"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.

Greg Pytel: No skin in the game

With the appointment of the Governor of the Bank of England, the Chancellor of the Exchequer confirmed that he was determined to ensure that the economic situation of the UK continued to worsen. (It is another matter whether the Chancellor realises that or whether it is his intention.) In that respect he has been doing a pretty good job. As predicted and expected by any sane person, the government actions led to a double dip recession and a growing debt.

Incidentally it would be interesting if the politicians, especially those in the government,published information how their financial situation changed since 2010 (the general election), or actually since the end of 2008 when the economic mess - which was an easily predicted result of actions of the financial industry - became omnipresent in the UK. If their personal financial situation improved - unlike the financial situation of the country - this would show that the politician have been acting in a conflict of interest situation as they have a personal vested interest in worsening the economy. As the UK economy deteriorates, they are becoming better off. Is it not great? The same applies to all the commentators but they are not elected and they do not wield a direct power.. (At very best they would not have a vested interest in not worsening the economic situation of the UK.)

We should not ignore that. Apart from statistically insignificant exceptions, people act for their own and their families benefit. And there is nothing wrong with this provided they do not act in a conflict of interest situation. And this is precisely the same lethal problem as a moral hazard. "no skin in the game", which clearly was one of the reasons that drove the financial industry to a behaviour that caused the current crisis. We should have been wiser by now.

Greg Pytel: Modern kind of democracy

Today we could see a debate in the House of Commons about how much money the UK should pay to the EU budget. When the government decided to pay many hundreds of billions (if not trillions by now) of pounds in form of subsidies to private individuals, i.e. to the banks, to "rescue" them in form of bailouts, in form of quantitative easing or in form of massive implicit insurance policy from collapse (as the government still accepts that the banks exist in a form of being "too big to fail"), interestingly, there was no such debate in the parliament prior to the decision. Well this really epitomises what the modern democracy is all about.

Greg Pytel: Leader of the Opposition: sort out this mess, please

As reported by the BBC today, the Leader of the HM Government Opposition, Ed Miliband threatened to break up the banks unless they separate the retail banking from investment banking, ring-fence the consumers deposits from the risk of investments.

It appears that the Leader of the Opposition starts putting his finger on the problems with the banks. He seems to start understanding how damaging the financial industry in the current form is to the economy. However Mr Miliband still does not have a scooby. Investment banking practices, and the massive risks they pose to retail banking, are not the underlying cause of the current economic woes. It is actually a result. How to fix the banking system and what to do to bring the economy back on track was described well over two years ago, in June 2010, in "Prime Minister, sort out this mess, please". The Leader of HM Government Opposition is well advised to read it. If he understands it he will find that the separation of retail from investment banking is one of the five steps and is actually auxiliary (but recommended).

The underlying behavioural causes, rather than technical were described in "The largest heist in history", behind the current financial mess are the facts that a) the industry is uncompetitive consisting of "too big to fail" institutions and that b) the key decision makers are not exposed to the risks of their own decisions (so called "moral hazard"). This turned the modern capitalism system into its caricature, a kind of "communism for the rich" system with the financial industry living on massive state subsidies (e.g. implicit guarantees, quantitative easing) as a powerful oligopoly.

Therefore banks should be split into many and made into partnerships (i.e. a collapse of a bank would immediately and directly affect the decision makers). This proposal was first published in March 2011 "Regulating the financial risks". (It was also published on Stockopedia.) Subsequently over a year later these original ideas were, well, repeated in The Atlantic, "Free the Banks! The Case for Massive Deregulation of the Financial System", and only then they got some limited, still minimal, traction with more mainstream commentators (tweets, blogs).

It is really disappointing and worrying that those who run UK plc, and those who aspire to run it, do not understand such bare basics. Or maybe it is within their roles not to understand them? The mainstream media commentators, apart from rare exceptions, are not any different.

Greg Pytel: £300m London property: crisis? what crisis?

It has been argued for some time on this blog that the current financial crisis is not in fact an economic crisis but an well organised wealth transfer mechanism from the middle classes to the superrich. E.g. "Crisis? This is how it works", "There is a method in this madness"

A couple of days ago BBC reported that the London's most expensive house ever was on the market for, what was believed, over £300m. And that it was a part of a broader trend. "Knight Frank calculates that what it calls "prime" central London property prices have gone up by 50% since March 2009."

