Friday, July 17, 2015

Is The Banking Game Corrupt?

This article, by a former Wall Street banker, argues that the system is corrupt.  Banks in the US and Europe play a dangerous game, with the help of rating agencies, in which they buy and sell risky assets to each other and to even more naive customers such as the Greek government.  They do so because they understand that they are too big to fail.  They make hay while the sun shines and they get bailed out by governments when it rains.  The Wall Street banks were bailed out by the US government after packaging and selling toxic assets, which were falsely rated safe by the rating agencies, because they believed that the government would buy the risky assets that that they did not unload.  The European banks bought risky assets from the Wall Street banks and they also bought sovereign debt from Greece which had received risk free ratings.  The storm for the European banks came in 2010.  The assets that they purchased from Greece lost their value when it became clear that the Greek government could not service the "risk free" assets that they purchased from Greece.  In order to save the banking system from collapse, loans were made to the Greek government which allowed them to repay the banks that purchased their assets.  That transferred the risk from the banks to the governments that provided the funds to the Greek government.  The Greek government was a bad borrower that sold toxic assets to the banks, but the banks that purchased those assets were rescued by their governments.  We tend to assign blame to bad borrowers but not to bad creditors.  The governments that made the loans to the Greek government have been caught holding the bag.  They can't let the Greek government off of the hook without angering their citizens who will end up paying for the bad loans.

The banking system, and the governments which protect them,  are the bad guys in this story.  The comments that follow this article provide an interesting response which illustrates how difficult it is determine the real culprits in the story.  It is pretty clear, however, that bankers, with their supporters in the rating agencies, have little regard for their customers who purchase toxic assets.  Some blame the banks for selling toxic products, others blame the purchasers for being naive. 

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