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Landmines in the fine print: interest rate swaps in Italy
September 15, 2012 8:32 PM   Subscribe

Interest rate swap derivatives have not only turned sour for local governments and agencies across the United States. London-based banks are accused of massive mis-selling to dozens of Italian cities and regions.

In 2009, Alfredo Robledo, the prosecutor in Milan, suspected the banks made $130 million in illicit profits, so the Guardia di Finanza in Milan, the financial police of Italy, took over real estate properties, bank accounts and stock holdings for four banks. In 2010, Deutsche Bank, JPMorgan, and UBS were charged With fraud in Italy (YT, also available on Bloomberg TV). Also in 2010, L’Espresso reported that Nomura Holdings Inc. paid two financial advisers for the region of Sicily 18.5 million euros ($22.3 million) in alleged kickbacks, and there are even allegations that former Governor of Sicily, Salvatore Cuffaro, taking kickbacks from Nomura (Google auto-translation of an Italian article on Il Sole 24 Ore).

In March of this year, four banks charged with defrauding Milan with derivatives offered to unwind the swap at a discount and pay the city its profit from the transaction under a proposed settlement with the municipality. Alfredo Robledo asked for a court to ban four banks from doing business with Italian local governments for a year for mis-selling swaps to the city, and told a court hearing that nine bank officials should be jailed for up to 12 months. Around the same time, Sicily, Italy’s poorest region, faced increasing losses on about 860 million euros ($1.1 billion) of derivatives that are weighing on its debt as the local administration faces a liquidity crisis. The banks finally settled with Milan, paying the city almost 500m euros (~655m USD) and terminating the swap contracts, though there are a number of outstanding civil and criminal proceedings by other Italian municipalities.

Recently, Nomura sued Sicily in London, though neither representatives from Nomura nor Sicily provided comments to elaborate on the potential outcome of that lawsuit.
posted by filthy light thief (60 comments total) 19 users marked this as a favorite

 
I just recently watched Frontline's excellent report on Money, Power and Wall Street. Episode 4 talks in depth about these types of derivatives and the fact that they were responsible for a number of cities (including ones in Italy) losing lots of money.
posted by Simon Barclay at 8:43 PM on September 15, 2012 [5 favorites]


i wonder to what extent these fraud cases come from the banks deceiving city governments, or the city governments making bad deals, either from ignorance or poor governance.
posted by cupcake1337 at 8:47 PM on September 15, 2012 [2 favorites]


First, I hate banks. Hate them. Loathe everything about them. Resent the fact that you can't really operate in the modern world without using them.

That said - I have a pretty hard time blaming the banks for this one. Swaps count as a perfectly legit tool for two parties to trade financial "goods" with a minimum of fuss. Dept swaps increase overall liquidity; Commodities hedge swaps mean your heating oil company can give you that fixed rate all winter without themselves going bankrupt if the market moves against them; interest rate swaps allow you to trade lifetime-cost for risk.

And the "potentially" in that creates the problem in this case. Any time you assume more risk to save money today - You have still assumed more risk! Whether you skimp on building codes to save a few bucks, or pass on that comprehensive auto insurance, or take a variable rate mortgage, you have chosen to pay less money today for the risk of paying more money tomorrow. And maybe tomorrow will never come - But it can.
posted by pla at 8:50 PM on September 15, 2012 [3 favorites]


i wonder to what extent these fraud cases come from the banks deceiving city governments, or the city governments making bad deals, either from ignorance or poor governance.

I guarantee that every one of these swaps involved people making deals they didn't understand the implications and consequences of.
posted by Talez at 8:53 PM on September 15, 2012 [4 favorites]


When are we going to find a way to stop derivative trading entirely? They aren't commodity futures. They aren't actually any product at all. They're imaginary things which hucksters invent for the gullible to gamble with.