It is worth reiterating: "Every time we read about obliterated pension schemes and generally falling income and purchasing power of the middle and working classes, the workhorse of the economy, and the growing gap between them and the super rich, thriving market of top end properties in London, luxury goods and services, from systemic perspective it is simply a wealth transfer.

One can argue whether this is right, or wrong, but this is exactly what is happening. Whatever the view is the current crisis is the largest wealth transfer exercise from the middle and working classes to the super rich using pyramid schemes which have exactly the same structures and mechanisms - pretty primitive actually - as Albanian pyramids in the 1990′s."

So if you ever wondered where the quantitative easing money went and we do not see any improvement of the economy, but rather the opposite, the price of this property and the steep price rise of prime properties in London (50% since 2009) should give some clues. And in the meantime the Bank of England balance sheets keep growing full of toxic waste.

Greg Pytel: Still out of their depth

In the wake of the completely predictable - but for some reason considered by the mainstream media and politicians as "unexpected" - news that the UK government's tax receipts dipped last July, BBC Newsnight held a discussion between Jon Moulton and Jonathan Portes moderated by Gavin Esler proceeded by analytical material. Whilst Jon Molton was advocating further cuts in public spending to revive the economy, Jonathan Portes argued for more spending at the moment (and possible spending cuts later once the economy picks up). At one point Mr Molton concluded that the UK government did not have any other choice: either cut or increase public spending. Messrs Portes and Esler implicitly agreed.

As it has been shown in the articles on this blog the current economic situation was caused by the financial industry which was turned into a global pyramid scheme. The spending cuts would not revive the economy as any spending cuts would immediately start choking off the economy at the time when banks do not lend to businesses and are not in a position to do so. More government spending, Keynesian approach, would not work either as the additional spending would be stolen by the financial institutions and used as a part of propping up a pyramid scheme. This additional government spending would be converted into toxic waste held by the banks. One way or another it is the same net effect: no growth of the economy.

The discussion on BBC Newsnight showed, again, the nature of the current economic crisis. It showed that those who comment on it or deal with it are completely out of their depth. They are simply confused: Mr Moulton's alternative - cut or increase public spending - is a vacuous argument.

For years it has been argued on this blog that the very first step of any remedial action taken by the government to revive the economy, be it spending cuts or more spending, must be the liquidation of the pyramid scheme run by the financial institutions. Otherwise, one way or another, it will always be a good money thrown after bad, exactly what we see since 2008.

Greg Pytel: Disturbing news

Standard Chartered has been accused by the US authorities of busting the US sanctions against Iran by aiding the Iranian financial transactions in the US dollar. Is it a disturbing news? Not really, as expected and we can expect more news of this kind about the financial institutions in the future.

The Bank of England downgraded the growth forecast to 0% (no growth), from 2% growth predicted a year ago, for the year 2012. Is it a disturbing news? Not really, as expected and - considering the way the economy is run at the moment - it is unrealistic to expect any good news any time soon. People should get real and accept that the way the government manages the economy is precisely designed to produce such results. This is the fact, this is how it works, not a rhetorical statement.

The government's Funding for Lending initiative is initially expected to lend about £80bn at below-market rates to banks and building societies. Is it going to help the economy? Of course, not. Even if the banks lend the initial £80bn to households and companies this money will come back to the banks in the first cycle of the money circulation and will not be re-lent again (or very little of it). It will then be used by the banks to convert their toxic waste to it and, of course, to pay huge bonuses to those who will do it. It is glaringly obvious that the financial system works in a way that any cash injection done through the banks will eventually be plundered by them. Funding for Lending is another classic example of throwing good money after bad after rescuing the banks and QE. The financial system is below-rock bottom.

The disturbing news is that it appears that those who run the economy, the government and their advisors, and also the mainstream media who comment on it, do not have a clue about what they are doing. As the alternative news is even worse and rather improbable: that they are damaging the economy on purpose. But from logical perspective such option cannot be ruled out either.


[Since this article has been published this morning BBC reported that "the UK's trade gap widened sharply in June, to its worst level since comparable records began in 1997." Is it a disturbing news? I can only reiterate: not really, as expected and we can expect more news of this sort in the future. But, hey, does it really matter? We are really set for more medals in the Olympics and the government folk and the establishment have a time of their lives.]

Greg Pytel: Guantanamo Camp: a new lease of life?

