Why Regulate the Banking and Financial System.

Last week, we saw something unheard of: the French President and the German Chancellor spending most of the night trying to make deals with private banks over the debt of a European country. In exchange of writing off 50% of the Greek debt, the banks (which would have lost 100% of their money otherwise, since Greece would default anyway), were promised €35 billion in "credit enhancement" to mitigate losses they might suffer. (NYTimes, Bloomberg)

Evidently, the stakes were high – no less than saving the Euro, they said. OK. Maybe so. But there is still something extremely disturbing, even eerie in seeing our representatives so dependent on the will of private banks and credit rating agencies. You can probably blame it on the debt, yes, but maybe also blame on the banks themselves.

This week, Rachel Maddow offered a great reminder of the role of the banks in the current financial crisis. And boy, do we easily forget...! Once you start piling up all the scandals and frauds, there's plenty of reason to get angry and feel for the "Occupy Wall street" protest, considering the dire consequences we all have to pay.

After all, the SUBPRIME CRISIS of which the banks are responsible triggered this whole mess, including the current European crisis.

Justa quick reminder of what the sub-prime crisis really is (you can also look here, here or here and here) :

The banks relaxed their mortgage standards so that people with higher risk if default than prime borrowers (hence the word ‘sub-prime’) could buy a house, using their homes as collateral. This created a bubble.

When home values fell, those borrowers could not afford the adjustable rate mortgage payment and had to default.

But the best part is that the lenders did not even bear the credit risk in the mortgages they issued as they transferred the risks to third-party investors, including shadow banks (through a complex process called “securitization”), by slicing and dicing the mortgages.

But as if this were not enough, the subprime crisis was soon followed by a FORECLOSURE CRISIS. (here)

The homeowners who had to refinance ended up being evicted from their homes without knowing whom to turn to litigate their rights. Why? Because there is no way to tell who owns your mortgage and thus who the true owner of your home is.

And to make matter worse, there is no official guaranteed record of rights and ownership of mortgage loans because that has been privatized - it is now in the hands of a the holding company called MERS,  and currently sued by the state of Delaware. 

Worse still, if you can believe it, as a result of ‘bad paperwork’, banks even evicted people erroneously by providing false documents (called robo-signed documents - see here) in court – including people who duly paid their mortgage or – believe it or not- even people who did not have a mortgage at all. (Florida is a good case in point)

The scandal was so great that last year the major banks (including Bank of America, JP Morgan, Wells Fargo, and Citigroup) had to temporarily halt their foreclosure proceeding. (MSNBC)

Not only did banks screw up the little guys, they even purposely misled their customers and investors into buying shares of companies they knew were failing - Merrill Lynch  (see here) and Infospace  or goto.com,  Citigroup and Worldcom (here) or Goldman Sachs and Timberwolf (here or more recently here and here).

THE EUROPEAN CONNECTION

You might not see the connection with Europe… unless you are Greek.

Goldman Sachs is actually a name well-known in Greece or even in well-informed circles in Europe. It is one of the banks – JP Morgan & Chase is another - that helped the Greeks mask their true debt while betting defaults on the very debt they helped hide by acquiring credit protection on the cheap and eventually selling the swaps to the Bank of Greece. (NYTimes, Spiegel, but also here, here, here, and here)

As a result, of course unlike most European banks - the suckers in the game - neither Goldman Sachs nor JPMorgan has net exposure on Greek debt. Beautiful!

Essentially, it is all the same story. Whether it is subprime mortgages or debt obligations, the same scheme: making money by swapping the risk to third parties and betting against the investment the banks sold to their own clients while making huge benefits in the process.

This has been happening in the last decade and it is a well-established fact.

ACCOUNTABILITY?

So what have been the consequences for these banks? Well, they have either lobbied politicians or scared them into thinking they, like Lehman Brothers, are too big to fail.

The result? Hardly a slap on the wrist: they have either accused low-level employees or made sweet deals with the SEC (Securities and Exchange Commission) in charge of the little regulation there is left. (Reuters, Propublica, also here), even if more it is not completely over yet.

“No major investment banker has been brought up on criminal charges stemming from the financial crisis. (…/…) Goldman, JPMorgan and Citigroup were all able to settle without admitting or denying anything, which, of course, is part of the problem. (…/…). Neither the Citigroup settlement nor any of the others come close to matching the profits and bonuses that these banks generated in making these deals.”. (Propublica)

POLITICAL FALLOUT

This is all very important to understand because in this global economy it affects all of us, in America as well as in Europe (USAToday). At the core of the problem is the deregulation of the financial market and the banking system, which allowed banks to take unreasonable risk without taking the responsibility for it.

For this, we can thank both Republicans and Democrats who passed a law repealing Glass–Steagall Act in 1999, signed by Bill Clinton, which essentially removed the separation between investment banking and commercial banks as well as conflict of interest prohibitions between investment bankers serving as officers of commercial banks.

The result: too big to fail, they say.  Well, then, maybe they should be split up. The US has started implementing financial regulatory reform with the Dodd–Frank Wall Street Reform and Consumer Protection Act but more needs to be done.

Unfortunately, already the Republican candidates, including the most serious one, Mitt Romney, want to repeal Dodd-Franck and “deregulate Wall Street”. (Washington Post)

This is why the “Occupy Wall street” makes so much sense to the 99% of us who have to pay for this mess one way or another.