The Failure of the Current Banking Model and the Deliberate Mispricing of Risk For Personal Gain

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Published : March 08th, 2012
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Category : Editorials





“Fraud and falsehood only dread examination. Truth invites it...Whoever commits a fraud is guilty not only of the particular injury to him who he deceives, but of the diminution of that confidence which constitutes not only the ease but the existence of society."

Dr. Samuel Johnson

This enlightening essay excerpted below is remarkable because the author strikes right to the heart of the matter, rather than endlessly talking around technical details of how to 'fix' things, adjusting this and that, which is what people close to, if not caught up in, the financial problem are often wont to do.

And such a tinkering discussion of it is a trap.

The patient does not require a pill or a poultice, a better diet or dental health regime, but surgery, and the sooner the better. The Volker Rule is a dulled knife, but directionally correct. And the banks fear it, and hate it, as they do all meaningful reform. Theirs is the art of privileged deception, and it is the common cause they find with their political systems.

And of course and unfortunately it is the same with their central banks and the corporations that have grown up around them, who are upholding the
exorbitant privilege, and danger, of the dollar reserve currency, which is to their benefit, by the massive mispricing of risk every day in the bond and currency, metal and derivatives markets. And the interval between major interventions is decreasing, such is the decay of their position.

The ongoing and conscious mispricing of risk is going to cause a second financial crisis that will be much worse than the first, which was also due to the conscientious mispricing of risk with the intent to take advantageous profit, which is a euphemism for fraud.

Fraud is corrosive, and impinges on what Samuel Johnson called that confidence which constitutes the ease and existence of society. And taken to the extreme levels which we have seen from the Wall Street Banks, the manipulating of markets to achieve personal profits, even under the excuse of governmental ends, becomes an assault on society as a whole.

The author is David Malone, a second generation documentary film maker.

And a special thanks to friend and City maven 'Harry' for sending this my way. And for passing along the amusing commonplace in the City of JPM and GS as Professor Moriarity and Colonel Sebastian Moran.

I have previously imagined the US Ratings Agencies with a Pythonesque twist, as
The Crimson Permanent Assurance. And perhaps in a similar whimsical vein, JPM and GS are more like Captain Flint and Long John Silver, with Canary Wharf as Dry Tortuga.

And Bernanke is the Parrot. Pieces of Eight! Arrrrrr.

Propaganda Wars : Our Version – Risk Weighted Lies. 1
By Golem XIV
February 28, 2012

The core claim of the Big banks and those who support them is that the financial system, as it is presently constituted, is not only fair and fit for purpose, but essential for our continued welfare. People should therefore stop complaining and knuckle down to suffer whatever deprivation is necessary. All must serve the greater good. Or as it should really be known – the Good of the Greater.

The banks are not frightened by a bank failure or two. As long as governments are prepared to force their people to bleed for the banks’ welfare it can actually be an opportunity. A bank failure is just a chance for the better connected ones to predate. Neither are they worried by a case of fraud here or an indictment there. They will settle for a sum which is of no significance to them, in return for a “no admission of guilt” clause. If necessary they are even prepared to throw one of their own to the baying crowd. No one in banking shed a tear for Fred the Shred. And why should they? Call him greedy if you want. See if he cares. He’d already sucked his millions from the wreak he left behind.

What scares the banks is any criticism that goes beyond claims of greed or fraud or even incompetence, and instead questions the system itself. The sanctity and perfection of the system and its right to ‘regulate’ itself, is what they are totally committed to protect. The system is what gives them their status and wealth. Question that and you threaten them where they are vulnerable.

It seems to me therefore that it is high time we questioned not just the probity, or even the solvency of the big global banks but their very intellectual foundation. It is time for us to wrench back the initiative from the banks. The financial elite have spent all this last year rewriting history so that blame for the banking crisis has been turned away from them and laid instead at the door of ‘people’ and then entire nations who ‘took’ on debts they coudn’t afford.

It is time to counter-attack and make the case, that it was and is the way that banks and banking go about their normal business that caused this crisis and are still causing it. We have to show that it was not a break down in an otherwise fine system which caused this crisis but that it was a result and consequence of a system which is an utter failure at doing what it prides itself most on being able to do – managing risk. Not just a onetime failure but a systemic failure which presents an on-going danger to the rest of us.

So let’s be clear. There is no systemic risk at all in welfare spending, no matter how large it becomes, for the simple reason that there is no surprise in welfare spending. It does not jump out at you unexpectedly. Welfare and social spending are a slow moving behemoths that can be seen coming for decades ahead. The only danger is they will trample you to death if you are stupid enough to stand there for decades listening, slack jawed, to the competing teams of witless cretins whose flatulent play-acting is all that remains of our political process.

There is, I suggest, a very clear, present and on-going systemic risk and danger from global banking. It was, after all, banking not welfare which gave us the phrase ‘systemic risk’. Bankers deal in risk. The welfare state deals in…welfare. Like it or loath it, there is no ‘risk’ in welfare or in social spending. They are linear and entirely predictable problems. Banking on the other hand not only deals in risk, it manufactures it. Risk is what bankers bank on.

Don’t take my word for it. Andrew Haldane is the Executive Director for Financial Stability at the Bank of England. In
his speech at the London ‘Future of Banking’ conference held in July 2010 he said rather clearly (Page 14),

…banks are in the risk business…’

His entire paper was analysing the ways in which banks create risk and then systematically mislead us and even each other about what they have created. He goes on to say (Page 14),

…it should be no surprise that the run-up to crisis was hallmarked by imaginative ways of manufacturing this commodity, with a view to boosting returns to labour and capital. Risk illusion is no accident; it is there by design. It is in bank managers’ interest to make mirages seem like miracles.

The mirage he refers to is the contribution banks claim to make to our over all economic well-being and security...

Read the rest here.



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