In 2002 Guantanamo Camp was set up as a camp for "illegal combatants", international terror suspects. Like any government's initiative it started a life of its own: jobs and income depend on it including those of most influential companies. For example Halliburton, a US company whose CEO was once Dick Cheney, the US Vice-president at the time when Guantanamo Camp was established, was awarded a $1 billion construction contract to revamp the Camp in 2005.

After a decade there are no longer "illegal combatants" roaming the world, waging the war against the US. There is a little operational case - to justify the expense - for Guantanamo Camp as a place for detention of international terror suspects. So what next for Guantanamo Camp? Is such a lucrative place of income for many influential defence businesses going to be closed? Or is it more likely that a large US company will get a lucrative contract for another revamp or even for running its operations?

Here the LIBOR scandal may come quite handy. Whilst we may be cynical about the capitalism in the US, especially in its current form of the "communism for the rich", the US has an impressive track record in prosecuting the financial fraudsters. From Charles Ponzi in the beginning of the 20th century to more recent perpetrators of the financial wrongdoings behind WorldCom, Enron, Tyco and "NatWest three" scandals. Not that long ago Bernie Madoff experienced the decisive side of the US justice.

It appears it is only a matter of time when the US justice system will start catching up with those behind the LIBOR scandal. In a recent interview on the BBC Radio, Prof Alan Riley from City University Law School said:

"Any fixing of the LIBOR rates is prima facie criminal price-fixing and the United States extra-territorial jurisdiction applies even to price-fixing in London. If price-fixing is proved the US authorities may well seek extradition of executives based in the United Kingdom. Given the effectiveness of the US criminal antitrust regime (in which over 25,000 prison days were handed down in 2009), compared with the failure to secure any home grown price-fixing convictions in the UK under Section 188 of the Enterprise Act 2002 (the Cartel Offence), it is much more likely that US authorities will successfully prosecute bankers than the British authorities".

As the number of individuals involved in the LIBOR scandal is significant the Guantanamo Camp may become handy. The prospect of extraditions to the US is not purely theoretical. Indeed a number of City folk are already taking legal advice on that. And those who do not - who were involved in the LIBOR "business" - should think about it.

Greg Pytel: Below rock-bottom

We may have thought in the last four years that the financial industry reached rock-bottom. But in the last couple of months we clearly heard knocking from below and it looks the financial industry will fall even further.

First a well-known for years industry practice of LIBOR interest rate rigging was found its way to the mainstream media as if it was something out of ordinary. This is the logic of the financial industry, especially in the City, and it is inconceivable - at least to the author of this article but everyone has to make his/her own mind - that The Economist did not know it when they were publishing "Save the City" article.

Then there were comments and explanations from Barclays Bank which - for some reason - was singled out in the LIBOR scandal. Price or financial rate rigging of any sort is wrong in any circumstances under free market principles. It is dishonest. The only kind of rigging which is the exception from this rule is by regulation. But regulation is not an ad-hoc decision of a banker, politician or bureaucrat but an effect of a transparent democratic process safeguarded by the clearly defined regulations. It is hard to believe that those who were involved in or knew about LIBOR rigging did not understand such basics.

We also heard news about HSBC involvement in drug money-laundering and mis-selling of complex financial products. It provided more examples that the financial industry has degenerated into a primitive fraud machine based on deceit. Before the end of 2008 each of this news would have been a massive scandal. These days we all seem to accept that this is how the financial industry works.

The mainstream media do not even dare to discuss the underlying cause of the current financial mess, the real engine of the fraud machine, which is bringing the western economy down. It is worthwhile to look into it again and how it works.

Cautious conclusions, based on other fraud investigations, indicate that a bunch of quite (not that) clever financiers changed the banking system practice from "fractional reserve banking" (i.e. lending with loan to deposit ratio below 100%) to, what the author of this blog called, "depleting reserves banking" (i.e. lending with loan to deposit ratio above 100%, which technically and legally is a pyramid scheme).

"Depleting reserves banking" rather than accumulating cash reserves at every deposit – loan cycle, depletes them. To cover this up a lot of instruments and methodology were invented (so-called "financial innovations") giving an illusion that whilst banks' reserves were rid of cash they somehow still had the reserves to cover for cash liabilities. This has nothing to do with whether cash is a paper or electronic record, but who is the guarantor of liability. Cash is guaranteed by a state. This is the key to understand this crisis: whilst capital reserves appeared to have been sufficient at the start of this crisis they collapsed in value as there was no sufficient cash on the market and only a state intervention prevented the financial system from a melt down.

