When's the referendum in Switzerland going to take place? A brief update
The earliest possible date is 10th June 2018, and the next possible date is 23rd September 2018.
Why isn’t it sooner?
The
government and both houses of parliament as well must give their
recommendations to voters, these recommendations being sent out along
with the voting papers. To achieve this the Initiative is discussed in
various committees to which experts are invited - all of which takes
time. (They may also make suggestions for "counter proposals" to go on
the ballot papers - which has not happened in this case).
What is the outcome of these discussions?
So far these discussions have, as expected, been dominated by
“traditionalists” who have focused on what they perceive the possible
downsides to be: banks won’t make money anymore from offering current
accounts (but Switzerland has negative interest rates so they already
don’t make money on current accounts now); the Swiss franc may have a
less stable exchange rate (but under the Sovereign Money system there
are more degrees of freedom to tackle problems such as exchange rate
fluctuations compared with the current system); and Switzerland would be
the guinea pig for an unproven system (true in current times, but
remember the Sovereign Money system should be compared with the current
system which is proven to result in build-ups of unsustainable debts and
major financial crises. In earlier times most transactions were carried
out using bank notes and coins issued by a national bank i.e. Sovereign
Money systems predominated).
Surprisingly there was little discussion on the potential upside of
money flowing to the national coffers when new money is brought into
circulation – sums likely in the order of billions of Swiss francs.
You know the old joke: How
do you make a killing on Wall Street and never risk a loss? Easy—use
other people’s money. Jamie Dimon and his underlings at JPMorgan Chase
have perfected this dark art at America’s largest bank, which boasts a
balance sheet one-eighth the size of the entire US economy.
After JPMorgan’s deceitful activities in the housing market
helped trigger the 2008 financial crash that cost millions of Americans
their jobs, homes, and life savings, punishment was in order. Among a
vast array of misconduct, JPMorgan engaged in the routine use of
“robo-signing,” which allowed bank employees to automatically sign
hundreds, even thousands, of foreclosure documents per day without
verifying their contents. But in the United States, white-collar
criminals rarely go to prison; instead, they negotiate settlements.
Thus, on February 9, 2012, US Attorney General Eric Holder announced the
National Mortgage Settlement, which fined JPMorgan Chase and four other mega-banks a total of $25 billion.
JPMorgan’s share of the settlement was $5.3 billion, but
only $1.1 billion had to be paid in cash; the other $4.2 billion was to
come in the form of financial relief for homeowners in danger of losing
their homes to foreclosure. The settlement called for JPMorgan to
reduce the amounts owed, modify the loan terms, and take other steps to
help distressed Americans keep their homes. A separate 2013 settlement against the bank for deceiving mortgage investors included another $4 billion in consumer relief.
A Nation investigation can now reveal how JPMorgan met part of its $8.2 billion settlement burden: by using other people’s money.
Here’s how the alleged scam worked. JPMorgan moved to
forgive the mortgages of tens of thousands of homeowners; the feds, in
turn, credited these canceled loans against the penalties due under the
2012 and 2013 settlements. But here’s the rub: In many instances,
JPMorgan was forgiving loans on properties it no longer owned.
The alleged fraud is described in internal JPMorgan
documents, public records, testimony from homeowners and investors
burned in the scam, and other evidence presented in a blockbuster
lawsuit against JPMorgan, now being heard in US District Court in New
York City.
JPMorgan no longer owned the properties because it had sold
the mortgages years earlier to 21 third-party investors, including three
companies owned by Larry Schneider. Those companies are the plaintiffs
in the lawsuit; Schneider is also aiding the federal government in a
related case against the bank. In a bizarre twist, a company associated
with the Church of Scientology facilitated the apparent scheme.
Nationwide Title Clearing, a document-processing company with close ties
to the church, produced and filed the documents that JPMorgan needed to
claim ownership and cancel the loans.
JPMorgan, it appears, was running an elaborate shell game.
In the depths of the financial collapse, the bank had unloaded tens of
thousands of toxic loans when they were worth next to nothing. Then,
when it needed to provide customer relief under the settlements, the
bank had paperwork created asserting that it still owned the properties.
In the process, homeowners were exploited, investors were defrauded,
and communities were left to battle the blight caused by abandoned
properties. JPMorgan, however, came out hundreds of millions of dollars
ahead, thanks to using other people’s money.
“If the allegations are true, JPMorgan screwed
everybody,” says Brad Miller, a former Democratic congressman from North
Carolina who was among the strongest advocates of financial reform on
Capitol Hill until his retirement in 2013.
In an unusual departure from most allegations of
financial bad behavior, there is strong evidence that Jamie Dimon,
JPMorgan’s CEO and chairman, knew about and helped to implement the mass
loan-forgiveness project. In two separate meetings in 2013 and 2014,
JPMorgan employees working on the project were specifically instructed
not to release mortgages in Detroit under orders from Dimon himself,
according to internal bank communications. In an apparent
public-relations ploy, JPMorgan was about to invest $100 million in
Detroit’s revival. Dimon’s order to delay forgiving the mortgages in
Detroit appears to have been motivated by a fear of reputational risk.
An internal JPMorgan report warned that hard-hit cities might take issue
with bulk loan forgiveness, which would deprive municipal governments
of property taxes on abandoned properties while further destabilizing
the housing market.
Did Dimon also know that JPMorgan, as part of its mass
loan-forgiveness project, was forgiving loans on properties it no longer
owned? No internal bank documents confirming that knowledge have yet
surfaced, but Dimon routinely takes legal responsibility for knowing
about his bank’s actions. Like every financial CEO in the country, Dimon
is obligated by law to sign a document every year attesting to his
knowledge of and responsibility for his bank’s operations. The law
establishes punishments of $1 million in fines and imprisonment of up to
10 years for knowingly making false certifications.
Dimon signed the required document for each of the years
that the mass loan-forgiveness project was in operation, from 2012
through 2016. Whether or not he knew that his employees were forgiving
loans the bank no longer owned, his signatures on those documents make
him potentially legally responsible.
The JPMorgan press office declined to make Dimon
available for an interview or to comment for this article. Nationwide
Title Clearing declined to comment on the specifics of the case but said
that it is “methodical in the validity and legality of the documents”
it produces.
Federal appointees have been complicit in this as well.
E-mails show that the Office of Mortgage Settlement Oversight, charged
by the government with ensuring the banks’ compliance with the two
federal settlements, gave JPMorgan the green light to mass-forgive its
loans. This served two purposes for the bank: It could take settlement
credit for forgiving the loans, and it could also hide these loans—which
JPMorgan had allegedly been handling improperly—from the settlements’
testing regimes.
“No one in Washington seems to understand why Americans
think that different rules apply to Wall Street, and why they’re so mad
about that,” said former congressman Miller. “This is why.”
Lauren
and Robert Warwick were two of the shell game’s many victims. The
Warwicks live in Odenton, Maryland, a bedroom community halfway between
Baltimore and Washington, DC, and had taken out a second mortgage on
their home with JPMorgan’s Chase Home Finance division. In 2008, after
the housing bubble burst and the Great Recession started, 3.6 million
Americans lost their jobs; Lauren Warwick was one of them.
