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07/22/2012

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Harlot's Ghost

I agree that some of the will-to-corruption comes from the fact that the business centers on paying Peter a dime for a certain commodity while charging Paul a quarter for the use of the same commodity. If we accept this idea, however, the bidirectionality of the merchant banking transaction becomes the culprit. The bank is a common scheme expecting profits from the skill and knowledge of the managers - while that skill and knowledge is correctly employed in searching out solid investments, deploying it in searching out investors (bank customers) upends the whole transaction. The recipients of the bank loans become the customers, and the depositors become the commodity - the bank that offers the most attractive combination of risk-acceptance and size of capital "wins." In short, the bank becomes the servant of two masters, and its transactions are therefore not viewed in the context of an ethical duty to one or the other.

Thomas Rekdal

Judge Posner offers some sensible speculations on why banking regulation has been (and perhaps continues to be) too lax. To his list I would add one more. Anyone motivated primarily by money is likely to prove smarter, quicker, and more resourceful than those appointed to a regulatory role in the public interest. If banks truly are too big to fail, too big to bail, and too big to jail, more pessimism is warranted about a reliance on regulation. Some of the more cynical (or realistic?) economists have even suggested that the real purpose of regulation is not to fix something, but to lull us into the false belief that it has been fixed (or is at least fixable).

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David Peterson

The LIBOR scandal is really just greenmail in my view. The government has written vast amounts of debt, and needs to find someone to pay the bills, but doesn't want to increase taxes. So it is going to find another way to extract money from some unpopular group of people.

I doubt that any bank is complaining that it was charged an inflated LIBOR. They know how this works. It's the nonbanking borrower that is complaining, but no one in that market pays LIBOR anyway. What they pay is a negotiated rate which uses LIBOR as its base. It really doesn't matter what base you use though. A negotiated rate is going to reflect the market, and the bank that sets LIBOR does not control the market.

NEH

Most interesting. That the latest Depression is the result of Systemic failures in the Banking and Financial Sectors. Such that there appear to be four causes:

1. The "Revolving Door" problem in the Regulatory agencies, such that "Don't Rock the Boat" is the primary regulatory reason for existence.

2. "Political Heft and Influence" better known as the "K Street" problem. Remember, "we have the best Senators and Congressman money can buy".

3. "Opacity of modern Finance", also known as "Black Banking" and "Creative Accounting".

4. The complacency in the belief of the "Capitalistic System" to self correct itself by open competition. Really? doesn't unregulated competition lead to various unscrupulous actions to beat the competition at any cost?

These four problems clearly look systemic too me and point to a clear lack of supervision both internally and externally. Yet, there appears to be another problem. Such that all of this seems to be operating under a more insidious problem inherent in Law and its application. And that is, the "Spirit and Intent" of the Law has been forced into the back seat by a slavish adherence to the "Letter" of the Law. Which raises the question, "Just what is being taught in the professional schools these days"?

Elliot Boudin

This is a great commentary. I agree with the statement that banking is not the only business prone to bankruptcy if not regulated. I would like to see something done in the way of the 4 explanations for why the regulators were allowed to did nothing about the "monkey business".

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george zeed

I just can't believe that for any explanation there is a reason that is compelling enough for the regulators NOT to do something to stop the monkey business - a nicer term than I would refer to it BTW.

TANSTAAFL

Doggone it, NEH was on a roll with the first three points above, but the fourth is so wrong that it torpedoes the whole lot. Freewheeling Franklin could explain.

Nicole

This was a well thought out discussion of the incentives financial intermediaries face.

However as most of the beahviors in response to those incentives, borrowing short and lending long etc., are within the scope of the law I have trouble making the leap to find that corrupt.

NEH

affl, Once again... I guess you haven't read the commentary of the Professor and thought about it or tried to put it into perspective. Just jumped on that old worn out and broken down ideological band wagon again. The four points are his, not mine...

TANSTAAFL

Uh, wrong again, NEH. In the first place the commentary above is that of the Judge, not the Professor. Second, your four points are your own imaginative distillation of what Posner has to say. And, coming from a experienced traveler on the Alinsky band wagon, the manner in which you paraphrase and interpret Posner's post comes as no surprise.

But please do not blame your fourth point on Posner. Such hatred of capitalism is yours alone. Own up to it.

Lainaa Luotto

It is true that interest rate that a depositor receives is reduced because the risk of his losing his money is reduced.Most of the bank for me are not really corrupt,in Finland most of the bank give a good services to their customer one of their services is giving loans and lending.I can say the interest is quite good but i cannot say that there is some corrupt things inside.

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Gordon Longhouse

Banking is no more or less corrupt, in general, than any other industry. Banking today especially in the US and UK are systemically corrupt today for a number of reasons.
1. Bankers and other experts have an information advantage over customers. Previously bankers were reluctant to push this advantage to their own short term advantage our of concern that the long term loss of goodwill would be worth more than the short term gain. This is no longer the case: transaction by transaction banking is in; relationship banking is out.
2. Bankers have internalised the whole unregulated free market ideology that says that pursuit of self-interest will be self-corrected by the market and that accordingly there is no reason not to do so.
3. Many, but not all, governments have pursued the chimera of being a world financial centre. Until now at least that has meant putting up a facade of safety and regulation for bankers to hid behind while ensuring that there is no reality to it. London is the leader in this regard. It is no co-incidence -as The Economist would have it- that AIG, JP Morgan and Lehmann Bros did their most nefarious trades in London nor that LIBOR was set in London and was corrupt.
This meant that there was no political will to resist bankers who complained of "exzcessive" intrusive regulation hence no will to engage in intrusive regulation.
3. Unlike an airline when a large bank goes bankrupt it brings a multitude of other businesses and creditors down with it. When an airline goes bankrupt it leaves some stranded passengers. I know whereof I speak as I was stranded when an airline collapsed and am solvent still.
Posner correctly points out that banking is an inherently unstable business: short term liabilities support long term assets. That is why traditionally bankers have tried to look safe, boring and trustworthy. A sound banking system that permits depositors to access their money and be kept safe and borrowers to carry out business safe in the assurance that their borrowings cannot be recalled prior to term without cause is a public good.
Regulators and their political bosses need to recognise this and tell banksters waving campaign contributions to jump in the nearest lake.

NEH

affl, Once again... you really don't seem to understand the distinction of sitting on the Bench and handing down Decisions and Dictum as a Judge and developing Commentary on important issues of the time as a Professor. Current or Ex...

As for "ol Saul" he had some interesting things to say and do back in the 60's; just as "ol Smith" and other fellow travelers had to say about the British Corn Laws and the wagons that it was carried in. Although, they're all "old worn out and broken down" in desperate need of repair or replacement these days...

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Josh Slade

Gladly, I have just started reading this blog. It is a real education, thank you. Also, I am going to put all of my future earnings in a savings account. It seems that one fix to the problem is the informed investor. If bankers cannot be trusted to wisely invest, then the wise investor will not trust the banker with money. It seems to me that the consumer is in the best position to regulate this industry. There is now way, in the current climate, that I will invest riskily with these types of bankers.

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