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Banks: Short on Friends, Short on Morality.

If there is anyone out there who still believes banks are the friend of the average citizen they should go and see the movie, “The Big Short”. Not without its humorous moments here and there, it is a damning indictment of the banking industry in the United States and by association the banking industry worldwide.

In a sense the film is a microcosm of all that’s wrong with 21st century humanity. We might think we are advancing in a whole host of healthy ways be it our living standards, technology, industrialisation and so on, but in fact we are devolving back to a modern version of serfdom where the vast majority are serving the interests of an ever smaller minority.

“The Big Short” gives us an insight into the obscene greed, the mindless stupidity and recklessness of the bankers whose sole interest and motivation is profit. Why shouldn’t it be, I hear you ask. Because the sort of profit we are talking about here is not the product of hard work.

kick It’s a profit that is made at the stroke of a keyboard with no consideration for who pays at the other end even though they know it will be a mortgagee who loses a house, a breadwinner a job, or a family their life savings. The bankers don’t give a rat’s hiss about that.

They gave us the GFC and, as we all know, the US government bailed them out and no one was called to account. The damage they caused reverberated around the world, millions lost their homes, their jobs, while the bankers paid themselves obscene bonuses with the bailout money.

The film gives us some idea of the financial product mix and the incredibly complicated manner in which these packages are put together. Sound mortgage securities on top (AAA rated), risky (A rated) in the middle and junk stock (B rated), underneath, all neatly packaged and rated AAA.

Selling them to unsuspecting investors was the easy part. The stupid part was that no one seemed to realise it would all come unstuck one day. Well, almost no one.

For those who did the math, a mere handful at the beginning, backing those CDSs (Credit Default Swaps) to fail (going short) was the pay cheque. All it took was one nervous financial house to do their sums, realise their exposure and start offloading their near worthless stock.

When the sell-off came, it caused a stampede on Wall Street and the rest is history. Those that went short cleaned up big. The rest went belly up. How this was not considered illegal was a failing of the unregulated, sloppy attitude regulatory authorities paid to what was happening.

It also brought to light how misinformed and delinquent was government oversight, and in particular the failures of the US Federal Reserve. But for us, today, the worst is yet to come. None of the changes introduced into the banking system since the GFC have prevented these corporate terrorists from giving us a repeat performance.

sach The CDOs (Collateralised Debt Obligations) have been rebranded to fuel another collapse. The MBSs (Mortgage Backed Securities) are being sold to a new generation of investors looking for higher returns.

Borrowers are highly leveraged, US interest rates are rising and there are any number of “experts” predicting when the pressure cooker will blow.

Private debt in Australian is currently at record levels. Another collapse will not see us able to avoid the fallout the way we did last time. Time will tell. I guess it all depends on who you believe and whether or not you think this is your lucky day.

But don’t expect any sympathy from the banks. That’s one product they don’t sell.

As Mark Twain said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

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21 comments

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  1. Mal Cayman

    The banks have plenty of friends, especially in high places!

    If they got rid of ‘hedging’ – the ability to ‘bet against’ a falling stock price, currency or anything else – then these regular crashes wouldn’t happen.

    With the security of knowing they can’t lose, they have no constraint. It’s us, the poor mug punters (workers, home owners, investors) that always pick up the bill!

  2. stephentardrew

    Thank you John no more need be said other than hold on for the ride of endless disequilibrium while the neo-liberals still bleat on about their wonderful model in equilibrium. Bankers and economists hand in had convincing you that black is white and up is down as they pilfer more and more of your hard earned savings.

    It is all going on behind your backs while you sleep in ignorance and, by default, complicity. The hope is I won’t be next. Don’t be too sure because many of you live hand to mouth with little savings and when the inevitable happens nothing will save you from the greed of the banksters.

    The eight year cycle survives while many of you will not unless you stand up and fight right now for a growth economy and completely refute this madness of a balanced or surplus budget which will simply destroy growth.

