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The Triple Failing of the Big Private Banks
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Damien Millet and Eric Toussaint
Counterpunch
March 21, 2008
Since August 2007, US and European banks have constantly made headline news concerning the deep crisis they are going through and its knock-on effect on the neoliberal economic system as a whole. Asset depreciation for these banks currently stands at over 200 billion dollars. Several banking research services and seasoned economists estimate that the final damage will exceed 1,000 billion dollars .
How did the banks manage to build such an irrational lending system? Eager for profit, mortgage companies made loans to a sector of the population that was already heavily indebted. The conditions attached to these mortgages–highly profitable for the lender–amounted to daylight robbery for the borrower: the interest rate was fixed and reasonable for the first two years but thereafter rose sharply. Lenders assured borrowers that the property they were buying would quickly appreciate thanks to the boom in the real estate sector. The problem was that the real estate bubble burst in 2007 and house prices started to go steadily down. The number of defaults on payment soared and mortgage brokers had trouble repaying their own loans. To protect themselves, the big banks either refused extra credit to the mortgage lenders or agreed to new loans at far higher interest rates. But the spiral did not stop there, since the big banks had bought up a large number of the original loans as off-balance sheet operations by creating specific companies called Structured Investment Vehicles (SIV), which finance the purchase of high yield mortgages converted into bonds (CDOs, or Collateralised Debt Obligations).
As from August 2007, investors stopped buying the unguaranteed commercial papers issued by SIVs, which no longer looked like a safe or credible option. Consequently, the SIVs lacked the liquidity needed to buy up mortgages and the crisis worsened. The big banks who had created the SIVs therefore had to bail them out to stop them going bankrupt. Up to then, SIV operations had not appeared in the banks’ accounts (thus allowing them to conceal the risks involved), but now the SIV debts had to come out of the closet and onto the books.
The result was general panic. In the US, 84 mortgage companies either went bankrupt or partially stopped doing business between 1 January and 17 August 2007, as opposed to only 17 similar cases for the whole of 2006. In Germany, the IKB BANK and SachsenLB were saved by the skin of their teeth. Recently, in England, the bankrupt Northern Rock has had to be nationalised. On 13 March 2008, the Carlyle Capital Corporation (CCC) fund, known to be close to the Bush clan, collapsed with debts 32 times its capital. The following day, the prestigious US bank Bear Stearns (5th US investment bank) called on the US Federal Reserve to provide an emergency credit line. Bear Stearns is being snapped up by JPMorgan Chase for a mere pittance.
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Several branches of the lending market are shaky constructions on the point of collapse. They drag into their misadventures the powerful banks, hedge funds or investment funds through which they were created. The salvage of these private financial institutions requires massive intervention on the part of the public authorities. And thus once again, profits accrue to the private sector, and losses to the public purse.
Which brings us to a key question: how is it that banks can readily waive bad debts to the tune of tens of billions of dollars yet have constantly refused to cancel the debts of developing countries? Why should the one be feasible and the other impossible? It should be remembered that the debts claimed today from these countries go back in the past to criminal dictatorships, corrupt regimes and leaders pandering to major powers and investors. The big banks lavished loans on such notorious regimes as that of Mobutu in Zaire, Suharto in Indonesia, the Latin-American dictatorships of the 1970s and 1980s, not to mention the apartheid regime in South Africa. How can the banks persist in inflicting the burden of debt on people who have suffered the consequences of despotic regimes funded by the banks themselves? From a legal standpoint, many of the debts appearing in their accounts are odious and as such should not be repaid. But the banks continue to demand their pound of flesh.
We should also remember that the Third World debt crisis was caused by the drastic unilateral hike in interest rates imposed by the Fed in 1982. Up to then the private banks had been happily handing out variable rate loans to countries that were already over-indebted. The crash came when these countries could no longer sustain repayments. Today history is repeating itself, this time in the North: overindebted households in the US are faced with mortgages that they can never repay as they watch the value of their properties plummet.
