Gillian Tett’s Astonishing Defense of Bank Misconduct

I don’t know what became of the Gillian Tett who provided prescient coverage of the financial markets, and in particular the importance and danger of CDOs, from 2005 through 2008. But since she was promoted to assistant editor, the present incarnation of Gillian Tett bears perilous little resemblance to her pre-crisis version. Tett has increasingly used her hard-won brand equity to defend noxious causes, like austerity and special pleadings of the banking elite.

Today’s column, “Regulatory revenge risks scaring investors away,” is a vivid example of Tett’s professional devolution.

The twofer in the headline represents the article fairly well. First, it take the position that chronically captured bank regulators, when they show an uncharacteristic bit of spine, are motivated by emotion, namely spite, and thus are being unduly punitive. Second, those meanie regulators are scaring off investors. It goes without saying that that is a bad outcome, since we need to keep our bloated, predatory banking system just the way it is. More costly capital would interfere with its institutionalized looting.

In other words, the construction of the article is to depict banks as victims and the punishments as excessive. Huh? The banks engaged in repeated, institutionalized, large scale frauds. If they had complied with regulations and their own contracts, they would not be in trouble. But Tett would have us believe the regulators are behaving vindictively. In fact, the banks engaged in bad conduct. To the extent that the regulators are at fault, it is for imposing way too little in the way of punishment, way too late.

As anyone who has been following this beat, including Tett, surely knows is that adequate penalties for large bank misdeeds would wipe them out. For instance, as many, including your humble blogger, pointed out in 2010 and 2011 that bank liability for the failure to transfer mortgages in the contractually-stipulated manner to securitazation trusts alone was a huge multiple of bank equity. So not surprisingly, as it became clear that mortgage securitization agreements were rigid (meaning the usual legal remedy of writing waivers wouldn’t fix these problems) and more and more cases were grinding their way through court, the Administration woke up and pushed through the second bank bailout otherwise known as the National Mortgage Settlement (which included 49 state attorney general settlements) of 2012.

Similarly, Andrew Haldane, then the executive director of financial stability for the Bank of England, pointed out that banks couldn’t begin to pay for the damage they did. In a widely-cited 2010 paper, Haldane compared the banking industry to the auto industry, in that they both produced pollutants: for cars, exhaust fumes; for bank, systemic risk. Remember that economic theory treats cost like pollution that are imposed on innocent bystanders to commercial activity as an “externality”. The remedy is to find a way to make the polluter and his customer bear the true costs of their transactions. From Haldane’s quick and dirty calculation of the real cost of the crisis (emphasis ours):

….these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.

It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.

Contrast Haldane’s estimate of what an adequate levy would amount to with how Tett’s article depicts vastly smaller amounts as an outrage:

A couple of years ago Roger McCormick, a law professor at London School of Economics and Political Science, assembled a team of researchers to track the penalties being imposed on the 10 largest western banks, to see how finance was evolving after the 2008 crisis.

He initially thought this might be a minor, one-off project. He was wrong. Last month his project team published its second report on post-crisis penalties, which showed that by late 2013 the top 10 banks had paid an astonishing £100bn in fines since 2008, for misbehaviour such as money laundering, rate-rigging, sanctions-busting and mis-selling subprime mortgages and bonds during the credit bubble. Bank of America headed this league of shame: it had paid £39bn by the end of 2013 for its transgressions.

When the 2014 data are compiled, the total penalties will probably have risen towards £200bn. Just last week Bank of America announced yet another settlement with regulators over the subprime scandals, worth $16.9bn. JPMorgan and Citi respectively have recently settled with different US government bodies for mortgage transgressions to the tune of $13bn and $7bn.

Yves here. Keep in mind that these settlement figures are inflated, since they use the headline value, and fail to back out the non-cash portions (which are generally worth little, or in some cases are rewarding banks for costs imposed on third parties) as well as tax breaks.

In an amusing bit of synchronicity, earlier this week Georgetown Law professor Adam Levitin also looked at mortgage settlements alone and came up with figures similar to the ones that have McCormick running to the banks’ defense. But Levitin deems the totals to be paltry:

There’s actually been quite a lot of settlements covering a fair amount of money. (Not all of it is real money, of course, but the notionals add up).

By my counting, there have been some $94.6 billion in settlements announced or proposed to date dealing with mortgages and MBS….In other words, what I’m trying to cover are settlements for fraud and breach of contract against investors/insurers of MBS and buyers of mortgages.

