A Trader Dreamed of Economic Collapse

Call it over-confident bravado or perhaps a lapse into utter transparency; trader Alessio Rastani’s comments on BBC give the rest of us a glimpse of the power behind the world’s thrones and how prone “the system” is to collapsing without a sufficient force geared to the viability of the system itself. In other words, it is amazing that the financial/governmental systems go on without more attention to them as systems rather than to micro self-interests. One might ask whether powerful self-interests are sufficient to keep the system from hitting the rocks. Apparently the answer is yes, though this is astonishing nonetheless. It is like a car somehow making its way down the street with one person in the car looking at pedal, another at the steering wheel, and still another at the speedometer. It is amazing if the car does not crash, yet somehow it managing to stay on the road.

As for a dash of reality, Rastani said on September 26, 2011 on BBC TV that Goldman Sachs rules the world and the Euro zone is poised to crash. "This is not a time right now for wishful thinking that governments are going to sort things out," Rastani said. "The governments don't rule the world, Goldman Sachs rules the world." Beyond the disciplining of egos within the bank, Goldman’s reach is multiplied by forays made by its alumni into governments and other banks. For example, when Merrill Lynch executives were finally facing the prospect of needing to sell to Bank of America in September 2008, John Thain relied on his fellow Goldman alums who he had lured to Merrill—sidelining Merrill’s own. In the U.S. Government, both Henry Paulson and his assistant at Treasury who ran TARP were Golden. It can therefore be surmised that the Eurozone was poised to crash because Goldman’s execs had determined that they could profit from it. The state-heavy E.U.’s government only appeared to be capable of protecting the viability of the euro financial system.

I suspect that Rastani was overplaying his hand. The financial interest of the rich states of the E.U. (and their respective banks) cannot not be written off in favor of a Golden hegemony unless Goldman Sachs controls the European banks. To be sure, at the time of Rastani's interview, there were players poised to benefit financially from the collapse of the Eurozone. Even so, powerful vested financial interests not limited to Europe surely had a financial interest in the continued viability of the Eurozone. Of more value to us than Rastani's crystal ball is his mentality and values, which were on full display during his interview. We have a rare snapshot of what sort of people rule the world in terms of real power. 

The crash will be good news for traders, Rastani told stunned BBC anchors. "For most traders we don't really care about having a fixed economy, having a fixed situation, our job is to make money from it," he said. "Personally, I've been dreaming of this moment for three years. I go to bed every night and I dream of another recession." Rastani said traders aren't the only ones who can benefit from the crisis. "When the market crashes . . . if you know what to do, if you have the right plan set up, you can make a lot of money from this." Whether or not such opportunities rule the day, Rastani’s mentality itself is startling (or should be). In other words, we should also be stunned.

 Rastani's dreaming of a recession (like Bing dreamt of a white Christmas?) even as he was predicting that the “savings of millions of people are going to vanish” in less than a year might strike us as insensitive, even sadistic—and at the very least, rather selfish. Would he cheer the death of an uninsured man who could not afford medical treatment if money could be saved by a hospital in Rastani’s portfolio?  If so, could we give any credence to his “deathbed conversion” should he fall on bad times? Beyond the obvious moral questions, does the child deserve his amassed power, wealth and position? Moreover, can we continue in good conscience to respect him now? The respect that we give to offices or positions may be exaggerated, and thus due an "adjustment." Just because a Wall street player has power on account of his or her position (and wealth) does not mean that he or she is due respect accordingly.

In fact, if traders such as Rastani have a financial interest in the collapse of an economic system, it could be asked whether they have enough power to make that catastrophe happen. If Wall Street bankers—the real power-brokers—are focused on such financial payoffs, is anyone of sufficient power looking out for the system itself? Again, Rastani may have been overplaying his hand.

In 2008, the U.S. Government enacted TARP to stave off financial collapse. Of course, even Goldman was vulnerable, so it was in its own financial interest that Treasury contain the contagion. The experience demonstrated that the American federal government is capable of safeguarding the financial system, but what if Goldman were to face no downside from a collapse and would in fact benefit from it? Could Goldman alums in strategically-placed government offices sabotage the government’s own efforts to protect the system? As Sen. Dick Durbin said in 2010, the banking lobby owns Congress. The U.S. Government acting against the interests of Wall Street might be akin to that government putting some air between itself and Israel. Elected representatives and their appointees know enough not to screw the sacred cows.

So the trader has a point, though beyond the content of his predictions, the transparency of his mentality and the mentality itself warrant reflection by the rest of us. I suspect that we have a naïve view of the type of people pulling the strings. Were we to get to know those people (even the CEOs), an obvious question might be whether they deserve the power, position and wealth that they have gained. In a plutocracy, there is unfortunately little that we can do about it, as they hold the strings. In a republic, on the other hand, the financial and business sectors are subordinate to the public good, and the representatives of that good can reform the selection and promotion rules in those sectors. In saying that the rest of us will have no other choice but suffer because it is in his financial interest, Rastani was essentially informing us that our so-called democratic republics are actually plutocracies. Our systems depend, in other words, on the particular financial incentives of the Golden traders. This is even worse than the prospect of a recession. 