"Depleting reserves banking" practice, peddled by fraudsters, need an army of incompetent "professionals" to run it. Incompetent to such a degree that they did not understand that this was a crude pyramid scheme that was bound to collapse. Hence a huge bunch of history, anthropology, other social sciences and, importantly, lawyers were employed as banks executives to execute heist designed that way. Typically these people's career in banking was very often based on hang-ups. A huge majority of them were very poor in maths in school and banking environment gave them a sense of massive self-importance. They became "masters of the universe" whilst many of their friends who were so much better in science at school were left behind in pretty poorly paid and mundane engineering jobs.

This mechanism was very important to the heist organisers. It created a mindless and incompetent army of financiers, like child soldiers in Africa. It also built a massive lobbying army protecting heist organisers from criminal consequences. This mindless lobbying army was also strengthened by the senior politicians who were given City jobs after the retirement. It is rather impossible to lock up thousands of influential thieves, most of whom did not even understand they were stealing. A lot of them still believe they were"creating value". Psychologically it is like prosecuting child soldiers in Africa. However this time we deal with the adults who should have known not to do jobs they were not suited for. Like a butcher should know that he cannot operate on humans: even taking appendix out which is a trivial surgical operation.

Is it then surprising that the UK economy is suffering from recession again, so-called a double-dip? Most politicians and mainstream media commentators appear to be surprised. This "double-dip" is a simple and easily predictable result of the way the economy is managed. Its is actually quite surprising that the recession is not even deeper. Are politicians playing stupid or are they really THAT stupid?

Greg Pytel: A bare-knuckle fistfight in the family

What we see now in the UK is a huge bare-knuckle fistfight in the family, i.e. the establishment that is running the country.

First the banks went bust in 2008, had to be rescued and became the wipping boy of the public: public enemy number one. So to counteract this, the expenses scandal sprung up out of nowhere. These things - that the politicians were on the take - have been know for years. But conveniently for the banks the scandal erupted and moved the role of the whipping boy onto the politicians. It seemed to work but the politicians had just enough of it and, conveniently for the politicians, the hacking scandal erupted. (The practice of hacking by the media had been very well known for years: from the primitive sifting through the rubbish of celebrities to most technologically advanced spying technologies). The resulting public inquiry into the practices of the media hit the entire media. So these guys had just enough of it. Hence now, when the Leveson Inquiry is getting into its final lap, conveniently for the media folk, new scandals around the banks have erupted this week. We turned the full circle.

Clearly it is a mafia-style bare-knuckle fistfight in the family. There is a war within the British establishment. It is interesting to watch where it will all end. Thus far we have to sponsor this pathetic and extremely expensive spectacle with our taxes.

Greg Pytel: There is a method in this madness

The publication of this article on this blog is dedicated to Sir Mervyn King, the Governor of the Bank of England, who reportedly said a few days ago:

"When this crisis began [in] 2007 - 2008, most people including ourselves [presumably the Bank of England] did not believe we would still be right in the thick of it, in the middle of it five years later."

Well Sir Mervyn, please speak for yourself and not for "most people". To remind you the analysis that was written at the end of 2008 and has been known by the House of Commons Treasury Committee since April 2009:

"If governments do not liquidate the global pyramid scheme, the money they injected will be, in time, converted into toxic instruments (e.g. securities) and cashed in by organisers and privileged customers of these schemes (or in the case of Albania, gangsters and their customer friends). As the amount injected is around 200 times less than the notional value of toxic instruments, the economy will not even see a difference. It will be a step back to September 2008, only now with trillions of dollars of taxpayers’ money spent to sustain the pyramid scheme. It will be merely throwing good money after bad. But can governments afford to come up again with the same amount money and do it 200 times over or more? This is based on a very optimistic assumption that the notional value of toxic instruments is not increasing. If governments take the route of continuing to inject money, they will make taxpayers dependent on the financial system in the same way that criminal loan sharks control their customers — their debt is ever increasing and customers keep on paying forever as much as it is possible to extract from them."

It is well documented on this blog that the actions taken by the governments at the time, in 2007, 2008 and 2009, were designed - which was glaringly obvious at the time too - to turn the liquidity crunch and banks' failures into a perpetual "crisis" spreading it into currencies and the sovereign debt. And the governments, together with the financial industry and the mainstream media, do all their best to keep it that way.