    People they do not give a shit about you yet you pretend they are on your side. To vote for more of the same L-NP or Labor is to vote for endless cycles of pain and hardship for the many and absurd wealth for the very, very few.

    How long is it going to take because if you thought the last collapse was bad you ain’t seen nothin yet.

    Glass/Steaglle was replaced by the pathetic Dodd/Frank rule which was substantially weakened by banks and financial sector lobbyist. John is right a new batch of derivatives and collaterilsed debt obligations are being pushed into the market place which can only lead to disaster. Guess who is going to get rich off of your suffering while destroying the social contract.

    To banks you are no more than the help needed to fill their coffers and emasculate your savings and investments when things fail.

    Maybe this time you will make sure they and their political sycophants go to prison for a very long time.

  3. Matthew Oborne

    We have high frequency trading, actually designed to take extra profits from the share values to such an extent it actually is capable of collapsing shares for profit. ANZ CEO years ago publicly stated what other companies make only 2 percent from their money. When defending banks. The only way that statement is true is that they do add a few percent higher than the RBA, but lets not forget they dont pay the principle.

    If Banks were our friends it begs belief not only because their rates are higher than the UK and US we have more charges. Our banks will announce putting up rates the same day an increase is mentioned by the RBA, and more famously now as rates dropped the banks consistently failed to pass on the entire rate cut.

    Banks are critical in our system and yet they are allowed commercial confidentiality in their loan criteria, there are things about your own home loan you have no right to know, just ask me, I can tell you from my own experience that my property was considered an improper security, yet not one person at the bank will talk about it to me as to why I have a mortgage on a security they consider improper and it seems I have no right to know.

    That is the banking system for you their mistakes are able to be covered up by commercial confidentiality, yet as a listed company by law they are not to have known liabilities without addressing them.

  4. Rossleigh

    The book on which the film is based makes an interesting read too. The real life person on which Steve Carell’s character was based had the unfortunate capacity for saying what he thought. Apparently, this was a bit of a drawback on Wall Street. As his wife said, “He’s not tactically rude. He’s sincerely rude.” Telling CEOs that they have no idea what they’re doing is not the way it’s supposed to go. And the CEOs get offended because they’re not supposed to know what they’re doing; they pay “experts” for that. It was only when Eisman and others started asking the experts to explain – and unlike most of us who just nod and except that we don’t understand what’s being said – Eisman was rude enough to keep asking questions until he concluded that they didn’t have a clue what they were talking about either.

  5. Rossleigh

    Actually it’s probably the intro to the book that says it all. The author, Michael Lewis writes about his confusion that, as a twenty four year old, a Wall Street Investment Bank was prepared to pay him large amounts of money to tell people how to invest even though he had no experience or expertise and hadn’t even really ever had savings of his own to manage.
    The whole financial market seemed more about moving money from here to there and skimming a little off the top each time, than actually working out good places to invest.

  6. Jennifer Meyer-Smith

    Another important aspect to this dim state of affairs is that it closes ordinary people OUT of the money-lending system even for worthwhile projects like the funding of micro-businesses of the unemployed or under-employed people who want their own self-employment based on good ideas, strong resolve and much energy (since there aren’t any jobs anywhere else anyway.)

    It also shuts people in public and private housing OUT of buying their own homes with their own modest mortgages and affordable repayments, which would be considerably less than private rental payments.

    It defies logic to deny ordinary people the right to pay off their own mortgages when they can already prove they can maintain exorbitant rental payments regularly.

    Where is the government supervision to administer funding schemes for ordinary people to live in their own homes if they so choose? (Rhetorical question.)