It means nothing that you or I might conclude that the system itself is broken, as we do not pull the strings; we merely pull the levers on election-day, lulled by the illusion that popular sovereignty lies with us. Even if Rastani’s interview wakes some of us up, little difference can be expected short of a major shift in power—but how can the less powerful overcome the kings of the hill to gain the hill itself? That would be like water flowing upstream as if gravity no longer held. Yet somehow, for people such as Rastani to be so respected and powerful in spite of the kind of persons they are seems to go against gravity itself. Like ignorance that is arrogant, one must wonder how the thing manages to stand at all. Perhaps all that is necessary is a gust of realization by us that the emperors are indeed trading in the nude, and are thus unworthy as de facto rulers. But can we act on the basis of a new awareness?

Source:

“Trader Alessio Rastani To BBC: ‘Governments Don’t Rule the World, Goldman Sachs Rules the World’,” The Huffington Post, September 26, 2011. 

Federalism & Business: States in India Deregulating for Economic Growth

The gross domestic product in India for the year ended March 31, 2011 was estimated to have grown at a robust 8.6%. Gordon Chang at Forbes argued that besides Delhi’s own fiscal and monetary stimuli, competition between the states of India for business was a formidable factor. Federalism, it turns out, can be good for business—yet at what cost? Chang omits this element, writing only that “As the states try to outdo each other, India’s investment climate improves.”

Chang cites Abheek Bhattacharya, who pointed to Tamil Nadu for its protection of property rights and Gujarat for its minimal regulations. Both states have been growing at double-digit rates. However, if the lack of regulations means that the economic growth has been at the expense of the environment and health of the citizenry, perhaps the weakness of the federal government is not such a boon to India. Federalism proffers the potential of a check and balance between the federal government and the state governments such that a “race to the bottom” element among the latter can be checked by a baseline of regulations issued by the federal government. To be sure, the latter is not without its own risks.

Whereas a race to the bottom risks the destruction of the country for short-term economic development, federal regulations risk a consolidation of power at the center. Federalism functions optimally if it is in balance. Chang undercuts such balance in suggesting that the “intense rivalry could even end up moving New Delhi in the right direction.” While such change would risk consolidation at the expense of federalism, Chang again cites Bhattacharya.

Although Bhattacharya had said on the John Batchelor Show that the states are essentially laboratories for nation-wide change, he had not meant that New Delhi would take over; rather, the more “laggard” states would simply realize that they need to “catch up” to the other states by loosening restrictions on growth. While evincing a “race to the bottom” in some respects, such convergence would not risk consolidation, as would New Delhi being moved “in the right direction.” Indeed, were the other states to join Tamil Nadu and Gujarat, any federal involvement should be antipodal to the deregulation at the state level to check any downsides. However, such a check and balance could risk eventual consolidation under the guise of protecting the environment and the Indian citizens.

In short, dangers exist in both runaway state and federal power. Just as economic growth and minimizing externalities needs to be balanced, so too must federalism for it to operate optimally as a system of public governance proffering governmental checks and balances. In a general sense, any system characterized by a maximizing variable that can break through the systemic constraints is doomed to implode. Accordingly, attention should be directed, at least in part, to the system itself so it may continue to be viable.

Sources:

Gordon Chang, “India’s Accidental Economic Formula,” Forbes, May 15, 2011.

Abheek Bhattacharya, “India Looks to the States,” The Wall Street Journal.

Essays on the Financial Crisis

The financial crisis that peaked in the United States during the fall of 2008 is an excellent case study of what can go wrong with leadership and corporate governance in business, financial ethics, government regulation directed both to the firm level and that of the financial system itself, and legal accountability for the culprits. The collection of essays begins with a series of essays on Lehman Brothers, with particular attention on its last CEO, Richard Fuld. Given the fraud surrounding subprime-mortgage bonds at numerous banks, the second part of the book looks at why legal accountability was so elusive in the United States. Weaknesses in the financial regulation, with particular attention to whether agencies had been captured by their respective regulated firms, comprises the third part. The fourth part examines the culpability of the Federal Reserve Bank, which had perhaps been too close to its regulated banks to anticipate the crisis. The book concludes with essays on why business ethics had been so very weak. The careful reader will take from the book a sense that the financial system remained vulnerable even after government attempts to reduce the systemic risks of a big bank going under. 

