Are you ready for the Western world's economy to crash -- again?
More banks will go under. Many tens of thousands of people will again be thrown out of work. Billions of dollars in "investments" will disappear into thin air.
I believe it's not a question of "if" financial markets and the economy will crash again, but "when."
Boom and bust economies are features of unfettered capitalism. There have been more than 20 major international and national economic collapses since the early 20th century.
But now a nuclear-scale financial implosion is more likely than just an economic downturn or a mere correction.
Many of the big investment banks that caused the near-meltdown in 2007-2008 -- well known firms such as JP Morgan Chase and Barclays Bank -- are more deeply involved than ever in dangerous, aggressive and unethical behaviour.
Economist Joseph Stiglitz, a Nobel Prize winner, warns that "a resurgence of right-wing economics, driven, as always, by ideology and special interests, once again threatens the global economy -- or at least the economies of Europe and America, where these ideas continue to flourish."
When the next crash occurs, we're again likely to see a domino-type chain of collapse reach into Canada -- just as it did in 2008, when all our Big Five banks needed bailout-type support.
Shady dealings in the corner office
Giant international banks employ "the best and brightest" minds they can find and pay them big bucks to spot loopholes in laws and regulations that will make them all filthy rich. Many of these strategies turn out to be corrupt or illegal. And some analysts believe the highly paid hot-shots will always outsmart lower-paid, less skilled government regulators.
Certainly, the investment banks and traders are again using an array of dizzying, barely understood financial instruments to make massive, risky bets that endanger the economy. Among these are derivatives, hedge funds, credit default swaps, reverse convertible bonds and other exotic creations that promise either huge gains or disastrous losses. (Derivatives have already done damage to the economy and could crash it again. I'll look deeper into these extremely dangerous betting mechanisms in the next installment of the series.)
Hard as it is to imagine, much of the investment banking business concentrated in New York and London is now little more than a racket for gamblers who call themselves investors. Practically every one of the large U.S. and European investment banks -- most of which do business daily with our Canadian banks -- have been involved in illegal or improper activities since the 2007-2008 crash.
Here are a few examples:
- HSBC Bank: Banking giant HSBC agreed in 2012 to pay a record US$1.92 billion settlement after it was found to have violated U.S. federal laws by allowing itself to be used to launder money for Mexican drug traffickers and processing banned transactions on behalf of countries like Iran, Libya, Sudan and Burma. The settlement allowed HSBC to avoid a criminal conviction.
- Goldman Sachs: The company paid a massive U.S. Securities and Exchange Commission fine (US$550 million) in 2010 for creating and selling a mortgage investment that had been designed to fail. Goldman Sachs even bet against the same derivatives it was selling to clients. The firm acknowledged that it "misled" investors but didn't admit to any wrongdoing.
- JPMorgan Chase: In 2012, the bank agreed to settle (without explicitly admitting guilt) to end a number of investigations into criminal activities, including the fraudulent sale of unregistered securities. It has paid a fine of $13 billion, and over three years spent $17.3 billion on litigation costs defending itself.
- Barclays Bank: Was hit with penalties of $448 million for its "serious, widespread" role in trying to manipulate the price of crucial interest rates that affect the cost of borrowing for millions of customers around the world.
- Bank of America: In a lengthy investigation, Rolling Stone magazine exposed what it described as the bank's "limitless fraud and criminal conspiracies," including defrauding schools and double-dipping on fees for welfare cheque recipients. The magazine accused the bank of "systematically ripping off virtually everyone they do business with."
As a result of these kinds of activities, Europeans have taken to calling their bank executives "banksters."
Many of the same big banks created cartels so they could work together to enrich each other. In December 2012, four major banks -- Deutsche Bank, JPMorgan Chase, UBS AB and Depfa Bank -- were convicted by an Italian judge for their role in overseeing fraud in the sale of derivatives to the city of Milan.
The judge ordered that each bank repay about 90 million euros, the amount of their profit. In addition, they were ordered to pay sanctions of one million euros each. He convicted nine bankers of fraud but, as is usually the case in almost every country, he suspended their sentences and didn't send them to jail.
Major world interest rate manipulated
In an even larger swindle, 13 giant banks conspired to manipulate a major world interest rate -- the Libor rate, which is the benchmark interest rate for a barely imaginable $360 trillion in financial instruments around the world. The scheme was huge. Hundreds of traders were involved in conspiring to submit false reports to gain profits for their trading positions. They made millions.