Settlements aren’t the same as litigation wins, and I don’t know the strength of the parties’ positions in detail in many of these cases, but $94.6 billion strikes me as rather low for a total settlement figure.

And that is the issue that Tett tries to finesse. The comparison that she and McCormick make on behalf of the banks is presumably relative to their ability to pay, when the proper benchmark is whether the punishment is adequate given the harm done.

In fact, despite McCormick’s and the banks’ cavilling, investors understand fully that these supposedly tough settlements continue to be screaming bargains. When virtually every recent settlement has been announced, the bank in question’s stock price has risen, including the supposedly big and nasty $16.6 billion latest Bank of America settlement (which par for the course was only $9 billion in real money). The Charlotte bank’s stock traded up 4% after that deal was made public. So if investors are pleased with these pacts, what’s the beef?

The complaint, in so many words, is that these sanctions are capricious. Tett again:

“The numbers are getting bigger and bigger,” observes Prof McCormick, who has been so startled by this trend that last month he decided to turn his penalty-tracking pilot project into a full-blown, independent centre. A former leading European regulator says: “What is happening now is astonishing. If you had asked regulators a few years ago to predict how big the post-crisis penalties might be, our predictions would have been wrong – by digits.”

Now the article does list some abuses, such as the Libor scandal, that were exposed after the crisis. That goes double for chain of title abuses, which suddenly exploded into media and therefore regulators’ attention in the fall of 2010. That means the reason that the penalties have kept clocking up is that, in the absence of having performed large scale systematic investigations in the wake of the crisis, regulators are dealing with abuses that came to their attention after the “rescue the banks at all costs” phase. Those violations are just too visible for the officialdom to give the banks a free pass, particularly since the public is correctly resentful that no one suffered much if at all for crisis-related abuses.

So the banks’ unhappiness seems to result from the fact that having been bailed twice by the authorities (once in the crisis proper, a second time via the “get of out jail almost free” of the Federal/state mortgage settlements of 2012), the financiers thought they were home free. They are now offended that they are being made to ante up for some crisis misconduct as well as additional misdeeds. Yet Tett tries to depict the regulators as still dealing with rabbit of 2008 bad deeds that are still moving through the banking anaconda, when a look at JP Morgan’s rap sheet shows a panoply of violations, only some of which relate to the crisis (as in resulting from pre-crisis mortgage lending or related mortgage backed securities and CDOs):

Bank Secrecy Act violations;
Money laundering for drug cartels;
Violations of sanction orders against Cuba, Iran, Sudan, and former Liberian strongman Charles Taylor;
Violations related to the Vatican Bank scandal (get on this, Pope Francis!);
Violations of the Commodities Exchange Act;
Failure to segregate customer funds (including one CFTC case where the bank failed to segregate $725 million of its own money from a $9.6 billion account) in the US and UK;
Knowingly executing fictitious trades where the customer, with full knowledge of the bank, was on both sides of the deal;
Various SEC enforcement actions for misrepresentations of CDOs and mortgage-backed securities;
The AG settlement on foreclosure fraud;
The OCC settlement on foreclosure fraud;
Violations of the Servicemembers Civil Relief Act;
Illegal flood insurance commissions;
Fraudulent sale of unregistered securities;
Auto-finance ripoffs;
Illegal increases of overdraft penalties;
Violations of federal ERISA laws as well as those of the state of New York;
Municipal bond market manipulations and acts of bid-rigging, including violations of the Sherman Anti-Trust Act;
Filing of unverified affidavits for credit card debt collections (“as a result of internal control failures that sound eerily similar to the industry’s mortgage servicing failures and foreclosure abuses”);
Energy market manipulation that triggered FERC lawsuits;
“Artificial market making” at Japanese affiliates;
Shifting trading losses on a currency trade to a customer account;
Fraudulent sales of derivatives to the city of Milan, Italy;
Obstruction of justice (including refusing the release of documents in the Bernie Madoff case as well as the case of Peregrine Financial).

Finally, let’s dispatch the worry about those poor banks having to pay more to get capital from investors. If this actually happened to be true, it would be an extremely desirable outcome, for it would help shrink an oversize, overpaid sector.

However, the Fed and FDIC earlier this month, in an embarrassing about face, admitted that the “living wills” that banks submitted were a joke, meaning that the major banks can’t be resolved if they start to founder. We’ve said for years that the orderly liquidation authority envisioned by Dodd Frank is unworkable. And we weren’t alone in saying that; the Bank of International Settlements and the Institute for International Finance agreed.

