photo: MyEyeSees via Flickr

photo: MyEyeSees via Flickr

In his testimony to the Angelides Commission, JPMorgan Chase CEO Jamie Dimon let slip half of an ugly truth:

“Not to be funny about it, but my daughter asked me when she came home from school ‘what’s the financial crisis,’ and I said, ‘Well it’s something that happens every five to seven years,”’ Dimon said. “We shouldn’t be surprised, but we need to do a better job.”

The other half is that each time they don’t do a better job, they look to the government to bail them out. Maybe it’s a direct transfer of money from government and taxpayer pockets, as TARP; sometimes the Fed revs up the printing press, as the money loaned to AIG to pay off Goldman Sachs and Societé General; and sometimes the government just knocks heads, as happened with the failure of Long Term Capital Management.

Noreena Hertz shows us in her book, The Debt Threat, that at least once, banks got bailed out by the World Bank and the IMF. In 1973, OPEC raised the price of oil 400%. The result was a huge pile of what were called petrodollars, which she pegs at $333.5 billion. Banks were dying to grab that money and lend it out, for the fees and the interest income, and, of course, bankster prestige. There was insufficient demand in the developed world, so the banks went on an orgy of lending to developing nations.

Loan officers crawled all over the officials of potential borrowers, offering extraordinarily favorable terms. The developing countries, particularly those dependent on imported oil, were in dire need, so loans looked like salvation; they wouldn’t have to raise taxes in the short run. The banksters didn’t care what the borrowers did with the money. Much of it was wasted, as in Togo, where the money went to build a steel mill, in a country that had no iron ore. Much of it went to buy military equipment. Other money just went to buy foreign real estate, or directly into bank accounts in Switzerland for the rulers of Latin American countries like Argentina and Venezuela.

Banks did little or no due diligence: “A loan is said to have been granted to Costa Rica in 1973 on the basis of a single Time magazine article on the country.”  (p. 63)  But they made tons of money. A giant French bank, Bank Nationale de Paris, made more from its African affiliates than it did from its large network of French branches.

This frenzy was justified on two grounds. First, the lenders figured that the borrowing nations would never default, regardless of the burden inflicted on their citizens. Second, they expected to be bailed out if things went bad.

Banks who lend too much too fast know there will be a bailout, no question about it,” the officer of a large New York City bank said at the time. “They scoff at bankers who create large loan loss reserves and those who in general are more conservative. They know that come the revolution in Mexico, or wherever, their banks will have the highest earnings and pay the highest dividends, and that they personally will receive the highest bonuses.” (p. 63)

After years of part payments of principal and interest sucked out of the life and health of the workers of the borrower nations, and negotiations and recriminations, the bailout finally came in 1989 under Treasury Secretary Nicholas Brady.

…[T]he Brady Plan called for a total reduction of about 20 percent of the global debt, rather than a restructuring or rescheduling. The IMF and the World Bank offered guarantees for the repayment of the other 80 percent. (p. 71)

Once the debt was guaranteed, investors were willing to buy it. A market developed in that debt, and banks unloaded their previously illiquid loans. That guy who predicted a bailout was right.

The parallels with the causes of the Great Recession are obvious. Banks made stupid loans to people who didn’t have any business borrowing money. They did it because they figured a) homeowners wouldn’t default, even if their houses were grossly underwater; and b) government would bail them out if homeowners defaulted. They figured that the government would give them enough money to hold them together in the short term. They would call on their congressional servants to crush any move to help borrowers. Then they would squeeze borrowers dry with increases in credit card interest rates and fees, refuse to renegotiate home loans, and make a fortune trading stocks and foreign currencies and derivatives. Eventually they return to profitability. It takes time and grit, and it’s working as planned, just as it did on the failed petrodollar loans.

Kind of makes you feel like a worker in one of those developing nations, doesn’t it?



I read a lot of books.