{"id":110323,"date":"2014-03-26T21:44:59","date_gmt":"2014-03-26T21:44:59","guid":{"rendered":"http:\/\/rinf.com\/alt-news\/?p=110323"},"modified":"2014-03-26T21:44:59","modified_gmt":"2014-03-26T21:44:59","slug":"another-financial-crisis-looming-heres","status":"publish","type":"post","link":"http:\/\/rinf.com\/alt-news\/latest-news\/another-financial-crisis-looming-heres\/","title":{"rendered":"Another Financial Crisis Is Looming – Here’s Why"},"content":{"rendered":"

David Dayen\u00a0<\/strong>
\nRINF Alternative News<\/strong><\/a><\/p>\n

Bloomberg financial reporter Bob Ivry has written an entertaining new book, \u201cThe Seven Sins of Wall Street<\/a>,\u201d\u00a0which,\u00a0instead of rehashing the various illegal activities that triggered the financial meltdown, focuses on what the banks have been up to\u00a0since\u00a0the crisis. Much of it would be familiar to readers of this space: the\u00a0Bank of America whistle-blowers<\/a>\u00a0who were instructed to lie to homeowners, and received gift card bonuses for pushing them into foreclosure; the\u00a0London Whale derivatives trade<\/a>\u00a0that lost JPMorgan Chase more than $6 billion; the investment banks who traded commodities while also\u00a0operating physical commodity warehouses<\/a>\u00a0and facilities; and more. All the while, megabanks continue to\u00a0enjoy subsidies<\/a>\u00a0on their borrowing costs because of the (accurate) perception that they will get bailed out in the event of any trouble.<\/p>\n

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The odds are that trouble will present itself soon.<\/p>\n

Ivry\u2019s opening quote in the book comes from Jamie Dimon, whose daughter asked him, \u201c\u2019Dad, what\u2019s a financial crisis?\u2019 Without trying to be funny, I said, \u2018It\u2019s something that happens every five to seven years.\u2019\u201d A quick check of the calendar reveals that we\u2019re almost six years out from the bursting of the housing bubble and the fall of Lehman Brothers.<\/p>\n

So are we on the precipice of another financial crisis, and what will it look like?<\/p>\n

To be sure, danger still lurks in the mortgage market. The\u00a0latest get-rich-quick scheme<\/a>, with private equity firms buying up foreclosed properties and renting them out, then selling bonds backed by the rental revenue streams (which look suspiciously like the bonds backed by mortgage payments that were a proximate cause of the last crisis), has the potential to blow up. And continued shenanigans with mortgage documents could lead to major headaches. A new court case against Wells Fargo\u00a0uncovered a bombshell<\/a>, a step-by-step\u00a0manual<\/a>\u00a0telling attorneys how they can fake foreclosure papers on demand; the fallout could throw into question the true ownership of millions of homes. Even subprime mortgages are in the midst of a\u00a0comeback<\/a>, because what could go wrong?<\/p>\n

However, in this era of the government-backed housing market, new mortgages have largely gone through Fannie Mae and Freddie Mac, and the mortgage giants have diligently scrutinized them for defects. As a result, mortgages originated in 2013 have actually\u00a0performed quite well<\/a>. Industry types grouse that this leads to \u201ctighter\u201d credit; you could also call it \u201csafer\u201d credit, without the tricks and traps that preyed upon low-income Americans in the last decade.\u00a0Proposed legislation<\/a>\u00a0to eliminate Fannie and Freddie couldchange this dramatically<\/a>\u00a0and return us to the Wild West show, but for the moment, financial risk may be located somewhere other than mortgages.<\/div>\n
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That\u2019s not to say that Wall Street firms have been choir boys. The risk is merely harder to see, and you can\u2019t just look at the banks. In fact, banks have reduced their stake in many normal banking activities, leaving things like small business lending to the\u00a0shadow banking system<\/a>. This is the broad term given to hedge funds, private equity firms and the labyrinthine deals they initiate to move money around. These less-regulated entities have increased their overall portfolios\u00a060 percent over the past five years<\/a>, bingeing on\u00a0subprime loans<\/a>\u00a0to businesses that could not otherwise access traditional credit. Nontraditionalleveraged loans<\/a>, issued to companies that end up with large amounts of debt, have\u00a0fewer protections<\/a>\u00a0for lenders and carry much more risk.<\/p>\n