The implication, which investors understand full well, is that “too big to fail” is far from solved, and taxpayers are still on the hook for any megabank blowups. As Boston College professor Ed Kane pointed out in Congressional testimony last month, and Simon Johnson wrote in Project Syndicate earlier this week, that means that systemically important banks continue to receive substantial subsidies.

Yet Tett would have you believe that banks are suffering because investors see them as bearing too much litigation/regulatory risk. If that were true, Bank of America, the most exposed bank, would have cleaned up its servicing years ago.

It’s clear that banks and investors regard the risk of getting caught as not that great, and correctly recognize the damage even when they are fined as a mere cost of doing business. It is a no brainer that their TBTF status assures that no punishment will ever be allowed to rise to the level that would seriously threaten theses institutions. Everyone, including Tett, understands that this is all kabuki, even if the process is a bit untidy. So all of this investor complaining is merely an effort to get regulators to fatten their returns a bit.

Bank defenders like Tett would have you believe that the regulators have been inconsistent and unfair. In fact, if they have been unfair to anyone, it is to the silent equity partners of banks, meaning taxpayers. Banks are so heavily subsidized that they cannot properly be regarded as private firms and should be regulated as utilities. Fines for serious abuses that leave banks able to continue operating in their current form are simply another gesture to appease the public. Yet Tett would have you believe that a manageable problem for banks is a bigger cause for concern than the festering problem of too big to fail banks and only intermittently serious regulators.

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  1. Clive

    I’m consistently amazed by the difference in attitude between “my” industry (finance) and where my Dad worked (the electricity supply industry at both high and low voltage — roughly analogous to “retail” and “wholesale” ends of the market). The FIRE sector routinely attributes utterly negative connotations to “regulation”. Managers blame regulators for intruding on their ability to make an, cough, honest profit and run their businesses the way they think they should be run. The fact that this blew up the economy a few years back is airbrushed out the picture and deemed to be someone else’s fault, mainly the government’s, bizarrely enough.

    In the electricity supply industry, there has long been a recognition that their “product” is inherently dangerous even if it can bring significant benefits. Regulation of practices, equipment, standards (e.g. voltage, frequency), training, licensing and much more goes hand in hand with ensuring that the “brand” (as we’d call it today) of electricity isn’t damaged through either bad actors in the supply sector or poor product quality in the retail/end user side of the business. Without regulation and the enforcement of it rogue operators or manufacturers would operate in the marketplace and damage the whole market.

    The problem is, damage and injury caused by a fault in electrical supply or equipment is fairly immediate and directly correlated whereas with the finance industry it is often diffuse and lagging. But I’d always argue that in aggregate, it is just as dangerous. With apologists like that turncoat Tett at work, it simply delays the inevitable day when the industry understands and accepts the benefits as well as the necessity of effective regulation.

    In terms of Tett’s motivation for this sudden cosy’ing up to the banks — and before I get too carried away on any moralistic high horse of my own as people in glass houses should not throw stones — it is pretty miserable
    being “poor” (I use that terms loosely) but honest. Selling, as Yves put it, your own brand for money can look very tempting as you’re pushing hard back on encroaching middle age with only your integrity to fall back on. It doesn’t pay the rent on your humble flat, nor, indeed, help you at the automat as someone once sang in a slightly different but related context.

