Laundering $800 Mil in Drug $, How Did HSBC Execs Avoid Jail?

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Originally Posted by an8150

Fivekatz, HSBC was not unregulated. And it was not a laissez faire operation, as you seem to acknowledge in your remarks about too-big-to-fail banks (ie. they're too big to fail because they have state guarantees).

I suspect, although I do not know, that broncofan is right that the US DoJ had insufficient evidence for criminal prosecutions, or at least for prosecutions that would net serious convictions. And I'd add a suspicion of my own that the DoJ's cost-benefit analysis concluded that it would net more (ie cash) through a DPA than through costly trials of insignificant middle managers.

Anyway, the anti-drugs laws are both asinine and wicked, so I couldn't give a damn about their enforcement.

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My comment about laissez faire was more about the unregulated parts of banks, which were and shockingly still are CDOs and Synthetic CDOs.

As far as the banks being too big too fail, the government had to bail the banks and AIG out after the fact because the tenants of moral hazard could not be allowed to apply without meltdown the world financial system. Now banks aren't laissez faire operations regardless and I do realize that, but they are't regulated well enough if they are too big fail and too foolish to avoid failure.

Alan Greenspan who through out his career fought for free markets and that markets would regulate themselves organically, that moral hazard would temper reckless behavior. But after the meltdown he stated he never imagined that people would be so greedy or so reckless.

As far as a cost-benefit factor, I am sure you are right that the settlement was a good move for DOJ, but I am not as sure as you are that this is all the work of middle management and not a corporate governance issue. Certainly Lehman in finance and Enron in energy trading are just two examples of senior management having knowledge of malfeasance.

As for drug laws, I have mixed feelings. I certainly think that the prohibition against marijuana is stupid and is costing us as tax payers way too much money needlessly enforcing those laws and incarcerating the users. But I have a hard time with Meth and other destructive substances that can so quickly addict and destroy the user.

If you're worried about moral hazard, fivekatz, then bailouts presumably do little to reassure you.

Greenspan, incidentally, may have started his career as a free market capitalist red in tooth and claw, but the very fact that he had a career as a central banker betrayed those principles: central planning for banks and money should be as anathema to us as central planning for food.

I should add, fivekatz, that too-big-to-fail banks have been a problem for at least fifteen years, probably longer. That situation occurred becuase of regulation and government intervention. In 19th century Britain, banks quite routinely failed. That was accepted as a normal, if for depositors regrettable, fact of life. And banks were much, much smaller than now. Moral hazard and caveat emptor came close to ruling in a market that came close to being free. And when occasionally banks failed, nobody thought this fact threatened the world, or even merely the British, financial system.

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Originally Posted by an8150

In 19th century Britain, banks quite routinely failed. That was accepted as a normal, if for depositors regrettable, fact of life.

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Compared to the US there were fewer bank failures in the UK in the 19th of which two were large and important -Overend, Gurney & Co in 1866, and the Bank of Glasgow in 1878. That you should dismiss the disappearance of someone's life savings as 'a normal, if regrettable, fact of life' underlines the pure hypocrisy of free market capitalists who believe the protection of private property is the protection of freedom itself -until this unnatural system robs people of that very same property, whereupon it is wished away as something to do with markets rather than the incompetence of bankers, while their 'freedom' turns out to be not worth protecting at all.

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Originally Posted by Stavros

Compared to the US there were fewer bank failures in the UK in the 19th of which two were large and important -Overend, Gurney & Co in 1866, and the Bank of Glasgow in 1878. That you should dismiss the disappearance of someone's life savings as 'a normal, if regrettable, fact of life' underlines the pure hypocrisy of free market capitalists who believe the protection of private property is the protection of freedom itself -until this unnatural system robs people of that very same property, whereupon it is wished away as something to do with markets rather than the incompetence of bankers, while their 'freedom' turns out to be not worth protecting at all.

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How, then, Stavros, should I express my regret at the consequences of bank failure the better to demonstrate just how cut up about human misery I am? Would tears and the gnashing of teeth be sufficient? Or, borrowing freely from The Sun, should I show you my grief?

Private property is certainly intrinsic to the maintenance of freedom, and intrinsic to the nature of private property is the ability to lose it. Remove that ability, and you remove one of private property's central characteristics. Freedom includes the freedom to fail and to lose: there is nothing in the belief in the essential characteristics of private property, and in their maintenance in law, which is incompatible with freedom. Your definition of freedom, on the other hand, is tantamount to decision-makers, of whom I suppose you imagine yourself one (see Kip Esquire's Law), deeming who should get what. Which of course is not freedom, it's merely an abuse of language.

But you confuse more than just that: you confuse incompetence with robbery, a subject dealt with on page 1 of Ethics for Dummies.

As for 'unnatural system', I thought you Proggies were all in favour of Natural Selection.

It is difficult because allowing banks to fail creates the crowd psychology that makes them fail too frequently. You have runs on banks because investors do not feel secure and since banks run on fractional reserves, such failures would happen too often. The answer in the U.S was FDIC insurance, which is a subsidy to banks, but also encourages the moral hazard we are talking about because being insured tends to increase risk-taking behavior. The response is that by accepting the subsidy the subsidized also accepts the burdens of greater regulation.

