Sunday, September 7, 2014

Moral Hazard Revisited: Too Big to Hack


Moral Hazard Revisited: Too Big to Hack

"And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."

- Jefferson

By J.M. Hamilton (9-7-14)

September 15 will mark the sixth anniversary of the Lehman Brothers collapse, which also marks the beginning of the global financial pandemic.  And as much as the Wall Street banking cartel would like to place this event in their rear-view mirror, the Obama administration, via the Justice Department and the SEC, along with various state A.G.s, have kept this problematic episode front and center.

Seemingly, not a month goes by without another record payout for bank malfeasance.  The latest being BOA’s record payout of $16 billion, some of which is tax deductible, so you get to pick up a portion of the tab, yet again, dear taxpayers.  Americans, depending upon one’s point of view, may or may not be thankful for the Obama Administration's efforts to keep the catastrophe, and the banking cartel’s roll in financial Armageddon, in plain site.  However, rest assured, under a Romney Administration, or a future Clinton Administration, the entire debacle would have, likely, been swept under the rug. 

Magically, disappeared.

Given that the U.S. congress is legally paid off by the banking cartel to look the other way, and regulators and pols often use the revolving door to land lucrative positions in banking and shadow banking, it appears that the Obama Administration is deliberately keeping the pressure on the banking cartel, via law suits, record fines, Dodd/Frank rules and regs, and higher capital/lending requirements.  One can speculate…  that by keeping the heat on, and eroding TBTF (too big to fail) monstrosities’ ability to mint profits (their returns on equity often have been spotty to lousy over the last six years), the Obama Administration appears to be hoping that the free market will do, what our feckless congress failed to do. 

That is, break up the TBTF cartel.  

The “free market” being personified, in this instance, by stockholders.  Yes, stockholders, who should rightly insist upon the break up of these banking institutions, for the very reasons that: the constituent parts are often worth more than the combined institution; that record fines, penalties, and legal fees would likely cease; dividends – in turn – would climb higher; and the reconfigured institutions would be easier to manage, without the on-going hangover of “unforeseen” risk management events.  Needless to say, the taxpayer would also be a huge beneficiary of a Wall Street break up as well, since Americans would no longer, implicitly, be on the hook for future bailouts, and financing and insuring so-called business practices that are inimical to America.

The banking crisis was eye opening to the public:  client double-dealing was exposed, as was a market for highly illiquid, and grossly under-collateralized, derivatives and hybrid derivative products (such as CDOs and MBS); the rabid speculation surrounding these instruments had come into view (this market now has a notional value of $700 trillion, plus); and the fact that the taxpayer reinsures this market was made manifest, with zero participation in the profit taking (quite the opposite, in 2008 and after: Americans took the Street’s losses, re-collateralized the Street, and in nearly all instances - paid for banker bonuses).

Since then, as noted in my piece, The Leviathan is Vertically Integrated, the list of Wall Street crimes, and its further consolidation and reach into nearly ever facet of ordinary Americans lives, has only grown, exponentially.  And these are the crimes that we know about:  cornering and hoarding commodities to gouge consumers and businesses; colluding on private equity deals to cheat stockholders, entrepreneurs and business owners; FOREX fraud; LIBOR fraud; illegally foreclosing on the American dream of home ownership, with fraudulent paper work (the Robo-Signing scandal, albeit often through proxies); and a rigged swaps and derivatives market, cheating the elderly and pensioners.  Then there’s Wall Streets’ involvement with ubiquitous payday loan operators, who define the words: “usury,” and “predatory.”  Shenanigans with high frequency trade burns investors, and guarantee profits for the banks/HFT crowd. 

And if it can get more outrageous, Wall Street banks advise corporate clients (making hundreds of millions in the process) to engage in that most Un-American of activities, effectively renouncing American citizenship to dodge paying taxes, known as inversions. 

Arguably complicit in all this is the Federal Reserve, and the ECB, both of which continue to bailout these institutions with QE, and interest rate suppression.  In direct causation to these bailouts, the “banksters” often make millions in bonuses, wealth/income distribution is increasingly polarized, and the poor and the middle class continue to bear the brunt of this six-year Depression.  It’s no surprise that the rise of the Mega-Bank, or Mr. Sandy Weill’s folly, coincides with the decline of the American middle-class.  Now six years in, Europe is grasping at straws, and the American economy plods along, seemingly with sub-par growth and low employment prospects.

Think of all the CEOs and CFOs in America and Europe, who rightly hedged that interest rates would rise, post 2008 crisis – utilizing swaps and derivatives, only to have central banks wade into the market place and artificially, suppress interest rates.  Once again, Wall Street and London banks made a killing on the sale of these same swaps products, at the expense of multinationals, corporations, and American and Europeans businesses.   The Leviathan is, indeed, vertically integrated.  There is not a facet of your life that the banks don’t have their hands in, demanding profits and tribute, which adds up to a tax on your very existence, a drag on the global economy, and a gross misallocation of capital and resources.  Witness consolidation and combination in industry after industry (sponsored by Wall Street M&A), leading to monopoly and cartel.