    1. steviefinn

      I basically lost everything financially in 2008 & it has been a hard road money wise ever since. Compared however to losing my wife of 25 years, 4 years earlier to cancer it was not such a big deal. I would be fine financially if I had been able to kiss the fat arse of my former employer but in comparison to those who did & still do, I feel whole, unlike those I occasionally come into contact with from that time, who appear to have shrivelled inside, due i think, to their actions in selling themselves.
      Obviously downright poverty is also soul destroying, but I am sure that it would be unlikely that Gillian would have to face that, which is also the case for me. I think there is a price to pay & I think it is a high one for those who abandon their integrity which material comfort will do little to ease. Maybe it’s just me, but I have all the things that I consider to be needed to be happy with my lot.
      This situation was actually further reinforced this last week due to me suffering 5 cardiac arrests. My half lucid moments between unconsciousness, the bouts of CPR & the seemingly eternal stage of the angioplasty were dominated by my mantra of ” I am not going to fucking die ” except for one occasion when the feeling of my chest being put through a mincer, led me to momentarily wish for a release, leading me to a feeling of slipping away – What sustained me & dragged me back was thoughts of those I love & those who love me.
      Now I am recovering & once again because of the dark I can fully appreciate the light. Over the last few years very slowly in terms of a career I have reinvented myself & am soon to have a piece of sculpture that is all me ( Unlike 35 years of previous work, which was all commercial ) exhibited in an art gallery. I don’t know how this will work out, it might fail, but due to very favourable criticism from certain people, I am optimistic that eventually it will succeed. If not I will hopefully be able to live basically, which with some creativity is surprisingly rewarding & enjoy my many non-material treasures, the work I do to survive & the work that I love. I have no masters & no debt & I defer to nobody.
      If I had died last week I would if able considered my life to have been a success, but not in the terms that are usually applied & when I consider my relatively much more affluent days they now seem uneventful & somehow grey in comparison to these last few years, which like a good painting have largely been a balanced mix of dark highlighting the light, producing a pleasing chiaroscuro that ever changes between Matisse to Carravagio, but most of the time would be at about, let’s say an everyday Pissaro.

      1. Doug Terpstra

        I’m glad you’re still with us, shining light and beauty in this dim realm. You clearly have more to do here before rejoining your wife in the real world.

    2. steelhead23

      I would not be so quick to see Tett’s article as a capitulation, or a dramatic change in personal perspective. Of course she, like the rest of us, is somewhat motivated by money and like most of us, deflects her personal perspectives to fit her boss’s. But, in her piece she is reporting on a report on bank fines. It is mostly the last two paragraphs that seem a bit limp. For example, after suggesting we “imagine another scenario, where a type of regulatory inflation sets in, as branches of government keep competing”, she makes a disturbing claim: “And it is still far from clear whether the banks can actually change how they behave.” Really? I feel compelled to ask – If, as she states earlier “… the transgressions that have sparked these penalties – say, in relation to subprime mortgages or Libor – have often been egregious, flouting both the law and any sense of ethics.”, what, pray tell, should be the proper regulatory response if fines are unlikely to change bank behavior?

      I sense that beneath the covers of this short story, Gillian would favor criminal prosecution to fines. And so would we.

      BTW – FT suggested that by cutting these short quotes out of the story, I violated their copyright. Because I prefer to quote the article rather than paraphrase it, I find their concern a bit overboard – but I wouldn’t want NC to get sideways with anyone – so if you choose to delete this comment, I’m fine.

      1. Robert Tartell

        “what, pray tell, should be the proper regulatory response if fines are unlikely to change bank behavior?”
        Uh- 1. Prosecuting them
        2. On conviction, actually locking a few of them up
        3. Throwing away the key

  2. Fiver

    Great memory and retrospective. One can only hope Ms Tett has not put career ahead of integrity (or rather, come around honestly to the Banksters’ unique perspective on same) joining a number of others who briefly punched keys for justice but were strangers to longer term conviction.

    I well remember the $200 trillion number in all the story headlines, and was struck as well at the implications of such damage, but when I think of it now as even 3x then-current global GDP in lost future output, my mind just balks – and I wonder if the physicist recounted is not telling us the number is ‘economical’ rather than ‘astronomical’ because it is impossibly big, or stretched over a very long time in the real world of output. The very high number was alarming, as were the apparent implications, but didn’t it also help effect what the Banks wanted, which was to nix the levy? Perhaps Haldane intended that effect?

  3. proximity1

    “Regulatory revenge risks scaring investors away,” — Huh? LOL!

    Danger!, Will Robinson! Danger! Hedge-fund managers!

    I wonder, practically, just how that would work. Do these investors reason,
    “Wait a minute! These brokers, these financiers, and fund managers are being subjected to vindictive measures of being held accountable! and, is that fair? Why should they have to account for their own clever efforts to defraud the unsuspecting investor? How’re they supposed to earn a living if they have to deal honestly with people? What I want are traders who take no prisoners in their financial dealings. I’m investing to take on risk, after all, and their wild and unscrupulous dealings are providing it. I don’t get it. Where’s the problem? Aren’t the little people supposed to bear the costs and the injuries for the deeds of the few of us who are bigger and meaner?”

    Really, Ms. Tett ! Consider: if investors aren’t frightened already, how is even less accountability (i.e. “regulation”) supposed to reassure them? It’s a serious question I’m posing.

