Senator Levin published a 300-page report last week on JPMorgan’s London Whale loss, and he followed up the report with a 6-hour Q & A with the bankers and regulators closest to the loss. The whole event called attention to the following key facts:
1) JPMorgan lost over $6 billion unexpectedly
2) They changed their accounting practices to help cover up some of their losses
3) Bankers at the firm, even executives, decided it would be best to not fully report the full situation to regulators
4) The regulators were mostly clueless about what was going on
A big part of the reason all of this matters is because of when it happened: After the Dodd-Frank Act of 2010. Some big bankers like to claim that Dodd-Frank fixed the problems that caused the financial crisis, but this JPMorgan fiasco proves otherwise. These big banks can still incur enormous sudden losses from derivatives trades, and they still play accounting games using these derivatives. It was fortunate in this instance that the London Whale losses didn’t spiral out of control and spill over to other parts of the financial sector (furthering additional systemic risk), but it doesn’t bode well for the future of the big banks.
Essentially what we see here is that if several derivatives-related fiascos like the London Whale were to occur at once, then we’d be in a similar situation to the financial crisis of 2008. This JPMorgan hearing and report proves that the problems associated with “too big to fail” are still with us.
See the video above for a 4-minute summary of the hearing.
Related: See “What are derivatives, and why are they dangerous?”
61% of respondents in a YouGov poll said that the big banks are too big. Now if we could just convince all those people to put their money where their mouth is and switch to a smaller lender… From YouGov survey (pdf)
Note: All the quotes below are real sh*t Wall Street says (though those who said them probably wish they weren’t).
Pro Publica recently reported that traders at Morgan Stanley joked about how crappy a toxic asset was before they sold it to a foreign bank.
They named the asset such things as “Subprime Meltdown,” “Hitman,” “Nuclear Holocaust,” “Mike Tyson’s Punchout,” and “s***bag.” And then they sold it.
Here’s why at least some of these guys should be in jail. They sold an asset they knew was junk.
To illustrate why this is wrong, let’s say a car salesman sells cars he knows are lemons. But he doesn’t tell his customers this (at least not outrightly). When questioned by the law about his actions, the car salesman says that the customer should be sophisticated enough to know the possible downsides of the deal, and so he doesn’t deserve any blame.
Only in a corrupted court system would such an argument pass as legitimate. And yet this is the kind of logic that seems like it would fly if executives at Morgan Stanley or Goldman Sachs were ever put on trial.
Perhaps the most memorable moment in the post-crisis megabank hearings was when Senator Levin quoted a Goldman Sachs employee, repeating the word “sh*tty” lots of times on CSPAN.
Here’s the exact line from the Goldman trader: “Boy, that Timberwolf was one sh*tty deal.”
This was the same situation as what happened at Morgan Stanley. The traders knew that they were holding a toxic asset (in this case, officially called Timberwolf), and yet they sold it to a client.
If you haven’t seen the interchange between Levin and the Goldman Sachs employee, it’s worth watching (language warning):
As bad as this was, it doesn’t top Enron’s antics.
Enron traders weren’t literally on Wall Street (few firms are now), but they were part of the same Wall Street trader culture. They infamously colluded with power plants in California to shut down the state’s power, something they did so that Enron could win bets they had placed on power demands there.
Whenever they did this, the power went out for hours, closing businesses dependent on electricity (and what business isn’t dependent on electricity?) and causing stop lights at intersections to go off (and the car crashes that ensued).
The traders knew what they were doing, and they laughed about it. Here are some excerpts of their conversations:
TRADER: Hey, this is David up at Enron.
POWER PLANT GUY: Uh, huh.
TRADER: There’s not much demand for power at all here.
TRADER: If we shut it down, can you bring it back up in 3 or 4 hours?
POWER PLANT GUY: Oh, yeah.
TRADER: Why don’t you just go ahead and shut her down then, if that’s ok?
One year massive wildfires in California moved the price of energy in Enron’s favor. Here’s a conversation Enron traders had about those wildfires which helped them make money:
TRADER: What’s happening?
SECOND TRADER: There is a fire under the core line…
FIRST TRADER: Burn, baby burn.
SECOND TRADER: That’s a beautiful thing.
Finally, traders also laughed at the idea that grandmothers in California lost money because of their actions.
TRADER: All that money you guys stole from those poor grandmothers in California.
SECOND TRADER: Yeah, Grandma Millie, man.
SECOND TRADER: She’s the one who couldn’t figure out how to ******* vote on the butterfly ballot.
