Tag: Banks

Did Cocaine Fuel the Financial Bubble?

The controversial former drug tsar David Nutt told the London Sunday Times this weekend that cocaine-using bankers with their “culture of excitement and drive and more and more and more … got us into this terrible mess”.

Nutt, who was sacked for claiming that ecstasy was as safe as horse riding, told the Sunday Times that abuse of cocaine caused the financial meltdown.

“Bankers use cocaine and got us into this terrible mess,” he told the paper adding that the drug made them “overconfident” and led to them taking more risks. Nutt, who is professor of neuropsychopharmacology at Imperial College, claimed that cocaine was perfect for a banking “culture of excitement and drive and more and more and more. It is a ‘more’ drug”

There were also lots of stories about some of the big swingers in New York enjoying a line or 10 of an evening. Bernie Madoff’s office was apparently known as “the North Pole” such were the gargantuan quantities of “snow” to be found there and most bankers are aware of the published allegations that Jimmy Cayne (former CEO of Bear Stearns) had an anti-acid medication bottle that was filled with cocaine.

Scarface!!!!!!!!!!1Dr Chris Luke, an A&E specialist based at Cork University Hospital, Ireland, who has studied the effects of cocaine on bankers, has stated that “prominent figures in financial and political circles made irrational decisions as a result of megalomania brought on by cocaine usage”. He concludes that “people were making insane decisions and thinking they were 110% right … which led to the current chaos.”

Greed, selfishness, ignorance and ruthlessness also played their part, of course, but I think it would be foolish not to see the role that the drug played in creating the bubble.

Did cocaine use by bankers cause the global financial crisis? | Business | The Guardian.

How Greedy States & Cities Were Fleeced $4 Billion By Wall Street

For more than a decade, banks and insurance companies convinced governments and nonprofits that financial engineering would lower interest rates on bonds sold for public projects such as roads, bridges and schools. That failed promise has cost more than $4 billion, according to data compiled by Bloomberg, as hundreds of borrowers from the Bay Area Toll Authority in Oakland, California, to Cornell University in Ithaca, New York, quietly paid Wall Street to end agreements since 2008.

The termination payments to Wall Street firms come at the worst possible time. The longest recession since the Great Depression left states facing budget gaps of $72 billion next fiscal year, according to the National Conference of State Legislatures. U.S. cities saw their general fund revenue fall the most since at least 1986 in the budget year that ended June 30, according to the National League of Cities.

Wall Street banks and insurers peddled financial derivatives known as interest-rate swaps to governments and nonprofits that bet they could lower the cost of borrowing. There were as much as $500 billion of the deals done in the $2.8 trillion municipal bond market before the credit crisis, according to a report by Randall Dodd, a senior researcher on the Financial Crisis Inquiry Commission, published by the International Monetary Fund in June.

via Wall Street Collects $4 Billion From Taxpayers as Swaps Backfire – Bloomberg.

India and China want IMF to sell its $100b gold

Another example of the emerging Markets thinking outside-of-the-box to come up with a seemingly simple solution to re-starting the developing world’s growth.

India and China may press for the sale of the entire gold reserves of the International Monetary Fund (IMF) to raise money for the least developed countries.

The IMF holds 103.4 million ounces (3,217 tonnes) of gold that, if sold, can fetch about $100 billion.

A draft paper exchanged between New Delhi and Beijing proposes that the gold be sold in bullion markets over a period of two to three years. The money thus raised must be used in tackling poverty in the poorest nations.

via India and China want IMF to sell its $100b gold.

IMF Warns Over Limits Of Stimulus

Mr Strauss-Kahn called for a urgent action to “cleanse banks” of toxic assets and for further fiscal stimulus beyond the 2pc of global GDP already agreed. The snag is that high-debt countries may have hit the limits already.

“The impact becomes negative for debt levels that exceed 60pc of GDP,” said the Fund.

While no countries were named, this would raise questions about Japan, Germany, France, Italy and ultimately Britain and the US after their bank rescues.

via IMF warns over parallels to Great Depression – Telegraph.

Black Swan-proof World

We love 10 step programs. So here an economic perscription by the author who was a veteran trader, a distinguished professor at New York University’s Polytechnic Institute and the author of The Black Swan: The Impact of the Highly Improbable 1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

via FT.com / Comment / Opinion – Ten principles for a Black Swan-proof world.

