"Too big to fail, too big to jail"

Before Sir Mervyn King made his comments in his recent Mansion House speech, on March 6th this year the US Attorney General, Eric Holder, said at a Senate Judiciary Committee:

"The size of the largest financial institutions has made it difficult for the U.S. Justice Department to bring criminal charges when there’s wrongdoing.

Criminal charges against a bank - something that could threaten its existence - may also endanger the national or global economies in the case of the largest ones, because of their size and interconnectedness. That has made it difficult for us to prosecute.

That is a function of the fact that some of these institutions have become too large. It has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate.”

When, over 4 years ago, the author of this blog wrote in his submission to the House of Commons Treasury Committee that the financial industry became a criminal enterprise in legal sense of this phrase, many considered it as an outlandish and eccentric statement, rather than the outcome of a professional analysis on the merits. It appears that the authorities - and then mainstream media - albeit slowly, start catching up with the reality. Why so late? It is very trivial indeed and has been more than obvious all along. However a more important question is when we start seeing prosecutions. How many years is it going to take? There is no point of even considering the current proposal of prosecuting for "reckless management" in the future until and unless the crimes of the past are not resolved. Basically first things first: the government should set the priorities right.

Sir Mervyn King comment on prosecuting bankers

On the 19th June 2013, the Governor of the BoE, Sir Mervyn King in his Mansion House speech confirmed that the bankers must have been prosecuted under the exiting law and regulations. He said that the "firms that pose a risk to taxpayers [i.e. the financial institutions], cannot be prosecuted because of their systemic importance" (sic) and are "too big to fail, too big to jail" (sic) (at 18:38 of the Bloomberg recording). I.e. he clearly implied - and from the Governor of the BoE it is as direct statement as it can conceivably be made - that the bankers would have normally been prosecuted under the existing laws, but the structural arrangements which defy the spirit and the letter of the existing law seemingly preclude this. And this cannot be accepted: such reasons are clearly against the public interest and undermine the public trust in the justice system. Is it the case that there are small people that can be easily prosecuted and there are those who can conspicuously break the law, make themselves fabulously rich, bankrupt the country, turn lives of millions into complete misery and do all that with impunity accepted by the government? This appeared to be a message of Sir Mervyn about the government handling of the financial mess.

The founding article of this blog, "The largest heist in history", proposed over four years ago:

"In a normal free market economy a business that fails should be allowed to collapse. If a business is a giant pyramid scheme, like the current financial system, it must be allowed to collapse and its executives and operators should face prosecution. After all running pyramid schemes is illegal." Sir Mervyn: at long last, welcome to the club!

Therefore is the government going to move forward and start prosecuting those who caused the current financial mess? Legally there is no problem to do so: creating financial pyramids is a very serious crime. Bankers committed very serious crimes, which - from technical standpoint - were very trivial (and it is even more trivial to prove this). This has been discussed on this blog since early 2009. Or maybe Sir Mervyn was talking nonsense?

It would be helpful if the government made a public statement on Sir Mervyn's comments. They were definitely not lighthearted jokes.

When the author of this blog started talking about the prosecution of those who caused the current crisis more than four years ago it was considered by the mainstream as eccentric and not worth an attention. Now the "Old Lady of Threadneedle Street" sings the same tune. Or one might try to generalise and say that, sadly, there is nothing ridiculous that can be said now about the current state of world affairs that after sometime turns up to be glaringly obvious.

It is also encouraging that the mainstream starts slowly catching up with something that has been glaringly obvious for more than four years ago. Although the mainstream media journalists have still a long way to go: but they will eventually get there kicking and screaming. They are also as part of the financial mess story as bankers and politicians, not just reporting on it.

Greg Pytel: Mainstream catching up

I can only recommend "This week" on BBC 1. The beginning of the programme is about the banking industry behaviour. Nothing new, in fact a very old news, but it is nice to note that the mainstream is catching up with things that have been glaringly obvious for over four years and have been discussed in detail on this blog for years. Still the mainstream has a long way to go and a lot to understand.

