Continuing With The Insanity

November 24, 2014

NOTE: Images in this archived article have been removed.

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During the peak of the financial crisis during 2008 and 2009, there was a window of opportunity for a fundamental remaking and realignment of the massively over-sized and dysfunctional global financial system. Perhaps, also a questioning of the consensus that supports general deregulation and globalization. This opportunity was not taken, and instead the status quo was supported. Now, five years later, the insanity continues. Just a few stories from a single issue of the Financial Times (October 28th, 2014) pay testament to this ….

Rebound in sales of risky assets raises fears over quantitative easing’s legacy

In the financial crisis the risky assets were subprime housing loans (retail loans to borrowers with very low credit scores) bundled together and securitized (turned into bonds and other financial instruments that could be sold to investors). The new risky assets of choice are subprime car loans, and junk-rated corporate (companies with low credit ratings) bonds. In the United States, the issuance of sub-prime car loan securitizations has grown rapidly from its nadir during the crisis, and may surpass its pre-crisis peak this year. Investors are taking on more risks to gain what they see as an acceptable return, in a low interest rate environment, just as they did pre-crisis. The overall issuance of securitized assets is still significantly below pre-crisis levels, but its current rapid growth shows how little the crisis changed things.

Life after Libor: bankers to face personal fines for rigging prices

After it has been found that the banks have been in the business of rigging seemingly every market they are involved in, together with a good deal of money laundering on the side, the authorities (in this case the Bank of England) have issued a consultative document which holds out the possibility of a radical tightening of the supervisory regime for the financial markets. So, if I rob a bank and get caught I probably get decades in prison. If a bank robs millions of people through the manipulation of interest rates, foreign exchange rates etc., they get the possibility of a tightened supervisory regime. Oh, and even some personal fines! As the old saying goes, “you don’t need to rob a bank, just own one”.

Financials bank on ageing clients for new sources of revenue

As the sub-title of this story states, “mis-selling concerns set aside amid shift to retirees managing their own savings”. As governments cut state pensions and other support to older people, many times under pressure from the banks to reduce government deficits, the banks will step in to help (mis)manage older people’s money. All those troublesome episodes of mis-selling (a wonderful term for what amounted to outright deception to cheat older people out of their money) have been forgotten. Is it a good thing that “Unicredit’s investment advisory business is now training 2,000 of its staff as home visit relationship managers, so elderly customers do not have to visit branches”? If the levels of taxation upon corporations (including those very same banks) and the wealthy were returned to where they were only two to three decades ago, and tax havens (run by many of the same banks) shut down, there would be more than enough money to pay for those pensions. That is of course if ecological and resource limits do not render the future growth required to fund those pensions impossible.

Insurers take the strain of longer and healthier lives

As the story notes “insurers take the savings of workers, promising to deliver a retirement income that can last for life.” As people live longer, and with low interest rates on the premiums invested by the insurance companies, profitability is squeezed. To help offload some of the risk a new derivatives market has been born, “longevity swaps”. In addition, insurance companies have moved away from taking on such risks and have instead moved into managing retiree’s assets (moving the risks onto the individual retiree). This mirrors the move of corporations away from defined benefits pension plans (commitment by the corporation to pay a given level of pension) to defined contributions plans (the level of pension is dependent upon the performance of the individual worker’s pensions assets).

Lenders consider how to help retirees with crushing interest-only mortgages

There are increasing numbers of retired customers who may be unable to repay their interest-only (ie no payments to reduce the principal of the loan) mortgages. One third of the UK mortgage stock is comprised of interest only mortgages, with a large proportion of these loans with retired borrowers. What would happen if house prices start to fall again, as seems to be the case in the United States, undermining the ability of many borrowers to pay off such loans?

Bank stress tests fail to tackle deflation spectre

The European Banking Authority has carried out a review to see which banks have an acceptable amount of capital with respect to the risks inherent in the assets on their balance sheets. There have been a number of criticisms of this exercise as not being tough enough. For example, the possibility of outright deflation (which is an actuality in some European countries) has not been taken into account. The minimum acceptable total equity to assets ratio of 3% also means that only a 3% fall in the value of a bank’s assets will drive it into insolvency. Yet another case of the bar being set low enough for all but the very sickest banks to be able to easily jump over?

Transatlantic trade negotiations should own up to their ambition

The “Transatlantic Trade and Investment Partnership”, an agreement being worked on between the European Union and United States governments, strives to “harmonize regulations”. Who could argue with getting rid of pesky, and inefficient, differences in regulations between countries? Such harmonization would tend to remove regulatory decisions from the remit of local authorities, and place them in the hands of international bodies, which may perhaps be more open to business lobbying and less to democratic pressure.

The agreement will also place corporations on the same level as governments, allowing them to sue the latter for future profits lost to local laws. Decisions made by democratically elected governments will be open to challenge by corporations, on the basis of a loss of future profits. This is another step in the process of limiting the ability of the citizenry to control corporations.

Roger Boyd

I have a BSc in Information Systems from Kingstom University U.K., an MBA in Finance from Stern School of Business at New York University, USA, and a MA in Integrated Studies from Athabasca University, Canada. I have worked within the financial industry for the past 25 years, and am also a research member of the B.C. Alberta Social Economy Research Alliance (BALTA) looking at the linkages between issues of sustainability and models of ownership and finance. Most recently I have completed a book, to be published shortly by Springer, titled “Energy and the Financial System”.

Tags: banking, financial crisis, financial system, risk