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According to the Collins English Dictionary 10th Edition fraud can be defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage".[1] In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain
*As defined in Wikipedia

Thursday, April 21, 2011

Why Can't Goldman Sachs Be Allowed to Fail?

Below is a thoughtful analysis by James Saft on why banks like Goldman Sachs cannot fail, at least until the next big crisis hits. Banks are bigger than nations themselves. Banks have captured the policies of governments. Regulation is still inefficient. The present nature of banks is a conduit to financial risk and financial instability in the game of global finance.

If the financial rules that are now being made to reflect the Dodd-Frank reform bill can successfully encompass actions that are now considered acceptable (as merely unethical or immoral) and, therefore, cannot be prosecuted, then these rules must state the illegality of the unethical and immoral actions of banks. Then the financial system may begin to be reformed.

Banks 1, nation states nil
by James Saft - Reuters

The battle between the banks and nation states is shaping up as something that lies between a phony war and a rout.

The bald facts are that three years after the crisis in which banking almost brought down the global economy, the biggest banks are bigger, more global and more entrenched in their positions courtesy of a now all-but-explicit government guarantee.

All three factors make large banks harder for individual nations to control, even the U.S., and even if the U.S. manifested the desire to pull out of its heads-you-win-tails-we-lose bargain.

“Too big to fail (banks) really creates a capture problem … They are now larger than single nations,” Andrew Sheng, chief adviser to the China Banking Regulatory Commission said on Saturday at a conference at Bretton Woods sponsored by the Institute for New Economic Thinking.

“The top 25 banks comprise 73 of global GDP and 45 percent of total assets of the banking system … They are so powerful they are essentially Godzillas.”

Sheng argues, rightly, that the creation of momentum upwards in asset prices by financial engineering combines dangerously with lax and co-opted regulation and an incentive scheme at banks that encourages risk taking.

The result: repeated and ever-larger crises that begin in the banking system but the costs of which are borne by taxpayers.

The global nature of banking makes single-nation regulation largely impotent. The Dodd-Frank legislation recently enacted has a resolution program that, though intended to combat the risks of a large bank failing, can do very little due to the global nature of such institutions’ assets, liabilities and networks.

Even if this starts as a regulatory problem, it almost inevitably ends as a political one, as a glance at Iceland shows. Voters in Iceland rejected by a 59-41 percent vote an accord that would have allowed for the repayment of $5 billion to Britain and the Netherlands, the second time voters have refused to pay to make good the debts of their formerly out-sized banking system.

Iceland, you will remember, was the host nation to a group of global banks which borrowed and lent unwisely and when they collapsed left the nation of 320,000 with a staggering liability.

The most recent “No” may be foolish, as it will shut Iceland out of international capital markets and may be reversed by international courts anyway, but it is a good example of how people react to debts which may be legal but are certainly not just.

The mechanics and merits of Iceland’s situation are not fundamentally different from those of the U.S. or Britain; the chief difference is scale.

As the scale of losses rises, it is possible that the politics of TBTF banks change in the world outside of Iceland, but it looks as if that will wait until a further crisis breaks.

For now banks have bested the nation states. Compared to 2007 there exists the same incentives to take risks, largely, while the funding and trading positions of the largest banks are, relative to their smaller peers, now better because the world has had an object lesson in their special government guaranteed status.

Simon Johnson, the MIT professor and former chief economist at the IMF, conducted a thought experiment with the audience at the Bretton Woods conference, asking who believed that Goldman Sachs would be allowed to fail if, for whatever reason, it found itself on the brink.

No one, it appeared, in the audience thought Goldman would be allowed to follow Lehman Brothers into history, and Johnson reports that having tried that question on several audiences he has thus far only found one person who does, an evidently somewhat overenthusiastic Goldman short seller in New York.

Of course Goldman cannot be allowed to fail, at least in their current form and in the current state of play.

Of the ideas for righting this few have much chance of working, and those have little chance of coming to reality. Higher capital, especially on a sliding scale linked to size, might work, but at levels perhaps well above those currently being debated.

Resolution authorities would have to be international, making an agreement out of reach for the foreseeable future. The same can probably be said of a financial transactions tax, which again would only truly be effective if global.

That is even before we consider the fact that both regulators and elites in much of the world have largely been captured by finance. Where do you think people go to work when their days as public servants are through?

So, it is on to the next banking crisis. Whenever it sees fit to come it will be larger and may finally make the rest of the world a bit more like Iceland.

Read the article here


Anonymous said...

Best Way to Raise Campaign Money? Investigate Banks By Matt Taibbi

This is about as perfect an example of how American politics works as you’ll ever see. This foreclosure issue is a monstrous story that is somehow escaping national headlines; essentially, all of the largest banks in the country have been engaged in an ongoing fraud and tax evasion scheme that among other things has resulted in many hundreds of billions in investor losses, and hundreds of thousands of improper foreclosures.

Hence the sudden avalanche of money sent Miller’s way. The numbers are laughable. In 2006, out -of-state donors gave Miller’s campaign $10,508. For the 2010 cycle, that number was $497,357. Three lawyers by themselves – Al Gore’s attorney David Boies, plus Donald Flexner and Robert Silver, all partners in the firm Boies, Schiller and Flexner – gave Miller a total of $60,000.

Guess who Boies’ firm defended last year, in a suit brought by an Australian hedge fund that claims it was ripped off in a deal involving toxic mortgage-backed CDOs? That’s right: Goldman, Sachs. Goldman hired Boies to represent it in a fight against the now-defunct Basis Yield Alpha Fund, which bought into Goldman’s notorious “Timberwolf” deal – one of the “shitty deals” Senator Carl Levin, in hearings last year, was haranguing Goldman for selling to unsuspecting clients.

Joyce said...

Thank you for the link above. I used it in a post.

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