Glass-Steagall worked for decades, as bankers were not allowed to take deposits and make risky bets with them. Risk can take two forms. It can be a bet on a less certain outcome, or a fairly safe bet levered up with funds from the Fed or who knows where.
Apparently Jamie Dimon made a relatively safe bet on interest spreads, levered up, so that if anything went wrong, it could be really bad. I am no expert regarding the inner workings of trading. However, while many in NYC in media were praising Dimon, I was aware that this bank was making very risky bets in the City of London, where collateral can be put up over and over again to guarantee positions.
Shoot, I live in Reno, Nevada and I knew Dimon was betting the farm in the Square Mile. I am a little disappointed that the NY financial media failed to be on this like a dog chasing a car.
Of course, Max Keiser has been screaming that this is criminal behaviour to do bets like this with deposits, for a long time. He supports regulation of the banks and fast.
But it is my contention that Glass-Steagall won’t be enough. It is necessary, or at least a really tough Volcker Rule is necessary. Perhaps some criminal penalties for screwing with deposits should accompany a Volcker Rule implementation. Don’t be fooled, the bankers and the hedge funds and most Republicans hate the Volcker Rule. If the Republicans win, there will be even more gambling, more easy money, more housing bubbles and more madness.
Glass-Steagall should be accompanied with rules forbidding our banks to trade in the UK Square Mile. The financial system has lost a lot of money there. The bets are unlimited as you can rehypothecate collateral over and over there. That is not permitted on Wall Street.
If Glass-Steagall is passed, US multinational banks will be able to take borrowed money, and investment money rather than just deposits and gamble in the Square Mile and there will be nothing anyone can do to stop them. Unless they are forbidden to engage in unregulated gambling there they will get money from somewhere to gamble. It could be brokerage money, or money market money, who knows?
The banks will be at risk engaging in this behaviour even without the use of passbook deposits. Banks may even use fictitious collateral in order to fund their behaviour in the UK. If banks are now permitted to engage in off balance sheet transactions, what is to stop these transactions from taking place in total secret in the City of London with bogus collateral?
The Square Mile is unregulated and the Parliament of the UK has no power over this financial centre, the closest thing to a New World Order that we have. Even the Queen of England bows to the mayor of the Square Mile when going within the walls of this original settlement of the City of London.
And perhaps something should be done to change the rules of the Square Mile itself, and make it less risky if banks do trade there.But who will change the rules if no one is empowered to do so?
Banks will always make the argument that we need less regulation here because there is less regulation “abroad”. Now you know they are talking about the Square Mile. Most massive trades blow up there as Jon Corzine found out. Even Sarkozy tried to get the Square Mile to accept a Eurozone wide Tobin Tax on trades. You know how that went.
You have libertarians saying that the banks should be allowed to gamble anyway they see fit and if the economy goes to hell in a handbasket, no problem. We will rise again. Well, there is no evidence that would happen. That is a dangerous way to fix the banks.The libertarians have been quiet the last few days as Jamie Dimon failed to live up to the “goodness” wrought by the invisible-hand-of-self-interest mantra.
This I know for sure, there is nothing different about what is going on in finance now than went on in the Great Depression, when Will Rogers came down hard on the banks. He was the only man I have seen who was able to schmooze with bankers and yet tear them to peaces daily. It is a shame that the only real New York financial journalist that consistently takes on the banks is Gretchen Morgenson, since apparently the men have decided to bow down to the rock stars of banking, like Dimon.
I hope this is changing and I think it is. Henry Blodget runs Business Insider. I believe he felt that Dimon was proof that bankers could be TBTF and still be responsible. I honestly believe that the emotion Henry has shown indicates that he feels betrayed by Jamie Dimon and by the banking establishment. That is a good thing, that he feels this way.
Jamie Dimon cannot be trusted with other people’s money. Plain and simple. Remember when Jamie Dimon was jumping all over Ben Bernanke for wanting to implement the Volcker Rule? Dimon then railed against the head of the Canadian central bank for wanting to rein in risk.
It is not like we can let the central banks off the hook. They allowed this risk taking to be hidden off the balance sheets of banks at Basel 2 in 1998. Alan Greenspan was on board saying adjustable mortgages were a “better deal” in February of 2004, as the plan to screw Americans with private MBS was applied in mid 2003.
I don’t believe that the central banks want housing bubbles stopped for good. I don’t believe that for a minute. I wrote a while back that the central banks want the bubble to be down the road a few years. Dimon likely wants a housing bubble as soon as is possible. The TBTF banks want all or most loans to be guaranteed by government, so that they don’t have to rely on bogus AAA ratings in order to lend out more easy money. They even want to take over Fannie and Freddie business, if it is guaranteed by government of course.
The point of all this is that these banks are pushing, pushing, to make more money ASAP off of main street. These banks are driven by an irrational greed. They are dangerous to society and they will hurt us again, as they and the hedge funds want the Volcker Rule in whatever form, to be defeated.