My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
Last week, we got into CDS in a big way and revealed how toxic they can become when the markets crash as happened to AIG during the meltdown in 2008. Now that global growth is slowing and the markets are now suddenly acknowledging it, Collateralised Debt Obligations will become crucial – here is a good description of the risks:
Here is the link to last week: ISSUE 43
In this issue we will close this Chapter with a final look at banking standards which have failed to improve the global financial system, in fact the various and many innovations and regulations have, if anything, made matters worse. One of the typical frauds which have been revealed in the UK is that of Payment Protection Insurance (PPI). This is only one example of the many instances of bankers’ misconduct both revealed and hidden and yet to come to light. Here is a short review:
https://complyadvantage.com/knowledgebase/financial-crime/financial-misselling/
Make no mistake, these people are criminals and need to be jailed, which will only happen when their protecting institutions are held properly to account which I hope will follow the coming crisis. In the meantime we mere mortals can only stand by and record the events as they unfold ensuring that we retain the evidence.
You will see that the City of London is quoted in the text. For those who wish to know more about how this unique entity works, this video is worth watching if you have the time:
https://www.youtube.com/watch?v=np_ylvc8Zj8
At the demise of empire, City of London financial interests created a web of secrecy jurisdictions that captured wealth from across the globe and hid it in a web of offshore islands. Today, up to half of global offshore wealth is hidden in British jurisdictions; Britain and its dependencies are the largest global players in the world of international finance.
Another key issue is that of separating the operations of investment banking and commercial banking which had already been in place following the great depression. Regretfully the bankers’ lobbying prevailed in America and this law was revoked in 1999.
https://dealbook.nytimes.com/2009/11/12/10-years-later-looking-at-repeal-of-glass-steagall/
CHAPTER 8
Financial Engineering
“Something hit me very hard once, thinking about what one little man could do. Think of the Queen Mary — the whole ship goes by and then comes the rudder. And there’s a tiny thing at the edge of the rudder called a trim-tab. It’s a miniature rudder. Just moving the little trim-tab builds a low pressure that pulls the rudder around; takes almost no effort at all”.
Richard Buckminster Fuller
Banking standards fail to rein in the bankers’ enthusiasm
In 2007-8 a series of bank failures caused widespread public anger and humiliation of symbolic figures in the financial and political world. However the scandals keep coming and thus we enter another stage of what therapists call “bargaining“.
A majority of the political class now recognises the need for change but remain unable to see the need for a fundamental change in the very structure of the current financial system. Thus far only fixes and patches have been applied with small increases in banks’ leverage ratios and bonus claw-backs combined with “ring fences” for ‘toxic’ assets carried on the banks’ balance sheets and ‘fines’ for malpractice such as PPI (Payment Protection Insurance).
On 28th June 2013 a report by the UK parliamentary commission on banking standards is a perfect example of this tendency to address the symptoms whilst keeping a dysfunctional system intact. The commission, set up after the ‘LIBOR’ scandal (London Interbank Offered Rate) https://www.theguardian.com/business/2017/jan/18/libor-scandal-the-bankers-who-fixed-the-worlds-most-important-number , effectively identified the structural problems and flaws in the present financial system; they reported that: “Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility.”
It is said to be quoted in the City of London that running a major bank is like: “playing Russian Roulette with someone else’s head”. Restoring the link between risk, reward and responsibility is a crucial step towards a robust and stable financial sector but the report’s focus on individual responsibility is also dangerously incomplete because it implies that the sector is merely out of control. This proposition encourages fixing the system by tweaking rules and realigning incentives or by bargaining. In reality, in my opinion, the financial sector is not out of control, it is beyond control.
Mega banks control the global financial system with little oversight
The global financial system consists of a set of interlocking ‘cartels’ that divide the market among each other and use their advantages to exclude competition. Cartels can and do extract huge premiums over what would otherwise be normal profits in a free market and part of those profits keep the cartel in business.
By using massive advertising, marketing and public relations the cartel can ensure continuing, easy-to-gain profits without fear of failure or loss. Their gigantic cashflow offers talented regulators three or four times their normal salary to participate in their illusory derivative schemes which result in extraordinary bonuses and commissions for all these insiders.
Here is the source of so many of the perversities in modern finance the solution to which is not only to denounce those who can’t resist its temptations but actually to remove those temptations; creating smaller banks, smaller and independent accountancy & auditing firms and credit-rating agencies, simpler financial products, much higher capital requirements and much smaller government. Here is one model of adjustments to governmental and economic controls that might work in future: http://harrogateagenda.org.uk/
The problem of a parliamentary banking commission in today’s world is that there are no politicians capable of doing these things, no matter how just and justified they may be, against the implicit and explicit demands of the financial elites in their respective countries. In the UK, the City of London operates as an isolated, unique unit beyond control of government.
So far as the most important political positions are concerned, they are available only to those who align themselves with these elites. It is not only the financial world that should be subject to a total overhaul, the political world should also execute it and this needs to be addressed now because it is not going to come from within.
Raising solutions to the impossible conundrum of the banker/politico cartel
In essence the solution is simple and those that matter already know the answers. A financial world that cannot function without a constant flow of public funds is so obviously dysfunctional to anyone with modest common sense.
A start has been made by putting a halt to the bank ‘bail-outs’ which we have seen in past years but now, in substitution, it has been decided to create ‘bail-ins’ as we witnessed in Cyprus. One option which has proved its worth, in the aftermath of the Great Depression, is to separate the operations of commercial banks from investments banks by not allowing investment banks access to depositors’ funds; they should only be allowed to gamble with their own funds.
Furthermore these massive banks should be broken down into smaller more manageable units and offer a simplified system which can be regulated effectively. But the question is not which are the proper measures but rather the question remains, who will execute these measures?
It cannot be the political establishment, because in the present situation they, like the bankers, can keep playing ‘Russian Roulette with someone else’s head’ indefinitely; and they want it to remain this way. Changes will have to be found by the coming generations who have already been dispossessed of their rightful inheritance and will eventually have to organise in unity to defeat the present malignant and dysfunctional apparatus of our present system of financial governance.
It is appropriate to leave this Chapter on a positive note to know that there are many jigsaw pieces of the derivatives package that inevitably will fail and bring down the current financial system. When this happens it will be helpful to have on hand a replacement system ready to implement with the minimum of fuss, cost and disruption and is the subject of Chapter 13 – The New Emergent Economy.
If there is going to be any cost at all it will be in the form of either deflation, with an attendant global depression, or a hyperinflation installing itself throughout the global economies causing a currency crisis and a similar disruption to our fragile distribution systems as that experienced by Germany in the 1920s; or can this time really be different?
The next Chapter deals with some of the underlying systems which affect inflationary and deflationary conditions. It is important to cover these basic requirements so we can fully understand how events are likely to unfold in future and which will impact each of us as the next global crisis unfolds.
To be continued next Saturday
Really good article! TPTB are incorrigible crooks and control every lever of societies Power so reform is impossible. “When the righteous are in authority, the people rejoice: but when the wicked beareth rule, the people mourn Prov29:2”. My mandatory truck insurance cost me many times more than the cost of the amount of gas I use in it; I also must pay for the PIP medical coverage which I don’t need; and for uninsured motorist, etc. The French have had enough and when their Reset occurs, I believe people won’t weed the existing financial crooks, they will plow them.
Thanks Robert for your kind words and for such a relevant quote. There is indeed wisdom to be found in the bible. Sorry to hear about your truck costs – it is little different here in UK and the costs are escalating constantly. Next week we move on to the Chapter 9: Inflation & Deflation so there will be much to say about this area that adversely affects us all.