The recent waiving of debts by banks can only justify the claims of those who, like the CADTM, demand the cancellation of Third World debt. Why? Because the long-term debt of Third World public authorities towards international banks reached 181.9 billion dollars in 2006 . Since August 2007, the banks have had to cancel a far greater amount, with more still to come.
It is clear that the big private banks have failed in three ways:
* they have built up catastrophic private lending structures that have led to the present disaster;
* they have lent to despotic regimes and forced the democratic governments that replaced them to repay this odious debt down to the last cent;
* they refuse to cancel the debts of developing countries, for whom repayment means ever-worsening living conditions for their people.
For all these reasons, the banks must be held to account for their actions over the last decades. The governments of the countries of the South must make a full audit of their debts, as Ecuador is doing today, and repudiate all debts that are odious and illegitimate. The bankers have shown them that such a step is perfectly feasible. It would also be the first step towards restoring the true role of finance, which is to be of service to men and women. Everywhere, without exception.
Translated by Judith Harris.
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March 21st, 2008 at 9:37 am
We the people should string them (the bankers)up. If we do not they will get rid of most the brain dead masses. We the living will triumph into the end or rather the beggining of a new period of true freedom which will last a thousand years
March 21st, 2008 at 10:34 am
I am not convinced the banks have failed, I believe something more like they have orchestrated our total demise and control. Their reign seems formidable, but it gets shaky as their complete greed becomes apparent. Will Americans awaken and PROSECUTE these crooks and RECLAIM their country from lawless predators? Will the globalists succeed in their harried dash for total domination? With The Magic Negro’s black hood showing, SongBird’s daffy irrelevance, and the Wicked Witch’s teeth-gnashing, it is interesting, indeed! Right now, as bleak as everything looks and with NO ONE addressing any substantial topics (HELLO DNC, GOP, WE HAVE A PROBLEM!!!) Ron Paul could EASILY sweep the entire detestable lot in any fair election, we all know this is expecting truth and logic in the middle of Oz.
March 21st, 2008 at 12:21 pm
I’m a bankster, im rich
March 21st, 2008 at 1:16 pm
Russian steelmaker to buy Sparrows Point
OAO Severstal says it has agreed to purchase Balto. Co. mill for $810 million
By a Sun reporter | Sun reporter
8:18 AM EDT, March 21, 2008
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Digg Del.icio.us Facebook Fark Google Newsvine Reddit Yahoo Print Reprints Post comment Text size: Russian steelmaker OAO Severstal said early this morning that it has reached an agreement to purchase the Sparrows Point steel mill in Baltimore County for $810 million.
It will be the plant’s fourth owner in four years. The 119-year old steel mill employs 2,450 hourly and salaried workers and has the capacity to produce 3.6 million tons of steel a year.
The sale, which faces several regulatory approvals, is expected to close during the second quarter of the year.
Related links
Sun coverage: Sparrows Point sale
Severstal said in a prepared statement that the company and the United Steel Workers have agreed to enter into a collective bargaining agreement. The acquisition will add to Severstal’s U.S. holdings, which include operations in Dearborn, Mich., and Columbus, Miss.
“With Sparrows Point, Severstal brings into its U.S. portfolio an asset with significant existing value as well as unlocked growth potential,” Severstal CEO Alexei Mordashov said in a statement.
The Justice Department ordered Mittal Steel Co. NV of the Netherlands to sell Sparrows Point in February 2007. The department had antitrust concerns related to Mittal’s acquisition of Arcelor SA of Luxembourg, another large international steelmaker. Mittal agreed to sell off Sparrows Point, and that agreement allowed it to complete the merger creating ArcelorMittal.
In August 2007, ArcelorMittal agreed to sell to E2 Acquisition Corp., a consortium of steel companies led by Chicago-based Esmark Inc. That deal was for $1.35 billion.
But “it became increasingly more apparent” that E2 couldn’t pull together the financing and never reached the necessary agreement with the United Steel Workers, according to a court filing last month by the Justice Department’s trustee, Joseph G. Krauss.
March 21st, 2008 at 1:50 pm
Banking establishments are more dangerous than standing armies.
