MONEY 70 - BANK CRIME

THIS IS MY 70^TH BLOG ON UNDERSTANDING MONEY TOOLS

Periodically, I like to go on tangents, and with this blog I’m going to hit on one of my favorite industries, the banking industry. Let’s toss in two sides of banking, commercial and investment banking as today after many mergers they are tied together.

Years ago it seemed as though bankers were held to some degree of esteem in the community. At least they tried to abide by the laws. In the last 35 years it has been one disaster after another reflecting how dirty and corrupt industries can become. Bankers just can’t maintain respectability. No one goes to jail for Federal Crimes committed and upper management sits in front of Congress denying they knew anything. That is impossible. If upper management was unknowing they were derelict in their management duties and should be released without their huge “golden parachute” retirements and stock options.

We’ll only touch the tip of the iceberg in this blog, but that is enough to get the reality across.  Going back to the mid-1980s mortgage derivatives were being created by Wall Street firms and then peddled to banks and Savings and Loans.  Bankers didn’t have a clue as to what these instruments were or how to analyze them.  They were sold as prime investments, parts of mortgages and American real estate. Then, came a downturn in real estate in the late 1980s and it took down the Savings and Loan Industry. The derivatives lost a good portion of their values and the government forced the Savings and Loans to sell their derivatives at significant discounts.

Apparently, Americans have short memories when it comes to investments and wars. In 1999 and 2000 we had the dot.com high flying stocks and the buying momentum that took our markets to highs just short of the highs of 1929; this resulting in a stock market crash. Investment bankers create much of this hype and the public is sold on it. As we have covered in other blogs, do you think Wall Street firms have no clue as to what is happening on the inside of companies? Do you think they will take a big loss, or will they peddle the stock of a company going down to the public? You better bet on the latter.

In 2003 Wall Street investment bankers started going crazy again pumping out all sorts of derivates based upon mortgages, defaults on collateralized instruments and more. Gambling at its best. Wall Street’s appetite grew wanting more and more mortgage packages. Most of these packages came from Fannie Mae and Freddie Mac. The investment bankers had Moody’s and the S&P falsely rate these packages and instruments, and then insurance companies, like AIG, insuring them. These were sold as A rated products through branch offices of Wall Street firms and US banks all around the world. (This history is known by most people, but I thought I would recap.)

Then, came the shocker of August, 2007, that our major banks were broke and had no capital reserves. The government bailed out certain institutions and left others to die, discrimination at it’s best. Old-line investment firms like Bear Stearns and Lehman Bros. went down. Goldman Sachs and others were bailed out. Again, discrimination. Goldman Sachs does a lot of trading for the US Government, and several of our Treasury Secretaries have come out of Goldman Sachs.  They are a protected icon in the industry.

Where am I going with all this? The same banks seem to be in the news over and over with billions of dollars in fines for Federal Crimes and yet no one goes to prison or held accountable. White collar crime I guess does pay! Very sad. The management and top employees know what is going on.

Most of the government tax dollars come from people like you and me, middle class. We bailed out these banks in 2008, their capital reserves were next to nothing.  It was reported a couple of weeks ago, (May, 2015), that now the capital reserves of these banks is $2.5 trillion. They invested the money we bailed them out with. They only loaned money to the wealthy who didn’t need loans, big companies and other banks, like Central Banks around the world, and the IMF (International Monetary Fund) that lends to countries.

Large banks will continue to gamble on investments as long as they think they are too big to fail. Title II of the Dodd-Frank Bill permits the Federal Deposit Insurance Corporation (the insurance behind banks’ deposits) to have a line of credit from our US Treasury, if in need of money. This is US taxpayer money, backing large banks where you and I can’t borrow money! We are just building on the storm that created the banking mess in 2007.

The latest corruption comes from the largest banks like Citigroup and JP Morgan/Chase. Management admitted to Federal Crimes related to manipulation of world currencies. Wow! Again, no one going to jail. Before this we had UBS Bank admitting to manipulating London Interbank Offered Rates (LIBOR), a benchmark interest rate that the very wealthy and institutions use as a low interest rate benchmark.

Here is some trivia to keep in mind.  We had strict statutory usury laws until 1978 when the Supreme Court decided that commercial bank’s credit card interest was exempt from usury laws. This opened the possibilities for more personal debt helping the economy yet trapping people with very high interest rates that many times are impossible to pay back to banks.  Some states are more lenient on usury laws. You will find states that are very hungry for business opening up for the servicing of commercial bank credit cards; these being mainly South Dakota, North Dakota, Nevada and Delaware.

I believe we have gone overboard on leniency and lack of prosecution of individuals committing Federal Crimes. Wall Street and commercial banks will continue with blatant corruption until there are penalties severe enough to deter such actions.