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Let’s Put Down the Pitchforks

During a financial crisis, fairness is a luxury we cannot afford. During the 1930s, bankers and financiers lost everything, but the outcome — a decade-long depression — was hardly fair to the ordinary American. The key question is not whether something is fair, but whether it helps get us through this mess faster and at a lower cost.

mob_pitchforks_smallAt the moment, the Treasury is working (and working and working) on ways to entice private capital back into the banking and shadow-banking system by offering government financing and guarantees against losses. Every dollar of private capital that can be attracted back into the system is a dollar that the Treasury won’t have to borrow or the Federal Reserve won’t have to print. And only with the return of private capital will the government be able to get back the rescue money it has committed.

As the financiers see it, there’s a big difference between the government that sets tough terms for participation in its financial rescue programs and a government that is a fickle and unreliable partner, that tries to micromanage their businesses and changes the rules of the game with every zig and zag of public opinion

While it was Wall Street that got rich by peddling new ways for Americans to live beyond their means, the decision to do so was ours. It was we who ran up the credit card bills, we who drew down the equity in our homes and we who refused to tax ourselves for the government services we demanded. Wall Street bankers may have been the pushers, but it was we Americans who became addicted to the easy credit.

via Steven Pearlstein – Let’s Put Down the Pitchforks – washingtonpost.com.

Joe Cassano – The Guy Who Sank AIG

joe_cassanoThat guy — the Patient Zero of the global economic meltdown — was one Joseph Cassano, the head of a tiny, 400-person unit within the company called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative use of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while wreaking financial disaster. Cassano, by contrast, was just a greedy little turd with a knack for selective accounting who ran his scam right out in the open, thanks to Washington’s deregulation of the Wall Street casino.

via The Big Takeover : Rolling Stone.

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A Simple Guide to the Banking Crisis

Proposition 1: The boom in the U.S. was funded almost totally by foreign money.

Proposition 2: Foreign investors preferred to put their money into investments that were perceived as having low risk.

Proposition 3: Today, after everything has gone bad, many of the counterparties on the other side of the toxic assets are foreign investors, directly or indirectly.

Proposition 4: It’s a lot harder for the Federal Reserve and Treasury to resolve a banking crisis where the main counterparties are not American.

Proposition 5: The fact that the counterparties are overseas means that out of the three options: bailout, bankruptcy, or nationalization—none are satisfactory.

The best actual marker of the progress of the financial crisis is not stock or real estate prices, but rather how well international cooperation holds up.

Sometime later this year we will have a massive global conference aimed at simultaneously resolving the banking crises in the major developed countries. The goal will be a political negotiation of the value of the toxic assets, and a clearing of the books.

If the conference succeeds, then it will be possible to fix the financial system relatively easily. But if it fails, then things get dicey.

via A Simple Guide to the Banking Crisis – BusinessWeek.

Globalization Retreating

“The collapse of globalization . . . is absolutely possible,” said Jeffrey Sachs, a noted American economist. “It happened in the 20th century in the wake of World War I and the Great Depression, and could happen again. Nationalism is rising and our political systems are inward looking, the more so in times of crisis.”

A Global Retreat As Economies Dry Up – washingtonpost.com.

Tom Friedman Is Worried

I’m worried. We’ve just elected a talented young president with many good instincts about how to propel our country forward, extend health care to more people, make our tax code fairer and launch a green industrial revolution. But do you know what I fear? I fear that his whole first term could be eaten by Citigroup, A.I.G., Bank of America, Merrill Lynch, and the whole housing/subprime credit bubble we inflated these past 20 years.

I hope my fears are exaggerated. But ask yourself this: Why couldn’t former Treasury Secretary Hank Paulson solve this problem? And why does it seem as though his successor, Tim Geithner, won’t even look us in the eye and spell out his strategy? Is it because they don’t get it? No. It is because they know — like Roy Scheider in the movie “Jaws,” when he first saw the great white shark — that “we’re gonna need a bigger boat,” and they’re too afraid to tell us just how big.

via Op-Ed Columnist – Obama’s Ball and Chain – NYTimes.com.

Thomas Friedman’s Five Worst Predictions