Before long, the Warwicks had virtually no income. While
Lauren looked for work, Robert was in the early stages of starting a
landscaping business. But the going was slow, and the Warwicks fell
behind on their mortgage payments. They tried to set up a modified
payment plan, to no avail: Chase demanded payment in full and warned
that foreclosure loomed. “They were horrible,” Lauren Warwick told The Nation. “I had one [Chase representative] say, ‘Sell the damn house—that’s all you can do.’”
Then, one day, the hounding stopped. In October 2009,
the Warwicks received a letter from 1st Fidelity Loan Services,
welcoming them as new customers. The letter explained that 1st Fidelity
had purchased the Warwicks’ mortgage from Chase, and that they should
henceforth be making an adjusted mortgage payment to this new owner.
Lauren Warwick had never heard of 1st Fidelity, but the
letter made her more relieved than suspicious. “I’m thinking, ‘They’re
not taking my house, and they’re not hounding me,’” she said.
Larry Schneider, 49, is the founder and president of 1st
Fidelity and two other mortgage companies. He has worked in Florida’s
real-estate business for 25 years, getting his start in Miami. In 2003,
Schneider hit upon a business model: If he bought distressed mortgages
at a significant discount, he could afford to offer the borrowers
reduced mortgage payments. It was a win-win-win: Borrowers remained in
their homes, communities were stabilized, and Schneider still made
money.
“I was in a position where I could do what banks didn’t want
to,” Schneider says. In fact, his business model resembled what
President Franklin Roosevelt did in the 1930s with the Home Owners’ Loan
Corporation, which prevented
nearly 1 million foreclosures while turning a small profit. More to the
point, Schneider’s model exemplified how the administrations of George
W. Bush and Barack Obama could have handled the foreclosure crisis if
they’d been more committed to helping Main Street rather than Wall
Street.
The Warwicks’ loan was one of more than 1,000 that
Schneider purchased without incident from JPMorgan’s Chase Home Finance
division starting in 2003. In 2009, the bank offered Schneider a package
deal: 3,529 primary mortgages (known as “first liens”) on which
payments had been delinquent for over 180 days. Most of the properties
were located in areas where the crisis hit hardest, such as Baltimore.
Selling distressed properties to companies like
Schneider’s was part of JPMorgan’s strategy for limiting its losses
after the housing bubble collapsed. The bank owned hundreds of thousands
of mortgages that had little likelihood of being repaid. These
mortgages likely carried ongoing costs: paying property taxes,
addressing municipal-code violations, even mowing the lawn. Many also
had legal defects and improper terms; if federal regulators ever
scrutinized these loans, the bank would be in jeopardy.
In short, the troubled mortgages were the financial
equivalent of toxic waste. To deal with them, Chase Home Finance created
a financial toxic-waste dump: The mortgages were listed in an internal
database called RCV1, where RCV stood for “Recovery.”
Unbeknownst to Schneider, the package deal that Chase
offered him came entirely from this toxic-waste dump. Because he’d had a
good relationship with Chase up to that point, Schneider took the deal.
On February 25, 2009, he signed an agreement to buy the loans, valued
at $156 million, for only $200,000—slightly more than one-tenth of a
penny on the dollar. But the agreement turned sour fast, Schneider says.
Among a range of irregularities, perhaps the most
egregious was that Chase never provided him with all the documentation
proving ownership of the properties in question. The data that Schneider
did receive lacked critical information, such as borrower names,
addresses of the properties, even the payment histories or amounts due.
This made it impossible for him to work with the borrowers to modify
their terms and help them stay in their homes. Every time Schneider
asked Chase about the full documentation, he was told it was coming. It
never arrived.
Here’s the kicker: JPMorgan was still collecting payments on
some of these loans and even admitted this fact to Schneider. In
December 2009, a Chase Home Finance employee named Launi Solomon sent
Schneider a list of at least $47,695.53 in payments on his loans that
the borrowers had paid to Chase. But 10 days later, Solomon wrote that
these payments would not be transferred to Schneider because of an
internal accounting practice that was “not reversible.” On another loan
sold to Schneider, Chase had taken out insurance against default; when
the homeowner did in fact default, Chase pocketed the $250,000 payout
rather than forward it to Schneider, according to internal documents.
Chase even had a third-party debt collector named Real
Time Resolutions solicit Schneider’s homeowners, seeking payments on
behalf of Chase. In one such letter from 2013, Real Time informed
homeowner Maureen Preis, of Newtown Square, Pennsylvania, that “our
records indicate Chase continues to hold a lien on the above referenced
property,” even though Chase explicitly confirmed to Schneider that it
had sold him the loan in 2010.
JPMorgan jumped in and out of claiming mortgage
ownership, Schneider asserts, based on whatever was best for the bank.
“If a payment comes in, it’s theirs,” he says; “if there’s a
code-enforcement issue, it’s mine.”
The
shell game entered a new, more far-reaching phase after JPMorgan agreed
to its federal settlements. Now the bank was obligated to provide
consumer relief worth $8.2 billion—serious money even for JPMorgan. The
solution? Return to the toxic-waste dump.
Because JPMorgan had stalled Schneider on turning over
the complete paperwork proving ownership, it took the chance that it
could still claim credit for forgiving the loans that he now owned. Plus
the settlements required JPMorgan to show the government that it was
complying with all federal regulations for mortgages. The RCV1 loans
didn’t seem to meet those standards, but forgiving them would enable the
bank to hide this fact.
The Office of Mortgage Settlement Oversight gave Chase
Home Finance explicit permission to implement this strategy. “Your
business people can be relieved from pushing forward” on presenting RCV1
loans for review, lawyer Martha Svoboda wrote in an e-mail to Chase, as
long as the loans were canceled.
Chase dubbed this the “pre DOJ Lien Release Project.”
(To release a lien means to forgive the loan and relinquish any
ownership right to the property in question.) The title page of an
internal report on the project lists Lisa Shepherd, vice president of
property preservation, and Steve Hemperly, head of mortgage
originations, as the executives in charge. The bank hired Nationwide
Title Clearing, the company associated
with the Church of Scientology, to file the lien releases with county
offices. Erika Lance, an employee of Nationwide, is listed as the
preparer on 25 of these lien releases seen by The Nation.
Ironically, Schneider alleges, the releases were in effect
“robo-signed,” since the employees failed to verify that JPMorgan Chase
owned the loans. If Schneider is right, it means that JPMorgan relied on
the same fraudulent “robo-signing” process that had previously gotten
the bank fined by the government to help it evade that penalty.
On September 13, 2012, Chase Home Finance mailed 33,456
forgiveness letters informing borrowers of the debt cancellation.
Schneider immediately started hearing from people who said that they
wouldn’t be making further payments to him because Chase had forgiven
the loan. Some even sued Schneider for illegally charging them for
mortgages that he (supposedly) didn’t own.
