The Banksters Still Gamble With the Comfort of Government Guarantees

UPDATE II:  "Financial firms can borrow money . . . more cheaply and with less market scrutiny when they have access to government guarantees of deposit insurance, loans from the Federal Reserve and, ultimately, taxpayer support such as we saw with the Troubled Assets Relief Program in 2008. This safety net was intended to stabilize the financial system by protecting the payments system that transfers money around the country and the world as well as the essential lending that commercial banks provide. But these protections also assure those who lend to banks that they will be repaid regardless of the condition of the bank. Under such circumstances, creditors give the firms a discount on the cost of the funds they borrow.

Things are made more difficult by the fact that the largest financial companies now combine traditional commercial banking with higher-risk activities such as trading so that both their banking and betting activities get access to these government protections and the multibillion-dollar subsidy that comes with them. Using subsidized money to finance the conglomerates’ bets encourages ever-higher levels of debt, risk and interconnectedness not attainable or sustainable in a truly free market. . .

This form of corporate welfare allows the protected giants — those 'too big to fail' — to profit when their subsidized bets pay off, while the safety net acts as a buffer when they lose, shifting much of the cost to the public. For example, the conglomerates can cover — and even double down on — their trading positions for extended periods using insured deposits or discounted loans from the Federal Reserve that come with the commercial bank charter. The subsidy often allows them to stay in the game long enough to win the bet, but it supersizes the loss if the bet should finally fall apart.

This system distorts the market and turns appropriate risk-taking into recklessness. The result is a more concentrated and powerful financial sector — and a more fragile economy."

Read the Washington Post, Stop subsidizing Wall Street.  

UPDATE:  "A couple of years ago, the journalist Nicholas Shaxson published a fascinating, chilling book titled 'Treasure Islands,' which explained how international tax havens — which are also, as the author pointed out, 'secrecy jurisdictions' where many rules don’t apply — undermine economies around the world. Not only do they bleed revenues from cash-strapped governments and enable corruption; they distort the flow of capital, helping to feed ever-bigger financial crises.

One question Mr. Shaxson didn’t get into much, however, is what happens when a secrecy jurisdiction itself goes bust. That’s the story of Cyprus right now. And whatever the outcome for Cyprus itself (hint: it’s not likely to be happy), the Cyprus mess shows just how unreformed the world banking system remains, almost five years after the global financial crisis began. . .

Everyone has seen the damage that runaway bankers can inflict, yet much of the world’s financial business is still routed through jurisdictions that let bankers sidestep even the mild regulations we’ve put in place. Everyone is crying about budget deficits, yet corporations and the wealthy are still freely using tax havens to avoid paying taxes like the little people."

Read The New York Times, Treasure Island Trauma. 

"Can anyone manage a big bank these days? Should anyone try?

Or should we simply conclude that playing in the modern world of derivatives is best left to those whose survival is not critical to the nation’s economy, and who do not benefit from government-backed deposit insurance?

That question is brought to mind by a reading of the fascinating — well, to me, anyway — story of how JPMorgan Chase got into the mess of the London whale trades that dominated the financial news last year, as told in a report by the Senate Permanent Subcommittee on Investigations that was released last week. . .

[The report documents the "sheer incompetence and stupidity" that exists with the government backed financial sector.]

Consider the following presentation written by Bruno Iksil, the whale himself, on Jan. 26, 2012, as the losses were growing. He called for executing 'the trades that make sense.'

He proposed to 'sell the forward spread and buy protection on the tightening move,' 'use indices and add to existing position,' 'go long risk on some belly tranches especially where defaults may realize' and 'buy protection on HY and Xover in rallies and turn the position over to monetize volatility.'

That presentation was made to a JPMorgan group called the International Senior Management Group of the Chief Investment Office, which seems to have approved it.

If the proposal does not make sense to you, don’t despair. It is largely gibberish."

Read The New York Times, Masked by Gibberish, the Risks Run Amok.