Why so late? What is so difficult about this crisis that it takes so many years for the mainstream commentators to understand? This seems to be a more challenging subject to study (psychology, media studies, study of transparency and corruption, etc.) than studying the causes of the current financial mess, as the latter have been obvious and clear all along. The mainstream media handling of the financial mess since 2008 is a very interesting story and a research subject in itself.

PS. The founding article of this blog "The largest heist in history" is recommended in a recent book by Paul Knott "Ouch! What you don't know about money and why it matters (more than you think)" (page 26), published by Pearson (owner/co-owner of the Financial Times and The Economist).

Greg Pytel: Here we are again

After introduction about the Parliamentary Commission on Banking Standards report on the couses of the collapse of HBoS in October 2008, Tuesday's Newsnight continued with discussion between Paul Moore, Fraser Nelson and John Mann MP moderated by Jeremy Paxman. Paul Moore said: "The terrible tragedy of this banking crisis is we never dealt with it properly in the first place. We should have done this kind of level of forensic inquiry right at the beginning, then we could get into the bottom of it and moved on."

John Mann MP and Fraser Nelson seemed to have concurred with Paul Moore opinion.

Paul Moore was slightly wrong however as the House of Commons Treasury Committee published a framework for a forensic report "The largest heist in history" back in April 2009. The readers of this blog may also remember an article "The Economist exonerate the bankers" published on 12 October 2009, three and half years ago: "However in old Economist tradition it [The Economist] should advocate a thorough forensic examination of the causes and mechanics of this crisis which is too big for half a page broad brush editorial judgment."

Then as the Newsnight discussion moved onto the psychology of bankers, Paul Moore added: "There is plenty of academic evidence that demonstrates that it is not the cream that rises to the surface in these [financial] business but is actually the very opposite. [...] The average psychopathic attribute of top executive leaders is three times the national average. [...] They have lack of empathy, they have narcissism: this is real academic research, I am not joking."

John Mann MP and Fraser Nelson seemed to have concurred with Paul Moore views again.

The readers of this blog may also remember an article "Curbing City pay will give it competitive advantage" published on 14 August 2009: : "Indeed it looks that big pay packets in finance attract the top talent: but not the one that banking really needs. It is a talent to use greed, skills in company politics, arrogance, posturing to cover monumental incompetence in climbing a corporate ladder. This ilk of people has hijacked the financial industry."

Indeed after many years the mainstream media starts "discovering" glaringly obvious issues directly related to the current financial crisis. It is very worrying that it is so late. It may be argued that one of the reasons why we are in this mess for so long with no light at the end of the tunnel is because it takes mainstream media, decision and policy makers and politicians many years to understand obvious but critical causes behind the current crisis. It is a different but even more worrying matter that they do not appear to act appropriately in response to their findings.

At some point during the Newsnight discussion Jeremy Paxman said: "It's five years on". "It's a long time on" John Mann MP agreed. And you can say it again.

However it is even more serious point, and more worrying, that no one of the taking part in the Newsnight discussion appeared to understand, in clear forensic terms, the difference between reckless risk taking and what the calculated risk is that businesses - including financial ones - have to take. And without that no serious banking reform is possible as the financiers will be calling reckless and indeed criminal risk taking as a necessary and reasonable business risk. This issue, from financial industry perspective, had been discussed in "Loans to deposit ratio and banks liquidity".

Greg Pytel: I told you so... with a mafia twist

It may be a bit self indulging to write all the time "I told you so. I told you so many years ago". But what's the choice? The continued economic downturn in the UK is not surprising at all. At present the economy is managed which ensures that dire straights will continue. So no one should be surprised: simply await more bad news to come. The politicians' rhetoric about growth, prosperity, etc. can only be met with an ironic smirk. It looks they treat people if they were silly and would not see the obvious. Some even mainstream pundits have been arguing (privately) whether it is correct to treat the politicians as either devious or stupid. Or maybe there is a third choice? Whatever the answer is it does not change the real situation.