When Lauren and Robert Warwick got their forgiveness
letter from Chase, Lauren almost passed out. “You will owe nothing more
on the loan and your debt with be cancelled,” the letter stated, calling
this “a result of a recent mortgage servicing settlement reached with
the states and federal government.” But for the past three years, the
Warwicks had been paying 1st Fidelity Loan Servicing—not Chase. Lauren
said she called 1st Fidelity, only to be told: “Sorry, no, I don’t care
what they said to you—you owe us the money.”
JPMorgan’s shell game unraveled because Lauren Warwick’s
neighbor worked for Michael Busch, the speaker of the Maryland House of
Delegates. After reviewing the Warwicks’ documents, Kristin Jones,
Busch’s chief of staff, outlined her suspicions to the Maryland
Department of Labor, Licensing and Regulation. “I’m afraid based on the
notification of loan transfer that Chase sold [the Warwicks’] loan some
years ago,” Jones wrote. “I question whether Chase is somehow getting
credit for a write-off they never actually have to honor.”
After Schneider and various borrowers demanded answers,
Chase checked a sample of over 500 forgiveness letters. It found that
108 of the 500 loans—more than one out of five—no longer belonged to the
bank. Chase told the Warwicks that their forgiveness letter had been
sent in error. Eventually, Chase bought back the Warwicks’ loan from
Schneider, along with 12 others, and honored the promised loan
forgiveness.
Not
everyone was as lucky as the Warwicks. In letters signed by vice
president Patrick Boyle, JPMorgan Chase forgave at least 49,355
mortgages in three separate increments. The bank also forgave additional
mortgages, but the exact number is unknown because the bank stopped
sending homeowners notification letters. Nor is it known how many of
these forgiven mortgages didn’t actually belong to JPMorgan; the bank
refused The Nation’s request for clarification. Through title
searches and the discovery process, Schneider ascertained that the bank
forgave 607 loans that belonged to one of his three companies. The
lien-release project overall allowed JPMorgan to take hundreds of
millions of dollars in settlement credit.
Most of the loans that JPMorgan released—and received
settlement credit for—were all but worthless. Homeowners had abandoned
the homes years earlier, expecting JPMorgan to foreclose, only to have
the bank forgive the loan after the fact. That forgiveness transferred
responsibility for paying back taxes and making repairs back to the
homeowner. It was like a recurring horror story in which “zombie
foreclosures” were resurrected from the dead to wreak havoc on people’s
financial lives.
Federal officials knew about the problems and did
nothing. In July 2014, the City of Milwaukee wrote to Joseph Smith, the
federal oversight monitor, alerting him that “thousands of homeowners”
were engulfed in legal nightmares because of the confusion that banks
had sown about who really owned their mortgages. In a deposition for the
lawsuit against JPMorgan Chase, Smith admitted that he did not recall
responding to the City of Milwaukee’s letter.
If you pay taxes in a municipality where JPMorgan spun
its trickery, you helped pick up the tab. The bank’s shell game
prevented municipalities from knowing who actually owned distressed
properties and could be held legally liable for maintaining them and
paying property taxes. As a result, abandoned properties deteriorated
further, spreading urban blight and impeding economic recovery. “Who’s
going to pay for the demolition [of abandoned buildings] or [the
necessary extra] police presence?” asks Brent Tantillo, Schneider’s
lawyer. “As a taxpayer, it’s you.”
Such economic fallout may help explain why Jamie Dimon
directed that JPMorgan’s mass forgiveness of loans exempt Detroit, a
city where JPMorgan has a long history.
The bank’s predecessor, the National Bank of Detroit, has been a
fixture in the city for over 80 years; its relationships with General
Motors and Ford go back to the 1930s. And JPMorgan employees knew
perfectly well that mass loan forgiveness might create difficulties. The
2012 internal report warned that cities might react negatively to the
sheer number of forgiven loans, which would lower tax revenues while
adding costs. Noting that some of the cities in question were clients of
JPMorgan Chase, the report warned that the project posed a risk to the
bank’s reputation.
Reputational risk was the exact opposite of what
JPMorgan hoped to achieve in Detroit. So the bank decided to delay the
mass forgiveness of loans in Detroit and surrounding Wayne County until
after the $100 million investment
was announced. Dimon himself ordered the delay, according to the
minutes of JPMorgan Chase meetings that cite the bank’s chairman and CEO
by name. Dimon then went to Detroit to announce the investment on May
21, 2014, reaping positive coverage from The New York Times, USA Today,
and other local and national news outlets. Since June 1, 2014, JPMorgan
has released 10,229 liens in Wayne County, according to public records;
the bank declined to state how many of these were part of the
lien-release project.
Both of Larry Schneider’s lawsuits alleging fraud on JPMorgan Chase’s part remain active
in federal courts. The Justice Department could also still file charges
against JPMorgan, Jamie Dimon, or both, because Schneider’s case was
excluded from the federal settlement agreements.
Few would expect Jeff Sessions’s Justice Department to
pursue such a case, but what this sorry episode most highlights is the
pathetic disciplining of Wall Street during the Obama administration.
JPMorgan’s litany of acknowledged criminal abuses over the past decade reads like a rap sheet,
extending well beyond mortgage fraud to encompass practically every
part of the bank’s business. But instead of holding JPMorgan’s
executives responsible for what looks like a criminal racket, Obama’s
Justice Department negotiated weak settlement after weak settlement.
Adding insult to injury, JPMorgan then wriggled out of paying its full
penalties by using other people’s money.
The larger lessons here command special attention in the
Trump era. Negotiating weak settlements that don’t force mega-banks to
even pay their fines, much less put executives in prison, turns the
concept of accountability into a mirthless farce. Telegraphing to
executives that they will emerge unscathed after committing crimes not
only invites further crimes; it makes another financial crisis more
likely. The widespread belief that the United States has a two-tiered
system of justice—that the game is rigged for the rich and the
powerful—also enabled the rise of Trump. We cannot expect Americans to
trust a system that lets Wall Street fraudsters roam free while millions
of hard-working taxpayers get the shaft.
David DayenDavid Dayen is the author of Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud, which won the Studs and Ida Terkel Prize.
Indian fishing communities and
farmers harmed by the Tata Mundra coal-fired power plant financed by the
International Finance Corporation (IFC, the World Bank’s private sector
arm) will take their case to the US Supreme Court,
the highest court in the country. On 26 September the US Court of
Appeals for the District of Columbia Circuit ruled that it will not
reconsider its immunity rule. The decision was taken in response to a July
petition filed by fishing communities and farmers represented by
international NGO EarthRights International (ERI) asking the full US
Court of Appeals for the DC Circuit to revisit a decision in their
lawsuit against the IFC. The decision to request rehearing “en banc”
in July was taken after one of the judges on the June panel wrote in a
dissenting opinion that cases giving the IFC “absolute immunity” were
“wrongly decided” and suggested the full court should reconsider them.
In June
the Court of Appeals ruled that the IFC is entitled to “absolute
immunity” from suit in the US and could not be sued for its role in the
coal plant that has devastated fishing and farming communities in
Gujarat, India (see ObserverSpring 2017, Summer 2015).
“This decision tells the world that the doors of justice are not open
to the poor and marginalized when it comes to powerful institutions like
IFC,” said
Gajendrasinh Jadeja, the head of Navinal Panchayat, a local village
involved in the case, adding “But no one should be above the law.”
