Seven years of the rigging game


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Bankism, or government and central-bank subsidization of the world’s flawed and fraudulent mega banks at the expense of entire populations, came to a head this year in Greece.

On July 5, the Greek population voted ‘no’ to Troika policies that placed big-bank creditor demands for repayment of bailouts with heinous austerity terms above citizens’ needs and rights to control their own economic destiny. 

Since the 2007-08 financial crisis began, the US Department of Justice and various global regulators have levied $130 billion in settlements against large international banks. The vast majority of the associated crimes and bad practice were committed by the Big Six US banks (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley).

But there was more.

In May, the Department of Justice announced that five major global banks (Citigroup, JPMorgan Chase, UBS, The Royal Bank of Scotland and Barclays) agreed to cop felony pleas and pay more than $5.6 billion in criminal, regulatory and other fines for rigging the foreign-exchange markets — for years.

Swiss giant UBS had to pay extra for repeated crimes, but the rest of the “cartel,” as they dubbed themselves, are repeat offenders in their own right. On the streets, recidivists get jail cells. Under bankism, financial behemoths get to apologize, pay a fine and promise to be good — basically going about business as usual with a wrist slap for PR purposes.

Citigroup spent the longest time — from December 2007 until January 2013 — manipulating the FX markets. The firm agreed to pay a $925 million criminal fine and a $342 million Federal Reserve penalty. JPMorgan Chase had to pay a $550 million fine for three years of FX rigging. 

VOLATILITY SIGNS SPREADING

Added to the $4.3 billion FX-related fines from November 2014, this spree brought the total fines and penalties paid by this cartel — just for FX rigging — to $10 billion. Around the same time as that announcement, JPMorgan Chase CEO Jamie Dimon’s annual pay package of $20 million was approved by shareholders.  

There’s more to come. The European Union is re-evaluating an antitrust probe into 13 of the world’s megabanks for colluding to shut exchanges from the credit-default swaps market during the financial crisis. Goldman Sachs, Bank of America, Deutsche Bank, JPMorgan Chase, Citigroup and HSBC Holdings are among the accused.

It’s now the seventh year of banks and the market being boosted by government and central-bank strategies. From a trends perspective, the additional fallout of this cozy policy has been increased volatility as the reality of the artificiality of this position has set in.

The four factors of volatility to be concerned with are dangerous individually, but concurrently could cause tremendous financial damage. They are:
» Uncertainty over central bank statements — particularly regarding the Fed’s possible rate hikes, which would render the cheap liquidity that banks enjoy slightly less cheap.
» Credit-default risk in individual asset classes like credit cards, subprime auto loans, student loans or home-equity loans made in the aftermath of the crisis, whose resets are coming due.
» Geo-political tension, related to Greece, the Ukraine, Middle East and Latin America.
» Ongoing financial-industry criminal activity that goes relatively unpunished and totally unreformed. 

Elite bank subsidization has overstayed its welcome many times over, but we are still targeting mid-2016 (the end of the current European Central Bank bond-buying program) as a period of extreme market and economic fallout. Meanwhile, volatility will continue to rise in fear of banks being left without every possible element of central-bank support.

THERE’S NO END GAME

Central-bank heads are scared and clueless. Whatever they tell themselves and the world about the necessity of their zero-interest-rate and quantitative easing policies, liquidity can still evaporate quickly and credit markets can choke in any adverse confluence of events. They don’t appear to understand that, despite their proclamations of enough additional reserves being held by banks for future emergencies, it’s not enough to forestall perfect-storm scenarios. 

The Fed and European Central Bank hold an epic $7 trillion worth of debt securities — government and collateralized bonds, most of which were recycled through the banks or pay them interest. This has not fixed the real global economy, nor have big banks diverted their stash toward increased lending to the real economy or helping people or countries restructure debts on more favorable terms. They just hoard the cash. 

International Monetary Fund Managing Director Christine Lagarde warned Fed Chairwoman Janet Yellen that premature hikes in US rates could incite widespread chaos. But the IMF only offers more QE as a solution to the QE that hasn’t already worked. 

QE-infinity isn’t a solution. It’s bankism subterfuge that kicks the can on necessary banking-sector restructuring to benefit, or at least stabilize, Main Street down the road. It fosters extra problems from asset bubbles to the inability of pension and life insurance funds to source less risky long-term assets that pay enough interest to meet their liabilities. 

In June, the latest Bank of International Settlements annual report revealed the extent to which global banking system supervisory entities are worried. The report said, “Globally, interest rates have been extraordinarily low for an exceptionally long time, in nominal and inflation-adjusted terms, against any benchmark. Such low rates are the remarkable symptom of a broader malaise in the global economy.” 

This is especially scary coming from the central bank of the central banks. The BIS also stated, “Global financial markets remain dependent on central banks.” Dependent is a strong word. How quickly the idea of free market capitalism was turned on its head in favor of bankism. 

Elite central banks and governments that back them are desperate to keep the bankism party going. Yet, they have no Plan B to supplement the fragile nature of the global economy after seven years of non-stabilizing policy. Greece had to shut its banks to keep capital from fleeing too quickly (or conduct a ‘bail-in’). Places like Puerto Rico as well as multiple states and municipalities are facing crippled economies. 

 

These developments enhance the fear that there is, indeed, an ultimate price to pay for years of playing and accelerating the rigging game.    TJ  

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