Competence or incompetence


Production no more
In the olden times, people got rich by producing and by investing in production. Nowadays, competence has changed. If you want to get rich, production is seen as an unnecessary step.

Taking over the economy
Borrowing to expand is a long time investment, meaning that it often takes years before you get any profit. A 2005 report noted that for the 40 years before 2002, on average US corporations ran an annual financial deficit of 1.2 percent of GDP. They borrowed. For 2002 to 2005, things had changed. On average, the corporations ran a financial surplus of 1.7 percent. Instead of investing, they spent their money on executive bonuses, shareholder dividends, financial speculations. I find it difficult to understand that we need more rich people for financing jobs.
In spite of less borrowing, financial services thrive. In 1950, they accounted for 2.8% of GDP, in 2006 the figure was 8.3%. 20 years ago, the banks held 26% of industry assets; now they hold 61%.

Profit without performance
The bankers have gone from supporting production to speculation. In the subprime crisis they made millions and billions selling bad securities; then, when the crash come, they still insisted they should be permitted to keep their income.
They drove their corporations into bankruptcy. When the state saved them like any good socialist state would, they insisted on the "sanctity of contract" and got further million dividends. Millions that in a good capitalist state had been lost in the bankruptcy but now were paid by the taxpayers. Like in the former Soviet Union, earnings are no longer dependent on performance.
Norway, a good capitalist state, wrote the share capital down to zero before committing public funds; the shareholders lost their money. Not so in socialist US.
Instead of production, the banks invest in trading and principal investments (broker/dealer activities), in asset management and securities services. In share buybacks. Hoarding instead of investing.

With or without a clue
In late 2006, the coming crash was general knowledge and Wall Street started massively betting on its collapse. But not all bankers are created equal. Some know what's going on and act accordingly, others just do like the others. Already in 2004, Morgan Stanly started betting against the bubble; others like Goldman Sachs and JPMorgan soon followed. Some like Merrill Lynch, Bear Stearns, and Lehman Brothers were more clueless and waited too long; they had to sell out to others or bankrupt.
Not even such a highly regarded player as JPMorgan's Jamie Dimon is proud of his work. Sometimes his mistakes sound just too sophomoric: "we just missed, you know, that home prices don't go up forever and that it's not sufficient to have stated income". His assessment of his hedge dealings seems very appropriate, looking at his overall performance: "In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective an economic hedge than we thought."
And don't forget Lloyd Blankfein. In spite of trading commodities and securities for his entire career at Goldman Sachs, he said that he didn't know the importance of ratings. And he said that under oath before the Congress so it has to be true.

Hiding knowledge
Fraud is not just any shady dealing. Fraud assumes intent to deceive. To be stupid is no crime. So the classical defense is "I'm the CEO and I know nothing". To stop this, the Sarbanes-Oxley Act (Sarbox) was enacted. Sarbox requires the CEO to certify that they have functioning internal controls with reliable reporting. Even if he does not know anything about what he's doing, he should know enough to hire competent supervising personnel.
It does not work. Over the last 20 years, virtually all major market fraud cases have been uncovered by whistleblowers, press, or short-sellers; not by internal controls, regulators, law enforcement, external auditors or people like that. The management prepares the financial statement, not accountants, not auditors. The auditors simply review them; a standard clause in their opinions is "we rely on the statements of management". And the management knows nothing. Like Enron's Jeff Skilling, many neither read nor write emails; in spite of Sarbox, they still get away with bad reporting and "I know nothing". The Justice Department admits that they think of effects on the system when they consider prosecution. No wonder that prosecution does not seem to be an option.

Trust me, I can do this
The gamblers at the banks claim that if they are not permitted to gamble the economy, then the economy will crash. Whoever would believe a drunk driver claiming that if he is not permitted to drive under influence, the car will crash? Especially if he has already crashed the car once? And would anybody even think of helping the driver by giving him more to drink? Still that is what the administration is doing, encouraging gambling by contributing gambling money. Are they afraid that if the banks are not permitted to destroy the economy, they will destroy the economy?
An IMF study of 124 financial crises showed that going tough with the banks gave a deep but short fall and a strong rebound. Sounds like a better strategy than that of the bankers. Remember how the bankers selected the worst CDOs they could find, sold them as especially good and then shorted them? Now they are selling themselves as especially good while doing their worst to plunder everybody else.

Unfair treatment of bankers?
Criticizing white collar crime is witch-hunt and Bolshevism. Lloyd Blankfein can see nothing wrong with selling securities you think are crap. And not only should we accept looters, we should be grateful too. John Mack, former Morgan Stanley CEO, thinks people should "stop beating up on Lloyd and Jamie (Dimon)". They (Lloyd and Jamie) should be rewarded for the looting they are doing for their shareholders. I don't believe those "beating up" Lloyd and Jamie are shareholders. I believe most of them are victims of Lloyd and Jamie.
Shareholder value is not the only thing relevant. Everybody is subject to regulations, companies and individuals. No matter how much money the drug dealers make for themselves and for their financiers, they cannot deal freely in drugs. This is because many drugs are considered to be harmful, to the individual and to society. Dealing in poisoned securities is not the same as dealing in drugs; still I can't see any reason to applaud doings just because they make a lot of money. No matter how well a drug lord performs for his financiers, I am sure there will be people wanting to beat him up. There will be people wanting to put him in jail. Maybe there will even be people putting him in jail. The banks are getting rich dealing in poisoned securities, looting house-owners, investors and taxpayers. No wonder there are people wanting to beat Lloyd and Jamie up. Destroying the economy is clearly not bad enough to put you in jail. Still I can understand a certain resentment.

© Anders Floderus