    1. Clive

      The unfortunate — but inescapable — conclusion one can only draw from our mate Gillian’s thesis is that, historically, investors got to collect a few crumbs from the high table share in the spoils of the looting. “You bilk\defraud\exploit your customers\society, we supply you with the capital, we all know the deal”.

    1. William C

      Maybe reflects the FT’s position as the daily for the banking industry in London?
      So, yes, the readers want to know what is going on so that they are not caught out by market moves (so GT reports on sub-prime etc.). But they will not want their paper to advocate sweeping and profound reforms to the industry (at least not until they have retired rich)?

      1. Ben

        True, honestly now the FT is a bit of a rag, lots of silly stories at the behest of finance industry and real-estate advertisers.

      2. Clive

        The FT is an increasingly bizarre, conflicted mish-mash of big finance puff pieces / PR (all-to-often) and the occasional rare insight into new economic theory and illustrations of market failure and its consequences (not often enough to be worth the price of its paywall). But it is worth a read because when it is good, it is very, very good. Although, as Tett’s latest opus testifies, when it is bad, it is horrid.

  4. Ben

    I’m not sure what people don’t get about the fact that the UK is collapsing. They are getting desperate. The UK has one way of creating “wealth”:

    1. have lots of banks
    2. get them to lend lots on housing
    3. goto 1

    London market is on the turn. Watch this space for another UK housing bailout (aka “stimululs”)

    1. James Levy

      The only way she can wangle her way out of a conviction for mendacity is if we imagine she got, and bought, the following tale: “Listen, Britain has no economy. We live on tourist dollars and the City of London. If the City was actually held to reasonable account, the money would all go elsewhere and then where do you think this country would be; I’ll tell you where we’d be, we’d be Poland. So shut your gob you stupid cow!”

  5. monday1929

    Poppycock! That long list of “crimes” you list are just NOTIONAL. If you add them up they total 23. Therefore, 11 of them net out against each other- it would be clear to a three year old that “money laundering for Drug Cartels” is cancelled out by “fraudulent sale of unregistered Securities”- after all, since the Drug Lord has now lost all of his (or her) Laundered Money right back to another branch, (or tentacle of justice, if you will), of JPM Chase. That just leaves “Artificial Market Making at Japanese affiliates” un-netted. That one is easy- since the “Market” now has become nothing BUT “Artificial”, this is just an example of the banks leading the way in Financial Innovation.

  6. Jim Haygood

    ‘Their TBTF status assures that no punishment will ever be allowed to rise to the level that would seriously threaten theses institutions.’

    What would one expect, when banksters passed a law 101 years ago to put their cartel in charge of monetary policy, with direct backing from the Treasury?

    There’s no such thing as banking reform until the Creature From Jekyll Island is abolished. Meanwhile, the show goes on. This way to the egress!

  7. Worker-Owner

    When your MBOs (variable compensation) are tied to toeing the line, your behavior adjusts. A clear example of getting what they pay for.

  8. Jim A.

    Investors SHOULD be, if not “afraid” than “cautious.” But the people selling defective financial products don’t want “cautious” customers. If the crisis shows anything, it is that the need “credulous” customers.

  9. craazyman

    Momentum check! I wouldn’t call it a defense as much as a deer-in-the-headlights gaping narrative mind stare. It’s complicated when the sun won’t shine unless the pyramid runs in blood. The pyramid is the face of god in the world and must be deferenced by our tender sensibilities. Our faculties are numbed at the contradictions and so we type away in platitudes, platitudinal pedagogeries, presumptively pellucidinal prevarications.Ouch. It hoits to think of bank fines mounting so high they re-consider their business strategies and stop throwing money at everything but the economy. That would be an inconvenience indeed. The only good news is boards of directors could consider the merit of raising executive bonuses, as the industry’s operating environment has become a more demanding arena for its talent. As a bank customer I am concerned. Can they still handle my $2000 checking account? There’s always the mattress if things get really bad. So it’s not like they don’t have competition.

    1. Jim Haygood

      ‘… platitudinal pedagogeries, presumptively pellucidinal prevarications …’

      Artful alliteration, ace. Like an ascot-accessorized aardvark!

