Matt Taibbi and Yves Smith join Bill Moyers to discuss our criminal global financial system. A synopsis of their discussion follows here.
Rolling Stone editor Matt Taibbi and Yves Smith (the creator of the finance and economics blog Naked Capitalism) join Bill to discuss the interlinked folly and corruption of banks and government, and how that tag-team is leaving deep wounds in our democracy and economy. Taibbi’s latest piece is “The Scam Wall Street Learned from the Mafia.” Smith is the author of “ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.”
As we saw in 2008, when big companies go down, we all end up paying for it. This is how we ended up financing a multi-trillion-dollar bailout in 2008. So, if and when a company like JPMorgan Chase now goes under, there will certainly be some sort of similar federal action, which is why we should now learn as much as we can about JPMorgan’s stunning new losses. We should damn well find out what led to those unexpected multibillion dollar losses, which will ultimately affect all of us. Here then is an attempt to find out that and more.
The first thing to understand is that the big banks have been guilty of gaming the system. And the main way they’ve done this is by using depositor money to make very large, profitable, and risky bets in the derivatives market. The main problem here is that the entire derivatives market is essentially a gigantic black box. This means that regulators lack access to much of the information they need to have. And the banks are doing everything they can to keep it that way. Why? To maximize their profits (at the expense of everyone else).
But this is not the only way that banks like JPMorgan game the system:
Example: quick summary of the con game JPMorgan played in Jefferson County, Alabama
Jefferson County had to build a new sewer system. And they had to borrow a bunch of money to do that. It was originally a $300 million project. But they got into a series of deals with JPMorgan Chase to basically push the financing well into the future. As it turned out, the deals were heavily mispriced in Chase’s favor. And Chase actually bribed another bank to stay away from these bilking opportunities Chase had scoped out, because they wanted exclusive rights to exploit this “opportunity’ . . to take Jefferson County to the cleaners. So they bribed their potential competitors to stay out of it. But they were discovered and were heavily fined by the SEC. Nevertheless, the scheme resulted in a disaster for Jefferson County which will now be bankrupt for a generation. Financing their sewer system will end up costing them $3 billion as compared to what was originally to be a cost of $300 million. Who will pocket most of the difference between $300 million and $3 billion? JPMorgan Chase.
Consequences for the people of Jefferson County: Basically they cannot have access to the sewage system without paying at least 50 bucks a month. So there are people in the poor areas of the county who are deciding what they’re going to have: electricity, water, or sewer. They simply can’t afford all three. Some can only afford one.
Why is it, exactly, that it’s JPMorgan’s fault that these folks have to make this terrible choice?
JPMorgan basically got them into these onerous toxic-swap* deals that were poorly understood by the local politicians. Then they bribed the local politicians to accept the swap deals. They did it through middleman companies that bribed the local politicians.
*What’s a toxic-swap deal (interest rate swap), you ask? They’re contracts that allow a city to enter into a deal, with some big bank, to pay for public infrastructure projects. In that deal, the city and the bank will “swap” interest rates with each other, which means that the city will pay the bank a fixed rate–3 to 5 percent, say–to borrow money, and the bank will in return pay the city cash based on a floating, variable interest rate. (This is determined by some underlying source, like the LIBOR rate for short-term lending.) The point of a swap deal is that, when the economy was booming, cities could borrow from banks on the cheap, because their fixed payment rate was on par with or better than the bank’s floating rate. But after the economy tanked, and the LIBOR rate dropped with it, banks emerged as the winners: Their variable payment rates to cities are now basement-low because overall interest rates are low. Cities, however, are still stuck with those higher fixed rates. So essentially they’re getting fleeced.
The consultant on the Jefferson County deal is in jail. The former mayor was involved in other improprieties, too. And the former mayor, who received kickbacks, is now in prison for signing off on these deals.
Given that these banks have systematically and repeatedly committed fraud, and have repeatedly been caught, in municipal bid rigging, why should we still give them billions and billions of dollars in emergency lending from the Fed, i.e. bailouts? How come there are no consequences for them, while there are such terrible consequences for the ordinary people of Jefferson County and other places where the big banks play their con games?
So why shouldn’t banks be operated as public utilities?
Why should we tolerate people like Dimon and the members of the CIO (chief investment office) unit, most of which he’s fired? Finally, what is the justification for hundreds of millions in bonuses being paid to these crooks?
Banks, more than any other business, more than military contractors, live off of the government. They depend on government backstopping. They exist only by way of government-issued licenses, which if you had a policy of open entry, to allow most any upstart bank easy entry into the marketplace, you’d see much lower fees. The banks enjoy the public’s confidence largely from the fact that they are regulated (by the government). Oh, and the most important thing is they have access to the Federal Reserve, from whom they’re getting huge amounts of free money. And not just free money. The Federal Reserve (which has a federally appointed board of governors) basically guarantees the payment system, in which they operate, and on which banks are utterly dependent. We write checks to each other. We have credit cards. Payments on these things clear through banks, and the Fed supervises this payment system and guarantees it.