Saturday, May 15, 2010

Rigged Market?

Score another triumph for the rigged- market theory.

In a feat that would seem to defy the odds, Goldman Sachs, JPMorgan Chase and Bank of America this week each said its trading desk made money every day of the first quarter. Goldman said its daily net trading revenue topped $100 million 35 times last quarter out of 63 trading days. JPMorgan and Bank of America disclosed similar eye-popping stats. Citigroup, too, recorded a profit on each trading day, Bloomberg News reported, citing unnamed people who knew the results.

The intrigue is high. If a too-big-to-fail bank’s traders were able to make money every day of a quarter, were they really trading in any normal sense of the word? Or would vacuuming be a more accurate term? What kinds of risks do such incredible profits entail, for the banks and the rest of us taxpayers? And are results such as these too good to be true?

…These banks have the advantage of an unlevel playing field, of course. They can borrow money for next to nothing at current rates and lend it for more, simply by buying longer-term Treasuries. They have access to information that their clients lack. They have computer-trading platforms that operate in milliseconds. There’s less competition now that Lehman Brothers and Bear Stearns are gone. Yet even taken together, these factors don’t offer a satisfactory explanation for last quarter’s amazing streaks.

…So let’s forget about the how and focus on the why. Why were these banks able to make so much money with such uncanny consistency? One logical answer is that America’s political leaders obviously want it this way.

Otherwise, for example, the government already would have begun to liquidate Fannie Mae and Freddie Mac and let the crash in housing prices and mortgage-backed securities run its course. To encourage personal savings, the Federal Reserve would have raised interest rates and turned off the banking industry’s easy-money spigot. And the White House would be throwing a fit over the International Monetary Fund’s use of U.S. taxpayer dollars to help bail out Greece and its ilk, along with the European banks that own their debt.

Americans don’t want the immediate pain such steps would bring, though. So our government keeps trying to stretch it out through massive subsidies for the financial-services industry, which means traders at America’s largest too-big-to-fail banks get to keep making their killings and bonuses, for now. What nobody knows yet is how long the government can keep up the rig.

Continue Reading