  10. Doug Terpstra

    One phrase should read: “get of out death-row supermax almost free”. The JPM rap sheet alone is mind-blowing, but Citi’s, Barclays, RBS’s, and many other systemically criminal institutions are similar. The critical point that Bill Black always makes is that enforcing the law doesn’t necessarily mean the death of the TBTF banks themselves, which can be resolved under taxpayer receivership. IOW, the MOJ (Ministry of Justice) can decapitate Jamie Dimon without executing JPMChase. Instead, Eric Holder has let Jamie slip the guillotine (for now) at a nominal cost to investors. Jamie not only escaped the chopping block (temporarily), the board gave him a substantial raise for co-opting Holder. I trust that Eric and Gillian Tett extracted exorbitant prices for their souls.

  11. cnchal

    I don’t know what became of the Gillian Tett who provided prescient coverage of the financial markets…

    Perhaps she had a revelation. Biting the hand that feeds her has led to some hard slaps to her face.

  12. Berial

    And to toss even more ‘oh woe are the corporations’ type stories, the Economist is now complaining that US Regulators are nothing but extortionists even while admitting the ‘extorted’ were guilty.

    1. monday1929

      They really are extortionists. If they actually STOP the criminal behavior then the pay-offs stop.
      Something like the tobacco settlement?
      Something like “terrorism”?

  13. impermanence

    Lying, cheating, and stealing. It’s what EVERYBODY is doing, some just a little bit, and some, a great deal, but this is why nothing works very well. This is what happens when corporate philosophy infects the population, giving even the purist among us multiple rationale to do whatever it takes [to survive].

    The institutionalization of lying, cheating, and stealing is what defines our era.

  14. HT

    There are very few writers on the FT worth reading. Martin Wolf, Gideon Rachman and Lucy Kellaway come to mind, as well as some of their other commentary from time to time and the weekend edition is entertaining. I never bothered with Gillian Tett, though I did watch her a few times with Charlie Rose. I never got the impression that she is a deep thinker, nor that she has the background required to be a serious economic commentator. Most likely she is trying to build her brand so that she can win speaking engagements from banks and other industry players, and therefore she needs to play to her audience. How much of what she writes she actually believes is up to anybody’s imagination.

  15. John Blaze

    When GT was posted in NY (perhaps she still is), she was hobnobbing with the Wall St. elite. I recall her once mentioning being at a dinner party at G. Soros’s crib. It’s no surprise that she has become an apologist for her social circle’s interests.

  16. Synopticist

    Yves, my sweet beloved darling, there’s something you need to understand. Tett is an English JOURNALIST. Not an academic, a professor, a writer, a doctor, a whatever. She is a JOURNALIST who works in the UK. It follows then, as day follows night, that she has the morals of an alley cat, and serves her corporate overlords slavishly.

    Lot’s of journalists in other places, like the US, Germany, France Spain etc etc have retained the old-school decency and professional rigour that used to describe the journalistic trade. None have in the UK. None. That old spirit is dead. It is entirely extinct over here. No-one, including journos themselves, even bothers paying lip service to it.

    1. proximity1

      RE: …Lot’s of journalists in other places, like the US, Germany, France Spain etc etc have retained the old-school decency and professional rigour that used to describe the journalistic trade…”

      I don’t know about Germany, Spain or etc.’s jounalists’ standards of practice but I can tell you that, comparing like for like, matters are not significantly better in France than they are in Britain or the U.S. When the general moral environment is rotten, so is the suffering and the degradation. That is as true for journalism as it is for high finance. Over centuries, the press, like finance, has typically been rather disgusting and only occasionally has either shown sporadic periods where things became so revolting that even management could not help feeling ashamed of itself. So I doubt that things are much different in Germany or Spain or etc. But, of course, there are many places where, by contrast, the standards of U.S. or European (incl. Britain) journalism seem remarkably good. For me, Le Monde Diplomatique is about the only French periodical worth reading regularly–besides the satirical weeklies, Le Canard enchaîné and Charlie Hebdo –especially before the latter sacked one of its star caricaturists, “Siné” (Maurice Sinet). When I read Edwy Plenel, Le Monde ‘s managing editor (1996-2004), say, in so many words, that “If you want to know what’s going on, read books,” (rather than periodicals) I dropped subscribing to newspapers (other than Le Monde Diplomatique).