One thing about market capitalism -- you should be required to have actual goods or services you are providing to the market. Derivatives aren't anything. They are vapor, and should be disallowed entirely.
posted by hippybear at 8:57 PM on September 15, 2012 [15 favorites]


Back in the day, at Morgan Stanley and the other derivative packagers, this kind of client interaction was joyfully known as, "ripping their face off." But that was then, when Midwest Teacher's Union pension fund managers, who had just been wined and dined and dazzled in the Big Apple, somehow never found the words "high risk" in the fine print.

But that was then. People are supposed to be a little bit smarter now.
posted by StickyCarpet at 9:02 PM on September 15, 2012 [1 favorite]


From what I've read, the issue is that the banks deceived the municipalities about the risks involved. Then the representatives who should be looking out for the best interests of the local governments are on the pay roles of the banks, so they have no real incentive in being forthright about the potential costs down the road.


When are we going to find a way to stop derivative trading entirely?

The BBC video in the last link above the break notes that the banks are not allowed to sell such derivatives to British municipalities, so they went elsewhere. Someone learned, but the lure of easy money for cash-strapped governments is pretty strong.
posted by filthy light thief at 9:06 PM on September 15, 2012 [1 favorite]


the banks deceived the municipalities about the risks involved.

Any investment that exceeds the current market norms is legally assumed to be high risk.
posted by StickyCarpet at 9:08 PM on September 15, 2012


I recall attending several derivatives lectures at Bloomberg around that time, and most of the guest speakers and subject matter experts had noticed that not only were the swap markets exploding, they were increasingly being traded by people who had no idea what they were doing other than the fact that potential profits were higher due to the looming credit crunch.

Especially cash strapped municipalities that were just starting to feel the hit from the breaking of the mortgage bubble, like, what the hell was something like the East Hackensack, New Jersey Sanitation Department (not necessarily a real example) doing investing in swaps?! Something like that has fixed, relatively predictable obligation costs [running the sewage treatment plants], what in the world were they gambling on an adjustable rate return for?

Because they got a good, deceiving rate that made it look like a steal, is why. Because they were just managing a sewage department budget, not researching international finance, and they had no idea the world credit crunch was coming, unlike the people they were swapping with. Because they heard that derivative swaps were the next cool thing you could invest in without thinking and look like a hero, is why. Everyone was doing it, and their bosses didn't know how it all worked either, so they couldn't criticize the decision; they just nodded their heads at the powerpoint graph that showed profits going up, assuming a best case scenario that they didn't realize had no chance of actually happening.

They were going to get creamed, and the banks knew it. There was a good chance several cities were going to be near bankrupt after this. The banks didn't even have to really sell them, they just published some good rates in a chart and they had people like these, people who were only technically in finance but wanted to pretend they were in the same league as the guys on Wall Street, calling them up and asking how to invest their budgets this way.
posted by ceribus peribus at 9:19 PM on September 15, 2012 [24 favorites]


I wish these articles would more carefully explain the contracts at issue.
posted by planet at 9:26 PM on September 15, 2012 [1 favorite]


At this point, it seems like it would be prudent to pass a law which severely limits either the financial institutions or the types of transactions that municipalities are allowed to deal with. Make everything go through a federal agency which has the expertise and resources to properly analyze these deals.

Barn door and all, but still.
posted by alexei at 10:01 PM on September 15, 2012


Like, a law that restricted municipalities to only investing in AAA rated instruments?
posted by ceribus peribus at 10:07 PM on September 15, 2012 [13 favorites]


i wonder to what extent these fraud cases come from the banks deceiving city governments, or the city governments making bad deals, either from ignorance or poor governance.

No no no, this isn't fraud, fraud does not exist in America where a TBTF entity is one party to the transaction.
posted by T.D. Strange at 10:10 PM on September 15, 2012 [3 favorites]


current market norms

And those, at any particular hour on any particular day will be exactly what?
posted by carping demon at 11:07 PM on September 15, 2012


I suggest bringing back the public pillory for these municipal banksters and fraudsters. I'm not kidding. That, and stripping literally every asset they hold, except for the clothes on their back, thus making them dirt poor, without hope, or friends.
posted by Vibrissae at 12:13 AM on September 16, 2012


At this point, it seems like it would be prudent to pass a law which severely limits either the financial institutions or the types of transactions that municipalities are allowed to deal with. Make everything go through a federal agency which has the expertise and resources to properly analyze these deals.