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The Bank of England, backed by the UK government, is going to pump yet another £100 – £120 billion into the economy. Regardless of a seemingly noble plan- to help squeezed businesses and ordinary people- this is yet another example of throwing a massive volume of good money after bad.

And as before, all this money will end up in the banks coffers redeemed for toxic waste (which from practical perspective is infinite) and then transferred to the super rich. It is astounding that the politicians do not see that their behaviour satisfies Einstein’s definition of insanity: “doing the same thing over and over again and expecting different results”. Is it not rather obvious that:

- that the financial system stopped working, i.e. performing properly its money distribution and multiplication function in the economy and instead became a bottomless pit of debt resulting from its financial pyramid structure?

- that money is no longer a credible carrier of value (long term), hence economic theories and assumptions (whether Keynesian more spend or neo-liberal austerity approaches) do not hold anymore and can no longer be applied in practice?

- that any bailout is only a temporary reprieve and the problem comes back soon with a multiplied force (if the politicians are too silly to understand why this is so they have had over three years to learn it from the reality, experience)?

What can be done then? The situation is very similar to a state of the financial system after a war or a massive disaster. The easiest way is to suspend old money (pound sterling, euro or dollar) and issue a new currency (new euro, new pound, new dollar). First paying for the most basic social needs: food and subsistence necessities, social security, health, education, defence and law and order. (There is more than enough slack in the economy to fund it. We do not have a shortage of any goods or of skilled people to provide services.) Only then you can start negotiating the remainder of liabilities in the financial system: (deposits, pensions, and so on) what you are going to honour 100%, what you are going to honour partly and what you will write off completely.

This is the same solution which was recommended over three years ago in a report to the House of Commons Treasury Committee. If all this is done properly there will be little drama. It has been done in the past in critical situations (e.g. Germany and Poland after World War II) and it works: the economies recovered. If, at the time, the financial system worked as today's, i.e. as a giant pyramid scheme, all stimuli such the Marshall Plan would have been wasted.

And, not a small matter, the financial system has to be reformed so it no longer functions like a pyramid scheme as it does at the moment. Again, nothing new or ground breaking: e.g. returning to banking rules and principles of the 1970′s and 1980′s in Germany would do for a starter.

However Europe would require a separate reform as apart from debt problems there are structural problems that the debt crisis exacerbated and brought to light. At present politicians completely mix up these two separate things. It suits the financial industry as it helps them getting money into the financial system, by bailouts and quantitative easing. And this is what they are after: like the heavy industries here were after the government subsidies in the 1970′s.

If it is not done by the deliberate political decision through negotiations, such or a very similar solution will be forced upon the world by the events. The later it happens, the worse, as the mountain of notional debt and liabilities keeps growing. Hence it will be more and more difficult to deal with that in an orderly fashion (i.e. notional losses will be bigger hence, even a greater room for conflict).

At the moment any bailout increases the overall liability and ends up on the financial markets which are a failure, which do not function according to free market rules. This is a textbook example of throwing good money after bad (with no end till a disaster). Is the above not really basic? This is not a financial crisis. This is an intellectual crisis, a demise. It is a stupidity galore.

But there is a method in this madness, there is a reason behind this insanity. Every time we read about obliterated pension schemes and generally falling income and purchasing power of the middle and working classes, the workhorse of the economy, and the growing gap between them and the super rich, thriving market of top end properties in London, luxury goods and services, from systemic perspective it is simply a wealth transfer.

One can argue whether this is right, or wrong, but this is exactly what is happening. Whatever the view is the current crisis is the largest wealth transfer exercise from the middle and working classes to the super rich using pyramid schemes which have exactly the same structures and mechanisms- pretty primitive actually- as Albanian pyramids in the 1990′s.

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This article was published first on Nutmeg blog

Greg Pytel: Barclays' interest rate rigging? Nihil novi

Yesterday it was announced that Barclays Bank was fined for manipulating interbank lending rates. It is business as usual in the City, not even the tip of the iceberg. Don't pick up on Barclays: this shows what the modern banking system degenerated into. It has nothing to do with free market financial trading. It is a crude and primitive manipulation and rigging. Very transparent indeed but regulators and politicians choose not to see this. As previously published on this blog: this also shows what kind of "top talent" the current financial industry attracts.

From a broader perspective it is simply a part of the largest heist in history which continues.