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In Denial (#OWS)

April 27, 2012

This is the first part of a four-part essay that was proposed by Cathy O’Neil, a facilitator of the Occupy Wall Street Alternative Banking Working Group, and written by Morgan Sandquist, a participant in the Working Group. Crossposted from Naked Capitalism.

The largest banks in America–Citibank, Bank of America, Wells Fargo, and others–are probably insolvent. I learned of this from my companions in Occupy Wall Street’s Alternative Banking Working Group. It seems that, based on a host of legal and accounting irregularities, the banks have been able to conceal real and potential losses far larger than their capital reserves. But this has been difficult to confirm.

Isn’t that strange? Wouldn’t the possible insolvency of the core of our banking industry be a matter of nearly universal importance? Shouldn’t we be trying to figure out if this is in fact so, how it came to be, what we’re going to do about it, and how we can prevent its happening again?

Anyone investigating the true health of the banking industry, apparently including regulators, is faced with opacity, complexity, and even outright hostility that stymies all but the most savvy and persistent. Fortunately, people within OWS, including the Occupy the SEC Working Group, are that savvy and persistent. But the reaction of the industry and its partisans to such efforts has included the not-so-subtle suggestion that inquiring into the well-being of the banking industry will somehow cause problems to arise that wouldn’t otherwise exist if we would all just mind our own business.

This seems odd in an ostensibly objective and quantitative context like banking. Shouldn’t the truth be clearly visible in the accounting? Shouldn’t we all–borrowers, investors, depositors, and regulators–want to know exactly what’s going on?

As unexpected as such a visceral and irrational reaction to genuine, well-founded concern is from the supposedly rational realm of finance, that telltale blend of evasion, grandiosity, and superstition will be familiar to anyone who has ever confronted an addict about his or her addiction.

Denial is far more than an addict’s dismissal of the truth of his or her addiction; it’s collectively developed by the addict’s entire social sphere, and it takes many forms.

It might be helpful to imagine addiction and denial as intangible agents acting in a social context. Addiction’s agency is directed solely toward uninterrupted use of the addictive substance, and denial’s agency is directed solely toward ensuring that no one sees, understands, or limits addiction’s agency. Denial denies not just claims and assertions, it also denies access and insight into the reality of addiction. It denies that behavior is driven by addiction and that behavior’s consequences are the results of addiction. It denies the story of addiction and proposes an endless collection of counter-conspiracies.

It appears as those around the addict ignoring the addict’s use and the consequences of that use; as the narratives, tics, and habits through which the addict understands and acts out his or her use; and as the alternate version of reality that the addict and everyone around him or her shares in lieu of the reality of addiction. To paraphrase Baudelaire on the devil, denial’s best trick is to persuade us that addiction doesn’t exist.

No addiction could develop a more effective narrative of denial than the trade in exotic financial instruments that’s evolved over the last decade or so; no addiction could hope for more willing abettors than the financial press, regulators, and ratings agencies; and no addiction could depend on a more permissive enabler than the Federal Reserve Bank.

It’s difficult not to imagine the banking industry as jittery and unshaven, embarking on yet another unregulated derivative binge, telling us, its concerned partner, that we just wouldn’t understand what it’s like, how high the return can get, while its friends in the financial press and ratings agencies encourage it, scoffing at the very idea of risk.

And later that night, as it’s coming down, it’ll shout something at us about not really needing the $1.2 trillion in liquidity, but if the Fed’s offering, why not?, it’ll make the night that much better, only to face us the next morning, hungover and distractedly claiming none of it ever happened.

We’ll confront it with seemingly undeniable evidence of MERS, TARP, executive bonuses, and a ruined housing sector, and it’ll look betrayed, ask us how we could even say such a thing, and tell us that it’s none of our concern and that we just have to trust it, because the bills are paid, right? It’s not like it’s as bad as AIG or MF Global, it’ll say, which will lead to an impossible-to-follow tale of the prank it played on MF Global last night, and how that was like something that happened to Bear Stearns and Lehman Brothers once, and ending with the declaration that the Fed and the SEC would never let anything bad happen to the Banking Industry.

And what choice do we have? Maybe it’s not that bad. After all, if the banks really were insolvent, there would’ve been something on the evening news.

Tomorrow: The Addiction

Categories: #OWS, finance, guest post
  1. April 27, 2012 at 6:34 am

    “This seems odd in an ostensibly objective and quantitative context like banking. Shouldn’t the truth be clearly visible in the accounting? Shouldn’t we all–borrowers, investors, depositors, and regulators–want to know exactly what’s going on?”
    Don’t forget we are also the lenders of last resort (ie taxpayers) who have to take the worthless equity in the banking system when reality catches up with the accounting tricks.

    If you were guaranteeing a relative/friends loan wouldn’t you want to know if there was a chance they could pay back at least some of it.

    Johnathon Weill


  2. April 27, 2012 at 11:23 am

    Steve Waldman at Interfluidity had a great explanation of why bank capital can’t be measured accurately enough to determine the solvency of financial institutions. There is enough uncertainty in the assumptions used to estimate capital in highly levered financial institutions that the margin of error will always exceed the measure of capitalization.