The only problem with this is that in Europe, Asia, and the US, money is law. Money is the only voice that counts at all in politics around the world. Historically, the only way I've ever seen political power removed from the moneyed elite is through force. Usually bloody, bloody force.
posted by Sphinx at 12:18 AM on September 16, 2012 [7 favorites]


Man the barricades, bring out the guillotines. You would think history should have informed us about class warfare. Nothing wrong with being wealthy but you have responsibility as we all do as adults.
posted by pdxpogo at 3:11 AM on September 16, 2012


To think that the term "London Bank" didn't even used to sound evil to me.
posted by telstar at 4:13 AM on September 16, 2012 [2 favorites]


I think that if you steal more than 3* the lifetime wages of the average working man, you should get the death penalty. (But I'm willing to be moderate, and just make it life in a very cheap prison, with no chance of parole).
posted by MikeWarot at 4:49 AM on September 16, 2012 [1 favorite]


I'm afraid that derivatives and liquidity are two sides of the same coin. We're told that derivative aid liquidity, but more importantly liquidity creates derivative. If you outlaw derivative but keep low transaction costs, then large players will simply print themselves internal derivatives using Black–Scholes, pushing their own liabilities onto the wider market.

You might argue that liquidity itself must be the problem, maybe so. I'd agree with respect to mortgage investments myself, but liquidity artificially inflates valuations too. We know congress triggered the great depression by reigning in day traders, for example. I'd personally favor a much deeper house price crash, brought on by reducing liquidity for mortgage investors, but any such reforms still make me nervous.
posted by jeffburdges at 4:56 AM on September 16, 2012 [1 favorite]


i wonder to what extent these fraud cases come from the banks deceiving city governments, or the city governments making bad deals, either from ignorance or poor governance.
There are accusations that some advisers were getting kickbacks from the banks, meaning that the banks had unarmed the cites and regions before selling to them.

That said, I don't understand the financial system, so have nothing to add but my anger.
posted by Jehan at 5:00 AM on September 16, 2012


I'm just happy to see the words "jail time" amongst the proposed consequences.
posted by Devils Rancher at 5:30 AM on September 16, 2012 [2 favorites]


Rate swaps are perfectly legitimate tools, but no one appreciated the extent to which interest rates would drop and keep dropping in the financial crisis, creating unprecedented losses for the pay fixed, receive floating side of the contract. These municipalities for the most part weren't even investing, they were hedging a floating rate borrowing they had made. In retrospect a bad decision but lack of sophistication wasn't the driver since comparable magnitude mistakes were made by Lehman, Bear, AIG, Fannie, Freddie, Citi, Wachovia, WaMu, etc. etc.
posted by MattD at 5:34 AM on September 16, 2012 [1 favorite]


So we have Greece, Portugal, and now Italy being basically defrauded by investment banks and bankers, with the cooperation of public officials on the take. Why not ban these banks from doing business with governments? A fine that by now is considered a cost of doing business is clearly not a big enough deterrent.
posted by alvarete at 6:11 AM on September 16, 2012


There are several things going on.

1. Several bank paid kickbacks to get business. Clearly illegal.
2. Some of the swaps that were sold did not have a clearly stated revenue component to the bank, but rather had it embedded in the fee structure. Not actually problematic for savvy market participants, but when dealing with municipalities and sell bespoke swaps I can see the issue. Clearly a smart move from the Milan folks to use this as grounds to sever a contract they didn't want.

3 . Losses on swaps. There is nothing wrong here. These swaps were swapping a floating rate obligation for a fixed rate obligation. This is good risk management practice. The municipalities have certainly on the cash flows required to service their debt. At the time the swaps were entered into interest rates were at generational lows. Of course you should lock in rates. It turns out it is cheaper to separate interest rate risk from default risk when selling this kind of debt so you sell floating rate debt and buy a swap that takes the rate risk for you.

