The beginning of bank bashing?
Banks have been under fire for more than a year, but there's plenty of evidence to suggest that we are just getting started.
By Dan Freed, TheStreet
Though many people -- even some non-bankers -- are tired of what they see as 18 months of attacks on banks by Congress, regulators and the public, there is plenty of evidence to suggest we are just getting started.
While the New York Times went over well-trodden ground earlier this month with an investigation into Goldman Sachs' (GS) role in the meltdown of AIG (AIG), the newspaper appears to have done more damage with a newer inquiry: the role of Goldman in the current Greek debt crisis.
It seems Goldman helped Greece mask its debt from European regulators through certain sophisticated derivatives transactions, the Times reported on Saturday. The article noted that JPMorgan Chase (JPM) performed similar wizardry on the books of the Italian government. The Financial Times followed up Monday, reporting that The New York Times article was prompting an investigation by European Union authorities into the Greek transaction. An additional follow-up by Times' columnist Floyd Norris compared the deals to one involving Enron that came to light several years ago.
As the sovereign debt crisis threatens to spread from Greece to other European countries, so, will the web of culpability expand to ensnare other investment banks, not to mention provide fresh evidence of questionable transactions by those already implicated, which include not just Goldman and JPMorgan, but France's BNP Paribas , Germany's Deutsche Bank (DB), and two Greek banks, EFG Eurobank and National Bank of Greece.
The revelations about banks helping clients rack up unsustainable debt loads are likely to multiply far beyond real estate and European sovereign debt. The particular genius of bankers during the securitization boom was their ability to find more and more uses for securitization.
Most of the focus of the crisis so far has been on real estate, but real estate securitization is old hat. Pooling mortgages together and dividing them into slices that could be sold as bonds was popularized by Salomon Brothers (now part of Citigroup (C)) in the 1970s, as we know from Michael Lewis' Wall Street classic, Liar's Poker.
By 2005, the practice had expanded to encompass credit card and auto loans, settlements from cigarette lawsuits, infrastructure projects, toll roads and life insurance policies, to name a few. In identifying scandals and linking them to Wall Street innovation, it would seem we still have plenty of ground to cover. Not to mention that even as we are trying to fully understand the causes of the last crisis, we are sowing the seeds for the next one.
Securitization took off after the tech bubble burst in large part because the Federal Reserve took short term interest rates very low and kept them there, making bond investors seek higher yielding places to stash their money. Securitized products looked safe, and offered higher yields than US Treasuries.
Well, guess what? US Treasuries still offer very low yields, and bond investors are still desperately in search of higher yields. There are plenty of signs the market for new securitizations is coming back to life. These instruments remain highly complex, which is one of the attractions for governments and companies that want to hide debt.
This desire to hide debt is far older than Wall Street, so you can expect it to stick around for a while, fueling a demand for products that satisfy that desire. In short, the securitization scandal is far from played out and other lines of inquiry have barely begun.
Take, for example, antitrust. The FT suggested last month a wide-ranging investigation into anti-competitive banking practices could have several benefits, including better understanding of the causes of the financial crisis.
A conversation I reported on some two weeks ago between JPMorgan boss Jamie Dimon and Emilio Botin, his counterpart at Banco Santander (STD), suggests an antitrust inquiry might prove enlightening indeed, as one has the impression the conversation between the two bank chiefs and their associates, while of great interest to antitrust scholars, was a fairly routine occurrence.
I imagine if JPMorgan executives had been concerned about the antitrust implications of such a conversation, they would not have described it so freely in an intercompany e-mail. It did not occur to them to be concerned because the financial services industry has operated in a regulation-free zone for so long, they seem to have lost all sense of perspective.
Surely that attitude is changing, but there is good reason to believe the changes are just getting underway.
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