Monday, May 14, 2012

(No.198) Banks & socially useless activity

"Banks and socially useless activity"


Alastair Rickard

I have argued repeatedly in these columns since the 2008 financial crisis that the public accolades claimed by and bestowed upon the big Canadian banks for their superior performance during the crisis in comparison with their U.S. counterparts really belonged more to tighter and tougher Canadian banking regulation and to the vigorous enforcement of same.

In my recent column, "Casino banking and the Wall Street shell game" (No.196, posted May 1, 2012) I referred to "the greed, incompetence and general thickheadedness of many of the senior executives in the financial services business", a view that was not universally well received by the readers of the column.

Since my column was posted there have been several interesting developments relevant to both the 2008 financial crisis and to the big Canadian banks.

I had observed in "Casino banking" that Canada's Finance Minister Jim Flaherty knows that Canada's big banks "are not the paragons that the Wall Street disaster made them seem by comparison." In fact Flaherty, who imposed a shorter maximum residential mortgage payment period, says he has warned the Canadian bank CEOs that "you should be cautious about your lending practices, because this is the type of practice that led to a mortgage crisis in the U.S."

Some recent points to consider:

-- There have been changes by Ottawa to limit the activity and tighten the supervision of the federal government's mortgage insurance agency, the CMHC. which supports Canada's banks by insuring $600 billion (the new maximun for CMHC). Why the changes? CMHC, i.e., Canadian taxpayers, are now backstopping half of the $1.1 trillion of home mortgages. The time was past due for this agency to be treated and regulated as a major player in the Canadian financial system.

-- During the Wall Street crisis it now seems that the feds and the Bank of Canada infused financial support for Canada's big banks to the tune of $140+ billion. Not surprising under the circumstances you may say -- unless you had bought into all the hype about Canada's big banks being so wonderful and well managed that they had sailed through the financial crisis like lords of the manor unassisted and unsupported by their peasantry.

-- Malcolm Knight, the former second in command at the Bank of Canada, warned in a recent Washington speech that "owing to their massive size relative to the Canadian market, the largest Canadian banks create a major 'too-big-to-fail' risk." An interesting and informed opinion and one rather less comforting than the media applause of recent years for Canada's banks. Also relevant to the sort of increased concern that Mr. Flaherty is showing about the stability of Canada's financial system.

In my recent column on "casino banking" in the U.S. I also referred to the lack of understanding demonstrated by "senior financial executives of what they were doing and the financial devices they were using to make their multi-million dollar bonuses." And now, oh surprise of surprises, along comes with some news the CEO of JPMorgan Chase, one of the largest U.S. banks and one that was left more or less unsullied by the Wall Street financial crisis (at least in terms of requiring government bailout money). He revealed last week that JPM will lose $2 billion (likely to rise to $3 billion) because of trading "mistakes".

This is interesting indeed given the fact that JPM and its CEO Jamie Dimond were among the most active in Washington -- post -2008 financial mess -- lobbying against significantly tighter financial regulation and for special breaks in the post-2008 reforms to allow banks to continue to make 'big bets' in their portfolios. In company with other financial institutions JPM obtained a loophole in the reform that allowed "portfolio hedging". Dimond now admits that JPM's "synthetic credit portfolio" was an amalgam of derivatives and hedging bets that blew up.

The JPMorgan 'bad bet' provides yet another illustration -- although one is scarcely needed -- that Wall Street banking institutions and their CEOs don't seem to understand as much as they should about what their firms are doing, certainly not enough to manage multi-billion dollar 'bets'. This latest episode serves to reinforce the need for tighter financial regulation combined with closer and more vigorous supervision. It is self-evident that even the obvious lessons of the financial crisis were insufficiently understood by too many politicians and CEOs. The need for effective scrutiny and genuine transparency is ever more evident.

It is clear that Wall Street's brave new world with its false gods was insufficiently regulated pre-2008 and it looks as if it still is.  It is obvious that this sort of financial la la land can still attract lots of groupies, including from the North American financial media, who will clap like ideologically trained seals for financial services and transactions that are, in the words of the chairman of the U.K.'s Financial Services Authority, "socially useless". Of course the talking heads in places like Fox News will never agree that obscenely large bonuses paid to CEOs and their senior management teams should ever be thought of in such critical terms.

A mindset that considers 1% of the American population receiving a quarter of all personal income (up from 9% in 1979)  as appropriate might, like those at Fox News, consider Wall Street compensation excesses to actually be a key to American prosperity; or that it is only right that 1% of Americans receive more pre-tax income than the bottom 50% and have a higher net worth than the entire bottom 90%. It seems as plain as a pikestaff that such attitudes are a major part of the larger problem.

I conclude by quoting this brief comment I received in response to my "Casino banking" column. It came from the CEO of a Canadian financial organization who asked: "Do you have any solutions or is it just easier to be a couch quarterback?"

I replied as follows: " The purpose [of the "Casino banking" column] was to draw attention to a fine PBS Frontline program which during its four hours identified not only problems but also a variety of "solutions". During several decades as both a public commentator and an industry participant I frequently rose from my couch to identify a problem and offer a solution. I did so through speeches, articles as well as corporate memoranda. Occasionally the reaction I received was like yours. I always found this encouraging."




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