So as for the big scary " mark to market" losses part of the story - that doesn't really mean anything. For starters they are calculated assuming current interest rates and interest rate volatility persists for the entire tenor of the contract - it isn't a number that is a very certain reflection of the cash the municipalities will end up paying. Rather what is in numerical for is " wow when I locked in long term rates at 4% who would have ever thought they'd go to 2%". But at the end of the day these guys traded that risk for knowing exactly what their interest expense will be for the life of the debt.

Hell any Americans with a fixed rate mortgage not refi'd in the last year is also sitting on a big mark to market loss on an interest rate swap. The difference is the us government says you can terminate the swap for free at anytime - so it costs you a little bit more.

Tl,dr. Kickbacks bad, opaque pricing sorta bad, losses of swapping floating obligations for fixed obligations not really bad.
posted by JPD at 6:24 AM on September 16, 2012 [7 favorites]


Actually I think the investment banks helped Greece defraud the other members of the EU.
posted by JPD at 6:26 AM on September 16, 2012


Meanwhile, the proverbial book is thrown at a woman who bounced a $48 dollar cheque at Wal-Mart.
posted by The Card Cheat at 6:31 AM on September 16, 2012 [2 favorites]


Actually I think the investment banks helped Greece defraud the other members of the EU.

Yes, specifically Goldman Sachs. Greece was already cooking the books to disguise spending obligations from the EU in order to gain membership. With GS's help, they were able to get giant loans which were recorded as currency exchanges and thus didn't count as debt.

The BBC has a good video synopsis of the whole thing, and the NYT has a good article.
posted by hippybear at 6:56 AM on September 16, 2012 [1 favorite]


And a different set of banks did the same thing for the Italians to hit the Maastricht criteria.
posted by JPD at 7:13 AM on September 16, 2012


I would say that not paying $180 for a "financial accountability class" shows great financial accountability.
posted by urbanwhaleshark at 7:29 AM on September 16, 2012 [2 favorites]


First, I hate banks. Hate them. Loathe everything about them. Resent the fact that you can't really operate in the modern world without using them.

Given the rise and rise and rise of credit unions, this really isn't true any more. I've been doing all my banking through the same (modulo mergers and acquisitions) credit union for about thirty years now, and I've consistently had better service, better rates for both savings and loans and better access to my accounts than my bank-using friends, along with a complete lack of banking-related bullshit.

What makes me sad is that most people seem to have a vague fear of both the magic word "union" and the idea of joining something, apparently strong enough to make them just stick with banks and keep on grumbling about getting ripped off instead.

This is such an issue that my own credit union has recently jumped through whatever regulatory hoops it needed to in order to re-style itself as a "customer owned bank" and now calls me a "customer owner" rather than a member.

I liked being a member, bugger it. I don't like being a customer. But so far the magic word "bank" doesn't seem to have turned MECU bad, and if you're Australian and you're sick of being treated like a mushroom by one of the Big Four you could do a lot worse than switch.
posted by flabdablet at 7:41 AM on September 16, 2012 [3 favorites]


The only problem with this is that in Europe, Asia, and the US, money is law. Money is the only voice that counts at all in politics around the world. Historically, the only way I've ever seen political power removed from the moneyed elite is through force. Usually bloody, bloody force.

Yet Canada avoided most of these financial shenanigans despite Canada also having money.
posted by srboisvert at 8:32 AM on September 16, 2012


Like, a law that restricted municipalities to only investing in AAA rated instruments?

How many of those favorites came from people who got the joke here vs. those who think its a great idea?
posted by JPD at 8:57 AM on September 16, 2012 [1 favorite]


Something like that has fixed, relatively predictable obligation costs [running the sewage treatment plants], what in the world were they gambling on an adjustable rate return for?