The lack of prosecution of US bankers
responsible for the great financial crisis has been a much debated topic
over the years, leading to the coinage of such terms as "Too Big To
Prosecute", the termination of at least one corrupt DOJ official, the
revelation that Eric Holder is the most useless Attorney General in
history, and of course billions in cash kickbacks between Wall Street
and D.C. And, naturally, the lack of incentives that punish cheating and
fraud, is one of the main reasons why such fraud will not only continue
but get bigger until once again, the entire system crashes under the
weight of accumulated theft, corruption and Fed-driven malinvestment.
But what can be done? In this case, Vietnam may have just shown the way -
sentence embezzling bankers to death. Because if one wants to promptly
stop an end to all financial crime, few things motivate as efficiently
as a firing squad.
According to the BBC, the former head of a major Vietnamese bank has
been sentenced to death for his role in a fraud case involving some 800
billion dong (which sounds like a lot of dong, but equals roughly $35
million) of illegal loans. Nguyen Xuan Son, who served as
general director of OceanBank, was convicted of embezzlement, abuse of
power and economic mismanagement. Bank founder, tycoon Ha Van Tham, and
dozens of other banking officials are also on trial, accused of lending
violations. Nguyen Xuan Son was sentenced to death at the People's Court in Hanoi
Meanwhile, dozens of former employees
also received lengthy prison sentences in the major corruption trial.
Because OceanBank is partially-state owned, Son's crime of mishandling
state money was thought to be particularly serious. After leaving the
bank, he rose to be head of state oil giant PetroVietnam. As Reuters reported previously, PetroVietnam and Vietnam’s banking sector are at the heart of a sweeping corruption crackdown in the communist state.
The four officials are accused of intentional breaches
of state rules over a loss-making investment in Ocean Group’s banking
unit, police said in an online statement.
Investigations into PetroVietnam made global headlines last month when Germany accused Vietnam of kidnapping Trinh Xuan Thanh, a former official of a PetroVietnam unit, from a park in Berlin and forcing him home to face charges of financial mismanagement.
A Politburo member who was a former PetroVietnam
chairman and a vice trade minister have also been sacked from their
positions as part of the crackdown -- unusual moves in a country where
such senior officials are rarely dismissed.
To be sure, Vietnam is one of the world's biggest executioners,
according to Amnesty International, but this is said to be the first
time in years that the death penalty has been given to such a
high-flying former official. Back in 2013,
another former banker, Vu Quoc Hao, the former general director of
Agribank Financial Leasing Co, was also sentenced to death by lethal
injection for embezzling $25 million (or what Goldman would call
"weekend lunch money") a case which however was relatively low profile
and received little international attention.
Earlier in the day, OceanBank's ex-chairman Ha Van Tham, once one of
the richest people in Vietnam, was jailed for life on the same charges,
and for violating lending rules. Judge Truong Viet Toan said: "Tham and
Son's behaviour is very serious, infringing on the management of state
assets and causing public grievances, which requires strict punishment." The bank's ex-chairman Ha Van Tham was jailed for life
More details from BBC:
In total, 51 officials and bankers stood trial, accused of mismanagement leading to losses of $69m (£50m).
The case comes amid a massive anti-corruption crackdown in Vietnam, which is ranked as one of the most corrupt countries in Asia. It is ranked 113th out of 176 countries on Transparency International's corruption perceptions index.
The government has vowed to tackle the issue in order to
boost the country's economic growth. In May, a top Vietnamese official
was sacked for "serious violations" while running PetroVietnam.
And yet, while one could be left with the impression that this is a
case of justice finally being done, even today's sentences appears to
have an element of corruption to them: according to BBC, the blitz,
while tackling corruption, has mainly targeted opponents of Communist
Party chief Nguyen Phu Trong.
Still, no matter the circumstances, an outcome such as this in the US
remains impossible: after all it is America's very own embezzling
bankers that control the legislative and judicial branches, and most
recently, the executive not to mention the central bank, which is why
deterrence of any substantial scale will never take place in the US and
small, medium and large-scale theft will continue unabated, with the
occasional slaps on the wrist, until there is nothing left to steal.
Just over 10 years ago, the UK experienced, with Northern Rock,
its first visible bank run in one-and-a-half centuries. That turned out
to be a small event in a huge crisis. The simplest question this
anniversary raises is whether we now have a safe financial system. Alas,
the answer is no. Banking remains less safe than it could reasonably
be. That is a deliberate decision.
Banks create money as a
byproduct of their lending activities. The latter are inherently risky.
That is the purpose of lending. But banks’ liabilities are mostly money.
The most important purpose of money is to serve as a safe source of
purchasing power in an uncertain world. Unimpeachable liquidity is
money’s point. Yet bank money is least reliable when finance becomes
most fragile. Banks cannot deliver what the public wants from money when
the public most wants them to do so.
This system is designed to
fail. To deal with this difficulty, a source of so much instability over
the centuries, governments have provided ever-increasing quantities of
insurance and offsetting regulation. The insurance encourages banks to
take ever-larger risks. Regulators find it very hard to keep up, since
bankers outweigh them in motivation, resources and influence.
A number of serious people have proposed radical reforms. Economists from the Chicago School recommended the elimination of fractional reserve banking in the 1930s. Mervyn King,
former governor of the Bank of England, has argued that central banks
should become “pawnbrokers for all seasons”: thus, banks’ liquid
liabilities could not exceed the specified collateral value of their
assets. One thought-provoking book, The End of Bankingby Jonathan McMillan, recommends the comprehensive disintermediation of finance.
Reforms
have not yet made the banks’ role as risk-taking intermediaries
consistent with their role as providers of safe liabilities
All
these proposals try to separate the risk-taking from the public’s
holdings of unimpeachably safe liquid assets. Combining these two
functions in one class of institutions is a recipe for disaster, because
the first function compromises the second, and so demands huge and
complex interventions by the state. That is simply not a market
solution.
Radical reforms are desirable. But today this is
politically impossible. We have to build, instead, on the reforms
introduced since the crisis. I was involved in the recommendations from
the UK’s Independent Commission on Banking for higher loss-absorbing capacity and the ringfencing of UK retail banks. Both are steps in the right direction. Even so, as Sir John Vickers,
chairman of the ICB, noted in a recent speech, the reforms have not yet
made the banks’ role as risk-taking intermediaries consistent with
their role as providers of safe liabilities. That is largely because
they remain highly undercapitalised, relative to the risks they bear.
Senior officials argue that capital requirements
have increased 10-fold. Yet this is true only if one relies on the
alchemy of risk-weighting. In the UK, actual leverage has merely halved,
to around 25 to one. In brief, it has gone from the insane to the
merely ridiculous.
The smaller the equity funding of a bank, the
less it can afford to lose before it becomes insolvent. A bank near
insolvency must not be allowed to operate, since shareholders have
nothing left to lose from taking huge bets. There is, however, a simple
way of increasing the confidence of a bank’s creditors in the value of
its liabilities (without relying on government support). It is to reduce
its leverage from 25 to one to, say, five to one, as argued by Anat
Admati and Martin Hellwig in The Bankers’ New Clothes.