  7. Terry2

    I’m working my way through the book, too and the stupidity of what was happening and to a large extent is still happening is mind boggling. What it says to me is that if we are going to allow these people and institutions to run riot in our financial markets and if we can’t regulate them or the offshore tax exempt havens they hide their money in – looking at you Malcolm – then we must tax them heavily, they are not lifters they are leaners

  8. terry

    but honestly John, as long as the truffels are good . fairly ironic ,but no coincidence that only pigs find them

  9. terry

    delicious …. don’t think god will save us

  10. terry

    in my eyes this government should be held for treason against Australia
    abbott should be put against a wall , blindfolded . along with a number of so many things they have purposely cut revenue in half with their austerity measures and created a huge unemployed pool of people , spent 80 million on a union witch hunt for big business by a bias liberal judge and brandis old law firm . what would you think the outcome would be with a corrupted media ,worst they are replacing Australian jobs with cheap foreign labour including 457 visa . in my eyes that’s treason against Australia .I have no other words for it, pretty sad to see the start of it actually

  11. Wally

    After the GFC there was talk of stopping “short selling” to protect companies from fraudsters who would undermine a company causing the share price to fall then collect a quick profit.

    Was this ever followed through or does short selling still occur?

  12. John Kelly

    Wally, rest assured short selling is still very much alive.

  13. Sooz

    ‘Inside Job’ is also a very interesting doco on big banking & the GFC

  14. ace Jones

    Great factual pointers there Mr. Kelly, alas falling on deaf ears, as people are tired of hearing that all that glitters is not gold. Sadly monetary greed drives most people in this age and i can see nothing changing that. Ethics and morals are kicked like an empty tin can into the gutter and washed away in the storm of faux surprise.

  15. Katrina Logan

    mars08

    ” And then they go silent again…”
    maybe it is because they get sick of the same little group of old Greens defenders carping on about the same old same old, day in day out….

  16. Wally

    Thanks John Kelly,

    From your article I assumed that was the case, the banks who lend money to companies are in the perfect position to profiteer.

    A bank could easily increase interest rates and/or call in a loan to create a gloomy outlook for a company and as a result profit from short selling. The banks hold so many cards it is hard to see them ever losing except for extreme situations like the GFC. Even when they do lose the government has little choice but to bail them out, Pyramid Building Society collapse was an Australian example.

  17. OldWOmBat

    As one senior accountant I know, now retired from the banking system, said: “Banks don’t have customers, they have victims”.

  18. Kyran

    The catch cry of ‘too big to fail’ was promoted by the bankers/financiers to great effect. They got bailed out by taxpayers on the undertaking they had learnt their lesson. Funnily enough, governments around the globe failed to hold them to their undertakings, and now they’re back at it.
    The Australian government guaranteed bank deposits, but the banks paid no ‘premium’ for this ‘insurance’.
    Back when the home loan rates were over 17% and suddenly declined due to recession, the banks introduced the notion of ‘fees’ on top of interest rates to protect their exposure, with an undertaking they would remove the fee’s when the rates became profitable. They never did remove them.
    The trickery of book keeping is a wonderful thing. Mr Kelly makes reference to ‘private debt’ which is at record levels. A significant worry is the amount of that which is ‘unsecured’ (credit cards, etc). My understanding is that, If a financial institution lends money, the debt created is an asset of the institution. If the debt is ‘called in’ and unpaid, it becomes a liability. Financial institutions have taken to ‘renegotiating’ loans rather than call them in. This is significantly problematic if the ‘housing bubble’ pops, as it did back in the 90’s.
    The Australian Bankers Association, an apparently wonderful, altruistic association, is one of the most effective lobbying groups I have ever seen in action. They have very deep pockets and will research a ‘problem’ into oblivion. They will manage the media and the politicians. And very few even know of their existence.
    As Alan Greenspan believes, ‘such large organisations should be deliberately broken up: “If they’re too big to fail, they’re too big”.
    As Mr Tardrew and Mr Oborne pointed out, this is a game, to them. I know who I think is being gamed.
    Thank you, Mr Kelly. Take care

  19. Terry2

    With the Australia Post prioritising mail delivery, we received our hard copy NAB Mastercard statement in the mail yesterday (15 January) but the due date for payment was 12 January . So, I paid them online today and told them that I don’t expect a ‘late fee’ or an interest loading as the fault was not mine but theirs (and Australia Post).

    How do you think I will get on ?

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