The examples here weren't. A pay floating get fixed swap would have mark to market gains right now.
posted by JPD at 8:59 AM on September 16, 2012


So now things are in place for the next phase of the con, where the banksters induce local governments to settle their debts by signing over assets & infrastructure. Once everybody's acclimated to that they can turn up the heat & start imposing their social agenda with a bit more force, now that they own something or other that's key to society's functioning & can withhold it as incentive for us to comply.
posted by scalefree at 9:19 AM on September 16, 2012 [1 favorite]


Back in 2008, Reporter Stefania Rimini produced an excellent video (italian language) pertaining to the unholy derivate mess that struck many hundreds of municipalities in Italy.

Can you imagine a small municipalty of a few thousand souls having a full time finance expert on its payroll? Actually, can you imagine a full time financial expert (and I don't mean the clueless kind of people that bet on Forex) that hasn't got some conflict of interest, vested interest, revolving door interest, in-bed-with interest working at a municipality? Surely it can exist, but probably only as a rethorical-mythical beast. So it was farily easy for bank salespeople to convince municipalities to nail their own coffins.
posted by elpapacito at 9:32 AM on September 16, 2012 [1 favorite]


The examples here weren't. A pay floating get fixed swap would have mark to market gains right now.

Right; no, from what I understood* these people were paying fixed and gambling that the variable they'd get in return would be high. Which made little sense since their department costs were basically fixed, but they incorrestly thought that even the worst case return would be high enough to pay their operational needs. The banks are always happy to take a fee on a fool's bet, though; no problem finding someone to take the other side of that wager.

(And this is just what I was hearing about state side, not sure if it was a similar situation in the EU, should have clarified that).

*I could be wrong; I'm not a CFA, just a guy who ran the numbers through the pipes really fast.
posted by ceribus peribus at 9:45 AM on September 16, 2012


a law that restricted municipalities to only investing in AAA rated instruments?

In case folks don't know, what I think JPD is referring to as "the joke here" is that most of the mortgage derivatives that shat on the world economy in 2008 had been rated AAA by corrupt rating agencies.

Tl,dr. Kickbacks bad, opaque pricing sorta bad, losses of swapping floating obligations for fixed obligations not really bad.

I can't help notice that JPD's tl;dr doesn't include anything about how the folks doing the selling knew that they were selling crap that would fall apart soon. It's just the kickbacks that were "bad"? Please.
posted by mediareport at 9:46 AM on September 16, 2012


urbanwhaleshark : I would say that not paying $180 for a "financial accountability class" shows great financial accountability.

I would say that someone bouncing checks needs that class - Though I have to agree with you that the price seems high (many community colleges offer not-for-credit fiscal responsibility classes either for free or for a token paying-for-the-classroom-lights cost).

No reason exists to ever bounce a check. Ever. If you don't have the money in your account, don't write the check. No, "needed to pay that bill and figured a check would give me a few days to cover it" does not excuse it, it means you need that class all the more. No, "I didn't realize* my account had dipped that low" does not excuse it, it means you need that class all the more. No, "The bank applied my deposits and checks in the "wrong" order does not excuse it, it means you need that class all the more.

And apropos to the FP article - No, "the banks tricked us into structuring our debt in a suboptimal way" does not excuse it, it means your town manager needs that class all the frickin' more.

* The sole exception to this, if the bank actually makes an outright error, in which case I wouldn't really say that "you" bounced a check.
posted by pla at 9:47 AM on September 16, 2012


mediareport : In case folks don't know, what I think JPD is referring to as "the joke here" is that most of the mortgage derivatives that shat on the world economy in 2008 had been rated AAA by corrupt rating agencies.

Great point, and "funny" in its own way, but I think you missed the more obvious 1st layer to the joke here...

TFA has nothing to do with munis investing money, it has to do with them (complaining about) finding ways to massage the numbers to allow them to borrow more money than they should.
posted by pla at 9:48 AM on September 16, 2012


I don't think that part of the fucking article was what JPD was referring to, pla. But fair enough; the towns weren't "investing," they were borrowing money from (cough) investment banks which sold them repayment plans the numbers of which had been massaged and which the banks knew were going to bite the towns in the ass.

Thanks for helping me not miss that part.
posted by mediareport at 9:55 AM on September 16, 2012


Whoah dude, calm down! I consider your observation a really good one, and didn't mean my comment at all as a slam!

