Wall Street big banks, although not entirely responsible for the Great Recession, most experts agree that banks creating and partying in the subprime securitization mess is one of the major contributing events that broke the camel’s back.
Warren Buffett’s Annual Letter: Mistakes, Buybacks and Apple
Warren Buffett published his annual letter to shareholders over the weekend. The annual update, which has become one of the largest events in the calendar for value investors, provided Buffett's views on one of the most turbulent and extraordinary years for the financial markets in recent memory. Q4 2020 hedge fund letters, conferences and more Read More
The 1999 repeal of provisions in the Glass–Steagall Act of 1933 has not only effectively made “Too Big To Fail” a reality and a moral hazard, the subsequent trillion’s of dollars in bank bailout funded by the taxpayer has also saddled the already over-indebted nation with even more debt.
Even with the Dodd-Frank financial reform, from a market perspective, there are still issues within the structure of the current banking operation that are not adequately addressed.
First of all, banks should not have prop trading in-house, period. At the very least, the clearing house and the trading arm now reside withing the same banks need to be completely separated into different companies, with a physical Chinese titanium wall in between!
The reason is that when the the banks, who are active players in trading the markets, have the visibility as to where the future market transactions are heading with their clearing house operation, they can position and front-run everybody. That’s an unfair advantage not only disrupting the normal functioning of the markets, but also creates market volatility. Frankly, we are flabbergasted that with new government regulations coming out of almost everywhere everyday, there’s no regulatory oversight in that aspect of the banking industry.
Another area that needs regulatory scrutiny from a market perspective is that investment banking houses (rating agencies as well) should be banned from releasing any kind of market moving ‘research notes’ to the general mass media, unless they are released to everyone (clients as well as the general public) at the same time!
When the ‘research notes’ by, for example, Goldman Sachs, JP Morgan, etc. hit the mass media, those banks and their rich paying clients are already positioned to take advantage of the subsequent reaction en masse from retail investors, which, by the way, is ‘properly’ disclosed in the fine print of their research notes.
Why do you think banks make their “intellectual property” available to the non-paying public in the first place? Why do you think Goldmanflip-flops their forecasts every six months? It is to move markets to their advantage, as they know they can.
A good example of this would be the market movement in the week before the S&P’s “official” downgrade of the U.S. sovereign debt. It is quite obvious judging from the decisive market trading actions that some big players knew ahead of time about the downgrade most likely from S&P. As we stated before,
As usual, retail investors were the last to know, and once again, Wall Street seemed somehow to know way ahead of even the Whitehouse and Secretary Geithner as nobody sells off 500 points on Dow based on ‘rumors’.
S&P is reportedly under investigation of possible insider trading; however, any good lawyer could argue the alleged “leak” by S&P does not exactly fit into the insider trading as stipulated by law. Again, that suggests a possible ‘loophole’ of potential unfair market manipulation and advantage that’s entirely not addressed in the current regulatory and legal framework.
Here are some more staggering statistics about the nation’s biggest banks from Think Progress:
– Bank profits are highest since before the recession…: According to the Federal Deposit Insurance Corp., bank profits in the first quarter of this year were “the best for the industry since the $36.8 billion earned in the second quarter of 2007.” JP Morgan Chase is currently pulling in record profits.– …even as the banks plan thousands of layoffs: Banks, including Bank of America, Barclays, Goldman Sachs, and Credit Suisse, are planning to lay off tens of thousands of workers.– Banks make nearly one-third of total corporate profits: The financial sector accounts for about 30 percent of total corporate profits, which is actually downfrom before the financial crisis, when they made closer to 40 percent.– Since 2008, the biggest banks have gotten bigger: Due to the failure of small competitors and mergers facilitated during the 2008 crisis, the nation’s biggest banks — including Bank of America, JP Morgan Chase, and Wells Fargo — are now bigger than they were pre-recession. Pre-crisis, the four biggest banks held 32 percent of total deposits; now they hold nearly 40 percent.– The four biggest banks issue 50 percent of mortgages and 66 percent of credit cards: Bank of America, JP Morgan Chase, Wells Fargo and Citigroup issue one out of every two mortgages and nearly two out of every three credit cards in America.– The 10 biggest banks hold 60 percent of bank assets: In the 1980s, the 10 biggest banks controlled 22 percent of total bank assets. Today, they control 60 percent.– The six biggest banks hold assets equal to 63 percent of the country’s GDP: In 1995, the six biggest banks in the country held assets equal to about 17 percent of the country’s Gross Domestic Product. Now their assets equal 63 percent of GDP.– The five biggest banks hold 95 percent of derivatives: Nearly the entire market in derivatives — the credit instruments that helped blow up some of the nation’s biggest banks as well as mega-insurer AIG — is dominated by just five firms: JP Morgan Chase, Goldman Sachs, Bank of America, Citibank, and Wells Fargo.– Banks cost households nearly $20 trillion in wealth: Almost was destroyed by the Great Recession, and total family wealth is still down “$12.8 trillion (in 2011 dollars) from June 2007 — its last peak.”– Big banks don’t lend to small businesses: The New Rules Project notes that the country’s 20 biggest banks “devote only 18 percent of their commercial loan portfolios to small business.”– Big banks paid 5,000 bonuses of at least $1 million in 2008: According to the New York Attorney General’s office, “nine of the financial firms that were among the largest recipients of federal bailout money paid about 5,000 of their traders and bankers bonuses of more than $1 million apiece for 2008.”
(h/t Ormond Swarner)