As
Sir John notes, this would impose private costs on bankers, which is
why they hate the idea. But it would not impose significant costs on
society at large. Yes, there would be a modest increase in the cost of
bank credit, but bank credit has arguably been too cheap. Yes, the
growth of bank-created money might slow, but there exist excellent
alternative ways of creating money, especially via the balance sheets of
central banks. Yes, shareholders would not like it. But banking is far
too dangerous to be left to them alone. And yes, one can invent debt
liabilities intended to convert into equity in crises. But these are
likely to prove difficult to operate in a crisis and are, in any case,
an unnecessary substitute for equity.
The conclusion is simple.
Banks are in better shape, on many fronts, than they were a decade ago
(though the questionable treatment of income and assets in banks’
accounts continues to render their financial robustness highly
uncertain). But their balance sheets are still not built to survive a
big storm. That was true in 2007. It is still true now. Do not believe
otherwise.
Marco Saba:"banks’
liquid liabilities could not exceed the specified collateral value of
their assets" - this is like to say that the face value of the money
creation must not exceed the face value of the loot on the other side of
the balance... No author do analyze seriously the problem, i.e. that
money creation is a liability for the public, not for the bank that
created the money, in a FIAT regime where the bank liability is a
liability only in name, as William Buiter pointed out in 2007.
Commercial banks do create digital currency (deposits) denominated like
the legal tender because their money is a legal tender de facto.
The
aggregate value of all money created by the banks - and not accounted
for as a revenue in their cash flow accounts at the time of creation -
is the biggest stealth tax that the public at large is paying without
knowing, and it is 'taxation without representation.' In Italy this tax
is twofold the state balance per year: 1.8 trillion Euros.
There is a
simple solution that is in accord with US-GAAP and IAS-IFRS accounting
rules: to account for money creation as a revenue in the bank's books
before lending or spending. There is no more need to hide money creation
in the books (i.e. clandestine money creation) because the public now
know well - after eight centuries - that the banks are engaged in money
creation, the biggest game in town.
If the banks become compliant with
the cash flow reporting rules, the client deposits will be segregated
from the banks balance sheet while today the only thing segregated from
the books remains the truth...
To: Thomas Wieser, President of the Eurogroup Working Group
The Insane Asylum in Brussels and the Horrors That Happened There
Rome, September 1, 2017
Dear President,
let me set the record straight.
From the birth-place of the common sense and economics knowledge lobotomy, the institutions in Brussels are more and more becoming a junkyard for mentally disabled old people.
Is there a chance of redemption ?
I think almost everyone is terrified of insane asylums. Think of all the horror movies that have taken place in one. American Horror Story set its second (and best) season within the walls of a ‘60s asylum.
They’re scary because they force us to confront the fact that our brains can turn on us any minute and turn us into an entirely new person.
There are plenty of famous insane asylums but the Brussels-one stand tall among others because it is not yet publicly recognized as that.
By reading "Adults in the room", the last available psichiatric report on the conditions of the European burocrats, one has to put forward some common sense observation.
Take this quote from the above report by Doctor Varoufakis:
"Given that I was not willing to plunder the remaining reserves as he had suggested, I asked Wieser whether we could use this credit to meet our IMF payments for March, buying us both extra time to negotiate. ‘It sounds reasonable,’ replied Wieser, advising me to send a formal request to Jeroen, his boss, for access to that €1.2 billion. (Days later, when I did so, Jeroen referred me to the president of the Eurogroup Working Group ... Thomas Wieser! And what was Wieser’s verdict, now that he had been given the authority to decide? That what I was requesting was ‘too complicated’.)"
How we can help those poor people ? Containement is not enough. The new ECB tower headquarters hosts some of the most dangerous cases, those that are willingly destroying the European dream by their insane policies of stealing by stealth - through accounting abracadabra - most of the wealth of the European Union citizens.
How so ? The European Central Bank - who think to be the Overlord of the place, a common disease in the asylums - don't publish the cash flow statement because they don't even know how to account for money creation... And the ECB has been put in charge of the Asylum !
Three suggestions
The first suggestion that comes to mind is to ascertain if the ECB people are only insane or maybe they are part and parcel of a secretive terrorist group that want to turn European states in the same pityful condition as Greece. To ascertain any of the above, I suggest to establish the 'Insane or Terrorist Working Group' (ITWG) but, in the meantime, to cordon-off those people awaiting for the results of the ITWG study by taking care that all the communications from the ECB Tower and aliens be curtailed off just in the case they want to try to escape from the tower.
The second suggestion is to nominate an extraordinary commissioner in place of the actual plunderer in chief Mr. Draghi and give to the new man (woman, transgender, whatever) only the powers normally attribuable to a mint chief. I.e. all the gains from the Euro creation must be returned to the Treasuries of the European member states.
The third suggestion is the 'extended Brussels holiday' i.e. sending the European Commission to Maldive Islands where they will be tought economics by Varoufakis and the likes until they can distinguish the difference from creating new money and imposing more taxes to the exhausted European subjects.
In my humble opinion You should read this letter to your friends at the next sex gathering so as to see if they share my suggestion to enact the three measures above as soon as possible.
Thank you and best regards from a concerned citizen.
From: "Adults in the Room", Yanis Varoufakis, 2017
Italian tip
I was escorted from Rome’s Fiumicino airport to the finance ministry
by two police cars and two motorcycles, sirens blaring. But stuck as
we were in Rome’s thick traffic, all our escort managed to achieve was
noise pollution, irritating other road users and my own embarrassment.
Creating more noise than substance, they brought Mateo Renzi’s
government to mind.
Pier Carlo Padoan, Italy’s finance minister and formerly the
OECD’s chief economist, is in many ways a typical European social
democrat: sympathetic to the Left but not prepared to rock the boat. He
knows that the EU in its current configuration is heading in precisely
the wrong direction but is only willing to push for inconsequential
adjustments in its course. He has the capacity to understand the
fundamental illness afflicting the eurozone but is loath to clash with Europe’s chief physicians, who insist there is nothing to treat. In short,
Pier Carlo Padoan is a convinced insider.
Our discussion was friendly and efficient. I explained my proposals,
and he signalled that he understood what I was getting at, expressing
not an iota of criticism but no support. To his credit, he explained why:
when he had been appointed finance minister a few months earlier,
Wolfgang Schäuble had made a point of having a go at him at every
available opportunity – mostly in the Eurogroup. By the time we met,
Padoan had managed to strike a modus vivendi with Schäuble and was
evidently not prepared to jeopardize it for Greece’s sake.
I enquired how he had managed to curb Schäuble’s hostility. Pier
Carlo said that he had asked Schäuble to tell him the one thing he
could do to win his confidence. That turned out to be ‘labour market
reform’ – code for weakening workers’ rights, allowing companies to
fire them more easily with little or no compensation and to hire people
on lower pay with fewer protections. Once Pier Carlo had passed
appropriate legislation through Italy’s parliament, at significant
political cost to the Renzi government, the German finance minister
went easy on him. ‘Why don’t you try something similar?’ he
suggested.
