Wall Street Wants Us To Repeat The Financial Crisis

6 min readSep 28, 2017

A few days ago, I wrote that Trump’s approach to the Iran nuclear deal threatened to repeat the mistakes of the Bush administration with North Korea, helping us end up in the crisis we are in now. That amnesia may likely end up with us facing a similar standoff with Iran a few years down the road.

But there is one area in American politics where amnesia is willful, instantaneous, and permanent and that involves the financial industry. It has only been a decade since the financial crisis and we are still dealing with the devastating aftermath of the Great Recession it created. Earlier this summer, the House voted to repeal a new CFPB rule that would have prevented financial firms from forcing its customers into arbitration and instead open the opportunity for customers to join in class action suits against financial firms that engage in malfeasance and illegal activity. Democrats believe that McConnell, already under the gun for the failure of health care and his preferred Alabama Senator, will be feeling the heat to give his donors and, by extension, himself a win and will force a vote to repeal the rule in the Senate any day now.

One of the reasons that Equifax and Wells Fargo, a continually recidivist corporate criminal, receive just a slap on the wrist and remain in business is simply because its victims can not band together to sue the company. Instead, each individual customer who has been fleeced by these companies must go through an individual arbitration procedure. These forced arbitration procedures are incredibly biased in favor of corporations, sometimes the company actually chooses the arbitrator, and forces the individual consumer to waste their own time and often money simply trying to get back the money that was stolen from them. The system also ensures that the company will pay no punitive damages, except perhaps getting a minimal slap on the wrist from the regulators.

Of course, the Republicans are simply responding to their donor base with this effort. The financial industry has given over $100 million just to the 24 Senators sponsoring this repeal bill. In addition, corporations in general have spent over $1 billion in efforts to get this Congress to roll back as many Obama-era rues as possible. The House has already voted to unwind many of the Dodd-Frank regulations although the Senate has not yet taken that bill up.

Two days ago, we discovered that Citibank was reviving one of the most reviled and destructive instruments from the financial crisis, the synthetic CDO. As Tyler Durden writes, “For those who have forgotten how Synthetic CDOs work, below is a quick primer. To summarize, you go out and find a bunch of suckers willing to backstop trillions of dollars worth of credit risk in return for a few bps in annual premium payments. You then tranche out the risk being taken by the CDO investors so that those at the top can get a AAA-rating and, in return, tell their investors that they’re taking no risk at all. Those investors then lever up their capital another 10x so they can make 8% returns on a ‘risk-free’ investment.” As we saw a decade ago, it usually turns out those returns are not risk free at all.

Citibank was one of the banks who had to be bailed out during the financial crisis due to its exposure to similar instruments backed by mortgages. But, don’t worry, Citibank promises things will be different this time. The bank believes “[t]he deals are tailored in a way that insulates it from any losses, while giving yield-starved buyers a chance to reap returns of 20 percent or more. The market today is also just a fraction of its size before the crisis, and few see corporate defaults surging any time soon.” Where have we heard that all before. The last guy I remember offering 20% returns was Bernie Madoff. And, while the bank may insulate itself somewhat from the losses, that surely does not apply to the investors, i.e. suckers.

Of course, now that Citibank has opened Pandora’s box once again, other banks are quickly looking to follow suit. BNP Paribas is also eager to get in the action and others will surely follow.

The synthetic CDO is yet another example of how far the big Wall Street banks have strayed from their real purpose. Rana Foroohar had an op-ed piece in the NY Times that described these failures. According to Foroohar, “[L]lending to Main Street is now a minority of what the largest banks in the country do. In the 1970s, most of their financial flows, which of course come directly from our savings, would have been funneled into new business investment. Today, only about 15 percent of the money coming out of the largest financial institutions goes to that purpose. The rest exists in a closed loop of trading; institutions facilitate and engage in the buying and selling of stocks, bonds, real estate and other assets that mainly enriches the 20 percent of the population that owns 80 percent of that asset base. This doesn’t help growth, but it does fuel the wealth gap.” The synthetic CDO is just another financial instrument that creates wealth at the expense of others without providing any new investment in the real economy.

Foroohar continues, “Small community banks, which make up only 13 percent of all banking assets, do nearly half of all lending to small businesses. Big banks are about deal making. They serve mostly themselves, existing as the middle of the hourglass that is our economy, charging whatever rent they like for others to pass through. (Finance is one of the few industries in which fees have gone up as the sector as a whole has grown.) The financial industry, dominated by the biggest banks, provides only 4 percent of all jobs in the country, yet takes about a quarter of the corporate profit pie.”

Earlier this week, James McDonald, the newly installed head of enforcement at the CFTC, the agency responsible for overseeing trading in commodities, futures, currencies, and complex derivatives like synthetic CDOs, said that the agency will increasingly rely on firms to self-report their own misconduct. The original plan was to reduce penalties by up to 75% for firms that volunteered information and cooperated with the CFTC in investigating malfeasance. Now, however, the commission will reduce penalties and perhaps eliminate them entirely on a case-by-case basis. According to McDonald, “when they [the banks] detect misconduct their decision whether to voluntarily report it often comes down to their perception of whether they’ll be treated fairly…We need to give the relatively low-level criminals an incentive to cooperate with us”.

The CFTC, a chronically underfunded and understaffed agency, was given new powers under Dodd-Frank and became an aggressive regulator under the Obama administration, uncovering an enormous scandal in the setting of the primary worldwide interest rate benchmark, LIBOR, that involved most of the biggest banks in the world colluding in setting rates for their own benefit. The CFTC also uncovered similar collusion in setting the benchmark for swaps, ISDAFIX, as well as collusion by the dealers in the swaps market to squeeze potential competitors out of the profitable market by not providing them liquidity. In addition, all the major banks were engaged in a similar collusion to fix the global foreign exchange market benchmark.

None of these investigations and resulting fines and settlements were driven by banks’ self-reporting. The majority of those banks had plenty of evidence about what was occurring but still refused to cooperate with the CFTC until it became clear the agency already had the goods on them. The idea that any of these banks would self-report is laughable. The LIBOR and foreign exchange collusion went on for years and yet no one reported it and the reason was not because the firms feared they would be treated unfairly but because they were making too much money unfairly to report it, especially knowing that they could simply pay whatever the fine might be and continue to do business. Under the Trump administration, we may not even get the fines anymore.

It’s clear the financial industry has far too much power already compared to what it actually produces for this country. Because of that, we are going to give that industry even more power and recreate the conditions that led us to the greatest financial crisis since the 1930s. Alan Greenspan said this in the wake of the financial crisis, “Those of us who have looked to the self-interest of lending institutions… are in a state of shocked disbelief.” When it happens again, we shouldn’t be shocked, just appalled and even angrier. This will not end well.

Originally published at tidalsoundings.blogspot.com on September 28, 2017.




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