As We Suspected: Bankers are Gamblers, Not Risk-Avoiders

By Shlomo Maital  


  Bank? Or Gambler?


  If you suspected that the world’s leading banks have excess appetite for risk, and behave like wanton gamblers, even after being bailed out – you were right.  A new study by the Bank for International Settlements (BIS), the Swiss-based bank for bankers, corroborates this.  It is cited in James Saft’s NYT “inside the markets” column today (Sept. 19). 

    Many addictive gamblers double down their bets, after sustaining big losses, hoping to recoup what they lost.  It rarely works.  It generally leads to disaster – to lacking even the taxi fare to get back to their hotel room.  Banks now appear to behave in the same disastrous way.

     According to the B.I.S. study, “bailed-out banks not only did not cut back on risk in their lending into the syndicated loan market [this is the market for loans that are highly leveraged, i.e. asset purchases nearly all funded by the loan, so that if asset prices fall, borrowers struggle to pay their debts].  …  after being ‘defibrillated by their governments, they actually increased the practice, relative to the market and to banks that had not been rescued.”    One of the key offenders is J.P. Morgan.   This bank chalked up huge profits by borrowing money (pumped in by the Fed) at near-zero rates, then seeking high-risk high-return channels to lend it.    Even though one of J.P. Morgan’s ‘roulette wheel’ deals brought billions in losses, the bank itself remains profitable.    But the problem is – this is the kind of behavior that caused global financial collapse.  Will we get “Act Two”?     Banks are supposed to use their low-cost borrowing, and low interest rates funded by the Central Bank, to spur borrowing and create jobs. Instead, it is funding speculation in proprietary activity (trading for ‘nostrum’, or the bank’s own, accounts).   The B.I.S. study covers 87 banks from wealthy nations, accounting for half of all global banking assets.

     Don’t look to the regulators for help. Another NYT article shows that the regulators are now shying away from prosecuting law-breaking banks, and instead go for plea bargains with minimal fines.  When the civil service regulators match their lawyers against high-priced Wall St. legal talent – it’s like Mohammed Ali against Grandma Moses. So the regulators choose not even to enter the ring.

    Saft concludes: “risky banking seems to be more a feature than a bug in the financial system.”  Translation: Irresponsibly risky big banks are here to stay.   Manage your funds and your investments accordingly.

Footnote:  Six of Israel’s tycoons, who took the kind of leveraged loans mentioned above, are in trouble and struggle to repay the loans.  Israeli banks have already written off big chunks of these loans, and pension funds stand to lose huge sums as a result.