‘I’ll think about it,’ I replied. ‘But thanks for the tip.’
Lawyers often see the financial system
differently to economists or financiers. In large part, this is because
they look towards the legal frameworks and commitments which bind it
together, rather than the theoretical economic actions or models which
are supposed to underpin it. That’s is why to a lawyer (and perhaps also
to more analytically minded people) banks don’t necessarily come across
as institutions which intermediate the private sector’s scarce capital
(loanable funds) to the wider economy.
To the contrary, as a new paper
in the Cornell Law Review by Cornell lawyers Robert Hockett and Saule
Omarova argues, some of them see finance as more akin to a
public-private partnership “most accurately, if unavoidably
metaphorically, interpreted as a franchise arrangement.”
Here’s the crux of the argument:
Pursuant
to this arrangement, the sovereign public, as franchisor, effectively
licenses private financial institutions, as franchisees, to dispense a
vital and indefinitely extensible public resource: the sovereign’s full
faith and credit.
In the United States, public full faith and
credit flows through the financial system in two principal forms. The
first form comprises directly-issued public liabilities: mainly Federal
Reserve notes and U.S. Treasury securities. The second, quantitatively
more significant yet less commonly recognized form is publicly
accommodated and monetized private liabilities. What we call
“accommodation” occurs when a public authority—typically, the Federal
Reserve (the “Fed”)—takes on a privately-issued debt liability as a
liability of its own. “Monetization” occurs when the ultimate
beneficiary of accommodation is then able to spend the proceeds thereof
as if they were currency. When a public instrumentality directly
or indirectly accommodates or monetizes a private liability, it
effectively extends the full faith and credit of the sovereign—in this
case, the United States.
It’s brave theory, not least because the view that the loanable funds theory is absolute is still being hotly debated.
Nonetheless,
the three-pronged approach to understanding the financial system they
propose is interesting. At a minimum it encapsulates — or at least in
part offers explanations — some of the weirder things that have been
going on post crisis that can’t necessarily be explained by the orthodox
model alone.
To the authors, there are three ways finance
operates through the economy: 1) credit intermediation 2)
credit-multiplication and 3) credit generation.
Credit intermediation follows the standard view. This suggests that which is lent or invested is always
something that has been previously accumulated, “hence is limited both
by the finite stock of the latter and by the willingness of its private
accumulators to invest it.”
If it’s been accumulated and not consumed, meanwhile, it must be intermediated because S=I.
The
authors note if this really was the case, all financial institutions
would be styled as mutual funds or peer-to-peer type organisations.
Which of course they’re not, hence the other theories, which aim to
explain the banking phenomenon very specifically.
“Credit-multiplication”
they note is the most familiar counter-example. This encapsulates the
theory of fractional reserve banking, the idea that the banking system
lends out more than it receives in investor deposits and holds only
enough of the latter to handle anticipated daily withdrawals. The rest
is continuously lent out.
Even
here, however, there is an element of loanable funds in play. The
“rest” which is being lent out, can only sustainably be lent out this
way for as long as it is not needed by the original investor. In the
event of depositors wanting more money out than the bank expected, the
bank must locate said funds in the market to make good on the claims. If
not, it runs into distress. Consequently, specific funds are still be
tracked and positioned in the economy on a singular basis. It’s just
that because of the velocity in play it appears that “the aggregate
funds lent or invested constitute a multiple of the funds originally
supplied by private savers, with the multiplicative factor inversely
proportional to the reserve ratio.”
According to the authors, however, these two theories aren’t enough to satisfy how the banking system actually works. The third model of ‘credit-generation’ also needs to be factored in.
What
they observe is that because the reserve can be preposterously small in
the credit multiplication model — even sitting at zero if the fluidity
of the system is continuously kept in check via a robust and continuous
form of real-time clearing — the idea that any form of loanable funds
are vital to the system may be an incorrect assumption. “Instead, it
might be more accurate to view lending institutions as generating
finance capital, rather than simply intermediating or even multiplying
it.” That’s the none-to-many model.
If banks are free to create money from thin air, what then are the limitations?
The
authors argue since credit outstanding is not fundamentally dependent
upon—or, therefore, limited by— pre-accumulated investment capital, it
must be limited only by investment opportunities which are viewed as
potentially profitable. “In other words, credit is endogenous rather
than subject to exogenously given, pre-accumulated funds.” If the
opportunities are there, banks will generate the funds (on effectively
maximum leverage by way of an accounting trick) to find ways to finance
them.
There is a catch though! It’s only authorised institutions which officially have this power, say the authors. This is how the public balance sheet comes into play. As noted:
“Where
credit flows conform to the multiplication or generation models, as
they do in all modern financial systems, the public inevitably becomes
the financial system’s principal protagonist.”
Effectively
the public sector ends up being responsible for both authorisation —
including any associated supervisory responsibilities — and for
guaranteeing the intrinsic value of these magically constructed
liabilities, especially when banks are unable to honour them (due, let’s
say, to a breakdown in the clearing mechanism and/or a failure in their
investment strategies at a systemic level).
That, in any case, is
how the public-private franchise evolves. Banks operate as agents of
the sovereign balance sheet, creating money — via the creation of
assets, simultaneously with the creation of liabilities — when they
believe the investment cases justify them. These asset/liabilities need
only to be funded on a holistic basis to the extent that regulations
require them to be funded.
You
might at this point be thinking about the shadow banking sector? Does
it too have the power to operate a credit generation model?
Our
take would be, yes — yes it does. If shadow banking liabilities are
accepted by the wider banking system as cash or a cash equivalent
(indistinguishable from bank-generated cash liabilities) there isn’t
necessarily a guarantee the shadow bank in question — whether
unwittingly or purposefully — is properly funding those liabilities
(since it’s outside of the supervisory loop). If they’re not properly
funded, or if there’s excessive margin lending going on, they’re either
credit multiplied or credit generated.
The difference is, the
public balance sheet is not theoretically supposed to be on the hook for
guaranteeing such liabilities if and when things go wrong.
The
problem is… even if the public balance sheet is not theoretically
responsible for defending shadow banking liabilities, the revolving door
between the shadow-banking sector and the official sector by way of
liability transfer opens the “authorised system” to contamination.
As the authors note, this revolving door is in part fuelled by the presence of leveraged investors in capital markets:
….capital
market investors—not only financial institutions but also ordinary
investing individuals—are able to finance their purchases of securities
in capital markets by borrowing (directly or indirectly) from banks, in
accordance with the model in Part II above. To the extent such levered
investing is a basic fact of the capital markets, it defies the
fundamental assumption that “accumulators” of scarce funds directly
finance issuing firms. It shows that capital market investors
themselves often act as the true “intermediaries” in the process of
transferring capital from banks—the ultimate “investors” in securities
purchased with the money borrowed from them—to firms.