I just think getting the elephant out of the kitchen gets a higher priority than worrying about the color of the trim. ;)
posted by pla at 10:20 AM on September 16, 2012


I don't think that part of the fucking article was what JPD was referring to, pla. But fair enough; the towns weren't "investing," they were borrowing money from (cough) investment banks which sold them repayment plans the numbers of which had been massaged and which the banks knew were going to bite the towns in the ass.


Huh. The municipalities borrowed money from whomever wanted to own Italian Municipal debt - which probably was not Investment Banks, but rather commercial banks and large institutions. That debt agreements/bonds paid a variable interest rate. The investment banks make money off of that because they get paid an underwriting fee. In order to secure that underwriting fee in the sicilian example certain banks paid kickbacks to get the business.

Very reasonably the municipalities wanted to swap their variable payments to fixed payments because they did not want to speculate on long-term interest rates. This is the right thing for them to do. You do this by buying a swap that pays you a variable rate of interest while you pay a fixed rate of interest. Convention is that the fee the investment bank makes is embedded in the initial spread between the fixed rate and floating rate payments. In the Milan case it was argued that 1) the value of this fee should have been explicitly disclosed 2) the size of that fee was bigger than market rates - which would have been clear if the disclosure was better.

The investment banks were not selling this "knowing" the fixed for variable swap was going to "bite them in the ass" - they've done what they were supposed to do. It only looks like a bad bet because the reference interest rate has declined. 5 years from now they might look like a great bet. The fact that no one knows that is why they bought the swaps in the first place.

I can't help notice that JPD's tl;dr doesn't include anything about how the folks doing the selling knew that they were selling crap that would fall apart soon.

Again what fell apart?
posted by JPD at 10:21 AM on September 16, 2012 [2 favorites]


the towns weren't "investing," they were borrowing money from (cough) investment banks which sold them repayment plans the numbers of which had been massaged and which the banks knew were going to bite the towns in the ass.

Moral of the story -- don't trust capitalist bankers. Ever.

Especially if you're hoping for a "deal". The other side has all the information and will only give you what you require to close the deal. Everything else will be contained in fine print and tucked away as far down in the deal as possible. There's no way to win; you will only lose.

Our banking sector is fundamentally corrupt at this point, and there's every reason to avoid contact with it at every possible opportunity in order to avoid getting burned or contaminated.
posted by hippybear at 10:27 AM on September 16, 2012 [1 favorite]


I have yet to see an analysis on this thread about fixed/vs/floating scenarios that were different, or even in the current scenario the cost differential of float+swap vs fixed. Oh yeah, lets just grab the pitchforks and skewer the bankers.
posted by H. Roark at 10:41 AM on September 16, 2012


Sorry, pla. And ok, I'll shut up and keep reading. I'm way out of my depth.
posted by mediareport at 10:54 AM on September 16, 2012


Oh yeah, lets just grab the pitchforks and skewer the bankers.

I'm not saying skewer the bankers. I'm saying that any person with insight would see making deals with them is akin to handling venomous snakes. You can claim faith is on your side, but you'll be bitten eventually, and then your faith won't save you.

If other solutions are available to you, then don't handle vipers. It's common sense.
posted by hippybear at 11:26 AM on September 16, 2012


As JPD rightly pointed out, the swaps in my anecdote are different from the swaps discussed in the articles; my apologies for introducing confusion into this discussion that way.

I think what's common is that in both cases you had one party to the swap who, while maybe not quite being predatory about it, was at least bearish enough on interest rates to be worried and was offering atypically generous terms with the goal of protecting themselves from an extreme rate drop. Meanwhile, the other party was mostly looking at the great deal they were getting, and downplaying the risk of interest rates dropping too far, based on their historical observations of interest rate growth.
posted by ceribus peribus at 11:46 AM on September 16, 2012


I worked on interest rate swaps, a long time ago, when I worked at Drexel Burham Lambert.

> That said - I have a pretty hard time blaming the banks for this one.

This is because your idea of the relationship between banks and their customers assumes that banks have every right to completely take advantage of those customers in order to feather their own nests.