  17. alex morfesis

    what is sad in the extreme is IF the 100 billion in HARD cash had been made available distributed to homeowners in specially designed t-notes of small increments of 250 dollars with a maximum of four per month…
    not only would there have been no crash…the bankers would not have been able to take down AMBAC, AIG, Lehman and Freddie and Fannie by making collateral calls on counter party swaps…the homeowners would have owed the money like a student loan, meaning they couldn’t run away from it, and the deficit would have been much lower for 2009 10 11 and 12….


    all those wonderful people on wall street would not have been able to make all that other money in derivative positions while the sheppards on maiden street just watched now would they ???

    and shiller and his phony index that he markets with s&p (those lovely mavens of reality)…

    he would not have made money with his intentionally altered and misleading data…

    and we would never have heard the wonderful voice of fabriccio…
    wait…that’s not his name…
    rubio houdini?????…the nyu guy

    silly me…i forgot already…

  18. RichL

    I’m utterly astonished about the lack of understanding shown in this post of how finance and the stock market works.
    Stocks are bought and sold. The current owners of Citigroup, Deutsche Bank, BankAmerica and all of the others are not the same owners from 2007-08. Any penalties for misconduct, irrespective of size, are being paid by current owners, not by the historic ones. Do you really believe that the costs of any fines are ignored by prospective new owners of bank equities?
    I know, for certain, that as a current investor in Citigroup who never owned any stock before 2012- that I’m paying the tab for fines and penalties incurred as a result of conduct that occurred BEFORE I owned the shares. The question that I and other prospective owners of bank stocks, must wrestle with is how large will the prospective damage from fines be relative to the price of the stock today.

    Investors must demand some discount in the share price for the regulatory uncertainty arising from ANY fines- excessive or not. The presence of regulators who are using fines to make a political point absolutely is impacting the cost of capital- in other words the stock price. Rest assured that investors do weigh the regulatory impact of fines when evaluating the ongoing investment merits of banks.

    How can you possibly think that stating a plain fact in security evaluation implies that Ms. Tett is caving to the banking industry? She is merely saying something as obvious as “The sun rises in the morning.”

    What the author needs to examine is the extent to which her own political prejudices are coloring her view of plain reality.

    1. Yves Smith Post author

      Wow, did you read the article?

      Tett is not talking about security pricing. She is attempting to make a perverse moral case against regulation by saying it is bad for investors and by depicting regulators as motivated by vengeance, as opposed to finding near-pervasive misconduct and dealing with it case by case.

      You also appear not to comprehend that equities are residual claims. Everyone else, from creditors to suppliers to successful litigants to pension-holders and regulators, is ahead of you. The onus is on you to understand those risks. We’d been writing about chain of title and mortgage abuses for a full two years by 2012. If you managed to miss that, it was your failure to do basic homework.

      And we also pointed out that large banks are not private companies. They are so heavily subsidized by the state as to warrant being regulated as utilities (and even that is too kind, your average power company is a lot closer to a bona fide private company than a large bank).

      So if you as an investor are so deeply invested in ideology and lousy at security analysis that you are unable to recognize banks as an inherently (at best) public/private partnership, and thus so highly exposed to changes in political and public attitudes as to have government risk every and always as part of the return equation, you’ve got no business buying stocks, much the less lecturing me.

      1. RichL

        Dear Ms. Smith,
        I most certainly did read the article.

        The second heading states “As uncertainty is seen shifting to legal risk, questions arise about the investability of banks”. A second quote from the article – “legal risk is now replacing credit risk”.
        I’m not defending an article that is reporting banal truth. It breaks zero new ground, and has far less of an attitude that you would likely find galling than the cover story “The Criminalization of American Business” in the Economist of 8/30/14. Your article treats Ms. Tett very unjustly.

        Banks now have diminishingly low loan losses due to the improvement in loan performance. Costs are well contained at most banks, leaving aside litigation risk. There are two remaining risks –low volatility and interest rates –both of which are linked and serve to compress spreads, and litigation risk. The latter is the point of Ms. Tett’s article. Why on earth do you disagree with that?

        As a securities analyst for 40 years, I know that equities are junior claims. Analysis involves the valuation of those claims in relation to the price of the equity. Sometimes they are priced cheaply, and sometimes not- also a banal and obvious comment. I was involved in the business before, during, and after the banking crisis as an investor, so I’m fully cognizant of the risks- and the rewards, though I thank you for your concern for my financial well being. I’m not in the least ideological, but I do weigh risk and return as a core of my investment process. Penalties are simply part of the risk on investing in banks nowadays –which was exactly the point of Ms. Tett’s article.

