By Kim Byoung-nam
At the G20 summit in France on Nov. 3 and 4, the financial transaction tax or Robin Hood tax was on the agenda.
European countries favored the plan, but the United States opposed it. The tax plan is the least we can do to make proper changes to prevent crises. There are other critical areas we should address.
Let’s look at complex financial products called derivatives.
In the good old days, when someone borrowed money to buy a house, the lending bank owned the mortgage. In the new structure, they sell the mortgages to investment banks to be bundled up with other loans to create collateralized debt obligations (CDOs) and to investors around the world.
The most toxic, called subprime loans are also combined to create CDOs. Regrettably, many of them received an AAA rating. Despite their precarious nature, the investment banks preferred them for their higher returns.
Credit default swaps (CDSs) were created to be spared from defaults on CDOs. CDSs function like insurance policies. Speculators can also buy them to bet against CDOs they do not have. Many financial companies don’t just sell toxic CDOs but actively bet against their customers using CDSs, which created the biggest bubble since the Great Depression.
When the ticking bomb eventually went off in 2008, it was not the financial companies that took the hit. Practically, they got off scot-free. Instead, people across the world have been paying for their screw-up. As always, the poorest suffered the most.
So these unscrupulous banks created junk products and sold them to investors around the world. How could this happen? Who else were in cahoots with them?
Governments failed to regulate them or more likely just looked the other way. They were too interconnected with the industry personally and professionally. Few took raised conflict-of-interest issues seriously.
The rating agencies were not just bystanders either. They made a lot of money dishing out coveted imprimatur to toxic derivatives. The more AAAs they gave, the more money they got from the banks. Again, conflicts of interest were not an issue.
Nowadays, the banks have started to post enormous profits again and throw bonus parties, while the public who bailed them out are still struggling to make ends meet. People have yet to see the light at the end of the cruelest tunnel we’ve seen in decades. The banks seem confident that the sky is the limit for the second round of binge money-making.
They have the most powerful lobbying force. Most important, they have a ``Wall Street government.” Most of Barack Obama’s senior financial advisors were the people who designed the current distorted structure. ``When it was clear that (Lawrence) Summers and (Timothy) Geithner were going to play key roles as advisors, I knew this was going to be status quo”, said Willem Buiter, chief economist of Citigroup.
Not a single meaningful change has happened since Obama took office. No criminal prosecutions against greedy executives. No recovery of the money they made by betting against their customers.
The banks manipulate the system where they can individualize profits but have risks consolidated. They exploit neo-liberalism in good times but shelter under socialism in bad times.
We need not tinker with but overhaul it. Unless there are fundamental changes especially for derivatives, the rating agencies, tax havens and undue bonus schemes, bigger crises can and will come.
The banks do not care. They know we will be the one who pay for their mess again.
The writer is a former banker and now an English teacher at a private language school. His email address is avectoi1224@naver.com.