Nevertheless,
the shadow banking sector — since it does not on the surface have
access to a lender of last resort — still attempts to regulate itself by
using government paper as its equivalent of “base money”. This, as the
2008 crisis shows, de facto extended the public guarantee since only the
government can create more of its own public debt. If the cost of not
supplying high quality public debt to the shadow banking sector is
potential systemic contamination of the official sector (due to the
intermingled state of respective liabilities), as it was in 2008,
chances are the state will act to defend the unofficial system. Its
choice from then on is whether to extend the public-private franchise,
in exchange for the right to supervision, or not.
Doing so ex post
facto, however, doesn’t set a good precedent for the shadow banking
systems of tomorrow, which can then assume they can operate according to
their own non-supervised terms in a risk-inducing way until something
goes wrong and they are forced to become supervised entities.
That,
in a nutshell, is the theory of the financial franchise: even those
institutions which are not officially franchised may be implicitly
franchised because nobody can be sure if their collapse will or will not
pose a systemic threat for the official sector in the long run.
What this has to do with fintech is coming up in our next post. (below)
In the first part of this two-parter we explained how the “financial franchise” theory of finance works, as thought up by Cornell lawyers, Robert Hockett and Saule Omarova
in a new academic paper in the Cornell Law Review. (It should be noted,
the theory isn’t necessarily unique as much as combinatory since it
channels both Chartalist thinking and shadow banking collateralist thinking.)
What’s
really interesting, however, is how it applies to the budding fintech
sector, which aims to increase its independence from the official sector
by recreating models based on loanable funds (credit intermediation)
assumptions. These models, most famously, include peer-to-peer systems
and cryptocurrency.
The authors imply these institutions will
learn the hard way that once a credit generation model backed by a
public-private franchise is in play in the economy, it’s almost
impossible to go back. The reason being: all exclusive loanable funds
systems carry a major competitive disadvantage on cost of funding vs
established public-private franchise systems, and are hence likely to be
outcompeted.
From the authors:
In
its aspirations to render both the banks and the central banks
redundant, this new-century fintech sector portrays itself as a
revolutionary alternative to the existing financial system. Ironically,
however, despite its disintermediation rhetoric, what this currently
unfolding “fintech revolution” seeks to create in practice is a pure form of the orthodox “one-to-one” intermediation model of finance, as described in section I.A.1 above,
in which traditional intermediaries such as banks or securities
broker-dealers are replaced by electronic peer-to-peer transaction
platforms.
Fintech enthusiasts view modern technology as the magic
key enabling the flow of pre-accumulated capital among
freely-contracting private parties, on a scale sufficiently large to
obviate the need for publicly sanctioned and supported
credit-generation. In that sense, fintech revolutionaries are
essentially envisioning a sort of financial “return to Eden”—or, at
least, to the putatively peer-to-peer origins of finance.
While
the authors note it’s probably too early to decisively write off
fintech, the way things are proceeding seems to support their theory. In
short, they believe that if these systems are to expand beyond their
peripheral place, they will have to reintegrate into the core finance
franchise system eventually:
Without
sustained direct access to the ultimate public resource flowing through
that system—the public’s full faith and credit—alternative finance is
not likely to outgrow its present fringe status. In fact, as
this Part shows, marketplace lending is already effectively
re-integrated into the core financial system, if only as a new variant
of shadow banking. Cryptocurrencies may be moving in the same direction.
For more on how peer-to-peer is already turning into a conventional banking model see Kadhim’s work on the likes of Rate Setter and Zopa.
On cryptocurrencies, specifically, the authors note:
…the
value of cryptocurrencies is tied fundamentally to their convertibility
into conventional currencies, such as U.S. dollars backed by the full
faith and credit of the United States. Cryptocurrencies are therefore
likely to remain on the fringes of the financial system. Not
surprisingly, startup cryptocurrency firms have reportedly been looking
for partnerships with banks that have the resources and scale to reach
mainstream audiences.
The second implication is that
bitcoin’s high volatility as a store of value makes it an attractive
underlying commodity for derivatives trading. In September 2014,
TeraExchange established the first regulator-approved U.S. bitcoin
derivatives trading platform. It may be only a matter of time before
large U.S. FHCs enter this market and turn virtual currencies into the
raw material for derivatives trading. The emergence of a deep market for
hedging—and speculating on—bitcoin risk would, in turn, enable growth
in the bitcoin acceptance rate in commercial transactions. Thus,
as in the case of marketplace lending, the most likely mechanism for
the success of cryptocurrency, ironically, involves its integration into
the existing financial architecture—again, through the familiar
channels of shadow banking, described above.
For more on that last part see Dan McCrum’s latest on Goldman Sach’s
recent foray into investment advice on bitcoin “as an asset class” in
which they predict the price will surge in a frenzy of speculation,
before going on to halve — while simultaneously disclosing that the
Goldman Sachs trading desk “may have a position in the products
mentioned that is inconsistent with the views expressed in this
material”.
Success story (by Varoufakis, from "Adults in the room", 2017)
While Stournaras was taking over at the finance ministry during the
hot summer of 2012, the folks at the EU and IMF were trying to solve
a little conundrum of their own. The loans for the second bailout had
been delayed by the twin Greek elections and would not start arriving
before the autumn. Unfortunately, Athens was meant to send just under
€3.5 billion to the ECB, one of its many unpayable debt repayments,
on 20 August. How could that happen given that the coffers were
empty?
When the troika has a will it discovers a way. Here is the wizardry
they used to conjure up the necessary illusion, narrated in slow motion
so that the reader can fully appreciate the magic.
- The ECB granted Greece’s bankrupt banks the right to issue
new IOUs with a face value of €5.2 billion – worthless pieces
of paper, given that the banks’ coffers were empty.
- As no sane person would pay money to buy these IOUs, the
bankers took them to the finance minister, Stournaras, who
stamped on them the bankrupt state’s copper-bottomed
guarantee – in reality a useless gesture since no bankrupt entity
(the state) can meaningfully guarantee the IOUs of another bankrupt entity (the banks).
- The bankers then took their worthless IOUs to the Central Bank
of Greece, which is of course a branch of the ECB, posting
them as collateral for new loans.
- The Eurogroup gave the green light to the ECB to allow its
Greek branch to accept these IOUs as collateral and, in
exchange, give the banks real cash equivalent to 70 per cent of
the IOUs’ face value (a little more than €3.5 billion).
- Meanwhile, the ECB and the Eurogroup gave Stournaras’s
finance ministry the green light to issue new Treasury bills with
a face value of €3.5 billion – IOUs issued by the state, which of
course no investor would touch in their right mind given the
emptiness of the state’s own coffers.
- The bankers then spent the €3.5 billion they had received from
the Central Bank of Greece – in fact from the ECB itself –
when they pawned their own worthless IOUs in order to buy the
state’s worthless IOUs.
Lastly, the Greek government took this €3.5 billion and used it
to pay off ... the ECB!
Taibbi: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?
While nuke kooks rage, British regulators reveal rip in financial space-time continuum and $350 trillion headache
British bank regulators recently revealed that they’re
abandoning LIBOR, the framework used for hundreds of trillions of
dollars in financial transactions.
Oli Scarff/Getty
It was easy to miss, with the impending end of civilization burning
up the headlines, but a beyond-belief financial story recently crept
into public view.
