Neil Barofsky, former Special Investigator General of TARP, prosecutor and author (more info here) answered questions from the Alternative Banking Group and other attendees for two hours yesterday. THANK YOU NEIL.
He said so much it is impossible to summarize. So, instead I will write several posts discussing different points (and hyperlink connections).
One key takeaway was just how badly broken the current system is.
One common thread of his analysis is to look at incentives. He noted that committing fraud, money-laundering and other malfeasance pays well. But the penalties are too rare and too small to provide an effective deterrent. In other words: crime pays.
Neil observed that the failure of the Obama administration to prosecute the malefactors of the latest crisis created a clear signal that the penalty for fraud and other financial malfeasance was very low. Many cases were not prosecuted. When they were pursues, they resulted in settlements with fines clearly inadequate to deter future crime. (His analysis for why this was so will be the subject of an upcoming post.)
The latest settlement with HSBC makes things even worse. HSBC apparently laundered drug money. For that they are paying nearly $2 billion in fines. To most of us, that’s a lot of money but to HSBC it is “six weeks of earnings”. Even worse, it further entrenches the “too big to jail” perception. Officials admitted that despite clear evidence that HSBC committed crimes, they were not indicted because of fears that it would crash the financial system. Neil compared this to hostage-taking. HSBC held the US economy hostage, that is you and I, and used that as leverage to avoid prosecution. This is completely outrageous and will be the subject of two future blog posts.
Risk-taking also pays. Normally, risk-taking is constrained because banks need to borrow. And no one would lend to risky, opaque institutions. But, if they are too-big-to-fail, they get a free pass. The government will protect the creditors from losses. This implicit guarantee is built into the banks credit ratings and the interest rates they pay. If the market were operating properly, complex, highly-leveraged institutions would pay higher interest rates than their smaller, less risky competitors. But, the megabanks actually borrow more cheaply the bigger and more systemically-threatening they become. Becuase the more of a systemic threat they pose, the surer the market is they will be rescued. So, the normal market constraints don’t apply.
The bottom line:
- There are no effective legal/regulatory controls on the megabanks.
- There are no effective market controls on the megabanks.
- The megabanks have an incentive to push the envelope until they crash the financial system — again
And we all pay the cost in money, jobs and lives.
To end on a less bleak note, Barofsky had much more to say that will be covered in future posts. Among other things, he gave us insights into ways that people can have impact and ways that the system could be improved — possibly even before the next meltdown. Stay tuned.
These comments are those of the author. They are not endorsed by OWS, Alternative Banking, Neil Barofsky or anyone else.