Thomas Jefferson
March 21st, 2008 at 3:39 pm
‘… We should also remember that the Third World debt crisis was caused by the drastic unilateral hike in interest rates imposed by the Fed in 1982 … ‘ – Errare humanum est perseverare diabolicum
March 21st, 2008 at 3:58 pm
watch the “Zeitgeist” documentary part III the “federal reserve” ( it’s free on youitube) I believe that’s the same tactics they’ll use today. it worked in ‘29 it’ll work again.
March 21st, 2008 at 4:36 pm
“Neither a borrower nor lender be.” ~~Solomon
March 21st, 2008 at 5:45 pm
Here is my list: BANKERS, Politicians, CEO’s, KNOWN ELITE………We are in the fight of our lives and we should be taking these people out right now but I know we will not. It’s going to come to use being rounded up and they start exterminating us until we start mounting a fight. Then they will have the advantage. NOT good tactics.
March 21st, 2008 at 6:52 pm
It is of ironic interest that the exact same thing happening to ‘us’ right now is what ‘we’ did to indiginous Americans only a short time ago in history.
March 21st, 2008 at 9:46 pm
A Pimp named Slickback says FUCK-A-BANK! You tell those crustyass catfish pimps that they ain’t gunna c a mafukin dime bitch!! Come round these parts and catch a .22 in the face ho!!!
March 22nd, 2008 at 9:34 am
let the banks fail. Just dont let them take your property. Destroy it before they can take possession of it. Slickback has the right atitude.
March 22nd, 2008 at 4:54 pm
Does anyone remember the Savings and Loan crisis of the late 1980s, which I think cost taxpayers $400 billion? The numbers bandied about with respect to the current crisis still do not seem to be approaching that amount, even after 20 years of inflation, so what are people getting all excited about?
March 22nd, 2008 at 10:10 pm
…Yahshua himself said that from the time of the destruction of the temple in Jerusalem, which occurred in 70 AD, to the very end of the age, would be marked by a constant state of war. He also said that such must come to pass, because it had been decreed, even before the foundation of world. For those who foolishly choose not to believe in God, it is a sad commentary on their intellect, that they believe that their supposed evolution from the primordial soup, to tadpoles, to dinosaurs to monkeys to humans, holds some answers for the world political events of today. All of the dramatic, even the less dramatic events unfolding daily upon the world stage, were foretold three to five thousand years ago, often in dramatic detail. What the world is seeing today in the Middle East and Europe, is the preparation for the fulfillment of Ezekiel, chapters 38 and 39. The nations identified in those chapters, by their ancient names, are revealed through comparisons of ancient and modern maps, as well as geographical descriptions from the Scriptures. Magog is Russia – Gomer is France, Germany and Belgium – Beth Togarmah is Turkey. That’s the short list, since this is not a Bible study, but a wake-up call to reality, for the unaware and the misguided.
-RRB-
March 23rd, 2008 at 3:23 am
It’s time to rid the U.S.A of the Federal Reserve, and start printing our own Monies just Like J.F Kennedy wanted to do!
but the bastards killed him first before he could fulfill his dreams! Can you believe his own C.I.A Limo Driver turned around and set the final shot to Kennedy’s HEAD. What you don’t believe me? Well just watch this video.
Milton William Cooper-Behold A Pale Horse
March 23rd, 2008 at 10:19 am
Who will profit most from the foreclosers that have allready happened.Will they sit untill the market gains to a level where by and which those properties will sell at a price where not only would they have gotten those payments all ready made,but the amount above that in a sale in which these properties in the future after the market has stablized they gain more from.If they stablize the market they stand to make great profits from these forclosed properties.There is foreclosed property now that has been sitting for loner than a year so sitting on it will only gain them more.Maybe they will resell it back to us for more under another name.Its obvius they don’t need the money now or they would have agreed to allow the home owners to come to an agreement in which they could have gotten a fixed payment in which the forclosers would have not happened.But they did not they allowed forecloser so something is clearly wrong with this picture.