The best classical quote this week before the Credit Suisse crash, came again from the president of Finland’s Central bank who is not known for being very sharp. He spoke to the media with the following statement translated roughly from Finnish:
“European banks withstand attacks – no bodies have been seen…”
Of course there are no bodies because central banks and governments are providing almost unconditional support for banks if and when the regulators discover that any bank is not as sound as they like to think.
How can regulators say they did not see SVB or Credit Suisse were speculating with other peoples’ money and taking huge and uncontrolled risks? The highly paid board members, the CEOs, and many others in the bank must have known that big profits do not come like magic without risks.
Central Banks are meant to keep us safe from inflation and banking chaos. In normal times, when we do not have extreme events like Covid or Putin’s war, they should manage, but time after time they fail. They get away with blue murder because we have a modern media that seems to believe that they must be beholden to these people because they are serious in their dark suits and expensive big buildings. However, their failures are an accumulation of decades of policy failures in full view right in front of our eyes.
Professional readers from the finance sector will now raise their voices against this view. The biggest central banks, the US Treasury, the US Federal Reserve, and the European Central Bank, ECB, along with many other less important central banks, have somewhat different structures and policy objectives, but in the West we have interconnected financial markets that depend on a small number of big banks and a few other closely related entities like asset managers of various types that are regulated directly or indirectly related to these central banks.
Let’s start with how central banks have failed to supervise and regulate these big financial markets and the big banks, which they have, time and time again since 1998.
I have decided to limit this report to the last 25 years because so much bad stuff has happened since then when the markets in Europe and in the US the markets were already heavily deregulated. Banks could make loans to corporate clients and private people for home mortgages, while speculating in the markets with their own money and with clients’ money.
Capital adequacy requirements are regulated by the Bank for International Settlements, (IBS), the central bank for central banks. The close and unhealthy relationship between the US Treasury, the US FED, the ECB and the BIS meant that banks could lobby hard and successfully to soften up tougher regulation. At the turn of the century, European banks did not have to allocate any equity to government bonds. Some of them purchased huge amounts of Greek, Spanish and Italian government bonds because their yields were very generous, meaning that they could lock in huge profits because the banks’ cost of funding was much lower.
The best governments, (USA, Germany, etc.), were highly rated and the interest from these government bonds were well below what the banks paid for their own funding. Banks only bought these very liquid and highly rated bonds when speculating for a sharp fall of interest rates or when forced to hold them because of various regulations. When Greece defaulted on its bond payments there was a serious run on the bonds of Italy and Spain that caused banks to make huge losses on their holdings of these bonds. The banks and the analysts knew about these holdings, as did the regulators knew, or should have known! This was a minefield where the regulators were negligent in their duty in ensuring that banks should not be allowed to game the regulations. Such “investments” were a rotten speculation that had no economic benefits for the real economy. It was a simple speculation that should not have been possible because it was massive in size. The losses for taxpayers were also massive, and Draghi, (the then ECB boss and former Goldman Sachs partner), was claimed to be a hero by the press! His PR spin doctors did a good job explaining that he was doing God’s work to save banks in distress! Massive bonuses were paid to senior executives and traders when the booked huge profits before these “investments” turned bad!
Then we had the housing mortgage scam in the USA where the US Treasury and the FED stepped in after a decade of mis-selling these products in plain sight enriching Wall Street dealers and bosses beyond anyone’s dreams! This activity was based on misleading credit risk information and interest rate speculation that also had no economic benefits for the real economy. In fact, the opposite was true because huge losses were borne by taxpayers and few if any bankers were punished by fines or prison. Again, central bankers stepped in to stop the flood of losses and potential bank failures.
In the UK, the world’s largest bank, the Royal Bank of Scotland, was nationalized by the UK government as it came to the brink of collapse in 2008 after a global acquisition spree that briefly made it the world’s biggest bank but also left it heavily exposed to risky loans in the U.S. It was too big to fail, which is another way of saying that the Bank of England just failed to monitor the real risks that caused its failure because they were just too friendly with senior management. Never believe any excuse that the regulators could not have known – any analyst with a spreadsheet and the same financial data that the regulators have access to would have spotted the risks in 5 minutes. The media blamed management for hiding their malfeasance, not the regulators, all of whom were former well-connected bankers!
This banking crisis of 2007/2008 caused central banks to invent the “QE policy” which gave central banks the possibility to buy trillions of government bonds which resulted in negative interest rates.
One trillion of Euros is a one million millions of Euros (= €1 000 000 000 000). That is big, a very big number. They probably purchased from banks around one third of all bonds issued by the West’s governments. In other words, central banks were effectively financing governments, from which they were meant to be independent!
You can imagine the profits made by the biggest banks with whom the bond trades were made. This was a gold mine for bond traders giving bonuses that were more than enough to retire with for a thousand years for hundreds, if not thousands of traders and their bosses. The final amount in 2023 was probably near to 10 trillion Euros, meaning the central bankers were financing our nations’ budgets with newly printed money – funny money! Huge liquidity and super low interest rates caused the prices of real estate and shares to increase fast, again something that benefited the rich and wealthy, thank you very much. Later in 2020, 2021 and 2022, more cash was then pumped into the banking system by governments to cover the banks’ lost revenues due to Covid lockdowns which just fed even more inflationary pressures on food, housing, and shares, all great for the small wealthy minority.
Inflation finally got out of the control of the central banks when Putin invaded Ukraine creating food and fossil fuel shortages. Putin cut off the supply of food and fossil fuels so their prices went up like a moon rocket. Central banks have no tools to stop these types of price increases caused by huge supply cuts, but they pretended to be financial heroes who could do the impossible by stopping this inflation in its tracks by rapidly increase interest rates. This just resulted in consumers with housing loans to have less spare cash than before. This sudden and sharp policy reversal just caused the prices of houses, real estate, shares, and bonds to fall like stones, while it had no impact on the price of food, fossil fuels or electricity!
This policy had other unforeseen consequences that caused banks with big speculative investments in government bonds to face huge losses like SVB, an American bank faced death while causing a chain reaction hurting other banks. At the time of writing, regulators were not just sleeping in their offices, but they were downright snoring negligently. They claimed to be innocent because they claim that they lacked powers and resources to supervise – and that is rubbish. The bond position of SVB bank was a huge and high-risk position that any accountant and regulator should have seen months ago! It was a high-risk position that should have been impossible for any bank to take! But readers should be aware that banks have lobbied successfully to weaken regulation and that the losses caused by foolish regulators have been borne by us the taxpayers.
Not one senior banking boss or central banker has ended up in court! If a person causes losses for others, then he or she should be personally liable to cover these losses like any ordinary thief. At the minimum, they should be removed from their office, and be banned from any public positions for life. But that is not what the media is saying, because they still treat these people as some kind of irreplaceable heroes… oh dear, what madness have we created here.
Photo: Monkey business from Wikipedia by