Piranha Tank: Financial Crime Rules the World (Guest blogger: Ron Hera of Hera Research)July 26th, 2012
Financial markets have exploded with financial crime since 2009 as an unintended consequence of the moral hazard engendered by the “too big to fail” doctrine of Western governments and monetary authorities. Since “too big to fail” became the norm, there has been an increase in the number and frequency of financial crimes and the crimes themselves have become more blatant and egregious. MF Global’s $1.6 billion plunder of segregated customer accounts suggests that regulators are impotent and that there is no rule of law.
The size of financial crimes has grown from the fraudulent dumping of bad mortgages and toxic mortgage-backed securities into U.S. government-sponsored entities Fannie Mae and Freddie Mac, to the LIBOR rigging scheme affecting as much as $550 trillion in bonds, over the counter (OTC) derivatives and other financial instruments globally. The conspiracy and fraud of LIBOR rigging could add up to trillions in illegal, ill-gotten gains for big banks. LIBOR rigging is easily the single largest financial crime in the history of the world.
The locus of crime has migrated from relative Wall Street outsiders like convicted felons Raj Rajaratnam and Bernie Madoff to the very heart of the world financial system. Even the Bank of England and the Federal Reserve have been implicated. It is no coincidence that central banks, which exist to backstop favored banks, eventually produce “too big to fail” institutions, thus shifting losses and risks to taxpayers (socializing losses while profits remain private).
“Too big to fail” is the inevitable outcome of central banking. Critics might contend that the harlot of Threadneedle Street (the Bank of England) and her bastard spawn (the U.S. Federal Reserve) have had their proverbial way with the United Kingdom and the United States. Simply put, the institution of central banking has facilitated the biggest banks becoming the largest, most influential corporations in the history of the world. In fact, “too big to fail” banks are so powerful that, rather than permitting them to suffer a loss, politicians, who depend on the favor of banks, seek to justify the growing body counts in collapsing nations like Greece.
As each new financial crime has been exposed, it has become more glaringly obvious and undeniable that the world financial system is rotten to its core. In the face of broad and protracted economic decline, big banks can only continue to exist either through more bailouts or through more and bigger crimes. Either way, the Western financial system has become one giant Ponzi scheme sucking the blood out of the real economy. Like parasites killing their host, the largest financial institutions have become too big to be supported by the underlying economy. Their continued existence therefore depends on their ability to cannibalize whatever is left of the economy. As long as big banks are “too big to fail” organized crime will undoubtedly continue to grow.
Financial crime is a profitable business model. The fines and settlements paid by big banks for their criminal activities is a fraction of their illegal profits. Rather than being a deterrent, fines and legal settlements are merely the cost of doing business. The cost of fines and legal settlements is ultimately guaranteed by the taxpayer. In other words, the victims pay the penalties owed by the criminals. When victims are punished instead of criminals, the correct term is not ‘moral hazard’ but ‘moral depravity’.
Although central banks exist to create inflation, which serves to transfer wealth from ordinary citizens to governments and banks, the problems of inflation are compounded by large-scale financial crimes. Papering over problems in the financial system is highly inflationary. Inflation, which is an increase in the money supply, can be extremely destructive. Inflation punishes savers and destroys genuine capital opening the way for banks to substitute credit for capital. Credit means that currency is created ex nihilo as a debt obligation owed to a bank. The resulting destruction of genuine capital (savings) guarantees banks ‘a piece of the action’ in every transaction, which gradually pushes the population into debt servitude.
Real interest rates are currently negative, which means that the yields on sovereign bonds, particularly U.S. treasuries, are less than the rate of inflation. In other words, the profit is less than the rate at which the currency is losing value. As more money is printed, e.g., for bank bailouts, each unit of currency becomes worth less. Structured annuities, money market funds, interest earning savings accounts, etc. can lose purchasing power, despite showing nominal gains. To make matters worse, inflation creates phantom gains in asset prices and the resulting tax liability eats away at the original principle of investments, which is why governments want inflation (i.e., to boost tax revenues by confiscating wealth).
Incredibly, most investors remain blissfully unaware of the fact that, as the economy continues to decay, the carrion eaters have emerged to pick the last meat from the carcasses of once great nations. Unless you’re an insider or part of the banking cartel, most so-called “investments” have become choices between different ways of losing purchasing power; between rigged games where the house always wins. Of course, big banks can’t lose, except when attempting to feed off of one another, e.g., in the high-risk OTC derivatives market, where JP Morgan’s “London Whale” derivatives trader lost $4.8 billion in a matter of weeks.
Large-scale financial crime means that there is no longer any institution where financial assets can be safely held. Few investors, savers, workers, entrepreneurs, small business owners or retirees understand that nearly all of the decisions presented to them lead to the same government approved piranha tanks, e.g., the Federal Reserve’s Primary Dealers. The oldest and deepest root of the crime wave is the institution of central banking itself. Owning hard assets free and clear (without any associated debt) outside of the financial system is the most likely way to preserve wealth and purchasing power.
About Hera Research: Hera Research, LLC, provides deeply researched analysis to help investors profit from changing economic and market conditions. Hera Research focuses on relationships between macroeconomics, government, banking, and financial markets in order to identify and analyze investment opportunities with extraordinary upside potential. Hera Research is currently researching mining and metals including precious metals, oil and energy including green energy, agriculture, and other natural resources. The Hera Research Newsletter covers key economic data, trends and analysis including reviews of companies with extraordinary value and upside potential.