According to the National Audit Office, The UK National Debt rose by £1.5trn as a result of the Bank Bailout. This is twice the nation’s total annual budget. For this amount, the UK could have funded the health service (£106.7bn a year) for fourteen years , the entire education system for forty years (£42bn a year) or over three hundred years of Job Seekers Allowance (£4.9bn a year). Not a single banker has gone to court, let alone to jail. Instead bankers are being let off with fines and the removal of honours, effectively buying their way out of justice.
Despite current propaganda that the national debt and the ensuing austerity policies are required to roll back excesses in public spending, the reality is the Financial Crisis was caused by the unregulated financial services sector.
There was collusion between government and the financial services industry, to avoid proper regulation of financial services in general, and the derivatives market in particular. There was intense lobbying in the US and the UK to maintain this position, with senior government figures on both sides of the Atlantic stepping in directly to prevent the Commodity Futures Trading Commission (in the US) and the Financial Services Authority in the UK, from ever coming close to putting the appropriate safeguards in place around these products.
This left banks, brokers and insurance companies free to mount the biggest assault on fiscal logic known to man. They started to rapidly expand their theoretical balance sheets by leveraging debt to almost infinite ratios.
High Street Banks and Mortgage Providers, credit card companies and other debt merchants chased the custom of individuals with little or no regard for their ability to pay back the loans. They did this to sell on to Investment Banks as Collateral Debt Obligations.
This product was then, with the support of the Cartel’s gatekeeper, the Credit Ratings Agencies, declared Triple A for its credit worthiness; the same as a government bond.
The banks then took these investment products and sold them to unknowing pension companies who bought them on the basis that they were now deemed perfectly safe.
The same banks then insured for the very product they sold the pension firm going toxic. These are called Credit Default Swaps (CDS). There was no limit on who could set up these CDS’s either. So, banks could place greater risk into the market by betting not only on their own toxic sell offs, but those of other banks.
At every point of these exchanges, significant fees are being handed over, generating paper profits, making balance sheets look amazingly positive, with no actual product or service underpinning them.
Finally, in 2007 all those little over leveraged consumers around the world started to find it impossible to repay their loans. As CDS claims went in the insurers couldn’t cope with the financial hit and started to fold, the brokers balance sheets couldn’t handle the hit and started to fold, and the high street banks, unable to claim from broker, bank or insurer started to fold.
However, instead of these corporations collapsing, this extraordinary mountain of toxic private debt was transferred into public debt by the Bank Bailout.
What Happened to the Bankers Responsible?
Most of the individual traders responsible for the crash are still at work trading in the same dodgy derivatives that created the crisis. The derivatives market is still unregulated and continues to accumulate a further pile of toxic debt which will one day implode again, currently standing at $700trn. This is nearly ten times the annual earning power of the entire planet ($79trn).
But beyond the individual traders are the leaders of the Banks, the people responsible for the strategy and the system of reward for unacceptable risk taking and greed. Did they at least face culpability for their crimes?
Goldman Sachs – Hank Paulson
Goldman Sachs played a key role in the crisis, making huge profits in the derivatives trades which busted the global financial system. The CEO at the time of this egregious behaviour was one Hank Paulson. Mr Paulson oversaw the sale of dodgy derivatives to pension firms, local governments and other misinformed investors. The bank also, appearing to foresee the crisis, sold more than $3bn in CDOs in the first half of 2006, immediately betting against them. That same year, Paulson left to become Treasury Secretary of the US and in doing so was able to sell his Goldman shares without paying Capital Gains tax. He made $485m. If he had held onto the stocks, they would have been worth just $278m. In his new position, Paulson was also able to lead meetings with world leaders and become the chief architect of the taxpayer funded bailout of the crash he created.
Paulson now sits on a personal fortune estimated at over $700m, is a senior fellow in University of California’s Harris School of Public Policy and still an opinion former on the economics world stage.
RBS – Fred Goodwin
On 7th October 2008, The Royal Bank of Scotland, the world’s largest bank (measured by assets), failed. The UK government made the choice to inject £45.5 billion of public money into the Bank to avoid total collapse.
The FSA report into the collapse blamed the bank’s failure on “underlying deficiencies in RBS management governance and culture which made it prone to make poor decisions”.
The RBS story has to be read to be believed. It is simply a litany of greed stimulated dodgy trades to maximise short term profits at the expense of bank employees and the taxpayer.
For his role in the scandal, CEO Fred Goodwin was stripped of his Knighthood, got a few weeks bad press and saw his annual RBS pension reduced from £650k a year to £342,500 a year. RBS employees who saw their pensions and share savings wiped out by the bank failure, could be left with as little as the basic state pension of £5,727 a year.
Hopes that RBS has turned a corner are also premature. Since the crisis the Bank has also been found guilty of manipulating the LIBOR rate and fined £390m and is facing an investigation for incompetence over IT failures which saw customers unable to make payments or use cash machines.