But this has NOT been the historic relationship between banks and their clients, and this is not the assumption made when government agencies make contracts with banks.

The banks are professionally supposed to be working for their clients. They are supposed to hold their clients interests at heart. They are the experts, in a very technical field - they are supposed to help their clients to investments that suit their clients risk exposure and technical expertise, not sell them a lot of junk that they have no use for.

Suppose it wasn't bankers, but doctors. Suppose a group of doctors sold a lot of patients expensive medicine that didn't actually cure their condition. Would you then be saying, "Well, it's the responsibility of the patients to make sure that their doctors aren't trying to defraud them."?

No reason exists to ever bounce a check.

I bounced a check once when my paycheck bounced, due to an error on my employers part. Can you tell me what I was doing wrong, please?
posted by lupus_yonderboy at 7:15 PM on September 16, 2012 [4 favorites]


Yet Canada avoided most of these financial shenanigans despite Canada also having money.

Wait until the housing bubble pops.
posted by one more dead town's last parade at 7:19 PM on September 16, 2012


This is because your idea of the relationship between banks and their customers assumes that banks have every right to completely take advantage of those customers in order to feather their own nests.

They not only have a right to do that, they have an obligation to do that; "feather their own nests" is nothing more than unsympathetic code for "maximize returns to shareholders". The only things constraining a bank's ability to screw its customers are competition for those customers from other financial institutions and a few knock-off-the-roughest-edges regulations.

This is exactly why credit unions exist. Credit unions are co-operatives built to serve one group of people - their members. Members have one share each and can't acquire more. That makes it much harder for small groups of powerful individuals to seize control, and means that credit unions typically don't piss money up against the wall on bonuses for the 1% and don't attract the kind of managers primarily motivated by that kind of behavior.

From an emotional perspective, banding together with a bunch of other like-minded people in order to be able to say to the banks "You know what? We don't need what you're selling" is a good feeling. Which is why I remain somewhat distressed by the shift my own credit union has made to describing itself as a "customer owned bank". Personally I'd much rather feel like part of a thing than part-owner of a thing; I think there's more community inherent in membership than in ownership. Time will tell, I guess, whether there is in fact a dilution of MECU's community ethos as new "customer owners" gradually take over from the longer-established members.

Be that as it may: in thirty years of membership I have never once been given any reason to regret choosing a credit union instead of a bank.
posted by flabdablet at 8:57 PM on September 16, 2012


> They not only have a right to do that, they have an obligation to do that; "feather their own nests" is nothing more than unsympathetic code for "maximize returns to shareholders".

That is utterly untrue. If you are someone's investment banker you have a legal responsibility to avoid conflicts of interest, and more, in most cases you actually have to be working in the client's best interest - similar to the relationship between a lawyer or a doctor and their client.

YES, many investment bankers have flouted these laws in the last decade and found bogus endruns around some of these laws. YES, the responsibility of an investment banker diminishes as the client gets more sophisticated (but in this case, the clients are clearly almost completely unsophisticated).

But that absolutely does not mean that an investment banker has the legal right to fleece customers by selling them completely inappropriate investment vehicles, as is happening in this case.
posted by lupus_yonderboy at 9:31 PM on September 16, 2012 [2 favorites]


> Be that as it may: in thirty years of membership I have never once been given any reason to regret choosing a credit union instead of a bank.

Just so we're clear here - the subject under discussion is not "banks that take deposits" - we're talking "investment banks", a completely different beast, subject to completely different laws.

None of the cities who were fleeced here had the option of going to a credit union - credit unions cannot do investment banking, and for that matter, savings banks can't do investment banking either. Thanks to the short-sighted repeal of Glass-Steagall, it is now possible for both savings banks and investment banks to be owned by the same holding company, but that doesn't mean that the laws that govern these two institutions are the same at all.
posted by lupus_yonderboy at 9:38 PM on September 16, 2012 [1 favorite]


> They not only have a right to do that, they have an obligation to do that; "feather their own nests" is nothing more than unsympathetic code for "maximize returns to shareholders".