        Banks are private corporations, and have been around for hundreds of years. They are not public utilities, as you imply. They do not have rate of return regulation, and do not have monopoly positions in given territories. While there are subsidies, there also are costs of doing business that government imposes. With all of that, the banking industry doesn’t earn asymmetric returns vs. other industries, as the costs and benefits are spread equally among all of the competitors and are thus competed away through lower pricing to customers. They are NOT public/private partnerships, excepting government owned entities like the landesbanks in Germany. This may be where your own ideology may be getting in the way of your ability to read.

        A bank is a leveraged business that employs loan officers who gain comfort by lending where other “prudent” loan officers do. The mortgage crisis had some bad actors, to be sure. But the preponderance of the poor decisions were made by bankers acting as lemmings, and by yield hog investors taking extraordinary risk to earn 50 bps more yield than in legitimately safe securities.

        What seems to happen like clockwork every 10 years or so is that banks extrapolate present trends into the future without regard to the sustainability of those trends. That’s why they need excess capital to have the cushion against loss from improvident lending.

        Money can’t be used twice. If bank capital goes to the government for fines, it can’t be used as an anchor to windward to protect against loan losses. The concern that I have with the regulatory penalties is that when our economy has sufficient loan demand to actually absorb excess liquid reserves, that the constraint on lending will be insufficient equity capital –thus choking out growth.

        So pick your poison- do you prefer punitive fines against people who no longer are at the banks paid for by the people who are there now, at the cost of an undercapitalized banking industry, or an industry that can take its own hits from the next round of loan losses, whenever they occur? My preference is to protect the economy from future credit events.

        Most sincerely,


        1. proximity1

          So pick your poison- do you prefer punitive fines against people who no longer are at the banks paid for by the people who are there now, at the cost of an undercapitalized banking industry, or an industry that can take its own hits from the next round of loan losses, whenever they occur?”

          Since, currently, we have neither, I can see why you’d be opposed to the “punitive fines.” Of course, you forgot to mention other possibilities–prison, for example. I favor the punitive fines– but only when applied in conjunction with stiff prison sentences for bank and securities fraud. The predatory classes like to explain that prison sentences (for everyone except themselves and their friends and family) are required in order to ensure social order and set a good example for others who may be tempted to commit crime. There are few if any places where such examples are more needed and more warranted and effective than in the world of high finance.

          “My preference is to protect the economy from future credit events.”

          If we merely saw to “protecting the economy” from frauds, wouldn’t these “credit events” take care of themselves?

          “Credit events” ? LOL ! When it comes to mealy-mouthed jargon, is there a field of human endeavor that tops business and financial management? This example is a noteworthy piece of mumbo-jumbo. Did you make that up all by yourself or is that gem actually current in financial parlance?

          1. RichL

            – When things go well when making a loan, a lender makes a few percent more than its cost of funds. When a loan goes bad, in loans like unsecured personal loans, the loss can be 100%. When the economy has a sharp recession, banks will lose money because their borrowers won’t be able to repay the loan. If enough borrowers can’t repay, the bank fails. It’s that simple.

            – When conditions in an industry, say shipbuilding, get terrible due to a sudden decline in world trade, then you can be sure that practically all shipbuilders will default on their loans. It takes a lot of money to build a ship, and if the value of the asset falls 50% over 6 months- which can and does happen- what looked like a money-good loan lending $700,000 per $1 million of the cost of construction for a two year contract to deliver the ship- becomes a huge problem for both the borrower and the lender. A sudden and unexpected change in the economy is what causes credit events. They are not fun!

            – Is it predatory to make a loan that does not get repaid? Who is the predator- the borrower who doesn’t pay, or the lender – a bank that takes CD deposits from customers and then lends their customer’s savings to other customers to buy a house? You tell me, because I don’t see it as that simple. Are you confusing normal commercial behavior with criminal activity?

            – Over the course of my business career, I have seen far more stupidity than criminality in any field of endeavor. Do not assume criminal behavior when simple stupid misjudgment can be the explanation.

  19. JMarco

    According to Tett:
    “And it is still far from clear whether the banks can actually change how they behave.”
    Is she saying that basically financial institutions are crooks at heart and that regulators need to accept this and get over it? Investors should be leery of putting their money into financial institutions. History especially year 2008 shows what can happen to value of investments.

    1. cnchal

      Is she saying that basically financial institutions are crooks at heart and that regulators need to accept this and get over it?

      Yes. The finance criminals are large and in charge, and if we threaten to discipline them, they will throw a financial grenade at everyone else. Laws are for little people.

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