The Libor conspiracy led Bloomberg's Jonathan Weil to ask: "If Barclays would lie about its borrowing costs, what else would it lie about?... The most important asset any bank has is trust -- especially when it comes to the figures on its own financial statements."
Forbes contributor Steve Denning, who follows the financial sector closely, questions the integrity of the entire banking sector. He argues that the poor financial performance of big banks in recent years clearly shows they are not pursuing the interests of shareholders and customers. "It doesn't take long to figure out that the banks are being run for the benefit of the executives and traders," Denning says.
The pattern of white-knuckle risk-taking is important to Canada, because if one of these irresponsible international banks triggers another meltdown, our Canadian banks will again feel the heat.
Canadian banks have a record
All five of our big Canadian banks have also been involved in shady dealings:
- Toronto-Dominion Bank was fined $52.5 million in 2013 by U.S. regulators for allowing a Ponzi scheme, described as southern Florida's biggest-ever fraud, to flourish. U.S. officials alleged the bank and a former official created misleading documents and made false statements concerning the accounts of the figure at the centre of the scams, now-jailed attorney Scott Rothstein.
- Scotiabank: In 2005, David Berry was a very successful Scotiabank trader who had built up a $15-million-a-year business when the bank fired him, claiming he had committed securities regulatory violations. In January 2013, regulators dismissed all charges against Berry -- and suggested his employers were aware of his tactics (he has filed a $100 million improper dismissal suit against Scotiabank).
- Royal Bank of Canada: In 2012, the wealth management arm of the bank agreed to pay a fine of $500,000 to settle allegations related to a Ponzi scheme orchestrated by subsequently convicted trader, Earl Jones. RBC and two investment advisers admitted they "failed to adequately perform their roles as gatekeepers to the capital markets."
- Bank of Montreal: In 2010, BMO Nesbitt Burns was fined $3.3 million for the bank's failure to exercise reasonable due diligence in the initial public offering of a Canadian company in 2005. Investors said they had been misled about the company. Earlier this year, U.S. regulators gave the bank a citation, but no fine, over deficiencies in a U.S. subsidiary's compliance with Bank Secrecy Act provisions designed to combat money laundering and ordered it to strengthen its anti-laundering programs.
- CIBC: In 2003, U.S. officials fined CIBC US$80 million for its role in the Enron collapse and the manipulation of Enron financial statements. The SEC also charged three executives with helping Enron mislead investors through a series of complex financial transactions over several years; all three settled and paid fines without admitting guilt. In an accompanying action, CIBC paid a massive US$2.4 billion fine to settle a class action lawsuit brought by a group of pension funds and investment managers that lost millions of dollars in the collapse of Enron.
None of the 'banksters' have gone to jail
Despite the apparent criminality, not one U.S. or Canadian executive has been prosecuted, let alone gone to jail. Lots of fines have been levied against banks, but they are trivial compared to bank profits.
In fact, some of the fines are laughable. Last year, U.S. bank Goldman Sachs, one of the most-cited names in the business, was hit with a regulatory penalty for failing to keep a close eye on a rogue trader. The fine was US$1.5 million. The bank generated US$8.35 billion in revenue in the third quarter of this year alone, a little more than US$63,000 per minute. A journalist with nothing better to do figured out that it would take Goldman Sachs just under 24 minutes to pay the fine.
During the recession crisis, with poverty and unemployment on the rise, thousands of top traders and bankers on Wall Street were awarded huge bonuses and pay packages. At Goldman Sachs, 953 traders and bankers received bonuses of more than $1 million each.
Few bank executives appear to have been wiped out financially during the recession. When a bank did collapse, the top executives usually received golden parachutes. In contrast, during the 1929 crash, just about everyone hit lost huge amounts of money; several jumped out of windows to their death. This time it seems that the people killing themselves were the poor and unemployed -- at least 5,000 of them in 2009 alone.
Some individual "banksters" seem to have no conscience about leading a Jekyll and Hyde existence. At their multi-million-dollar homes they have the wife, the kids, the trips to exotic resorts; they're highly regarded at their clubs. At work, they make outrageous salaries, often by destroying the livelihoods of people who have lost their jobs to corporate restructuring. Or they may speculate on the grain market, driving up the price of rice in Africa where children in desperate need of food have swollen bellies.
