Investment Banks Behaving Badly, Aided by Government

“The Greed Merchants” is a book I mentioned in an earlier post entitled, “A History Lesson in Financial Greed and Corruption“. It’s about the Investment Banking business. So how badly behaved can Investment Banks be?

Really Bad! And governments have been complicit in the banks bad behaviour.

The banks have been getting away with it for years. This post is a short history of that greed, using extracts from the Greed Merchants book by Philip Augar?

Why is this important for Baby Boomers? Well, if they don’t stop Investment Banks behaving badly in the way they have for years this financial crisis will almost certainly happen again.

I know the G20 have told us they will fix it. You and I know the first rule of government is to find some way to blame someone else in the future, just in case the problem happens again.

In this case they intend to establish a global financial supervisor. This supervisor will have the mandate to oversee the global financial markets. It won’t have the resources or the money to really do that over the long term though. Plus no one will listen to it if they are in political danger. So another toothless tiger will be created and all the employees will probably be subject to no laws of any country and be paid high salaries and live off expenses paid for by the worlds tax payers.

In 1792 twenty four brokers and merchants got together in Wall Street to form what would become the New York Stock Exchange. This is the important bit though. They signed a pledge to give preference to each other in our negotiations.

So from the very start it was all about them and NOT their clients.

By 1890 the rise of the robber barons led to Congress passing the Sherman Anti-Trust Act but did nothing to curb the Investment Banks which they believed had aided the robber barons.

So the US Government did nothing to control the investment banks.

The House of Representatives formed the Banking Committee to investigate the “Wall Street Money Trust“. This led to the formation of the Federal Reserve in 1912. It was set up to regulate the money markets.

Guess what though the first FED Chairman was a Wall Street Banker called Benjamin Strong!

This article, “Game’s up for Big Brothers of Banking” for the 2009 version Wall Street Money Trust. The article states,

“At the time Summers was busy opening the floodgates of financial abuse for the Wall Street Money Trust, his assistant was none other than Geithner, the man who today is US Treasury Secretary. Today Summers is President Obama’s chief economic adviser, as head of the White House Economic Council.

To have Geithner and Summers responsible for cleaning up the financial mess is tantamount to putting the proverbial fox in to guard the hen house.”

How much regulation took place between 1912 and the Crash of 1929 we can only wonder. The Dow fell 40% in three weeks, 10,000, yes 10,000 banks failed and millions lost all their money.

A Senate enquiry in 1932 found that investment bankers and brokers did not make good witnesses – really! Many banks had competitions for their sales people to sell worthless investments to get rid of the stocks.

Judge Pecora concluded that,

“the banks had contributed to the crisis by marketing high risk investments to unsophisticated customers, gambling with clients’ deposits, charging excessive fees, favouritism, price manipulation and short selling. Hmmm! does that sound familiar?

In response President Roosevelt formed a strong national regulator the Securities and Exchange Commission – SEC.

He also broke up the investment banking business into,

  • Commercial Banking (loans and deposits)
  • Investment Banks (securities, underwriting and dealing)

President Truman wasn’t happy even with that so when he took over he used the Sherman Anti-Trust Laws against seventeen leading investment banks. It was alleged that ,

“the defendants as a group developed a system to eliminate competition and monopolize the cream of the business of investment banking by agreeing to share underwriting business among themselves”

So even after being broken up Investment Bankers still found a way around the laws! So what make the G20 think they can have a global regulator?

Fast forward to 2000 when Clinton undid Roosevelt’s work of separating the banking businesses. It was the great unwinding of two laws that should have stopped this financial debacle.

“One significant law was the repeal of the 1933 Depression-era Glass-Steagall Act that prohibited mergers of commercial banks, insurance companies and brokerage firms like Merrill Lynch or Goldman Sachs. A second law backed by Treasury secretary Summers in 2000 was an obscure but deadly important Commodity Futures Modernisation Act (CFMA) of 2000. That law prevented the responsible US Government regulatory agency, Commodity Futures Trading Corporation, from having any oversight over the trading of financial derivatives. The new CFMA law stipulated that so-called over-the-counter derivatives like credit default swaps, such as those involved in the AIG insurance disaster (which investor Warren Buffett once called ‘weapons of mass financial destruction’), be free from government regulation.”

Can you imagine a government passing a law that actually prevented a government regulator from doing its job and monitoring the financial derivatives market? Crazy stuff?

So after 200 years nothing has changed. Investment Banks are still getting away with it and still do not have to pay the price for their individual failures.

But that’s not the problem now. The problem is we have both Summers and Geithner in charge again! Are they going to be strong enough to oppose the powerful banking lobby this time around?

You should watch and wait to see what happens. Right now Geithner is busy bailing out Wall Street and giving selected private investors a virtual no-lose situation of they join the government to buy the banks toxic assets. More on that in another post.

Suffice to say watch what these guys do in the coming months. It could help you determine where to put your money.

Leave a Reply

CommentLuv badge