by tonytran2015 (Melbourne, Australia).

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(Blog No.xxx).

#investment bank, #too big to fail,

Investment banks are the worst examples of concentration of powers in capitalism. They should have been broken up a long time ago using anti-trust laws let alone rescued with tax money.

1. Activities of an Investment Bank.

An investment bank may many arms. The main ones are:

a/- A wheeling-dealing “commercial bank” that can lend to any deserving economic entity the money entrusted by its depositors. Its depositors know that their money is not protected by any government rule but can earn a very high interest rate. The commercial bank may also buy or sell Treasury Notes as well as foreign currencies.

b/- A stock brokering arm which can buy or sell listed shares as well as matching betting contracts (options and warrants).

c/- a hedge funds management arm, which can use the funds of its clients to buy or sell listed shares, commodity supply contracts, Treasury Notes, and foreign currencies as well as setting up counter-parties to enter options and warrants contracts.

d/- a superannuation management arm which can use the funds of their clients to buy or sell listed shares (including shares in Gold-holding companies), Treasury Notes and Interest Earning Bank Deposits. Superannuation funds can neither borrow nor lend their money.

In principle, each of the arms are designed to work according to the laws. The problem is the possibility of these arms working together to the detriment of their clients.

2. The synergy of various arms of an Investment bank.

The brokering arm sets up or operates in a stock exchange to earn brokerage.

Broker arm also allows investors to borrow from their commercial bank (on Margin Loans) to leverage their share investment. The multiplies their gain or loss while allowing the Commercial bank earn high interests.

As stock prices, mineral prices and commodities prices fluctuate wildly there is a need for hedging for some investors and industrialists. The hedge funds management arm uses their funds to supply counter-parties to any “risk” people want to “insure” against. Obviously, the “insurers” have to make some profit margins. This market is unregulated, so the “insurers” (hedge funds) may ask for a premium that far exceed the average payout to the hedge demanders. The hedge fund can borrow large amount of money from the Commercial bank.

3. The collusion between various arms against clients.

This is dangerous to its clients (https://rielpolitik.com/2019/11/28/the-media-monopoly-research-study-on-ongoing-wall-street-mega-banks-crime-spree-gets-news-blackout-heres-why/

… happened on March 14, 2012 when Greg Smith resigned from Goldman Sachs in an infamous OpEd in the New York Times. Smith wrote that the managing directors at Goldman call their clients muppets and openly speak about “ripping their clients off.” Smith said the environment at the firm is “as toxic and destructive as I have ever seen it.

a1/- the Commercial banking arm can also buy and sell foreign currencies before decision time to manipulate exchange rate at the decision time to help the hedge fund arm win its bets.

a2/- The commercial banking arm can also report false interbank overnight lending rates to help move the prices of the derivatives for the hedging arm to win its bets. (Deutsch Bank and overnight rates,
https://www.investopedia.com/terms/l/libor-scandal.asp

“The LIBOR scandal, which came to light in 2012, involved a scheme by bankers at many major financial institutions to manipulate the London Interbank Offered Rate (LIBOR) for the purposes of profit…
In the LIBOR scandal, some banks reported artificially low or high interest rates to benefit their derivatives traders, undermining a major benchmark for interest rates and financial products.”

b1/- The brokering arm may inform the hedging and superannuation arms unusual trading activities on the market giving some kind of “insider advantage”.

b2/-Brokering arm may give time priority to their other arms over outside clients.

c1/- The hedge fund management arm may enter into bets that some share prices may move up or down. The superannuation management arm then “re-balance” its portfolios. This requires it to sell some shareholdings to get into others. This makes two wins for the bettings by hedge management arm having prior knowledge. Is there any better explanation for massive selling down and buying up of shares few seconds prior to decision times.

c2/- The hedge fund and superannuation management arms may collaborate to unjustly pull up or push down the shares of particular companies. This is known by small investors as GAME BY THE BIG BOYS. This game creates sudden price movements which causes panic and losses to small share investors but makes fantastic profits for well connected but hard to proved “insider traders”. The sudden drop in share prices also “de-leverage” those share holders on Margin Loans. If they cannot meet the margin calls (to return the cash to their Margin lenders to maintain the safe ratio of loan to sellable values) their holdings would be dumped at any market price. With fore-knowledge of the play, superannuation management arm can buy these (unjustly dumped) shares at cheap prices.

d1/- The superannuation management arm may aimlessly churn the share holdings of superannuation funds to benefit the brokering arm.
d2/-Superannuation arm may give prior knowledge of portfolio rebalancing to hedging arm.