FIRST TRADER: Now she wants her ******* money back for all the power you’ve charged… (source)
In conclusion, let’s look at one of the most recent examples of egregious trader conversations from UBS.
When UBS was fined at the end of 2012 for manipulating interest rates, they were also forced to reveal documents showing conversations between their traders and brokers.
Here are four quotes from them that may seem fake because they are so stupid. But, in fact, they’re real quotes. (source)
“I need you to keep it as low as possible… if you do that…. I’ll pay you, you know, 50,000 dollars, 100,000 dollars… whatever you want…”
“as i said before - i dun mind helping on your fixings…”
“Anytime i can return the favour let me know…”
“JUST BE CAREFUL DUDE… i agree we shouldnt ve been talking about putting fixings for our positions on public chat…”
It’s amazing that these “dudes” are given millions of dollars to push around and speculate with, isn’t it?
According to a CFTC report, RBS placed derivatives traders on the same desk as the people submitting the Libor interest rate.
This setup allowed the traders to make a trade and then ask the submitters to manipulate the interest rate to their advantage (and to someone else’s—a competing hedge fund’s, for instance—disadvantage). Even after RBS placed the traders away from the submitters, however, the manipulation continued through instant messaging.
Here are some highlights from the messages. No corrections have been made to grammatical, syntax errors:
August 20th, 2007
Senior Yen Trader: its just amazing how libor fixing can make you that much money
Senior Yen Trader: its a cartel now in london
December 5, 2007
Yen Trader 2: FYI libors higher again today
Yen Trader 4: ‘ucksake. keep ours low if poss. don’t understand why needs to go up in yen
Yen Trader 2: no reason dude[,] [Bank C] and [Bank D] went high yest
Yen Trader 4: send the boys round
Yen Manager: pure manipulation going on
April 2, 2008
Senior Yen Trader: i am sure some HF [hedge fund] will complain tomorrow ..
Yen Trader 1: tough
Senior Yen Trader: we will say we lower every tenor ..1m 3m 6m ..we feel rbs name has very good credit ..no problem getting money in
Senior Yen Trader: good way to boost share price!
This sample gives a sense for what was going on. See the full CFTC report for more.
The point here isn’t that Wall Street traders are naughty alpha males (though many are). The point here is that these are some of the guys behind trades on Wall Street. This alpha male culture is embedded at least to some extent at all megabanks with trading floors: JPMorgan Chase, Citi, Bank of America, Goldman Sachs, Morgan Stanley.
These are some of the guys who are speculating in the market. These are some of the guys who have blown up firms over and over and over and over (see our derivatives timeline).
These are the firms people should boycott and support local lenders in their stead. People who have loans or deposits with these megabanks are casting their vote for this kind of a “value only equals money” culture.
Wikipedia co-founder Jimmy Wales spoke bluntly and boldly in a speech given at a conference of community bankers this morning. He also called too big to fail an “abomination,” and he said ”if you run a company into the ground and pay yourself a bonus, that’s not capitalism, that’s criminal.”
It’s good to see such a resurgence in calling attention to the problem of too big to fail, which hasn’t been fixed and in many ways has only gotten worse since the financial crisis.
Simon Johnson, MIT economist, has a NYTimes article out today that acknowledges this resurgence: “The largest banks in the United States face a serious political problem. There has been an outbreak of clear thinking among officials and politicians who increasingly agree that too-big-to-fail is not a good arrangement for the financial sector.”
And an article from David Dayden published this morning notes the same thing: “There’s been an unlikely yet welcome resurgence of chatter about breaking up the nation’s largest and most powerful banks. Bloomberg’s story quantifying the too big to fail subsidy grabbed some eyeballs (and there’s an upcoming GAO report on the subsidy that will do the same). Sherrod Brown announced an unlikely pairing with David Vitter working on legislation on the subject. Dallas Fed President Richard Fisher is going to give a big speech on Friday on breaking up the banks… at CPAC, the largest conservative political conference of the year.”
All of this is great news for us since it gives us hope that maybe we will finally break up the big banks and officially end too big to fail.
“$2 trillion is far too big in terms of the social costs.” - Simon Johnson, MIT economist
See our too big to fail page for more.
Update: Also see work from Andrew Haldane, executive director of Bank of England, here and here (pdf). Haldane’s studies show that once a bank passes the threshold of $100 billion in assets, then it offers little upsides and lots of downsides for the overall economy. Simon Johnson is basing his assertions in the video off studies like these ones.