HBOS – James Crosby
Way back in January of 2004, the FSA and the HBOS Board were told by Group Finance Director Mike Ellis that “the Group’s growth had outpaced the ability to control risks. The Group’s strong growth, which was markedly different than the position of the peer group, may have given rise to “an accident waiting to happen”.
Both the FSA and the HBOS board ignored this warning and in 2007 the ‘accident’ happened, the bank crashed. The UK government injected £8.5bn of taxpayer money into HBOS, but this was not enough. HBOS needed to be taken over by LloydsTSB to survive and received a further £12bn from the taxpayer in the deal.
According to the damning verdict of a Parliamentary Commission report by the UK Treasury Committee “the FSA’s regulation of HBOS was thoroughly inadequate”. The report states that the FSA’s focus moved away from HBOS after 2004, and even after HBOS collapsed the regulator took more than five years to launch an investigation into the bust bank. In a stunning coincidence, HBOS’s Chief Executive James Crosby was appointed to the Board of the FSA in 2004, whilst still operating as the Chief Executive of the bank it was investigating. He became Deputy Chair of the FSA in 2007, just as HBOS was crashing. Although RBS didn’t fold until a year later, the FSA put HBOS at the back of the queue for investigation.
When the Bank’s own internal Head of Group Risk Charles Moore raised his concerns to Crosby he was summarily dismissed. When Moore blew the whistle in 2006, Crosby denied the claims and was supported by both the FSA and then Prime Minister Gordon Brown.
We now know that Moore’s allegations were entirely accurate. Crosby has since been enjoying a non executive directorship for catering company Compass worth £125k a year, a HBOS pension of £580,000 a year, alongside other lucrative positions with MoneyBarn and Bridgepoint.
Despite being found by the Parliamentary Commission to have been the person primarily responsible for the bank’s failure, the loss of £20bn of public money to save it, the summary dismissal of the Group of Risk for doing his job, and participating in a bungled investigation of these failures as board member and later Deputy Chair of the FSA, Crosby is angling to avoid his day in court.
Like Goodwin before him, Crosby is offering up his knighthood (for services to Banking) and just 30% of his pension, leaving him to struggle by on £406,000 a year. He has resigned from his Bridgepoint directorship but maintains his other positions and is free to pick up others worth more than £125k a year.
What does it take for a Banker to go to Jail?
One Goldman Sachs banker did go to jail. Rajat Gupta was sentenced to two years in October 2012 for insider trading. He was jailed for, as the judge in his case put it: “stabbing Goldman in the back” Yes, he was jailed for losing Goldman Sachs money.
“The Court can say without exaggeration that it has never encountered a defendant whose prior history suggests such an extraordinary devotion, not only to humanity writ large, but also to individual human beings in their times of need,”
Despite this, Gupta’s behaviour in providing a tip which lost Goldman cash was considered worthy of an example making custodial sentence. Gupta’s crimes were far less harmful than Hank Paulson’s tipping off of Hedge Funds that Fannie Mae was to receive a government bailout in 2011 when it was non-public information.
The lesson here is: Bankers go to jail when they defraud banks, not when they defraud the public purse.
Meanwhile Among the 99%
The cost of the bailouts is being met by ideological austerity on the poor. A decade of planned austerity measures across Europe is delivering a lost generation of young people born into a world of zero opportunity.
An additional 200,000 children have been forced into poverty in the UK alone by the Coalition government’s austerity programme.
The working poor and those others in our society reliant on the support of public money to live in dignity are paying the price for a financial crisis they did not cause. Meanwhile, the men (and they are mostly men) who made themselves stinking rich by destroying their own banks and the global economy, continue to live lives of rampant indulgence.
Disaster bankers are being allowed to escape justice by throwing back loose change from the mountain of public money and ill gotten gains they acquired through their criminal behaviour. This in effect, turns our justice system into a means tested rule enforcer: the rules only apply if you cannot afford to buy immunity. Not only that, but it all but guarantees another great crash in coming years as the bad behaviour continues, unabated and ever more rewarded.
Find Out More
For those preparing a comment parroting the corporatized government line that the bankers didn’t commit any crime, I turn you to Charles Ferguson’s book Predator Nation. It lays out, in detail exactly which crimes have been committed; by whom and the reasons they are not being indicted.
Watching Ferguson’s Inside Job (free online and wonderfully narrated by Matt Damon) is a great and accessible way of understanding the financial crisis and just how unnecessary and ideological the subsequent ‘austerity’ programmes really are.
Professor Steve Keen’s Debunking Economics is, in my humble opinion, the financial text of our age. It explains in layman’s terms exactly how we ended up with this defunct economics, challenges and debunks its bogus assumptions, and introduces the exciting new schools of economics growing in the waste ground. This should be on your reading list a high priority.