections of the banking system are the same, and it is not at all clear that any of the underlying problems that have been revealed in risk management and so forth have been resolved.

The second think which I would like to link with this. The other thing we have learned definitively, absolutely definitively, that the dominant dogma of central banking, which was that ‘if we stabilise prices’ – this brings us all the way back to Wicksell and Hayek, it brings us back 100 years of debate – ‘if we stabilise prices, or price expectations, in this case inflation expectations, the economy would be stable and we could assume the financial sector wouldn’t cause us problems’ that proposition has also I think been definitively disproved. And for that reason central banks are engaged in a desperate attempt to put together a coherent doctrine of what it is they are about when they get back to normal, if they get back to normal. Remember Japan hasn’t got back to normal for twenty years’

‘Our views about the financial sector and our views about monetary policy were, in my view, simply demolished, and we don’t yet have a coherent and agreed alternative.’*

‘The third lesson I would draw, and it is controversial, but to a first approximation, a long period, to a first approximation, there are some exceptions, a very lengthy period of running very large current account deficits is likely to be a warning of a very significant financial macro crisis, unless ……….. the money is being invested. Because by definition some sector of the economy is a very large net borrower……..that the money is being invested in extremely valuable assets which have a particular property of being able to service foreign debt – they are tradables. And this is almost inconceivable because one of the consequences of a large current account deficit, a concomitant, is a huge appreciate of the real exchange rate, which has exactly the opposite effect. ’

‘On the other hand. If Canada and Australia managed to really succeed in screwing up where they are it will be impressive’


Supports MacroPrudential regulation


9 thoughts on “Bad bankers, bad debts and bad banks

  1. “After all, we cannot have a publicly-owned, democratically-run banking system, can we?”

    Nope, as a matter of fact we can’t. That’s the point. No more than we can have publicly owned, democratically run capitalism; no more than we can have socialist commodity production; socialist wage-labor; socialist production of and for value accumulation.

  2. Oddly, perhaps, circumspection about the efficacy of the bloated and enormously profitable financial arm of late-stage-capitalism is a perspective that is not the sole perview of Marxist-oriented eonomics. Hedge funds, short term traders, and even some quite large private equity funds are sanguine about what finance capital has been up to since about 1982. In other words, there is no secret here. But there is a lot of banana oil coming out of Wall St., nonetheless: the Big Lie, in action (unemployment statistics, various measures of economic growth, earnings reports, etc., etc., ….all completely misleading if not deliberately inaccurate). Regrettably, enormous pain has been and will continue to be suffered by the cannon fodder in this gigantic rip-off: hundreds of million workers in both developing and developed economies.

  3. Nor can we have publicly-owned, democratically-run retirement and medical care. Obama’s ACA points the way for the privatization of Medicare and SS in the USA. We are all to be frog-marched into a state engineered “market” and made to contort ourselves into “truckers and barterers” whether we like or want it or not.

    Per Karl Polyani’s dystopia, the coercion of everything into the “market”, into universal private property, will require a totalitarian police state to protect against the inevitable mass rage against capitalism and its “market” ways. They are busy at that parallel project as well. Here in Oakland, CA the security forces are preparing for a para-military exercise called “Urban Shield”. Oakland has clearly been picked out by the Feds as a “trouble spot” requiring, among other things, Israeli consultants in repression:

    Ever get the feeling that the capitalist state in the USA (and UK) is girding itself to suppress a revolution? Our ruling classes don’t appear too optimistic about their own future.

  4. Basically, I personally believe that most of those “liar’s loans” were fraudulent because even minimal underwriting of the loan files was sufficient to detect the overwhelming majority of them. No honest, rational lender would make such a large number. The epidemic of mortgage fraud was in fact so large that it hyper-inflated the housing bubble, which allowed refinancing to further extend the life of the bubble and the depth of the recession.

    I guess “liar’s loans” were done for the usual reason – they optimized (fictional) short-term accounting income by creating a “sure thing” . A fraudulent lender optimizes short-term fictional accounting income and longer term (real) losses by maximizing fictional profits and real losses. This destroys the lender, but it makes senior officers that control the lender wealthy.

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