A Bloomberg headline on the story was a notable achievement in the history of understatement. It read:
LIBOR'S UNCERTAIN FUTURE TRIGGERS $350 TRILLION SUCCESSION HEADACHE
The casual news reader will see the term "LIBOR" and assume this is just a postgame wrapup to the LIBOR scandal of a few years back, in which may of the world's biggest banks were caught manipulating interest rates.
It isn't. This is a new story, featuring twin bombshells from a
leading British regulator – one about our past, the other our future. To
wit:
Going back twenty years or more, the framework for hundreds of
trillions of dollars worth of financial transactions has been fictional.
We are zooming toward a legal and economic clusterfuck of galactic proportions – the "uncertain future" Bloomberg humorously referenced.
LIBOR stands for the London Interbank Offered Rate. It measures
the rate at which banks lend to each other. If you have any kind of
consumer loan, it's a fair bet that it's based on LIBOR.
A 2009
study by the Cleveland Fed found that 60 percent of all mortgages in the
U.S. were based on LIBOR. Buried somewhere in your home, you probably
have a piece of paper that outlines the terms of your credit card,
student loan, or auto loan, and if you peek in the fine print, you have a
good chance of seeing that the rate you pay every month is based on
LIBOR.
Years ago, we found out that the world's biggest banks were manipulating LIBOR.
That sucked.
Now, the news is worse: LIBOR is made up.
Actually it's worse even than that. LIBOR is probably both manipulated and made up. The basis for a substantial portion of the world's borrowing is a bent fairy tale.
The admission comes by way of Andrew Bailey, head of Britain's Financial Conduct Authority. He said recently (emphasis mine):
"The absence of active underlying markets raises a serious question about the sustainability of the LIBOR benchmarks. If an active market does not exist, how can even the best run benchmark measure it?"
As
a few Wall Street analysts have quietly noted in the weeks since those
comments, an "absence of underlying markets" is a fancy way of saying
that LIBOR has not been based on real trading activity, which is a fancy
way of saying that LIBOR is bullshit.
LIBOR is generally
understood as a measure of market confidence. If LIBOR rates are high,
it means bankers are nervous about the future and charging a lot to
lend. If rates are low, worries are fewer and borrowing is cheaper.
It
therefore makes sense in theory to use LIBOR as a benchmark for
borrowing rates on car loans or mortgages or even credit cards. But
that's only true if LIBOR is actually measuring something.
Here's
how it's supposed to work. Every morning at 11 a.m. London time, twenty
of the world's biggest banks tell a committee in London how much they
estimate they'd have to pay to borrow cash unsecured from other banks.
The
committee takes all 20 submissions, throws out the highest and lowest
four numbers, and then averages out the remaining 12 to create LIBOR
rates.
Theoretically, a fine system. Measuring how scared banks
are to lend to each other should be a good way to gauge market
stability. Except for one thing: banks haven't been lending to each
other for decades.
Up through the Eighties and early Nineties, as
global banks grew bigger and had greater demand for dollars, trading
between banks was heavy. That robust interbank lending market was why
LIBOR became such a popular benchmark in the first place.
But
beginning in the mid-nineties, banks began to discover that other
markets provided easier and cheaper sources of funding, like the
commercial paper or treasury repurchase markets. Trading between banks
fell off.
Ironically, as trading between banks declined, the use
of LIBOR as a benchmark for mortgages, credit cards, swaps, etc.
skyrocketed. So as LIBOR reflected reality less and less, it became more
and more ubiquitous, burying itself, tick-like, into the core of the
financial system.
The flaw in the system is that banks don't have
to report to the LIBOR committee what they actually paid to borrow from
each other. Instead, they only have to report what they estimatethey'd have to pay.
The
LIBOR scandal of a few years ago came about when it was discovered that
the banks were intentionally lying about these estimates. In some
cases, they were doing it with the assent of regulators.
In the most infamous instance, the Bank of England appeared to encourage Barclays to lower its LIBOR submissions, as a way to quell panic after the 2008 crash.
It
later came out that banks had not only lied about their numbers during
the crisis to make the financial system look safer, but had been doing
it generally just to rip people off, pushing the number to and fro to
help their other bets pay off.
Written exchanges between bank employees revealed hilariously monstrous activity, with traders promising champagne and sushi and even sex to LIBOR submitters if they fudged numbers.
"It's just amazing how LIBOR fixing can make you that much money!" one trader gushed. In writing.
Again,
this was bad. But it paled in comparison to the fact that the numbers
these nitwits were manipulating were fake to begin with. The banks were
supposed to be estimating how much it would cost them to borrow cash.
But they weren't borrowing cash from anyone.
For decades now, the world's biggest banks have been dutifully reporting a whole range of numbers
every morning at 11 a.m. London time – the six-month Swiss franc rate,
the three-month yen, the one-month dollar, etc. And none of it seems to
have been real.
These numbers, even when sociopathic lunatics
weren't fixing them, were arbitrary calculations based on previous,
similarly arbitrary calculations – a rolling fantasy that has been
gathering speed for decades.
When regulators dug into the LIBOR
scandal of a few years ago, they realized that any interbank lending
rate that depended upon the voluntary reports of rapacious/amoral banks
was inherently problematic.
But these new revelations tell us
forcing honesty won't work, either. There could be a team of regulators
sitting in the laps of every LIBOR submitter in every bank, and it
wouldn't help, because there is no way to honestly describe a
nonexistent market.
The FCA's Bailey put it this way (emphasis mine):
"I
don't rule out that you could have another benchmark that would measure
what Libor is truly supposed to measure, which is bank credit risk in
the funding market," he said. "But that would be – and I use this term
carefully – a synthetic rate because there isn't a funding market."
There isn't a funding market! This is absurdity beyond satire. It's Chris Morris' "Cake is a made-up drug!" routine, only in life. LIBOR is a made-up number!
Think
about this. Millions of people have been taking out mortgages and
credit cards and auto loans, and countless towns and municipalities have
all been buying swaps and other derivatives, all based on a promise
buried in the fine print that the rate they will pay is based on
reality.
Since we now know those rates are not based on reality – there isn't a funding market – that
means hundreds of trillions of dollars of transactions have been based
upon a fraud. Some canny law firm somewhere is going to figure this out,
sooner rather than later, and devise the world's largest and most
lucrative class-action lawsuit: Earth v. Banks.
In the
meantime, there is the question of how this gets fixed. The Brits and
Bailey have announced a plan to replace LIBOR with "viable risk-free
alternatives by 2021."
This means that within five years,
something has to be done to reconfigure a Nepalese mountain range of
financial contracts – about $350 trillion worth, according to Bloomberg. A 28 Days Later style panic is not out of the question. At best, it's going to be a logistical nightmare.
"It's
going to be a feast for financial lawyers," Bill Blain, head of capital
markets and alternative assets at Mint Partners, told Bloomberg.
With
Donald Trump in office, most other things are not worth worrying about.
But global finance being a twenty-year psychedelic delusion is probably
worth pondering for a few minutes. Man, do we live in crazy times.
British bank regulators recently revealed that they’re
abandoning LIBOR, the framework used for hundreds of trillions of
dollars in financial transactions.
