The EU Parliament sidesteps the real issues about banks, while the US target the Eurozone lenders

European Parliament. Committee on Trade and economic relations, INTA, hearing on the Trade and economic relations with the United States. (EP Audiovisual Services, 14/10/2013).

European Parliament. Committee on Trade and economic relations, INTA, hearing on the Trade and economic relations with the United States. (EP Audiovisual Services, 14/10/2013).

Last week, The Economic and Monetary Affairs Committee – ECON of the European Parliament approved a draft legislation to ostensibly protect small investors from risks hidden in investment products sold by banks. However, this development coincided with J.P. Morgan’s agreement with the American authorities over a payment of a record fine of $13.5 billion, regarding a series of civil probes related to the infamous mortgage-backed securities, sold by US banks all over the world. Everybody knows by now that this led to the still on-going global economic and financial crisis of 2008.

J.P. Morgan, the top US bank, accepted that this agreement is connected to securities purchased by Fannie Mae and Freddie Mac from JP Morgan, Bear Stearns and Washington Mutual from 2005 – 2007. Fannie Mae and Freddie Mac are the US government controlled mortgage lenders, hit badly by the real estate market collapse in 2008. Bear Stearns and Washington Mutual were then acquired by JP Morgan to save the American financial system from a total collapse.

Same frauds

Let’s compare those two developments. On the one side, it’s the European Parliament saying it now adequately protects the small investors. On the other side it’s JP Morgan, agreeing to pay the highest fine in the Atlantic financial history, set by American prosecutors at $13.5bn. It’s about unworthy securities sales of a nominal value of almost $40bn to the abovementioned two long established and well organised semi-public financial institutions.

The first conclusion that comes to mind is that no matter what the Parliament says, if dangerous investment products aimed at cheating everybody are thrown into the market, there is nowhere to hide. Today, the EU investment market has reached a total value of €10 trillion and the built-in risk element in all those securities is known only to the banks, if at all. Today, the three largest Eurozone banks, Deutsche Bank, Crédit Agricole and BNP Paribas share between them a total asset portfolio of $7.5tn. JP Morgan’s assets are of the same magnitude around $2.5tn.

All those trillions of assets in those four banks’ balance sheets contain risky bets. Every first year student of economics knows very well that it is impossible to identify those risks, sometimes even for the banks themselves. Even low ranking dealers working in the banks’ immense investment departments can cause, intentionally or not by pressing the wrong button, losses of billions. Still, the banks don’t care much about that. Such affairs reach the media and shake the public opinion, only if they reach the order of billions. Hundreds of millions of losses appear as footnotes in the huge balance sheets, totalling in trillions. Let alone what is happening in off balance sheets items, where very few people in the banks hierarchies have access.

Impotent watchdogs

Some months ago, the Commission’s competition watchdog accused thirteen western giant investment banking groups of forming a price setting cartel, in the over the counter trade of Credit Default Swaps and Derivatives. This is a multi-trillion business. As reported by the European Sting, the Commission’s investigation covers the period before and after the financial crunch of 2008 and was targeted against the following financial groups: Bank of America-Merrill Lynch, Barclays, Bear Stearns (now part of JP Morgan), BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, UBS and the Royal Bank of Scotland. The Commission sent them ‘a statement of objections’, a key step in the on-going antitrust investigation that the Commission opened in April 2011.

There is also another major on-going investigation against those banks: the fraudulent setting and use of financial benchmarks like the Euribor and Libor interest rates and the Baltic Indicies of sea freights. Those benchmark riggings are being investigated in London, New York and Brussels.

Let’s now come back to JP Morgan. This historically high fine of $13.5bn the bank agreed to pay accounts of less than a quarter of its net income this year. Despite that it was announced this month that the bank agreed to pay this record fine, its shares rose by 5.5% this same month and have gained almost 25% from the beginning of the year. It’s obvious that betting the trillions JP Morgan gets for free from the US Federal Reserve, the American central banks known as Fed, all over the world, give the lender the ability and the profitability cushion to almost ignore the fines. JP Morgan is implicated in endless law suits for forming cartels and conspiring to set prices for financial products. Still, its management doesn’t care. They gain so much money for themselves and their shareholders by betting other people’s money, that they really pay no attention to legality. As for the business ethics, that is something long forgotten.

The same is true for the major Eurozone banks. All of them are implicated in benchmark rigging, cartels and other illegal activities. They also don’t mind if their dealers lose billions. After all that, it becomes obvious that the latest European Parliament’s approval of a new legislation to protect small investors has no significance at all and changes nothing. The ‘Key Information Document (KID)’ that the Parliament now asks the banks to offer to Eurozone’s small investors is just an illusory protection. The real problem is that no major western bank can be effectively controlled within any single continent and the Parliament knows that. Still, legislators tell us stories about KIDs… Logical…

An ocean of differences

Unfortunately, the US and the EU have not managed to agree on uniform rules and controls on banks. The Atlantic Ocean may not be bridged. The truth is that there are differences between the US and the EU that go far deeper than what the media can investigate and report. The banks themselves have to be blamed for that. Even the now expected investigation of the American authorities against the European banks, on the same grounds as in JP Morgan’s case, may take the form of a US – EU banks confrontation. The unseen before magnitude of the fine JP Morgan agreed to pay in the US, may actually be a warning and a threat against the EU banks.

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