Here’s the problem: Wall Street banks get an implicit bank subsidy where they can borrow money for less than other financial institutions largely because creditors see them as “too big to fail.” Specifically, according to scholars at the IMF, these biggest banks get an implicit bank subsidy of around 0.8 percentage points.
Now, 0.8 percentage points doesn’t sound like much, and it’s not for typical Americans. But for banks that have trillions in assets, 0.8 percentage points can add up to billions.
Bloomberg, in their image above, shows that without these implicit multi-billion-dollar subsidies Bank of America and Citigroup would be bleeding. In short, too big has failed.
Here’s the article the image comes from. We strongly recommend reading it in full.
So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?
Granted, it’s a hard concept to swallow. It’s also crucial to understanding why the big banks present such a threat to the global economy.
Let’s start with a bit of background. Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail.
Homeowners who’ve faced foreclosures in the aftermath of the 2008 financial crisis will soon receive some compensation for their worries, but in most cases the compensation is a complete sham.
Here’s the story: In January, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board called off an independent foreclosure review and decided instead to reach a settlement with the big banks (Bank of America, Citibank, Goldman Sachs, Chase, among others) who’ve improperly threatened or completed foreclosure on customers. This means that on Friday of this week millions of people who’ve been hassled by these banks will receive a check in the mail.
However, most of the harassed customers aren’t really being compensated much at all. Check out this breakdown from American Banker:
In other words, 70% of people receiving compensation are getting less than $500. That’s almost salt in the wound, isn’t it?
It’s simply amazing the lengths that the federal government has gone to in order to make sure homeowners don’t get helped while the Wall Street banks do.
Think of it this way: Wall Street was bailed out immediately in 2008 to the tune of tens of billions of dollars. These homeowners, on the other hand, are receiving compensation years after the crisis and only receiving $3.6 billion.
Let’s put that $3.6 billion in perspective. According to an internal report by the Consumer Financial Protection Bureau, these banks made more than $20 billion by shortcutting their customers on foreclosure programs. So for the big banks, all of this was still profitable. Sure, they’ll lose $3.6 billion, but they gained at least $20 billion from their actions, so no big deal.
To learn more about what’s going on, see the excellent clip from Christopher Hayes below which expounds on all the necessary details. Also see the Tumblr “For Having My House Stolen” from Alexis Goldstein (a guest in the Christopher Hayes clip), which pokes fun at the weaksauce compensation from the Wall Street banks, as well as the full spreadsheet showing compensation.
If you were looking for a reason to switch banks (and you were, weren’t you?), this is a good one.
Elizabeth Warren ripped into federal regulators this morning in a hearing focused on HSBC’s massive money laundering scandal. She started out by questioning that if laundering nearly one billion dollars for drug cartels wasn’t enough to send someone to trial, what amount would be?
The regulators responded by saying that it wasn’t their role to prosecute—that’s the role of the Justice Department. Warren said that she knew that, but she was asking if these regulators (who interact closely with the Justice Department on these megabank cases) had an opinion on the matter, seeing as these regulators advise the Justice Department on these cases. What amount of money laundering is proper for actually sending someone to trial? The regulators hemmed around the question, refusing to answer directly.
Warren’s question deserves serious attention. These bank regulators who advise the Justice Department should have said without hesitation that their opinion is that any amount of criminal activity is grounds for trial and that they would firmly tell the Justice Department so. They should have said unequivocally that a two-tiered justice system isn’t a justice system at all. Instead, they said that it’s complicated, and that these problems aren’t their problems.
Elizabeth Warren followed up her question with a compelling statement about how unjust this system seems. She said, “If you’re caught with an ounce of cocaine, the chances are good you’re going to jail… Evidently, if you launder nearly a billion dollars for drug cartels and violate our international sanctions, your company pays a fine and you go home and sleep in your own bed at night.” It’s a very simple message, but one that accurately conveys the insanity of our current system.
The HSBC money laundering scandal went on for years and years and years, and when the Justice Department finally decided to do something about it, they fined HSBC what amounted to a tiny fraction of their income over these years. The point is that there had to be people on the front line—some managers or officers—who knew that thousands of dollars in cash were being pumped into their bank (sometimes daily) by drug cartels. You don’t launder nearly a billion dollars in drug money and have no one in the entire bank have any clue as to what’s going on. The answer is simple: People who break the law so egregiously shouldn’t just go home and sleep in their bed at night. They should be held accountable in order to effectively end a two-tier justice system.
One way to better ensure that we resolve these problems is to join the call to break up the banks. Another way is to make sure that you don’t support banks that get a pass from criminal activity simply because they’ve been deemed “too big to fail.” See why you should switch.
Here’s the video: