If you were, say, five years old and had a dime you were proud of, and someone, say ten, convinces you to trade the dime for a nickel…because it’s bigger and thus must be better, is that an a-hole move? The ten year old benefitted from your loss. He or she made you a dupe by using ‘knowledge’ to cheat you. Is this just a life lesson learned while the stakes are low? Or representative of a ‘banking’ type culture?
Unfortunately in the banking business the stakes are high: give us your dime they say and we’ll hold it for you. In the old days they even paid you some interest if they could use your money to make money. Before the Great Recession (as well as in the Great Depression), we were told it was safe and could have it back when we wanted. But the current banking culture allows them to take your ‘guaranteed’ deposits and invest it in potentially very profitable (to them), but high risk ‘derivatives.’ To add to the risk, the banks then borrow money to add more high risk investments. So, they take your dime and add 40 more and purchase, let’s say, credit default swaps. If the investment goes up 1% they make a 40% profit (while your deposit is lucky if it’s earning a half a percent). They then sell these to, like, pension plans (maybe yours and mine). They receive exorbitant fees to do this. If the investment goes down two things can occur: 1) Its not their money, why would they care? And they already made a fortune selling what could be a worthless asset. 2) They can bet against it (selling short) and make an even larger fortune when they fail.
What the devil is a credit default swap anyway? you ask (exactly my point). And how would the bankers know they were going to fail? They have the same edge the ten year old had: a select few in the banking culture have knowledge few others do about very complex derivatives. You may have heard this term used derisively since derivatives, not time-tested, have been failing and making us poorer and Wall Street rich for several years. A simple explanation is: a derivative is not a straight forward investment, like a stock or a bond, but a derivation. The ‘inside knowledge’ of Wall Street about these convoluted investments gives, you may want to call them a-holes, an edge…the same edge the ten year old abused. They are in a position to estimate how unsound these risky investments might be and, thus, profit handsomely when they fail – at our loss.
An example of a derivative you can understand (also the one that contributed the most to almost unraveling the global economy and resulted in the most ‘fines’) involves what you have probably heard of: sub-prime mortgages. These being made to persons unlikely to pay. Wall Street created a derivative by bundling these sub-prime mortgages together with others and sold them in ‘traunches’ to institutional managers of mutual funds, pensions, 401k’s…our retirement accounts! These managers were duped as well by the high risk nature not being disclosed. And when the sub-prime mortgage holders were unable to pay, the derivatives failed, the pension plans, etc, (us) lost value, but Wall Street exec’s walked away with millions and millions stuffed in their pockets (and probably stuck in foreign bank accounts to avoid taxes)…while we lost our jobs, our homes, our dreams and, maybe, our marriages. The greed, rewarded in the banking culture, of this handful of people, remarkably, almost toppled the global economy.
Yes, there have been enormous fines as it was substantiated that Wall Street banks did misrepresent what they knew the risks were. But, the fines are a joke. The ten year olds get to keep our dimes…million and millions of them. The fines are paid much as the ten year old can keep scouring the neighborhood for other five year olds to cheat. Basically, WE pay the fines. Nothing comes out of the ten year old’s pocket.
A related, but just as egregious an example, of this culture are the lightly regulated ‘hedge funds,’ which manage institutional accounts (like your 401k, pension or other retirement account). These funds failed to out-perform the S&P stock index (an unmanaged index of 500 mostly large US stocks – which you can invest in indirectly for almost no cost) in 2014. To be fair, using one year is not adequate, but they have failed to beat the S&P for 6 years in a row. Yet the top 25 managers’ average annual salaries, from fees taken out of the fund’s (your) return, was $464 million. One underperforming hedge fund manager took $1.3 billion in fees for himself out of the fund! (Star and Tribune, May 31, 2015.) Almost unbelievable. And he got paid this to, basically, fail.
The question I’d suggest, is: are these individuals a-holes, or is the culture that allows this behavior the A-hole? Are the Wall Street people ‘in the know’ just being smart and getting away with what the system allows and waltzing away with the spoils as a result of their knowledge? Is the ten year old an a-hole for using his knowledge to…is it fair to say…cheat the five year old? What if the ten year old had barrels of nickels and traded the five year old for barrels of dimes? Is this now worse because of the extent? What if the five year old was fifty…and lost his home, his retirement? Is that worse, or is the root cause what’s wrong…that you can use knowledge in some cultures to gain advantage unfairly for personal gain at the loss of the common folk?
If we want to change this culture, the individuals at the top who control the culture have to stop rewarding this behavior. Government imposed fines won’t do it. The top dogs have to be dissuaded by personal pain. If they have to pay a price, themselves, they will be forced to change the culture. If they have been found to intentionally misrepresent risk to their advantage, this is fraud, cheating, and prison should be the consequence. “Claw-back should be natural…they should not be able to keep money they earned fraudulently.
These firms during the ‘great recession’ they caused were considered ‘too big to fail.’ If we had all gone into our banks and asked for our ‘guaranteed’ money during the recession they couldn’t have given it to us, which would have toppled our entire monetary system. So, to add insult to injury, the government bailed them out, giving them money!? Are these people at the top of the banking culture too big to fail? Something must be done as the culture that created the Great Recession is not only still intact but the risk is worse: there are now fewer banks manipulating even more money.
I can write about it, but somebody HAS to do something. There’s another, maybe greater, recession that could happen if we don’t change this a-hole culture that represents one of the most dangerous coups of all time. The kings of the shit pile have to be dethroned.
The question for the psychiatrist: how do these ‘cheaters’ rationalize their actions? I’ll put out there: “If I don’t do it, somebody else will.” What you think?