The triple failing of the big private banks
- Opinión
Since August 2007, US and European banks have constantly made headline news concerning the deep crisis they are going through and its knock-on effect on the neoliberal economic system as a whole. Asset depreciation for these banks currently stands at over 200 billion dollars. Several banking research services and seasoned economists estimate that the final damage will exceed 1,000 billion dollars (1).
How did the banks manage to build such an irrational lending system? Eager for profit, mortgage companies made loans to a sector of the population that was already heavily indebted. The conditions attached to these mortgages – highly profitable for the lender – amounted to daylight robbery for the borrower: the interest rate was fixed and reasonable for the first two years but thereafter rose sharply. Lenders assured borrowers that the property they were buying would quickly appreciate thanks to the boom in the real estate sector. The problem was that the real estate bubble burst in 2007 and house prices started to go steadily down. The number of defaults on payment soared and mortgage brokers had trouble repaying their own loans. To protect themselves, the big banks either refused extra credit to the mortgage lenders or agreed to new loans at far higher interest rates. But the spiral did not stop there, since the big banks had bought up a large number of the original loans as off-balance sheet operations by creating specific companies called Structured Investment Vehicles (SIV), which finance the purchase of high yield mortgages converted into bonds (CDOs, or Collateralised Debt Obligations).
As from August 2007, investors stopped buying the unguaranteed commercial papers issued by SIVs, which no longer looked like a safe or credible option. Consequently, the SIVs lacked the liquidity needed to buy up mortgages and the crisis worsened. The big banks who had created the SIVs therefore had to bail them out to stop them going bankrupt. Up to then, SIV operations had not appeared in the banks’ accounts (thus allowing them to conceal the risks involved), but now the SIV debts had to come out of the closet and onto the books.
The result was general panic. In the
Several branches of the lending market are shaky constructions on the point of collapse. They drag into their misadventures the powerful banks, hedge funds or investment funds through which they were created. The salvage of these private financial institutions requires massive intervention on the part of the public authorities. And thus once again, profits accrue to the private sector, and losses to the public purse.
Which brings us to a key question: how is it that banks can readily waive bad debts to the tune of tens of billions of dollars yet have constantly refused to cancel the debts of developing countries? Why should the one be feasible and the other impossible? It should be remembered that the debts claimed today from these countries go back in the past to criminal dictatorships, corrupt regimes and leaders pandering to major powers and investors. The big banks lavished loans on such notorious regimes as that of Mobutu in
We should also remember that the
The recent waiving of debts by banks can only justify the claims of those who, like the CADTM, demand the cancellation of
It is clear that the big private banks have failed in three ways:
- they have built up catastrophic private lending structures that have led to the present disaster;
- they have lent to despotic regimes and forced the democratic governments that replaced them to repay this odious debt down to the last cent;
- they refuse to cancel the debts of developing countries, for whom repayment means ever-worsening living conditions for their people.
For all these reasons, the banks must be held to account for their actions over the last decades. The governments of the countries of the South must make a full audit of their debts, as
- Damien Millet, spokesman for CADTM France (Committee for the Abolition of Third World Debt, www.cadtm.org), coauthor with Eric Toussaint of Who owes who?, Zedbooks, 2004.
- Eric Toussaint, president of CADTM Belgium, author of The World Bank: A Critical Primer, Pluto,
Translated by Judith Harris and Elizabeth Anne.
(1) On 7 March 2008 Goldman Sachs research department estimated losses of 1,156 billion dollars, George Magnus of UBS in February floated a figure in excess of 1,000 billion, and Nouriel Roubini of
(2) World Bank, Global Development Finance 2007.
CADTM
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