There is a lot of nonsense being published about the excesses of the banking sector, especially the harsh criticism of what has been undermining Credit Suisse for the past thirty years. The problem with today’s unbridled banks is not that they serve private and commercial clients, nor that they deal with corporate finance, but rather the role they play in making investments for themselves, including the “financial products” they bring to the market for that sole purpose.

A bank is a place to circulate money, to keep the savings of someone and lend them to others, including mortgages. This banker is more an accountant than an adventurer. In corporate finance, a bank provides services to companies so that they can be capitalised, on or off the stock exchange, obtain credit, take out loans, or structure the financial side of mergers or acquisitions. This banker needs to be well versed in corporate life and the capital markets. Asset management is another service, primarily to hold private or collective (pension fund) portfolios, to advise clients on their investments or even to execute management mandates. This is my understanding, and also that the green, rainbow and other requirements (ESG) put a dose of madness into it[1].

However, this is not the end of the story. When these banks became financial institutions, competing in some way with the national money-issuing banks, that’s when things started to go wrong. The selection of people to run these entities was influenced by the pursuit of this goal, so it is not surprising that the wrong choices were repeated again and again, and stubbornly.

Having myself been active in an industry making products of a material nature, coloured or not, smelly, toxic, solid or liquid, and therefore very concrete, I witnessed the arrival of salon producers offering “products” made of paper written in sympathetic ink.

At the same time, the usual business consultants came to teach us that our materiality was irrelevant and that our marketing positioning should be conceived as a service rendered, the propulsion of a ship rather than a marine diesel engine, or the health and hygiene of crops rather than a pound of insecticide. This had its usefulness, making us rethink the relationship with our customers, but also relativising the strategic importance of production which could therefore be relocated.

It is always curious to observe the semantic leaps that are so fashionable these days: while our manufactured goods were becoming services, the banks were inventing products as if they were donuts. What they never understood is that their products are dangerous – toxic and explosive – not only for the users but also for the producers. We know this in the chemical industry, the bankers do not in their offices.

Another misunderstanding is the idea of limitlessness. In a speech given in Basel a few years ago, Thomas Jordan, the current head of the Swiss National Bank, showed that an issuing bank could never go bankrupt because, by exclusive privilege of the State, it is always able to produce liquidity, which is commonly called printing money. Its balance sheet could therefore grow infinitely, regardless of the consequences for the economy. The chemical engineer wonders how this is at all possible, since any process cannot create more goods than the resources introduced into it. It is materially and thermodynamically impossible unless one cheats by providing external well-hidden support or by diluting wealth through inflation. The investment banker therefore knows no limits. He creates products whose definition is so abstruse that one must doubt the reality of their content. It is no longer just the national banks that create money and control the quantity, but the entire financial system that engages in cavalry. Two people who practice it would be criminally punished, a system that lives off it under the scrutiny of regulation authorities is praised for the “value” it would create. Ponzi was no worse.

Impossible regulation: Credit Suisse before 19 March 2023 had 14% of equity, well above US or European requirements. This did not prevent it from facing a lack of liquidity, even on the verge of bankruptcy. Have we forgotten that one can have 100% equity and still default on payments? Have we also forgotten that the 100 of a hundred percent is only a prophetic assessment of the value of a balance sheet? Yet a large part of the banks’ staff and the hundreds of agents of the financial regulatory authorities (SEC, FINMA, FCA, AMF, ESMA, etc.) are comfortably paid to practice an intense ping-pong where everything is measured and checked for compliance several times, without preventing anything since this regulated system harbours the causes of its own disorders. What is the purpose of all these agents, to swindle each other in a crown?

The very notion of financial products is also problematic. While bonds and shares are quite clearly defined, this is not at all the case for the rest. This is why the last page of the prospectus describing these ectoplasms is a litany of legal mumbo jumbo that specifies in microscopic lettering everything that is not to be understood and, above all, who is in no way responsible for the tainted goods.

“Futures”, forward sales or purchases, are however a necessity for many business sectors, especially agriculture, and should be just that: insurance for the purchase or sale price of a commodity that is not yet available (seasonal crops) or that is put into post-harvest storage and will only be needed later. The etymology of hedging comes from this agrarian sector. Every farmer in the Midwest has a screen in his office or on his tractor where he can follow the futures prices of corn, soybeans or wheat on the Chicago Board of Trade, not to mention bioethanol and its subsidies, another economic poison.

But beyond this existential necessity for these few sectors, what is the contribution to the general prosperity of the economy of derivatives or derivatives of derivatives, such as options, call or put combinations, Credit Default Swaps or Contracts for Difference? The clever calculations of the value (sic) of options that won the Nobel Prize in economics for Harvardian gurus are not obsolete, they were never valid. It is true that the high-frequency trading of these financial instruments contributes to multiplying the volume of trade on the stock exchanges and to churning scriptural liquidity, but it remains to be demonstrated that they enrich other people than the managers of this casino. It is therefore necessary, in my opinion, to erect a Chinese wall to separate this world from that of banking at the service of the economy, to revive everywhere the Glass-Steagall Act of 1933. The banking profession will become boring again and remain profitable, and so will the corresponding trading. The branch of financial delusion could be totally deregulated, as everyone would remain free get lost in it at their own risk. The current players are strongly opposed to this separation because they know that if they can’t tap into the solid savings of normal people to fuel their stoves, their business may no longer prosper. So be it! wild capitalism will remain confined to its zoo, the civilised one will stay open and accessible to the greatest number and in all honesty.

---

[1]     The great delusion of rescuing the planet by a great reset. How the economic and financial circles are pleased to be convinced. Michel de Rougemont .MR-int, 2021.

Original article published in French on Antipresse, a magazine outside the box.

Merci de compartir cet article