The Rise, Fall & Ultimate Victory of the Banks

As is often the case, it is history that proves our most useful crystal ball. At times of great anxiety and uncertainty we seek clairvoyance, and in this day and age it is the prospect of systemic collapse or decades of unending debt that fuels the public angst.

After the 1929 Wall Street Crash the prevailing powers declared that it could and would never happen again. Banks were restricted, capped and ultimately placed under the jurisdiction of the U.S. Securities and Exchange Commission (SEC) by Franklin D. Roosevelt in 1932. President Kennedy’s father Joe was appointed as the SEC’s first Chairman, despite his widely accepted involvement in the importing of alcohol during the prohibition era. When President Roosevelt was asked why he had appointed his campaign fundraiser and a man of such questionable reputation to the office, he replied that it ‘Takes one to catch one’. Well so much for good intentions. Since the raft of tighter regulations were introduced some 75 years ago the Republicans have given the banks ever greater freedoms in return for their political support, not that cash has had any bearing on the issue… In Britain, the former Chancellor and now Prime Minister, Gordon Brown made great strides towards the deregulation of the financial sector as part of what many insiders viewed as a Faustian Pact to pave his passage to the golden keys of No. 10 Downing Street.

If we are to be honest with ourselves, the creeping deregulation of the banking sector in effect allowed investors and bankers to regulate themselves. This is akin to releasing an insatiable fox into a hen house and asking the predator to be prudent. When money is the goal and there is no referee, chaos ensues and no one can keep score.

If there was ever an illustration that history is cyclical, then surely the credit crisis and global stock market collapse of 2007 would be picture perfect. As in 1929, credit default swaps were the root cause of the malaise, there was a property bubble, and countless millions had bought shares on margin (a means of share speculation through borrowing as only a small fraction of a share’s actual value is initially deposited). Then, as now, the big fish played the small investors and most small speculators got their fingers badly burned. The rest was history, until now…

Most of us have long since become dizzy and disorientated as the rising Federal bailout fast approaches the $8 trillion mark. Almost as impossible to conceive as it is to repay, this blank cheque includes $750bn in additional aid to the banks; $1.9trn in Federal Deposit Insurance; $1.4trn in senior unsecured debt issued by banks; $1.6trn in support for mortgage & credit card markets; a $200bn loan facility to prop up consumer spending; $1.8trn worth of purchases of commercial paper; $200bn in loans to primary dealers; an additional $787bn fiscal stimulus plan, and a $700bn TARP program designed to refinance the banks & automakers, which includes a further $110bn for AIG. In addition the U.S Treasury intends to launch a public-private investment fund to buy up to $1trn in distressed bank assets, not to mention $400bn for Fannie Mae & Freddie Mac, $300bn for the Federal Housing Administration, $50bn from the Great Depression-era Exchange Stabilization Fund, or the $29bn in financing for JPMorgan Chase's buyout of Bear Stearns. If you have lost count, then you are not alone…

To cut a long balance sheet short, although the banks are still teetering on the brink of oblivion, kept alive by the pumping of fresh and artificial taxpayers' blood through their system, the general population faces years of forthcoming hardship and generations of debt repayment. The worst is not yet over, as unemployment may not peak until late 2010 and this is invariably associated with a wave of credit card defaults. So ultimately it is the people (or the tax payer in popular parlance) who have in effect ‘rescued’ the banks. The banks and hedge funds for their part have shown little remorse, and even less in the way of self-restraint as their bumper bonus and salary culture continues unabated. In the UK the politicians attempted to tether and rein in the bankers with legislation and moral opprobrium and look what happened: The banks retaliated by airing the politicians own dirty laundry in public… The poor general public, who have in effect underwritten the sins of the bankers, face record levels of unemployment, record debt repayments, tax rises and a series of massive cuts in public services to pay for it all.

Have these harsh realities stopped the champagne from flowing within the well-furnished reception halls of the banks? Well hardly. Has the financial aid that was so readily pumped into the banks trickled down through the system to help stricken small businesses, mortgage holders and the unemployed? Not really. As though part of a pre-meditated cull, otherwise healthy small businesses are being bled dry by a collapse in consumer credit and spending, while the corporations keep their powder dry for an asset fire sale… After all, without the economics of boom and bust, investors could not become obscenely wealthy within a single lifetime by selling at market peaks and buying during recessionary lows.

Ironically in 2007 the banks lay fatally wounded by their own misadventures, yet within two years they have successfully recaptured the initiative and now have absolute power over the financial life blood that courses through the veins of the world’s economies. What has in effect been achieved, either by design or default, is a massive repolarization of capital away from the general population and towards the financial institutions in the form of loans, guarantees and favorable terms of repayment. We are now forever in the debt and pockets of our banking paymasters. Only those who still have cash can be king. The banks have fallen and risen again - long live the bankers!

The blogger wishes to apologise for the long delay since the last post but the banks refused to recapitalise him... meanwhile I strongly recommend 'City Boy' by Geraint Anderson for those who seek an insider's insights