“I'm Shocked, Shocked to Find that Gambling is Going on in Here.”

Written by Kathleen Packard

Wednesday, July 11, 2012

So said Captain Renault in Casablanca.  But should we be shocked to find out that some strange things have been going in banks that were supposed to have “rules” in place to prevent those strange things from going on?  We all know about liars’ loans that helped get the United States first into the mortgage crisis and then into the Great Recession.

Now, we are learning about Libor liars at Barclays Bank in England.  As the Economist reported: “When a trader asks a colleague to submit false information in order to boost his profits, the correct answer is not “done…for you big boy”.  This response was one of a host of exchanges involving 14 Barclays traders that were revealed this week as part of a probe by Britain’s Financial Services Authority (FSA) and American agencies including the Commodities Futures Trading Commission (CFTC) and the Department of Justice (DoJ).

Since JPMorganChase disclosed in April that its traders made risky bets that cost the bank at least $2 billion, the bank’s market capitalization has fallen nearly $40 billion.  This is of course gambling on a scale that America’s smartest banker was not supposed to condone.  He was of course shocked that gambling was going on with the bank’s money.  The trading strategy was “poor conceived and vetted,” he told a Senate committee, but other bank officials have claimed that risk controls on the chief investment office were insufficient.

Then, of course, there are the banks in Ireland, Spain and elsewhere in Europe who made horrendously bad bets on mortgages – which Europe is now trying to bail out.

German Chancellor Angela Merkel has tried to stand firm against the bet-the-bank and fudge-the-books crowd, but they’ve been ganging up on her wherever world heads of government meet.    As the Economist’s Charlemagne columnist wrote: “the plea from America, much of Europe and even from Germany’s opposition parties is for Mrs Merkel to act decisively to save the euro.”  The Economist editorialized for action, headlined “Start the Engines, Angela.”  And when the Chancellor succumbed to pressure at th European summit, markets rallied at the end of June.

Chancellor Merkel was placed in the unenviable position of playing Lady Bountiful to a bunch of indigent children.   Do it for the family, she was told, in effect.  Last Friday, she apparently did it for the banks – agreeing to allow bailout funds to go directly to banks.   It is a very strange state of affairs, noted University of Indianapolis finance professor Mathew Hill in the Wall Street Journal:

Until now, investors saw socialist calls for more borrowing and more spending as ridiculous, since no one will loan them money. The only reason private investors now care is because they were recently forced to take a 70% loss on Greek government bonds.

Then came the stroke of genius that united the forces of socialism and capitalism: Allow the profligate nations such as Greece, Italy, Portugal, etc., to borrow and spend, but require Germany to pay back the loans.

The reality is that some tough love is called for in Europe, but world’s political and economic leaders seem determined to feed American and global addiction to the fiat currency printed by the U.S. Federal Reserve.

The New York Times recently celebrated the 40^th anniversary of its op-ed section by reprinting a January 4, 2009 op-ed by Michael Lewis and David Einhorn.  “Incredibly, intelligent people the word over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness,” Lewis and Einhorn wrote of the United States.

Gambling and money madness go hand in hand.   The only cure is Lewis Lehrman’s five-step plan for a new gold standard.   Until then, the gambling on flawed monetary and banking policies will  continue.