NOTE:This is the first part of a three-part series by Canadian investigative reporter Nick Fillmore exploring how crime and violations occurring in the giant investment banking field are again threatening the world economy.
Five years after the Great Recession of 2007-08 destroyed the lives of millions of people and cost trillions of dollars, many of the big investment banks that caused the near total meltdown are still involved in shady and sometimes criminal financial gambling schemes that could crash the world economy again.
Independent economists warn that another melt-down could destroy the economy as we know it. Fear is ever present because the giant private banks -- particularly U.S. banks -- bet trillions of dollars that are not properly secured and could cause havoc if defaulted on, causing other investments to crash.
Economist Joseph Stiglitz, a Nobel Prize winner who I trust implicitly, says that the economies of Europe and North America in particular are in danger because of the irresponsible behaviour of rogue financial gamblers and criminal giant banks.
Millions of ordinary citizens who have their savings and investments tied up in the financial racket are unaware that their money and the entire economic environment around them is at risk.
When the topic of a new financial crisis comes up, most people throw up their hands in frustration. The general public is at a serious disadvantage when it comes to trying to understand the seriousness of the problem. Negative analysis of the dangers of a collapse is more-or-less a taboo topic in the business-dominated mainstream media.
Because so many things are wrong with the economy, my fear is that the next crash could be the worst ever.
Multi-national banks with billions of dollars in assets now actually employ "the best and brightest" minds they can find, and pay them big bucks to work out illegal schemes and find loopholes in government legislation that will make them all filthy rich.
Crime in the corner office
Practically every one of the large U.S. and European investment banks have been involved in a number of criminal, illegal and immoral activities since the 2007-08 crash. It's safe to bet that officials catch only a fraction of the illegal activities that go on. Here are a few of my favorites:
- Bank of America: In a lengthy investigation, Rolling Stone magazine exposed the "limitless criminal conspiracies" the Bank of America has been involved in, and says they are guilty of "systematically ripping off virtually everyone they do business with."
- HSBC Bank: HSBC agreed to pay a record $1.92-billion penalty in connection with a money-laundering scheme that included accusations that it transferred billions of dollars for nations like Iran and enabled Mexican drug cartels to move money illegally through its American subsidiaries.
- Goldman Sachs: A New York jury found former Goldman Sachs trader Fabrice Tourre liable for fraud in a complex mortgage deal that cost investors $1-billion. He was accused of misleading investors about investments linked to subprime mortgages that he knew would fail. He was also described by the regulator as the "face of Wall Street greed."
- JPMorgan Chase: America's largest bank, JPMorgan Chase, admitted to being involved in a number of criminal activities. In various court cases and investigations, the bank either admitted to or did not defend itself against a number of grave charges. Included were money laundering for drug cartels, violations of sanctions against Cuba and Iran, violations related to the Vatican Bank scandal, the fraudulent sale of unregistered securities, etc.
Amazingly, despite all this criminality, not one of the executives of the giant international investment banks has gone to jail, or even been prosecuted. Governments and regulatory bodies seem to lack the power, or the will, to bring the violators to justice.
Bankers use exotic instruments to get rich
The investment banks and traders use an array of dizzying financial instruments to make massive, often illegal profits. Included are derivatives, hedge funds, credit default swaps, reverse convertible bonds, and other exotic creations that promise either huge gains or disastrous losses.
Derivatives, one of the main trading instruments, are a complex, extremely high risk securities gamble whereby two parties make a bet on what will be the future value of some sort of asset that has a varying value. Or, you can think of the definition that analyst Alan Kohler likes: "It's a bit like betting on flies crawling up a wall, without having to buy the flies." If this definition is not clear enough, you can go to this site for a thorough explanation.
Two former JPMorgan Chase employees are facing criminal charges related to a derivatives trading scandal that cost the bank $6.2-billion last year. The case has earned the name the "London Whale" for the huge size of derivative sales made out of the London office. The bank ignored growing risks and hid losses from investors and federal regulators.
Had JPMorgan Chase's loss been larger, and had there been other claims against the bank at the same time, it might have crashed, taking the investments of millions of everyday people with it.
No one knows the exact value of derivatives that exist globally, but it's at least an unimaginable $1,200-trillion, which is more than 20 times the size of the entire world economy. And the amount is still increasing.
These massive, sometimes bizarre bets -- some investors bet on the weather -- can play out over a period of 15 to 20 years, and, if you'd like to bet with me, I'll bet they can crash at least two or three banks without much difficulty!
Danger of derivatives-driven meltdown
"We can say this with virtual certainty," wrote Steve Denning in Forbes magazine, "if we continue as now and ignore them [derivatives] again, the great white shark of a global financial meltdown will gobble up the meager economic recovery and make 2008 look like a hiccup."
There are several other dangerous factors that, if combined with a huge derivative collapse, could bring down the financial markets. They include:
No matter what happens with the bottom line of their companies, the men who run the big institutions make certain they get their millions in compensation. In 2012, James Dimon of admittedly crooked JPMorgan Chase carried away $42-million, and Lloyd Blankfein of Goldman Sachs, also admittedly crooked, was awarded with $21-million.
Crazies in the corner office
If we see really erratic behaviour at one of the giant banks that has an impact on performance, there may be an explanation. Author Kets de Vries says that about 3.9 per cent of corporate professionals have psychopathic tendencies, which is about four times higher than psychopaths in the general population.
"Ironically," de Vries told the New Knowledge site, "many of the qualities that indicate mental problems in other contexts may appear appropriate in senior executive positions."
Psychologists urge financial organizations to identify and weed out the psychopaths before they do considerable damage. Hmmm, so is the next banker who makes a $5-billion derivative bet that places his company in danger a psychopath -- or just your run-of-the-mill trader?
Coming in Part 2 next week: The next article will describe how the giant banks are refusing to go along with proposed stronger financial transaction controls, increasing the danger of another even larger economic crash.
Read other articles by Nick Fillmore on is blog, A Different Point of View.