There is continuing conflict between banks that want free rein to maximize earnings from their own equity and their depositors’ money and the governments they run to for bailout funds when things turn sour. At this year’s World Economic Forum jamboree in Davos, Switzerland, heads of the world’s biggest banks touched base with political leaders and each other, protesting the calls by Presidents Obama and Sarkozy (of France) for stricter laws to combat the financial speculation, desire for unlimited deregulation, unrepentant awarding of bonuses to themselves, accounting legerdemain and other excesses that had cost the OECD governments trillions of dollars in bailout funds since the current recession started. And there is no light at the end of the tunnel yet.
The lingering recession was precipitated by unwise (on hindsight) involvement in sub-prime mortgages earlier in the decade and spun out of control with trans-Atlantic speculation in “mortgage-backed securities”. When the market collapsed and the liquidity crisis of US banks emerged full blown in the second semester of 2007, many sectors of the economy contracted and plunged first the nation and then its principal trading partners into the worst recession since the Great Depression of the 1930s. The U.S. Federal Reserve, the European Central Bank and national central banks are estimated to have injected at least $4 trillion dollars by buying up money-losing assets and acquiring preferred stock in banks.
The toll on financial institutions was severe and even long-established institutions failed. Arguing that the ripple effects would be far worse if the largest banks closed, the USA government bought out AIG, Freddie Mac and Fannie Mae. The Fed also had a hand in letting Bear Sterns, Lehman Brothers, Merrill Lynch, Washington Mutual, and Wachovia either close their doors or endure sell-outs to peers in the industry. All told, 23 American banks failed in 2008 and almost as many, 21, closed their doors in 2009. In January 2010 alone, just as many were quietly shuttered.
In large part, the lesson one draws from the sorry tales of derivatives trading –mortgage-backed securities (MBS), collateralized debt obligations (CDO), credit default swaps (CDS) all finally liquidated at as little as five cents on the dollar – was how little attention bankers paid to risk appraisal and pricing.
The magnitude of trillion-dollar subsidies, loans and buyouts has spilled over to the political arena. At Bretton Woods in 1944, the victors of World War II and their allies formalized the idea of government “management” of floating exchange rates based on gold. During his State of the Union address on January 21, a President still smarting from his setback of taking health insurance public waged a populist war cry reminiscent of the Glass-Steagall Act of 1933. Back then, the investment banking role was stripped from commercial banks that accepted retail deposits. This time around, the White House railed against bank size for its own sake because the Treasury had been held hostage by the idea that certain banks were “too big to fail” (News Wires 1). At Davos, President Sarkozy joined the call for more regulation, cutting banks down to size, banning ownership of (or sponsoring) hedge and private equity funds, as well as engaging in so-called proprietary trading, that for their own account. This follows an agreement among the Group of 20 nations just last year to regulate banks more strenuously in point of capital, liquid assets, and executive compensation plans.
Works Cited
News Wires. “Bankers at Davos Criticise Obama’s State of the Union Speech.” France 24. 2010. Web.