Monday, January 28, 2008

In Banks We Trust

Ever since the news of the Société Générale bank fraud spread around the world, bank depositors and the general public are now wondering whether banks are part of the solution – or cause of the problem – of our current global financial crisis?

By: Vanessa Uy

As the French bank Société Générale prepares to close its offices for the weekend last January 25, 2008. A 31 – year – old Junior Executive Trader named Jerome Kerviel now dubbed as the “rogue trader” managed to loose a little over 7 billion US dollars worth of Société Générale’s funds by trading on the European Equities Market. An amount equivalent to 15% of the bank’s total assets or the amount the bank earns in an average fiscal year. The Junior Executive’s questionable action was defined as a fraud under established trading laws. Now under custody, investigators have doubts whether Jerome Kerviel acted alone. If found guilty, Jerome Kerviel may face a 5 - year prison sentence and hefty fines. Since the incident happened, ordinary bank depositors around the world – i.e. you and me – now doubt whether commercial banks and related financial institutions can do their part in solving the current “financial turbulence”.

For as long as I can remember, banks are seen as “agents of economic progress.” This is so because in school our teachers had instilled in us that if we save our money in banks - as opposed to stashing it in our “secret cookie jar” - we will be contributing to the economic progress and welfare of our nation. But recent events, like the Société Générale bank “fraud” case introduced a worm of doubt on everyone’s perceived trust between their money and their bank.

As of late, top economists had been pointing their fingers on the culture of “savings disparity” as the primary cause of the US credit crisis that is now threatening the global economy. These economists point out that on average, typical Americans save an equivalent of about 10% of their annual income, while in China its 50%. The prevailing wisdom about the role of banks on a nation’s / state’s economy lead the economists to conclude that the phenomenon of “savings disparity” is the overwhelming reason why – at present – the US Economy is weakening. While China’s remained strong despite the “bad decisions” made by US banks and related financial institutions that lead to the credit crunch and sub prime mortgage crisis. But since – taken as a whole – the global economy is a relatively complex dynamic system that’s continuously in flux, only time will tell if the Federal Reserve chairman Ben Bernanke and the Bush Administration’s resort to John Maynard Keynes – style economics. Like the 145 - billion dollar “Economic Stimulus” package that will supposedly prevent the US Economy from sliding into a recession. Or should everyone of us prepare for a repeat of the “Banking Panic of 1857”, or the draconian credit control measures of the Roosevelt Administration that lead to the “Bank Holiday” of March 4, 1933. Just remember what John Maynard Keynes wrote early in his career: “In the long run we are all dead.”


Janelle said...

As of late, the Société Générale Junior Executive Trader Jérôme Kerviel has been indicted with the following charges: 1) Breach of Trust 2) Falsifying Documents 3) Unauthorized Computer Activity. Even though the fraud charges are thrown out by the presiding judge, the "fraud angle" of Jérôme Kerviel's case will surely be a factor when his trial proceeds. In my opinion, I think "white collar" criminals are punished too liniently under existing laws. Will Jérôme Kerviel's "good looks" be a factor in his indictment? He does look like Charlie Sheen circa 1986. Even though Jérôme Kerviel said "he will not me made a scapegoat". A lot of anti capitalist hacking sites have praised the "Rogue Trader" as their latest working class hero. Maybe Orlando Bloom will play him in an upcoming movie of this event.

Judith said...

As of late, the authorities are now investigating a second trader with complicity to Jerome Kerviel's "trading Debacle". The second trader was then released for lack of evidence (does this remind you of that famous "Second Gunman" taking aim on the grassy knoll?), will the outcome of this investigation restore our confidence and trust on banks and other financial institutions? But first, lets look at the financial and economic events brewing on the other side of the Atlantic.
A number of us might have asked the extent of liabilities of bank officers in the US about their complicity in the subprime mortgage crisis and credit crunch? In general, bank officers are accounting technicians rather than policy makers (or accounants first, policy makers second). However, policy decisions may certainly be eventually involved. When bank officers find out that month after month their bank is losing reserves to other banks, they are likely to decide that they have been lending and investing their funds too freely. Or if total reserves of the banking system are showing little gain but reserves of an individual bank are steadily increasing, the individual bank's officers may conclude that their credit policy has been too restrictive. A bank must keep in step with other banks. The decisions of how much to lend or invest, where to lend, and to whom to lend call for discretion and judgment. This is the work for which the banker is trained. Yet quite a number of bank officers in the US have approved those so called "Liar Loans" to a degree that it instigated the US credit crisis and the subprime mortgage crisis. I think that recent events in the financial and economic world has been proved once again that when it comes to banking, prudency - like honesty - is still the best policy. That's why I think that in the long run the concept of Muhammad Yunus and Grameen Bank could keep the global economy from going deeper into a full blown recession. This is also what I like about "Sharia Banking Laws" where only "concrete assets" are accepted as collateral.

Vanessa said...

Since the recent crackdown on the irregularities at Société Générale, Jerôme Kerviel now caught in a "Francophone Wallstreet" like drama. The laws governing on line trading and on line banking needs to be updated as do stricter policing of internet brokers and on line traders.
As of late banks - even central banks - on their own cannot possibly avoid the inevitable economic slowdown in the US and the resulting knock-on effect on the rest of the world. I came to this conclusion because based on recent economic events, central banks can only deal with the liquidity issue - i.e. solutions like the one formulated by the US Federal Reserve Chairman Ben Bernanke called the Economic Stimulus Package ( Probably with behest from the Bush Administration.). But in most cases banks are essentially powerless against the underlying issue of US sub prime mortgages and credit crisis which is a product of "unsound" investment / fiscal malfeasence of issuing credits to non - credit worthy / "dead beat" clients. Did these dead beats manage to evade current credit score algorhythms? No one knows for sure.
Also, the current economic turbulence affecting the US and poised to have a knock-on effect on the rest of the world can be traced to the US Federal Reserve's lowering of credit rates (lowering the cost to borrow money) back in 2005 - 2006 period that caused too much liquidity. Should we blame Ben Bernanke's predecessor Allan Greenspan? I don't know yet, but these days are really hard for IPO's and venture capital funds. It seems like bad fiscal policies had driven the Bull Market into extinction.