It's all about Amelioration

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Banking Shenanigans

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photo by rick

A  second hand car dealer purchases a large quantity of Toyotas from a third world country at a fraction of the original price. He is grinning from the fact that he is able to resell them at a 200% profit margin. The only catch here is that these cars actually have problems with their braking system. Does he give a damn? Absolutely not, all for the name of profits.

A newly wed young couple walks into the shop one day.The car dealer, comes to greet them in his sleek looking suit and immaculate showroom. Within minutes, he is able to paint that image of the couple cruising down the highway, in their new Toyota convertible.  The couple is delighted and gives the thumbs up for the purchase. Only issue is their poor credit rating. “No worries!” exclaimed the owner. I can work it out with the finance company. What’s most important is your comfort and pleasure. Within seconds, he whips out the contract and the deal is sealed.

This dealer is a very enterprising  guy. He is constantly seeking other methods to earn money as well. In this world of fantasy, he is actually able to purchase an insurance on the cars that have been sold.  Never mind that ownership has changed hands already. “What an awesome product,” he thought.  He sure knows that the cars he imported have faulty breaks. Sooner or later, an accident will happen and he will be the sole beneficiary of the sum assured! In his glee, he purchased an insurance on the Toyota that the young couple bought. His sum assured is worth 5 times its sale price. Yes, in such a fantasy world, it is possible.

Only that in recent times, such fantasy is actually a reality exclusive only to the filthy rich network of banks and hedge fund companies.

Being able to purchase an insurance on something you do not even own, now that’s taking a page out of Las Vegas.  The logic of insurable interest gets thrown out the drain, because you are essentially able to place a bet on the failure of any principal.  However, when the principal does crash, and the insurer is unable to pay, this will trigger a series of catastrophic financial meltdown that we have witnessed in the last 3 years.

Welcome to the world of banking, where syndicated gambling is being substituted by jargon like credit default swaps and financial engineering. Bullshit if you ask me. The car dealer example I highlighted above failed on the basis of ethics on many fronts. I guess if car dealers were involved in such shenanigans, the law would catch up with them real quick. But just because these bankers have offices in prime districts, dress in fine suits, educated in ivy league schools, earn huge pay cheques, come from esteemed families, the so called creme de la creme of the private sector; they are spared the punishment time and time again. Oh ya, don’t forget that they spend millions on lobbying  as well.

photo by Mike Licht

Selling  products called collateralize debt obligations (CDOs), where mortgages are packaged into so call securities to be sold as an investment is fine.  In fact CDOs have been a source of funding for decades. However, when the underlying collateral is trash, that’s where the problem lies. Now, these bankers  know damn well that the housing market was going to implode. Why? Because I reckon that they essentially fueled the greed cycle.   In the years of irrational exuberance, the average American was living way above their means (greed factor number 1). This was fueled by the fact of low borrowing interest rates employed by the FED.  However, that cycle could have ended if the smaller banks and mortgage houses kept lending conditions stringent. However, they  did not seem to  mind lending the money even though the borrowers  had poor credit ratings or give collateral loans pegged to inflated housing prices. Reason being they knew that they can offload these loans to bigger investment banks at a price. Hence, any loan is a good loan (greed factor number 2). These investment banks gave a whole knew dimension to triple A bonds as they sliced and diced these sub prime loans to create CDOs which can be sold to investors worldwide (greed factor number 3). And then came along credit default swaps which the investment banks created as well.  The ability to place a bet against all these trash without even owning them, (greed factor number 4).

The investment banks defense argument was that they were simply the middleman, taking both sides of the fences. However regulators think otherwise. They were playing God. They flooded the financial system with all their self made time bombs and were pulling the strings on both sides to their own benefit.

Whatever happened to ethics? I spoke to an American banker involved in the structuring of such products once and he said as long as he is able to give his family a good life, he does not question what he does. It’s just a job.

That’s real sad. But, am I being too idealistic?

I sure hope that the reformed SEC can nail Goldman Sachs. People were sleeping for too long. Bankers were earning exorbitant profits at the expense of others, creating financial weapons of mass destruction while the regulator, SEC was  surfing pornography at work. Yes, I kid you not. I do not care if the law suit is politically driven or not.  It’s been almost 2years, and nothing concrete has been laid out yet to regulate the banking sector. Something has to be done. Some can argue that by removing  proprietary trading away from investment banks, the quality of investment advise will be compromised.  Yes, it’s true, but now, the question is not about the quality of performance. Wall street has the smartest brains in town. The crux of the issue here is ethics. If these smart bankers let greed rise above all, then regulators just have to limit the kind of power they have and sift out the bad from the good. It might be a painful process in the short run, but if the financial sector gets so powerful that it poses a systematic risk to the entire fabric of the economy, a thorough overhaul of the financial system got to happen.

It’s obvious. When you are a banker surrounded by millions of dollars on a daily basis, and stressed by perpetual performance targets, you will loose the empathy for people ‘s money. Never mind whether it’s  corporate clients or individuals.  You forget that people actually work and slog for their entire lifetime to earn the money which they entrusted you to. Such ramifications can be monumental as we have all witnessed.

photo by Mike Licht

Capitalism is only effective when proper regulation and above all, ethics is present. The idea of socializing loses and privatizing profits must end. Wall Street is actually earning record profits in history, at a time where they also squandered the most in history. It’s just getting plain ridiculous.

Do read this riveting article on Goldman Sachs by the Rolling Stone magazine.  They screwed main street, just like how they did Greece.

Hmmmm, back to our home soil, do you now see the irony that our casino is being built right smack in front of our financial district?

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Written by Nabs

April 26, 2010 at 11:10 am

4 Responses

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  1. Insightful. An interesting read. Well done.

    SH

    April 26, 2010 at 10:28 pm

  2. […] Kin Lian’s Blog: Public Opinion on the Mainstream Media – It’s all about Amelioration: Banking Shenanigans [Thanks Nabs] – Cooler Insights: How to Manage “Gen Y” Workers – Singapore Sports Fan […]

  3. […] Kin Lian’s Blog: Public Opinion on the Mainstream Media – It’s all about Amelioration: Banking Shenanigans [Thanks Nabs] – Cooler Insights: How to Manage “Gen Y” Workers – Singapore Sports Fan […]


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