If you’re anything like me, this week’s announcement that 5 banks – JP Morgan, Citigroup, Barclays, RBS, and UBS – have pleaded guilty to manipulating foreign exchange markets is both confusing and more than vaguely familiar.
It was a classic price fixing cartel, and it went along these lines: these big banks had all the business, being so big, and the traders got on a chat room and agreed to manipulate prices to make more money. The myth of the free market was suspended, and eventually they got caught, in large part because of leaving stupid messages like “If you aint cheating, you aint trying”.
But hold on, I could have sworn that these same banks, or a similar list of them, got in trouble for this already. Or was that LIBOR interest rate manipulation? Or was that for mortgage fraud? Or was that for robosigning?
Shit. I mean, here I am, someone who is actively taking an interest in financial reform, and I actually can’t remember all the fines, settlements, and fake guilty pleas to criminal charges.
I say “fake” because – yet again – nobody has gone to jail, and the banks found guilty have immediately been given waivers by the SEC to continue business as usual. According to this New York Times article, the Justice Department even delayed announcing the charges by a week so those waivers could be granted in time so that business wouldn’t even be disrupted. For fuck’s sake.
But again, same thing as all the other “big bank events” that we’ve grown tired of in the last few years. What it comes down to is fines, but then again, the continued quantitative easing has essentially been a gift of cash to those same banks, so I wouldn’t even count the fines as meaningful.
In fact I’d call this whole thing theater. And really repetitive, boring theater at that, where we all nod off because every scene is the same and they’ve turned up the heat too high.
The saddest part is that, given how very little we’ve improved about the integrity of the markets – I’d argue that we’ve actually gone backwards on incentives not to commit fraud, since now everything has been formalized as pathetic – we are bound to continue to see big banks committing fraud and then not getting any actual punishment. And we will all be so bored we won’t even keep track, because nobody can.
As it turns out, it takes a while to write a book, and then another few months to publish it.
I’m very excited today to tentatively announce that my book, which is tentatively entitled Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy, will be published in May 2016, in time to appear on summer reading lists and well before the election.
Fuck yeah! I’m so excited.
p.s. Fight for 15 is happening now.
I was taught that justice is a right that every American should have. Also justice should be the goal of every American. I think that’s what makes this country. To me, justice means the innocent should be found innocent. It means that those who do wrong should get their due punishment. Ultimately, it means fair treatment. So a call for justice shouldn’t offend or disrespect anybody. A call for justice shouldn’t warrant an apology.
Those who support me, I appreciate your support. But at the same time, support the causes and the people and the injustices that you feel strongly about. Stand up for them. Speak up for them. No matter what it is because that’s what America’s about and that’s what this country was founded on.
I think I will take him up on that suggestion, this morning at Citigroup Headquarters, 399 Park Avenue (near 54th Street) at 10:30am, in part inspired by Liz Warren’s speech from last week. See you there!
I don’t have enough time for a full post today, but if you haven’t already, please watch Liz Warren’s speech from last Friday. She lays out the facts about Citigroup in an uncomplicated way. Surprising and refreshing coming from a politician.
There’s some tricky business going on right now in politics, with a bunch of ridiculous last-minute negotiations to roll back elements of Dodd-Frank and aid Wall Street banks in the current budget deal. Hell, it’s the end of the year, and people are distracted, so the public won’t mind if the banks get formal government backing for their risky trades, right?
Occupy the SEC has a petition you can sign, located here, which is opposed to these changes. You might remember Occupy the SEC for their incredible work in public comments on the Dodd-Frank bill in the first place. I urge you to go take a look at their petition and, if you agree with them, sign it.
After you sign the petition, feel free to treat yourself to some holiday satire and cheer, namely The 2014 Haters Guide To The Williams-Sonoma Catalog.
Having written a couple of guest posts about bubbles possibly inflating (college tuition, high end Manhattan condos), I thought it might be interesting to consider what a deflating bubble looks like.
A number of observers point to the oil markets, where the price of crude has fallen by about 30% since June of this year, to a multi-year low today of about $75.50 per barrel. Just last spring, Bloomberg was reporting on how the drilling and exploration business in the US was heavily dependent on the issuance of junk rated debt – over $160 billion worth by some measures – to fund the shale drilling that has been so popular lately. The junk debt had been popular because it was a source of relatively cheap funds, thanks in part to the Federal Reserve’s efforts with Quantitative Easing to drive down bond yields. Oil and shale exploration are expensive and there are quite a few people that believe that certain types of exploration only make economic sense when the price of oil is above a certain level – say $80 a barrel (or perhaps even higher). Now that the price of oil has plummeted, there is a possibility that a whole collection of oil drillings and mines are underwater, so to speak, and no longer profitable.