  3. April 28, 2012 at 9:59 am

    are you guys for real? addiction is about choice. these fools don’t have a choice. it’s the damn system that requires them to seek whatever route necessary to make profits. you are asking for reforms of a system that needs to be dismantled


  4. RichL
    April 28, 2012 at 11:32 pm

    As an economy grows, there is greater specialization, and a natural consequence of this is that more financial transactions must take place. To make this clearer, if you are a subsistence farmer, growing your own food and weaving your own cloth, then you don’t need a bank account. You also are living VERY poorly, and your time is spread equally among those things in which you excel, and those which you are terrible at. Compound the income of a subsistence framer at 3% for 200 or so years, and you get to where the economy is today.

    Finance is required to allow for exchange at a robust level. The health of the financial system has everything to do with the health of the economy. The decisions of bankers are those of middling quality business people (as all business decisions are), not replete with fraud, but perhaps too complex for a middling intelligence to comprehend. Those poor financial decisions came home to roost in 2008.

    In banking, conservatism is now the order of the day. 20% downpayments and absurdly low appraisals for mortgage loans, 65% loan to value for commercial property, and other indications of conservative underwriting practice is what I see. Higher equity to assets on bank balance sheets is what is happening, which is exactly what you would expect to see from a reactionary business. LOOK AT THE NUMBERS! You claim to not be able to see accounting clarity, but you have to remember that accounting is a backward looking view of the world. It is what HAS happened. If you follow business, you’ll hear that there is actually some decent growth in data centers, autos, and other areas of the economy. If business is OK, then the banking system is OK. You are deluding yourself for the sake of political correctness to see the banks as insolvent.

    Your initial premises are so off the wall that you can’t possibly come to a logical conclusion.
    A modern successful economy IS a financialized economy. This has nothing whatever to do with addiction, but rather with the blooming of greater choice. Some people/firms can’t handle greater choice. They find it confusing, and perhaps make unintelligent choices. Others thrive in that environment.

    My choice is to take your blog off my blogroll. Unintelligent political views that are written with a veneer of intelligence are too depressing for words.


  5. April 29, 2012 at 6:52 pm

    “The largest banks in America–Citibank, Bank of America, Wells Fargo, and others–are probably insolvent.”

    In a reserve banking system, ALL banks are insolvent given the simultaneous demand for full payment of underlying assets. It is only the TRUST in the reserve system that the underlying assets will be prudently invested enough to provide the reasonable rate of return promised that keeps a simultaneous demand for full payment highly improbable. When the improbable happens, only the central bank creators of liquidity money can keep a “crisis of liquidity” from becoming a true “crisis of insolvency”, inevitably at the cost of higher inflation.

    Idiotic (and criminal) gambling that somehow “virtually” all risk can be distributed (or even transferred) simply by machinations of inapplicable, highly sophisticated (i.e. obscurantist) mathematics is a delusion that can only be described as a Ponzi scheme approved by academic legitimacy based on profound ignorance of real-world quantitative measurement and analysis.

    All the credit default swaps (and other financial derivatives) that can possibly be dreamed up from standard deviation analysis pretending to be a realistic measure of fat-tailed volatility can NEVER, in a world slapped in the face by a Black Swan that should “virtually” never happen, lead to anything but a freeze-up of trust and a classic run-on-the-banks prevented ONLY by central bank intervention and its brutal cost to the taxpayers that once trusted the regulation that AGAIN failed them.


  6. leigh anne
    May 4, 2012 at 2:10 am

    mathbabe, is there a way to force transparency on to the derivatives market?
    If americans can do something that draws attention to the opacity problem, and demand to see whats what in derivatives, make it a topic of conversation, not only on your website, but at the diner table, if EVERYBODY demands to see, can we at least make it as big a problem for the big 8 banks as it is for us?
    My father has used his credit union for decades. Moving money to local banks and credit unions is a simple elegant solution that may be felt by wall street, but 350 million americans knocking on the doors of their banks every morning all day every day, will be a problem FOR THEM.
    Derivaties are their meat and our single biggest problem. If the government cant or wont open the door, can we?


  7. Ken French
    May 4, 2012 at 12:06 pm

    mathbabe, I have many times contacted Chase about Harp II in order to refinance to a lower interest rate. The last communication was I will receive something in the mail when they are participating. Of course I have received nothing. Obviously there is no insentive for them to allow a lower interest rate for my Mortgage. My loan is a Fannie May Freedy Mack backed Mortgage. How can I acheive my goal? I am definitely under water. Mortgage balance $130,000.00 value of Condo $78,000.00, loan to value way past 125 %.


  8. June 13, 2012 at 10:45 am

    “Anyone investigating the true health of the banking industry, apparently including regulators, is faced with opacity, complexity, and even outright hostility that stymies all but the most savvy and persistent”…Diddo inquiry into the Money System itself, upon which was built this banking system.


  1. April 28, 2012 at 6:19 am
  2. April 29, 2012 at 8:00 am
  3. April 30, 2012 at 6:39 am
  4. April 30, 2012 at 9:06 pm
  5. May 1, 2012 at 8:31 am
  6. May 29, 2012 at 7:00 pm
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