Readers of "The largest heist in history" would remember that the financial mess which resulted from the collapse of a giant global pyramid scheme was engineered in order to funnel the money out the economies to private individuals. Governments bail outs, financial stimuli, generating massive public debt, quantitative easing, and so on - all in direct contravention with free market principles, common sense and indeed many existing laws (unlawful subsidies to the industry, anti-competitive behaviour, etc) - are reaching the end of their practical capacity. Every financial pyramid has its limit. Now, after investments, endowments, pensions have been plundered, the time came for private savings and deposits. What happened in Cyprus was not a mess or a misjudgement. Cyprus, being a small island, is a test case. Firstly it is a tiny economy so any unpredicted overreaction can be contained. Secondly it is an island so things cannot spread physically easily.

Telling people that they can lose their deposits, even possibly below guaranteed amount (100,000 euros), which later was retracted, had not been a mistake. Firstly people realised and got used to the idea that such thing was no longer unthinkable. Secondly, by hitting deposits above 100,000 euros with up to 40% (or even maybe up to 60%) tax, it was made clear that such hit can be very hard indeed. Not some 6.75% or 9.9% as originally mooted: so now it is matter for the 'financial markets' to extend their target, below 100,000 euros. It is indeed a very primitive piece of social engineering and coaching people for the forthcoming loss. It is preparing psychologically all countries in Europe for the next step of the largest heist in history: direct and hard targeting of people's deposits.

There is also a rather ironic twist in the events in Cyprus. It has been widely reported that many billions of euros held in banks in Cyprus came from all sorts of dodgy businesses (Russia?). There is even a whispering subliminal propaganda designed to make it easier to accept this new phase of the largest heist in history. The message is that there is nothing wrong in stealing money from the thieves. Technically what happened there was that the billions of euros in cash deposited in Cyprus was used to redeem for a lot of toxic waste of the financial institutions (it is called 'making investments' in a financial language, with depositors cash). So, as expected, those who had cash ended up with nothing and those who held (and are still generating) zillions of toxic waste, got another tranche of their heist. The largest heist in history continues.

If it is true, as it is widely rumoured, that many billions of euros of mafia money have been kept in Cyprus and now something like 40% or even 60% are going to be lost, one could wonder whether European politicians, central bankers, who drive this process, e.g. finance ministers, or some other decision makers, even lower down the chain, are going to sleep comfortably. Or are they going to think more about their own and their families safety? Is mafia going to accept such multibillion euros loss? Or would they plan to teach a lesson in order to get their money back, to get a compensation for the current 'inconvenience' and mess and to make sure such a thing is unthinkable in the future. Mafia starts wars when there is big money at stake. And in Cyprus some powerful groups lost billions of euros. Therefore we can also look forward to listen to some interesting news. Don't be surprised. Despite being a mere speculation. This is as predictable - and even possibly engineered on purpose - as the current financial mess.

Greg Pytel: Juncker warns against the danger of war in Europe

For some years articles (and comments) on this blog warned that unless the current financial mess is solved (which was not that difficult) there was a real risk that the situation would develop into a war. For example in the article dated 23 December 2011, "Democracy on the ropes":

"The financial crisis that had started with the Wall Street collapse in 1929 ended up ten years later with the World War Two. It is impossible to tell whether history will repeat itself. But considering carefully the scale of the current financial crisis and the way it is managed by the world leaders, there is no particular reason to feel overly optimistic."

(This article was also published on OpenDemocracy blog: "Capitalism no longer exists: it's communism for the rich" on 5 December 2011.)

In today's Der Spieger Jean Claude Juncker, the Prime Minister of Luxemburg, who recently stepped down as the President of the Eurogroup after over 8 years, is quoted saying: "Anyone who believes that the question of war and peace is not an issue could seriously be mistaken" warning about the dangers of war in Europe.