Typically lenders sell these loans off into the capital markets, where years of ultra-low interest rates have encouraged investors to search for any deal that will make them a bit more money. Thus we have seen an\u00a0explosion in junk bonds<\/a>, speculative investments in risky companies that return a high reward. Just as with subprime mortgages, these junk bonds feature shoddy underwriting, with money handed out to businesses that should in no way get an infusion of cash. Got an idea for a vegan restaurant on a cow farm? A lingerie shop in a nunnery? No problem, the shadow banking system will fund you! The junk bond market has doubled to nearly $2 trillion since 2009, causing more cautious investors to head for the exits, wary that the market could turn quickly. If losses mount and some of the bigger shadow banks take a hit, they remain so interconnected to the traditional banking industry that the risk could spread.<\/p>\n

Regulators have displayed a vague awareness of these blind spots, though it may be too late. Recent actions from the Federal Reserve suggest that they are thinking about\u00a0guarding against financial instability<\/a>, amid concern that microscopic interest rates and expanded balance sheets have fed speculation. In addition, the Securities and Exchange Commission\u00a0recently began looking<\/a>\u00a0into leveraged loans that have been packaged into bonds known as collateralized loan obligations, or CLOs. These CLOs are traded privately between buyers and sellers, so regulators cannot discern whether they hide risks, or whether the sellers cheat the buyers on prices. And some of them are \u201csynthetic\u201d CLOs \u2014 derivatives that are basically bets on whether the underlying loans will go up or down, without any stake in the loans themselves. Recently, commercial banks have attempted to get CLOs exempt from the Volcker rule, the prohibition on trading with depositor funds. CLO issuance has\u00a0skyrocketed<\/a>\u00a0since this lobbying push, and it could be the next vessel Wall Street uses for their gambling activities.<\/p>\n

But whether the SEC will actually enforce securities laws on CLOs, and drive them out of the shadows, remains to be seen. And other examinations of\u00a0shady derivatives deals<\/a>\u00a0and\u00a0price-fixing<\/a>, if past history is a guide, will end with cost-of-doing-business settlements instead of true accountability. Meanwhile, we are told that the economy has little to fear from big bank failures. The Federal Reserve recently released\u00a0results of its stress tests<\/a>\u00a0on the 30 biggest banks; it claims that 29 of them would hold up in the event of a deep recession. But the stress tests, designed in conjunction with the banks subjected to them, do not realistically measure the reality of a financial crisis, and if they did, the\u00a0banks would all fail them<\/a>.<\/p>\n

Ultimately, we don\u2019t yet know exactly where the next financial crisis will emerge. But we do know how the conditions for future crises get set. When law enforcement fails to prosecute Wall Street for prior misdeeds, they give no reason for them to curb their behavior. As the head of New York\u2019s Department of Financial Services, Ben Lawsky,\u00a0said recently<\/a>, \u201cThere are certain bad apples in any large institution who are willing to push the limits. And if they don\u2019t think there are going to be large consequences for them, they\u2019re going to keep doing it.\u201d<\/p>\n

Similarly, the size and power of the largest financial institutions, which has only grown since the crisis, virtually guarantees similar outcomes. Congress and the White House have not yet moved to chop these behemoths down to size; as a result, their sprawling corporate structures and inadequate risk controls make them almost unmanageable.<\/p>\n

It\u2019s telling and sad that it took until the past couple of\u00a0weeks\u00a0for top regulators to publicly consider whether Wall Street exhibits a\u00a0culture of corruption<\/a>. Those seven sins Bob Ivry documents in his new book practically comprise a credo in the financial industry, with a desire for making fast profits, ignoring pesky things like rules or ordinary people\u2019s lives, and offloading risk like a hot potato. We saw in 2008 how this puts all of us in peril.<\/p>\n<\/div>\n<\/div>\n

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David Dayen is a freelance writer based in Los Angeles, CA. Follow him on Twitter at @ddayen.<\/em><\/p>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

David Dayen\u00a0 RINF Alternative News Bloomberg financial reporter Bob Ivry has written an entertaining new book, \u201cThe Seven Sins of Wall Street,\u201d\u00a0which,\u00a0instead of rehashing the various illegal activities that triggered the financial meltdown, focuses on what the banks have been up to\u00a0since\u00a0the crisis. Much of it would be familiar to readers of this space: the\u00a0Bank […]<\/p>\n","protected":false},"author":1,"featured_media":110324,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[18],"tags":[],"class_list":{"0":"post-110323","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-latest-news"},"_links":{"self":[{"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/posts\/110323","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/comments?post=110323"}],"version-history":[{"count":0,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/posts\/110323\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/media\/110324"}],"wp:attachment":[{"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/media?parent=110323"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/categories?post=110323"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/tags?post=110323"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}