The Year From Finance Hell
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“Should Old Acquaintance be forgot, and never thought upon...”
If anyone is singing the traditional Scotch ballad "Auld Lang Syne," it's the banking industry. 2012 marked a sordid turning point in the history of Financialization. One by one the Great Banking Houses stumbled into the regulator's loving arms. LIBOR. London Whale. Barclays. Standard Chartered. Muppets.
This has been the year from Finance Hell.
The Rise of the Banksters
He's the Man You Love to Hate. Former Lehman Brothers CEO Dick Fuld – a man who's name was the Wall St. Journal's inspiration for a King Tutankhamun-like curse– could rightfully be considered to be the Father of Banksterdom.
The Urban Dictionary defines the term “banksters” as “a portmanteau deriving from the words banker and gangster” which “often refers in a vague way to...Wall Street, or to those persons in the financial services industry who grow rich despite the continued impoverishment of those who depend on their services, despite their apparent inability to succeed in business without constant government assistance.”
To put a finer point on it: The difference between gangsters and bankers is that the former -
a) has a working business model that rarely requires a bailout from Fat Tony on the population at large
b) is often the more forthright of the two
c) charges less interest, with less severe long term penalties
Once-revered names such as Bank of America and Citgroup (NYSE: C) have had their names drug through the mud since the financial crisis by everyone from Occupy Wall St. to the G20. Citi has been dubbed “the Incredible Shrinking Bank” by bank analyst/prognosticator Meredith Whitney, and “Too Big to Succeed” by senior Forbes editor Allan Sloan:
"If you have any idea of what you are doing, you can just go the a la carte route, which a lot of people did...meanwhile the banks were falling all over themselves trying to make all the pieces work together, which generally they don't."
The London Whale
How do you lose $6.2 billion by making bets intended to limit loss? Apparently JPMorgan's (NYSE: JPM) Bruno Iksil found a way, making outsized bets on credit derivatives made by Mr. Iksil out of JPMorgan's CIO unit in London. Jamie Dimon, still widely considered 'The Smartest Man on Wall Street,' had his reputation tarnished and was forced to admit that JPMorgan's London CIO had made “stupid mistakes,” and ultimately undermining Dimon's long-standing criticism of the Frank-Dodd Act with lawmakers on Capitol Hill.
“You f----ing Americans! Who are you to tell us, the rest of the world, that we're not going to deal with the Iranians?” Thus began the saga of Standard Chartered (SCBFF.PK ), the golden boy of Wall Street analysts and investors right up until the point when regulators from the New York Department of Financial Services issued a scathing public rebuke – peppered with phrases like "staggering cover up," "motivated by greed" and "programmatically engaged in deceptive and fraudulent conduct" to describe the London bank's alleged efforts to launder money for Iran. The NYDFS gave Standard Chartered until 10 a.m. on Aug. 15 to explain in person why it should not be ejected from Wall St.
Standard Chartered paid a $340 million fine to NYDFS, while claiming that NYDFS' figure of $250 billion was “vastly overstated.”
Back in March, Goldman Sachs (NYSE: GS) London trader Greg Smith penned his resignation – in the Opinion pages of The New York Times. The OpEd, “Why I Am Leaving Goldman Sachs” instantly went viral, provoking a public backlash against the legendary Wall St. firm and sending Llyod Blankfein on a what financial pundits would later dub “The Great Muppet Hunt” through millions of corporate emails. Goldman Sachs' concluded that “98% of Muppet references are about the Muppet movie.”
In Douglas Adam's third book, Life, the Universe, and Everything alien party animal Ford Prefect describes a universal principle of invisibility hitherto unknown to the befuddled, Arthur Dent: The SEP (Somebody's Else's Problem) field.
“An SEP is something we can't see, or don't see, or our brain doesn't let us see, because we think that it's somebody else's problem.... The brain just edits it out, it's like a blind spot...This is because it relies on people's natural predisposition not to see anything they don't want to, weren't expecting, or can't explain.”
As in: “Wow, an alien spaceship just landed on the Superbowl stadium during half-time and squashed all the cheerleaders! Oh, well. Must be someone else's problem.”
That pretty much explains LIBOR for me. The manipulation of the London Interbank Offered Rate by Barclays (NYSE: BCS) in exchange for a Starbucks latte and a bottle of Bollinger is, without doubt, the most brazen case of fraud in the history of finance. Traders gleefully manipulated rates in exchange for anything and everything – from liquor, coffee, to flowers and a “thanks, pal!” The Economist penned a scathing polemic on the scandal entitled “The Rotten Heart of Finance,” while British authorities began to hold serious discussions on breaking up London's banks. Investors, however, were curiously unmoved by the scandal, which involves an estimated $350 trillion in derivatives.
This Fool makes no bones about investing in Financials like Bank of America while they're on the operating table. However, I would not recommend banking stocks to any long term investor until there's a fundamental reform of the financial industry. Making millions of huge bets for the sole purpose of pocketing the transaction fees is the height of risk, unaccountability and decadence, rather than a sustainable business model.
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