The mainstream politicians are eventually catching up with glaringly obvious realities some 2 - 3 years too late.

The risk of war in Europe is quite real. And it will not just happen, As the economies were robbed and ruined - not just for now: for generations ahead - social unrests seem inevitable. They could be directed against those who caused the current economic mess. So why not direct them as a conflict between the nations, so people start killing each other under very noble slogans of patriotism and all that rather than those who stitched them up in this mess? This idea seems to be a no brainer. And like the current financial mess it will be quite easy to engineer. And it is also quite predictable.

In 1929 a Polish poet Julian Tuwim wrote a poem: "To the simple man". It is worth reading again.

PS. In fairness, in September 2011 British-born Polish Finance Minister Jacek Vincent Rostowski warned about the dangers of war in Europe in 10 years time. However his speech in the European Parliament in Strassburg did not get much traction.

Greg Pytel: Be careful what you wish for...

In today's Channel 4 News Mr Brooks Newmark MP discussed the EU proposal to cap the bankers bonuses to twice their salaries with a Swedish MEP Mr Olle Schmidt. Mr Schmidt argument for such a move was predominantly based on the public outrage about the bankers who engineered the current financial mess and are still handsomely rewarded for causing such disaster. Mr Newmark argued against limiting the bankers' bonuses as it would make the industry leave Europe (and the UK in particular). Instead he suggested that there should be an analysis of banks' balance sheets in the context of the credit risk.

Clearly, as Mr Schmidt admitted, his argument was political. Mr Newmark argument was professional, getting into the crux of the current financial situation. It appears that he was also right but most likely - as the context and the tone suggested - not in a way he actually intended.

If the analysis that Mr Newmark suggested had been done, it would have showed without any doubt whatsoever that the financial industry engineered and ran a giant global pyramid scheme that led to the systemic collapse in 2008. Basically the industry had been degenerated by those who had run it into a criminal enterprise operating according to exactly the same mechanisms as pyramid schemes in Albania in 1996 - 1997. In this case the bankers - most likely with very few exceptions and mainly on a junior level - should not only lose their jobs (hence any prospective salaries and bonuses), but also their liberties and any wealth (in order to compensate for the massive losses that they caused). If Mr Newmark's recommendation was followed scrupulously, the City would be turned into a giant prison (as this, quite likely, would have been cheaper than building new ones).

Mr Newmark, you may just have to be a little bit careful what you wish for.

Greg Pytel: UK lost its top credit rating

"The UK has lost its top AAA credit rating for the first time since 1978 on expectations that growth will "remain sluggish over the next few years".

It is no news really. In fact it was commented upon already on this blog on the 2nd December 2011:

"George Osborne should also not be too smug because the UK keeps AAA credit rating and has a very cheap borrowing rate, cheaper than Germany. Currently the financial markets are preoccupied with taking as much money as possible, squeezing Germany to the maximum. Once they finish this process, and in the meantime the UK makes a lot of cuts thereby creating a lot of room for additional borrowing in the future, there is little doubt that the financial markets will turn their attention to the UK and squeeze it for more cash. Hence all the money that the Chancellor is saving now are really destined to the bankers coffers. This is how financial system works these days. It is all about extracting as much money as possible from the middle class taxpayers. Another obvious fact that seems to be completely missed."

PS. I am not writing frequently on my blog anymore as it is really a closed theme. Nothing new is happening. (Almost) whatever is happening in the economy now was commented on my blog in the past. So why repeat it?

Greg Pytel: "Third Sector Performance"

Graham Manville of University of Southampton and Richard Greatbanks of University of Otago published a book, with Gower Publishing, "Third Sector Performance". In the first chapter the book is citing extensively the report for the House of Commons Treasury Committee, "The largest heist in history", which was the founding article of this blog.

Here is the link to the book's Chapter 1.

Here is the link to the book's Forward.

Here is the link to the book's Introduction.