Reigning in the banks
By P. GUNASEGARAM
There is little question that banks need to be reigned in and watched closely – it’s a question of how much
THE international banking community, after having brought the world to the brink of disaster and having wreaked havoc on the economies of the world, is now griping, really griping.
The gripes stem from efforts being made around the world to regulate bank activities, particularly by US President Barack Obama who announced a number of key measures to help ensure that there is no repeat of the crisis that threatened to crash the world.
This, extracted from Obama’s speech last week on the financial reforms, outlines succinctly the changes: “For while the financial system is far stronger today than it was one year ago, it’s still operating under the same rules that led to its near collapse. These are rules that allowed firms to act contrary to the interests of customers; to conceal their exposure to debt through complex financial dealings; to benefit from taxpayer-insured deposits while making speculative investments; and to take on risks so vast that they posed threats to the entire system.
“That’s why we are seeking reforms to protect consumers; we intend to close loopholes that allowed big financial firms to trade risky financial products like credit default swaps and other derivatives without oversight; to identify system-wide risks that could cause a meltdown; to strengthen capital and liquidity requirements to make the system more stable; and to ensure that the failure of any large firm does not take the entire economy down with it. Never again will the American taxpayer be held hostage by a bank that is ‘too big to fail’.”
It was quite clear to anyone who watched the situation closely the reasons for the financial crisis. Banks were taking too much risks with depositors money and were not doing the business of banking properly.
Bankers were being rewarded when huge risks they took resulted in extraordinary profits for them, paying themselves millions of ringgit in bonus. There were substantial incentives to take risk. The average bonus at Goldman Sachs for instance was almost US$500,000 a year!
This high figure is because of many staff who routinely earned millions of dollars a year. Goldman’s bonuses amounted to an incredible nearly 40% of revenue – revenue, not profit. And most of its revenues came from proprietary trading – trading for its own account. Because of their huge size, banks have tonnes of deposits.
Citibank’s deposits amount to over US$800bil. If they muscle into proprietary trading – and many of them have – they can move markets by using just a small portion of their deposits. These can be in the commodities, foreign exchange, derivatives or other markets.
In fact major investor/speculator/manipulator – depending on who you talk to – George Soros said at the World Economic Forum at Davos earlier this week that Obama did not go far enough to push banking reform. His arguments ran counter to those by bankers who predictably wanted less regulation. In situations like these, common sense should prevail.
And how about this one which Obama formulated with former Federal Reserve chief Paul Volcker: “It’s for these reasons that I’m proposing a simple and common-sense reform, which we’re calling the ‘Volcker Rule’ – after this tall guy behind me. Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers. If financial firms want to trade for profit, that’s something they’re free to do. Indeed, doing so – responsibly – is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.”
Around the world people should stand up and fight against this attempt by banks to stop close supervision of their activities, arguing that this will crimp their profits and cut the creation of jobs. The world needs to be protected against bad banking.
We should take heart in this extract of that speech by Obama: “So if these folks want a fight, it’s a fight I’m ready to have. And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can’t lend more to small business, they can’t keep credit card rates low, they can’t pay a fee to refund taxpayers for the bailout without passing on the cost to shareholders or customers – that’s the claims they’re making. It’s exactly this kind of irresponsibility that makes clear reform is necessary.” Well said Obama.
Managing editor P. Gunasegaram says there is no harm done and every benefit derived, from requiring banks to be prudent. After all, are they not the custodians of our money?
THE international banking community, after having brought the world to the brink of disaster and having wreaked havoc on the economies of the world, is now griping, really griping.
The gripes stem from efforts being made around the world to regulate bank activities, particularly by US President Barack Obama who announced a number of key measures to help ensure that there is no repeat of the crisis that threatened to crash the world.
This, extracted from Obama’s speech last week on the financial reforms, outlines succinctly the changes: “For while the financial system is far stronger today than it was one year ago, it’s still operating under the same rules that led to its near collapse. These are rules that allowed firms to act contrary to the interests of customers; to conceal their exposure to debt through complex financial dealings; to benefit from taxpayer-insured deposits while making speculative investments; and to take on risks so vast that they posed threats to the entire system.
“That’s why we are seeking reforms to protect consumers; we intend to close loopholes that allowed big financial firms to trade risky financial products like credit default swaps and other derivatives without oversight; to identify system-wide risks that could cause a meltdown; to strengthen capital and liquidity requirements to make the system more stable; and to ensure that the failure of any large firm does not take the entire economy down with it. Never again will the American taxpayer be held hostage by a bank that is ‘too big to fail’.”
It was quite clear to anyone who watched the situation closely the reasons for the financial crisis. Banks were taking too much risks with depositors money and were not doing the business of banking properly.
Bankers were being rewarded when huge risks they took resulted in extraordinary profits for them, paying themselves millions of ringgit in bonus. There were substantial incentives to take risk. The average bonus at Goldman Sachs for instance was almost US$500,000 a year!
This high figure is because of many staff who routinely earned millions of dollars a year. Goldman’s bonuses amounted to an incredible nearly 40% of revenue – revenue, not profit. And most of its revenues came from proprietary trading – trading for its own account. Because of their huge size, banks have tonnes of deposits.
Citibank’s deposits amount to over US$800bil. If they muscle into proprietary trading – and many of them have – they can move markets by using just a small portion of their deposits. These can be in the commodities, foreign exchange, derivatives or other markets.
In fact major investor/speculator/manipulator – depending on who you talk to – George Soros said at the World Economic Forum at Davos earlier this week that Obama did not go far enough to push banking reform. His arguments ran counter to those by bankers who predictably wanted less regulation. In situations like these, common sense should prevail.
And how about this one which Obama formulated with former Federal Reserve chief Paul Volcker: “It’s for these reasons that I’m proposing a simple and common-sense reform, which we’re calling the ‘Volcker Rule’ – after this tall guy behind me. Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers. If financial firms want to trade for profit, that’s something they’re free to do. Indeed, doing so – responsibly – is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.”
Around the world people should stand up and fight against this attempt by banks to stop close supervision of their activities, arguing that this will crimp their profits and cut the creation of jobs. The world needs to be protected against bad banking.
We should take heart in this extract of that speech by Obama: “So if these folks want a fight, it’s a fight I’m ready to have. And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can’t lend more to small business, they can’t keep credit card rates low, they can’t pay a fee to refund taxpayers for the bailout without passing on the cost to shareholders or customers – that’s the claims they’re making. It’s exactly this kind of irresponsibility that makes clear reform is necessary.” Well said Obama.
Managing editor P. Gunasegaram says there is no harm done and every benefit derived, from requiring banks to be prudent. After all, are they not the custodians of our money?
Chris Matyszczyk is an award-winning creative director who advises major corporations on content creation and marketing. He brings an irreverent, sarcastic, and sometimes ironic voice to the tech world. He is a member of the CNET Blog Network and is not an employee of CNET.