That is utterly untrue. If you are someone's investment banker you have a legal responsibility to avoid conflicts of interest, and more, in most cases you actually have to be working in the client's best interest - similar to the relationship between a lawyer or a doctor and their client.


Doesn't this situation reflect the shift of investment banks from private partnerships to public corporations? The whole rationale for the partnership model is that, if shit happens, and "shit" certainly includes conflicts of interests and other ethics issues, then the partners have a lot more at stake than just their share of the partnership's working capital. It isn't just the money, but also their personal reputations, and their very ability to stay in those professions. They therefore have a strong interest to stay in the strait and narrow, and to ensure that their subordinates also do it. On the other hand, the generally anonymous shareholders of a public corporation don't have to worry about reputation or personal or even criminal liability, and are going to pressure the corporation's management to get them the highest possible ROI by any means available, even if this implies screwing the clients.
posted by Skeptic at 5:26 AM on September 17, 2012


Just so we're clear here - the subject under discussion is not "banks that take deposits" - we're talking "investment banks", a completely different beast, subject to completely different laws.

Perhaps you're unaware of the changes to the regulations which kept these two entities separate, but with the Gramm-Leach-Bliley Act passage in 1999, the Glass-Steagall Act firewall between commercial and investment banking was largely dissolved, leading to a large-scale blending of those two types of institutions.
posted by hippybear at 7:35 AM on September 17, 2012


Doesn't this situation reflect the shift of investment banks from private partnerships to public corporations? The whole rationale for the partnership model is that, if shit happens, and "shit" certainly includes conflicts of interests and other ethics issues, then the partners have a lot more at stake than just their share of the partnership's working capital.

Nah - that's the story behind taking prop risk. Overcharging naive counterparties for opaque products is as old as Goldman and Sachs selling shitty cooking pans from a horse drawn cart.
posted by JPD at 7:45 AM on September 17, 2012


Perhaps you're unaware of the changes to the regulations which kept these two entities separate, but with the Gramm-Leach-Bliley Act passage in 1999, the Glass-Steagall Act firewall between commercial and investment banking was largely dissolved, leading to a large-scale blending of those two types of institutions.

Not really what you think it means. It allowed Banking holding companies to own both commercial banks regulated by the OCC and investment banks regulated by the SEC. So the institutions weren't really blended, the regulators weren't changed. Its a little esoteric, but it matters. The guys at Chase bank weren't selling these swaps, it was the guys at JP Morgan Securities.
posted by JPD at 7:50 AM on September 17, 2012 [1 favorite]


I really don't think that banks are at all interested in the solidity of the societies that allow them to make their profits. This is the tragedy of the evolution of capitalism: where we once expected citizenship from companies, we now absolve them of responsibility for maintenance of the very communities that give them sustenance. It's a broken system.
posted by Mental Wimp at 7:53 AM on September 17, 2012


> > Just so we're clear here - the subject under discussion is not "banks that take deposits" - we're talking "investment banks", a completely different beast, subject to completely different laws.

> Perhaps you're unaware of the changes to the regulations which kept these two entities separate, but with the Gramm-Leach-Bliley Act passage in 1999, the Glass-Steagall Act firewall between commercial and investment banking was largely dissolved, leading to a large-scale blending of those two types of institutions.

???

I'm not trying to be rude, but you really need to work on your reading skills, because literally one sentence later I say:

"Thanks to the short-sighted repeal of Glass-Steagall, it is now possible for both savings banks and investment banks to be owned by the same holding company, but that doesn't mean that the laws that govern these two institutions are the same at all."
posted by lupus_yonderboy at 9:08 AM on September 17, 2012


Wall Street Rolling Back Another Key Piece of Financial Reform (Rolling Stone coverage of the passage of a new House bill (HR 2827), which rolls back a portion of Dodd-Frank designed to protect cities and towns from the next Jefferson County disaster. It will go to the Senate next, so it's not a done deal yet.
posted by filthy light thief at 7:18 PM on September 20, 2012 [1 favorite]


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