4. Which banks had been caught manipulating the market

a/- Sumimotto on copper prices.
“Mr Copper” went to jail.

b/- Deutsch Bank on Libor rate.
Banks in the Libor scandal were fined at 2.5billion dollars.

5. What are the consequences.

Copper price became more stable after Sumitomo scandal was discovered. Less hedging was required for copper prices. Already, there is much less trading on Copper futures and futures which depend on interest rates.

Libor rate is to be taken away from private banks. There is less confidence in derivatives trading.

With reckless trading even these giant banks may get caught by governments, get fined (

https://www.cnbc.com/2019/10/30/deutsche-bank-q3-2019-earnings.html

Deutsche Bank posts 832 million euro loss amid major restructuring plan

) and may fail for their systemic reliance on those unauthorized actions. Then they may ironically even get rescued by tax money from the population (https://www.forbes.com/sites/mikecollins/2015/07/14/the-big-bank-bailout/#574a26da2d83

The Special Inspector General for TARP summary of the bailout says that the total commitment of government is $16.8 trillion dollars with the $4.6 trillion already paid out. … and the banks are now larger and still too big to fail.

References

[1]. https://www.forbes.com/sites/mikecollins/2015/07/14/the-big-bank-bailout/#574a26da2d83

The Special Inspector General for TARP summary of the bailout says that the total commitment of government is $16.8 trillion dollars with the $4.6 trillion already paid out. … the banks are now larger and still too big to fail.

… Rating agencies like Standard and Poor’s are paid by the banks (which is a conflict of interest) and … continued to give triple AAA ratings to toxic mortgages. The justice department wants $5 billion in restitution from Standard and Poor’s for its part in falsifying ratings.
… Both JP Morgan Chase and Goldman Sachs worked with hedge funds to bet against the toxic mortgages after the crash had started. They made money by selling short on the financial catastrophe they had created. JP Morgan was fined $296.9 million and Goldman Sachs … $550 million for actions …

… The jailed billionaire Raj Rajartmn made nearly $One million a minute by getting inside information from Goldman Schs. The New York attorney has fingered 70 hedge funds but the prosecution is very slow.

[2]. https://rielpolitik.com/2019/11/28/the-media-monopoly-research-study-on-ongoing-wall-street-mega-banks-crime-spree-gets-news-blackout-heres-why/

… happened on March 14, 2012 when Greg Smith resigned from Goldman Sachs in an infamous OpEd in the New York Times. Smith wrote that the managing directors at Goldman call their clients muppets and openly speak about “ripping their clients off.” Smith said the environment at the firm is “as toxic and destructive as I have ever seen it.

[3]. The Copper King: An Empire Built On Manipulation,
https://www.investopedia.com/articles/financial-theory/08/mr-copper-commodities.asp

[4]. https://www.investopedia.com/terms/l/libor-scandal.asp

“The LIBOR scandal, which came to light in 2012, involved a scheme by bankers at many major financial institutions to manipulate the London Interbank Offered Rate (LIBOR) for the purposes of profit…, some banks reported artificially low or high interest rates to benefit their derivatives traders, undermining a major benchmark for interest rates and financial products.”

[5]. https://www.cnbc.com/2019/10/30/deutsche-bank-q3-2019-earnings.html

Deutsche Bank posts 832 million euro loss amid major restructuring plan

[6]. Deutsche Bank posts worst quarterly loss in four years, https://www.theguardian.com/business/2019/jul/24/deutsche-bank-posts-worst-quarterly-loss-in-four-years

German lender counts cost of plan to cut 18,000 jobs as it records €3.1bn shortfall

[7]. This Major Bank Is about to Go Bust – And It’s 3X Bigger Than Lehman Bros., http://investorinsider.net/bank-bankruptcy-three-times-bigger-lehman-bros/

In April, Deutsche Bank confirms it’s agreement to a joint settlement with the US and UK regarding the manipulation of LIBOR. The bank is saddled with a massive $2.1 billion payment to the DOJ.

…

June 9: S&P lowers the rating of Deutsche Bank to BBB Just three notches above “junk”. (Incidentally, BBB is even lower than Lehman’s downgrade – which preceded its collapse by just 3 months)

[8]. Deutsche Bank’s 5 biggest scandals, https://m.dw.com/en/deutsche-banks-5-biggest-scandals/a-46510219

[9]. Deutsche Bank, BNP Face Reality of $168 Billion Hedge-Fund Deal
By Donal Griffin
and Sonali Basak
17 July 2019, https://www.bloomberg.com/news/articles/2019-07-16/deutsche-bank-bnp-face-reality-of-168-billion-hedge-fund-deal