Greater capital reserves, safer portfolio of investments, restrictions on the size of loans it can make. I don't see how banks can operate without major regulatory oversight. This is imo one of the weakest arguments of the laissez faire advocates. Banks do not have incentives to play smart as they are investment vehicles run on tremendous financial leverage. They hold in cash a fraction of what they lend and even if they were not insured they would take risks they could ill afford. Why? Because when you get control over more capital than you invested in equity, you know your losses are limited to your equity investment but your upside is much greater.

The problem with letting them fail is that some would fail without even being a credit risk because of public insecurity (bank runs). There needs to be some security on people's hard earned money or people would not use banks and this would shrink the economy because who would lend money if it were not someone elses'? Too big to fail is a monster created by the regulatory system but is far better than the alternative.

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Originally Posted by an8150

Your definition of freedom, on the other hand, is tantamount to decision-makers, of whom I suppose you imagine yourself one (see Kip Esquire's Law), deeming who should get what. Which of course is not freedom, it's merely an abuse of language.

As for 'unnatural system', I thought you Proggies were all in favour of Natural Selection.

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I haven't volunteered a definition of freedom, and the post is not about me but about your utopian fantasy, in which the operations of the market take place in a world of risk and reward and everyone merrily agrees that you win some and you lose some. Your defence of free market capitalism is as fantastic as a Trotskyist insisting that after the revolution all these problems will be solved. What you cannot do is justify private property as the natural condition of mankind, it is an historical formation, and integral to the slavery which your free market capitalism is dependent upon, which you cheerily inform us is freedom. We have but the one earth, to share in common.

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Originally Posted by broncofan

The problem with letting them fail is that some would fail without even being a credit risk because of public insecurity (bank runs). There needs to be some security on people's hard earned money or people would not use banks and this would shrink the economy because who would lend money if it were not someone elses'? Too big to fail is a monster created by the regulatory system but is far better than the alternative.

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Just as a piece of utilitarian calculus, is it?

Go back to my example of the Victorian banks. Yes there were runs. One one occasion (in fact shortly before Victoria acceded), political activists tried to bring down the government by creating a bank run. And yes there were failures, but none that threatened economic civilisation as then conceived. Just as a piece of utilitarian calculus, then, smaller banks, greater spread of risk, fewer significant consequences when the inevitable failures occasionally happened. That's the alternative to the monster.

Couple of other points: in the early days of FRB bank reserves in England were often many orders of magnitude higher than under the Basel Regulations.

Also, if people want nothing but security for their money, as a store of value, there are always safety deposit boxes. In a fiat currency system, however and of course, constant debasement of the currency makes these less attractive than taking the risk of depositing with a bank in the hope of some slight return in % interest.

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Originally Posted by Stavros

I haven't volunteered a definition of freedom, and the post is not about me but about your utopian fantasy, in which the operations of the market take place in a world of risk and reward and everyone merrily agrees that you win some and you lose some. Your defence of free market capitalism is as fantastic as a Trotskyist insisting that after the revolution all these problems will be solved. What you cannot do is justify private property as the natural condition of mankind, it is an historical formation, and integral to the slavery which your free market capitalism is dependent upon, which you cheerily inform us is freedom. We have but the one earth, to share in common.

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Either, in my utopia, everyone merrily agrees that you win some and you lose some, or, in my utopia, all these problems will be solved. Both propositions cannot be correct. That being the case, there is nothing fantastical about my utopia.

And as for the proposition that what I call freedom is what you call slavery, well, you're talking Cantonese and I'm stuck with Spanish.

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Originally Posted by an8150

Just as a piece of utilitarian calculus, is it?

Go back to my example of the Victorian banks. Yes there were runs. One one occasion (in fact shortly before Victoria acceded), political activists tried to bring down the government by creating a bank run. And yes there were failures, but none that threatened economic civilisation as then conceived. Just as a piece of utilitarian calculus, then, smaller banks, greater spread of risk, fewer significant consequences when the inevitable failures occasionally happened. That's the alternative to the monster.

Couple of other points: in the early days of FRB bank reserves in England were often many orders of magnitude higher than under the Basel Regulations.

Also, if people want nothing but security for their money, as a store of value, there are always safety deposit boxes. In a fiat currency system, however and of course, constant debasement of the currency makes these less attractive than taking the risk of depositing with a bank in the hope of some slight return in % interest.

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I follow your logic (I'm fine with utilitarian calculus in this example). And yes it makes sense if you can choose between many small failures and huge conglomerates failing, you choose the former. But I don't think small banks are much less susceptible to systemic failure than the conglomerates. When people hear macroeconomic news and want their money, they want it from their regional bank just as quickly.

As you say with your reference to Basel Regulations, the bank regulators are always figuring out new metrics to test for strength because you can meet all capital requirements but hold really low quality assets. The assets can also have risk that is all positively correlated and so will tend to a credit risk at the same time. So it's incredibly tough to use rules of thumb to make sure banks are well managed.

I think the federal insurance program we have in the U.S. has on balance helped prevent calamity. There are problems with it and it does increase industry concentration and moral hazard, but public fear is too great when it comes to money already earned. If we didn't have this insurance and people really were rational they would be demanding all sorts of exorbitant interest rates on simple checking even. Lower interest rates on checking are one of the most important sources of subsidy to the banks.

With uninsured banks, I don't think there would be enough liquidity for a large scale economy. It goes without saying I could be wrong. Tell me how.