And the congress wonders why the airlines are making record profits, and job creation is stifled.

None other than Mr. Warren Buffett called the Fed, the greatest hedge fund ever; and the FED serves its master, the Wall Street cartel, and they in turn, when they are not being sued, operate as enormous hedge funds that you, Dear Americans, fund and reinsure.  The banks are vertical integrated throughout the economy, and their size and scope, insures that U.S. taxpayers will be bailing them out for generations to come.

So where’s the news, you ask.

Well, we are getting there.  Seems that J.P. Morgan has been hacked by shadowy actors, possibly the Russian government or its criminal proxies.   And as Bloomberg recently wrote, it appears that Americans may be on the hook for another form of bank bailout, that of economic damages, as a result of a future and pending cyber attacks.  That is to say, in the event of a terrorist, criminal, corporate, or state sponsored cyber event – one that can easily be foreseen:  The American taxpayer will likely ride to the rescue, once again, to bailout banks, who have had funds stolen or data, accounts and financial records erased.   Instead of breaking up these institutions into manageable entities that can be closed down in a crisis… once again, politicians, plutocrats, bankers, and the FED will calmly and solemnly assure us all, that the almost guaranteed future cyber-bailout event is completely necessary, for the good of the global economy, and Main Street health.

The implicit bailout of banks, at the expense of the taxpayer, creates moral hazard in banking and shadow banking institutions.  As we saw with the London Whale event, J.P. Morgan, allegedly, made illegal under-reported/un-reported bets (to regulators/bank board), counter bets, and outsized trades, with losses running into the billions; because, at the end of the day, if J.P. Morgan blows up the global economy, the FED will be right there to bailout the bank, yet again, as will the taxpayer.

The implicit cyber bailout, noted by Bloomberg, just creates another layer moral hazard, since Wall Street operates as a giant casino/hedge fund, where “banksters” gamble with taxpayer money, provided by the FED and congress (here’s the moral hazard).  Therefore, it is not at all hard to imagine a future event or occurrence, where the banks themselves have an incentive to hack into their own systems to erase problematic trades, or to juggle or eliminate accounts and records.  A bank CEO with a multi-billion dollar problem on their hands, such as the London Whale event, knowing full well that the taxpayer will provide insurance for economic loss in the event of a cyber attack, just might have every incentive to call upon a foreign government, a criminal enterprise, or a bank’s own offshore squad of hackers (outsourced, of course).  And said banker might request that files and data covering the problematic trade or transaction be eliminated, from bank computers as well as the counterparties' computers (makes one reconsider the idea of going paperless?).  If a trade, or a deal, is big enough and bad enough, involving numerous financial players and actors, what’s to prevent a banker, via proxies, from eliminating the entire enterprise’s files and records, or all of Wall Street’s and London’s records from being erased?

All the while, said banker, is pointing the finger at shadowy players, and geo-political events, such as the War in the Ukraine.


Too far fetched you say?  The scenario I have painted is paranoid?

Consider the case of former MF Global CEO, and former NJ governor, John Corzine, and his actions, as his commodity and sovereign bond trades went south?  Mr. Corzine, last I checked, allegedly, gave orders to dip into client monies, in effect doubling down on the futures, commodities, and bond bets that brought MF Global down. Afterwards, client money went missing for a lengthy period of time.

How about the moral hazard we see everyday on the corner of Wall and Broad? 

Too Big to Fail is very real but passé…. In the 21st Century, U.S. citizens also need to begin to worry about Too Big to Hack.

If we have learned anything since the 2008 financial crisis, it is this:  Given our exponential leaps in technology, with money and power added in, man’s capacity to do great good and unfathomable evil is only limited by his imagination.

I have nothing against banks.  My credit union serves me well.  What I, and many Americans, are against are institutions that have rigged our democracy, our government, our courts, our regulatory bodies, and the Federal Reserve, in their favor, and to the detriment of this great nation.  These institutions and their list of crimes is ever growing; their business model appears to based upon adding a speculative tax, or charge, on nearly ever transaction engaged in by Americans, with Americans financing and insuring these highly egregious acts.  

What a business model!

This piece doesn't even begin to touch on the crippling amounts of debt banks and private equity institutions load legitimate businesses up with daily, as yet another means to dodge paying taxes.  These dodged taxes, in turn, are paid for by ordinary Americans, in the form of higher tax rates.

One possible solution is to break up these institutions, before another catastrophe occurs.

Copyright JM Hamilton Publishing 2014

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