Funding a bunch of expensive exploration with junk bonds makes things complicated and speculative. For instance, a substantial portion of these junk offerings were purchased by issuers of collateralized loan obligations (CLO) and then rated (up to the AAA level), securitized and distributed to an audience of investors who may or may not have been investing in energy related debt otherwise. CLOs are being issued at a record pace, by the way, and 2014 is on track to be the highest issuance year ever, exceeding the pre-crisis peak in 2007 of $93 billion. If the energy exploration companies that issued junk debt are no longer profitable and getting squeezed by the falling price of oil, will that lead to a bunch of companies defaulting and then sending shockwaves through the securitized market, via CLOs? (Note – the CLO market is much smaller than the subprime mortgage backed collateralized debt obligation market got to be before the 2007 implosion and energy companies are only a portion of the total issuance).
One thing that happens when investable asset prices fall, is that a bunch of people think that maybe it means there’s a new buying opportunity – a chance to get a hot asset at a cheap price on the expectation that prices will spring back up again soon. That’s what a bunch of hedge funds did a couple of weeks ago, betting that the sharp fall in oil would turn around. And then it fell another 6 or 7% to today’s levels. If oil prices continue to fall, as some speculate may happen, that would be called “catching a falling knife” and the investors may end up feeling rather burned by their optimism. Once cut by the falling knife, some investors become reluctant to come back a re-test their theory on rising prices, and this can contribute to a negative spiral for the falling asset.
I learned from my father-in-law, who worked at an oil company his whole life until he retired, that the oil business is always complicated. Up and down, supply and demand; they don’t work the way you’d think they would. When oil prices go down, gasoline gets cheaper, so people drive more, which drives prices back up (unless people are driving less and buying fewer cars, as appears to be happening now, perhaps because of those darn millennials and their urbanization and bike riding). Plus, there’s international politics, with Russian, OPEC, the Middle East, China the drive for energy independence, solar power, etc. On the other hand, gasoline and home heating oil and such are getting cheaper, which is a nice bonus for consumers, particularly in more car dependent regions. The economy benefits from the effect of extra money in the hands of consumers as that money gets spent elsewhere (other than on oil executives third or fourth homes, presumably). Oil is complicated.
But oil can and does crash. When it does, it can have a wider adverse impact on local oil-dependent economies, like Texas in the 80’s or perhaps, North Dakota, today. While there are a number of mysterious factors at play in the current fall in oil prices, the knock-on effects are starting to pile up. Oil producers are cutting production, idling rigs and cutting prices to stay competitive. The somewhat worried sounding consensus is that there is “too much oil supply” currently. The speculative portion of the oil market will be hit hardest, i.e. the junk-debt fueled shale companies. At some point, investors in the CLOs (and regular debt) backed by this highly leveraged debt from companies that aren’t profitable anymore, are going to get nervous (yields on such debt are already quite a bit higher) and start selling. In all likelihood, some exploration companies will fail. I wouldn’t describe it as a fear environment yet – in many cases the junk debt from exploration companies doesn’t come due for a few years – but the seeds of worry have been planted on fertile ground. One observer described the current environment as a “negative bubble”, with a herd mentality driving investors away from any optimistic assumptions for the market.
Why should we care? For most consumers, the most likely impact of a continuing deflation in oil prices will, as I mentioned, be cheaper gas and heating costs. When the housing market crashed, the negative impact was mostly felt by average Americans, as wealth was destroyed up and down the block, whereas the oil market seems very different and more removed. Still, it’s fascinating and instructive to watch the dynamics of a (potential) collapse of a bubble – on exploration, shale, oil prices, international politics – and the odds are high for unexpected consequences and global volatility. What will happen to the recent growth in solar and other renewable energies, if the price of the competing product gets much cheaper? What about the local politics of fracking? What kind of exposure do banks have to the oil markets and will it trigger any regulatory issues? What will happen to the international politicians, who like moving chess pieces around the Middle East map if oil-producing countries lose their political clout? Also, it’s odd that the Fed’s efforts to fight deflation have contributed, in part, to a price collapse of a crucial commodity, via QE-fueled easy money helping to push oil producers to dig up too much oil? How will the Fed react to this challenge?
I don’t know the answer, nor do I expect anyone else does either. But oil and energy are hugely important issues to most Americans (and the people of other countries, too, obviously) and to the national and global economies – not as big as housing, but pretty close. What happens in the next few months may affect many of us and it bears watching how our regulators, politicians, mega-companies and generals respond to the emerging (potential) collapse.
For the sake of the essay, we coined the term “marble columns” to mean the opposite of “broken windows.” Instead of getting arrested for nothing, you never get arrested, as long as you work at a company with marble columns. For more, take a look at the whole piece!
Also, my good friend and bandmate Tom Adams (our band, the Tomtown Ramblers, is named after him) will be covering for me on mathbabe for the next few days while I’m away in Haiti. Please make him feel welcome!