Biffies of gold, really
Several big U.S. banks received tons of U.S. bailout money that was to be made available as loans to clients who needed to restart their businesses. It's estimated that the banks used up to half the money for their own purposes.
One executive, John Thain, is a poster boy for behaviour on Wall Street. Thain's company, Merrill Lynch, was going out of business. That didn't stop him from using public bailout money to pay huge bonuses to staff and remodel his office for about $1.2 million. A mild extravagance in the remodelling was a $35,000 gold-plated toilet.
The U.S. government facilitated the larceny, allowing people it knew to be crooks to move easily back and forth from Wall Street to Washington, creating opportunities for fraud involving billions of dollars.
The banks have yet another way of getting away with stealing millions: keeping unintelligible and misleading financial statements. "There is no major financial institution today whose financial statements provide a meaningful clue" about its risks, says Paul Singer, who runs the influential U.S. investment fund Elliott Associates.
The health and integrity of banks are being checked more frequently now, both internationally and in Canada. Some well-intentioned tougher laws are being put in place.
In Washington this month, the government approved the Volcker Rule, which is supposed to prohibit banks from using clients' resources as collateral for trades made for the sole benefit of the banks. While government officials claimed that this new aspect of the law would help stop banks from getting into a dangerous situation where they might collapse, independent critics disagree.
Critics say that while the rule will make business more difficult and less lucrative for banks, it does not deal with the main problems of bank survival. "Those expecting the Volcker Rule to be a fix-all for Wall Street's ills have probably misplaced their hope -- the rule seems like a solution desperately seeking a problem," said MarketMinder website.
However, it is hard to see how high-rollers, determined to chase profits into unethical extremes, can be stopped. There's lots of money to be made gambling with risky derivatives. They can take a chance in handling accounts for a Ponzi scheme -- great profits there. Money laundering for the mob is very profitable and hard for the authorities to catch. And sometimes it's possible to "cook the books."
And there's a silver lining: If they get caught, they almost certainly won't go to jail.
A globe loaded with financial land-mines
Financial fallout from bad behaviour by powerful banks could easily collide with any number of other economic problems we face, creating a much more serious situation.
In particular, Europe and the United States face massive problems.
- The U.S. is dumping billions of dollars into its economy every month to try and keep the wheels moving. But critics worry that when they turn off the tap, the economy will go into a tailspin. The U.S. economic recovery is so thin that such a shock could be devastating.
- Looking back, one of the main causes of the Great Depression in 1929 was that the U.S. Federal Reserve, during the Roaring Twenties, had increased the money supply and kept interest rates low. This caused a rapid expansion, followed by collapse. Analysts can only guess about how close the U.S. is now to the same kind of situation.
- Stock markets and the American automobile market are both overheated; personal debt is high. Borrowing at low rates, many people are buying stocks that may be worth much less when the U.S. government ends its stimulus program.
- And there is the world debt. Earlier this year ING Bank pulled together some research that showed total world indebtedness, including all parts of the public and private sectors, to be US$223.3 trillion. That amounts to 313 per cent of the global gross domestic product. (To keep track of this ominous expansion toward a global debt bubble, check out The World Debt Clock.)
The Gordon Gekko syndrome
Bankers who wheel and deal hyper-aggressively, who display domineering and ruthless tactics, are not uncommon. For some, there may be an explanation.
Author Kets de Vries says that about 3.9 per cent of corporate professionals have psychopathic tendencies. That's not a large number, but it is four times the estimated number of psychopaths in the general population
"Ironically," de Vries told the New Knowledge site, "many of the qualities that indicate mental problems in other contexts may appear appropriate in senior executive positions."
The issue is serious enough that it is being studied by numerous psychiatrists.
"Corporate psychopaths are managers with no conscience who are willing to lie and are able to present a charming façade in order to gain managerial promotion via a ruthlessly opportunistic and manipulative approach to career advancement," says Clive Boddy of Middlesex University Business School.
Psychologists urge financial organizations to identify and weed out the psychopaths before they do considerable damage.
For the world economy, it may already be too late.
Nick Fillmore is a Toronto blogger and sometimes investigative journalist. He worked in several capacities at the CBC over 25 years, and was a founder of the Canadian Association of Journalists. Please email Nick Fillmore or visit his blog.
This article originally appeared on The Tyee and is reprinted with permission.
Photo: flickr/Quinn Dombrowski
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