The book: Essays on the Financial Crisis

Going Off-Shore, Dodging Sanctions, and Laundering Money: The World of the Richest of the Rich

On April 3, 2016, 2.6 terabytes of data—more than 11.5 million documents—leaked from Panama’s law firm, Mossack Fonseca. The documents show that the firm “helped heads of state, oligarchs and celebrities launder money, dodge sanctions and avoid taxes.”[1] Over 40 years, 214,000 offshore shell companies in 200 countries implicate individuals including the family of Syrian President Bashar Assad, and that of British Prime Minister David Cameron, several friends of Russian President Vladimir Putin, and Icelandic Prime Minister Sigmunder Gunnlaugsson; financial institutions implicated include UBS, HSBC, and Société Générale.[2] I contend that the markets themselves had been tilted in the interest of the greater power (i.e., the rich), so systemic rather than incremental or piecemeal efforts would be necessary to solve the problem.

To be sure, offshore accounts were not at the time illegal, yet even so, the ethical dimension is stinging. Peter Atwater, a behavior economist, points to the 1% being able to “move anywhere they want and profit handsomely from the relocation” whereas “the 99% are left with the aftermath—the empty buildings of a deserted Detroit, the toxic waste from chemical plants in West Virginai or the unsustainable tax liabilities of Puerto Rico.”[3] In short, the richest of the rich had for years gotten away with minimizing their taxes in ways that are not open to anyone else. Simply put, this is not fair; no social contract with any sort of equitable basis would have such an “out.”

Global Financial Integrity found at the time of the leak that “developing and emerging economies lost $7.8 trillion in cash from 2004 to 2013 because of maneuvers like those allegedly perfected by Mossack.”[4] In 2016, illicit outflows were increasing at the rate of 6.5% a year, twice the rate of global GDP growth.[5] As most emerging economies were slowing in the first quarter of 2016, the outflows could have tipped the global economy into recession.

Clearly, a cultural mentality of self-aggrandizement at the expense of the general economic good (not to mention ethics) had gripped the richest of the rich, with a slanted (i.e., unfair) economic “game-board” resulting. Such a dynamic is the antithesis of a social contract. Put another way, the mentality undercuts the de facto social contracts by which people agree to live within societies and accept even their basic frameworks. Were the 99% organized, we might have seen an effort to re-evaluate how the market mechanism works. As it was, incremental rule-changes by governments was the response. For instance, “new rules released by the U.S. Treasury on April 4 crack down on American corporations that allow themselves to be acquired by foreign firms to avoid U.S. taxes.”[6] Yet if the Panama Papers are any indication, the problem goes well beyond the acquisition of U.S. firms by foreign ones. For instance, a company need only establish operations in a tax-haven to shield taxation at higher rates. Furthermore, what was being done to stop companies from dodging sanctions to do business with certain countries? What of the money laundering? Even answering these questions one by one misses the more fundamental point that the global market-system itself is flawed—and in a way that is convenient only for the rich. Attention to the system itself is needed, yet without the organized pressure of the 99 percent, wholesale political efforts are unlikely.

Abstractly speaking, a system is not a system if certain internal variables can maximize themselves without stopping at the contours of the system. Put another way, a system that restricts the vast majority of people yet is semipermeable to the maximizing few is inherently as well as ethically compromised. Yet efforts to level the board would seem to require lessor power to overrule a greater power unless the power of the vast majority is organized and activated such that it becomes the greater power.

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[1] Rana Foroohar and Matt Vella, “The Panama Papers Expose the Secret World of the 1%,” Time, April 18, 2016, pp. 11-12.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

Electric Utilities Thwart Solar Applications: A Conflict of Interest Rewarding the Status Quo

Considering the contribution of coal-burning power-plants to atmospheric carbon-emissions and thus global warming, governments around the world should be encouraging rather than discouraging home-owners to install solar panels. That is to say, we ought not privilege the status quo when it has contributed so much already to an uncomfortable or even uninhabitable Earth for mankind. So it is unfortunate that energy officials in Hawaii’s government had to step in to pressure—no, order—the Hawaiian Electric Company to approve its “lengthy backlog” of solar applications.[1] I submit that the officials should have gone further in correcting for the conflict of interest in the utility. Put in the vernacular, electric companies tended at the time to screw customers who could sell back “home-grown” solar power. The root problem here is in the utilities’s dual roles of seller and consumer of power.


The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

Wall Street Subsidies Silently Magnifying Systemic Risk

At a U.S. Senate hearing on a GAO report on the costs of expectations of government support for banks should they go under, “discussion went far beyond the report and delved into the current state of banking, the limits of the Dodd-Frank Act and what should be done about banks that are simply too big to manage,” according to The New York Times.[1] Six years after the massive credit freeze, a major question hinged on whether some financial institutions were still too large, complex, and interconnected to be liquidated in an orderly and containable manner should they head under water. 

The full essay is at "Wall Street Subsidies."

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1. This and all quotes in this essay are from Gretchen Morgenson, “Big Banks Still a Risk,” The New York Times, August 3, 2014.