More volatility equals more profit
Paul Jay speaks to Sony Kapoor at the Tides Foundation Momentum conference in San Francisco.
Kapoor left the investment banking world to expose its "dark secrets." He explains that "the more
volatile the financial environment, unless there’s a systemic breakdown like now, the more money
investment banks make."
PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network in San Francisco with Sony Kapoor, and we’re discussing musical chairs. So where we ended up in the last segment, we talked about international finance capital. As the music plays, everybody runs to invest their massive flow of capital after we’ve had this great transfer of wealth from people who are working for a living and getting paid not more, and in many cases less. Productivity goes up, massive amount of capital into a handful of hands who’ve got to do something with it. So what they do is they hire people to manage their capital and they say, "Go make me more," and they run madly at the speed of this global digital network of information, and every so often it’s going to crash. So we crashed, and now we have the Obama administration took various steps that they said were to systemically correct things. So have we had a systemic correction? Or have they put the chairs back out for another round of music?
SONY KAPOOR, MANAGING DIRECTOR, RE-DEFINE: We’re in the middle of deciding which one of these two it’s going to be. The administration’s put forward a series of proposals, of detailed legislation, which they sent to the Congress at various points in August. And right now they’re just pieces of paper. It’s not very clear what the timeframe for the Congress will be and whether these legislative proposals would be made stronger.
JAY: Well, tell you what, before we go there, let’s go back. Talk about what’s been done. Where’s all this money gone? We’re seeing, supposedly—not supposedly—some of it’s been paid back. We’re getting the sense of, oh, it’s going to be okay. We may even make money out of all this. What’s the real secret of what these paybacks are about?
KAPOOR: Well, these paybacks were primarily designed to get rid of any form of government influence, you know, on bonuses, etcetera. So if you are the top management or the highly paid people in Goldman Sachs and you suddenly find yourself in an environment where the way these investment banks make money is—and if you’ve read some of the income statements from the past, they were all often statements such as, quote, "It’s been a low-volatility environment, so profitability is low." So what you’ve got to understand is, the more volatile the financial environment—unless, you know, there’s a systemic breakdown like now—the more money these investment banks make.
JAY: So the bigger the swing, the more money you make.
KAPOOR: The more money you make. And that works for two reasons. I mean, one simple one is the more uncertainty there is, the more countries would want to hedge their commodity risk, the more companies would want to hedge their currency risk. You know, everybody uses more of risk management than banking products the more uncertainty there is, and there has been a massive amount of uncertainty now.
JAY: Break that down for someone who doesn’t understand that. Give an example of that.
KAPOOR: Well, let’s just say that, you know, there’s a lot of uncertainty as to where the dollar is going to be ’cause of the financial crisis, and you are a European company and you have earnings in dollar. So you want to make sure that when it’s converted back to euros you’re not actually ending up, you know, getting half the euros that you expected because the dollar has fallen, so you go to an investment bank and you say, sell me a currency option.
JAY: So you might hire some people on the Internet to start, "Oh, we’re going to be in an amero currency soon. The US dollar is about to collapse." It’d be very good to you to create this whole psychology, the American dollar is going to collapse. [inaudible] some money to be made out of that.
KAPOOR: Hey, that’s not what I’m trying to do here.
JAY: No, I’m not saying you are, but perhaps some people are.
KAPOOR: Well, that’s very possible. And then these banks sell more insurance products and more derivatives, on which there are big margins. And it’s been big business for the banks that survive. The second big development has been because many of the competitors are no longer there—Lehman’s no longer there, Bear Stearns has been absorbed, Merrill Lynch had been absorbed. So the profit margins for the banks left standing, such as Morgan Stanley and Goldman Sachs, are much higher—in some markets two to three times—than they were. So this combination of increased business flow—because of the uncertain environment—with higher profit margins means that many of these banks are actually making substantial amounts of money again and wanting to use that money again to go back to business as usual, to how bonuses were paid before the crisis hit.
JAY: Now, is there another piece to this I’ve heard, that the Federal Reserve and the US government are giving practically zero-interest loans to these banks, and they’re using some of that money to pay back the government, so they wind up paying back the government? So you can have a newspaper headline, "We collect," you know, "x billions payback," except they’re getting the money loaned through the other door.
KAPOOR: Money is fungible. You don’t know what the dollar that the Federal Reserve gave to you was and whether it’s the same dollar that comes back. It might [inaudible] leave the account, and it’s really hard to tell. And the fact of the matter is, as long as there’s this perception that something might still go wrong—and we are far from being in the clear—the government and the Fed Reserve need to say that, hey, we’re standing behind the banking system, ’cause if they don’t, there might be another run, and economic consequences for that will be disastrous. So they’re doing that. But at the same time it’s amazing to me why they’re letting these banks get away with going back to business as usual. So something needs to be done rather soon, before the sense of entitlement which has always been there with investment bankers in particular comes back in big force.
JAY: So Barack Obama recently ordained [Ben] Bernanke—. They used to call in Russia the heroes of socialist labor. Well, now we have the hero of saving capitalism. What do you make of what the Fed’s done? Does Bernanke deserve this praise?
KAPOOR: I wouldn’t want to venture there. But the fact of the matter is it’s not very clear, because we don’t have a counterfactual, we haven’t been in a similar situation before. There was a lack of tools in place to deal with the situation, so a lot of things had to be made up on the go. It was a very big threat that was facing us and is still facing us, and something drastic needed to be done, and something drastic’s been done. As to whether someone else other than Bernanke would have done a different job or a better job or not, it’s very hard to tell, because this is the only one incident we have. There’s nothing to compare it with.
JAY: But let’s talk about what the Fed and the Treasury Department have done. They’ve either borrowed new whacks of money from the international finance market—I don’t know, from China and other places. They’re printing money, I guess. And they’re putting it back into the game of musical chairs. But they haven’t—doesn’t that just put off the day of the next big crash? Nothing seems to really have been changed in all of this.
KAPOOR: Well, yes and no. Because in finance, you know, you rely so much on confidence, a lot of this game is about getting confidence back. As long as you don’t have confidence in the financial system, it doesn’t make sense for any of us individuals. You know, it makes sense for us to keep our money close to our chest, not to spend. It makes sense for investors not to invest, ’cause there’s a lot of uncertainty. But if confidence is restored, for example, by the government and the Fed saying, "Hey, no matter how much it takes, we’re there to back this up," there is a chance that the confidence will come back and people will start playing the game again. It doesn’t have to be the same game.
JAY: But Bernie Madoff was a confidence game. Ponzi schemes are confidence games. But if you have a recovery in the markets and a recovery of confidence and we’re still seeing unemployment going up into double digits, real purchasing power dropping, then what is the confidence based on?
KAPOOR: It’s not based on much, and that’s a big part of the problem. But what you need to think about is, if you have a situation where the asset markets were still falling, banks were still reporting more losses, and unemployment was going up, and all the economic problems that we have, that situation would be worse. So as I said, you know, we’re still far from being in the clear, we’re in deep shit, still, but this is slightly less deep than we would have been in if these rescues had not taken place.
JAY: So in the next segment of our interview, let’s talk about, okay, we’re in deep shit, we could have been in deeper, but what might actually get us out of this? So let’s talk about some possible solutions in the next segment of The Real News. Please join us.
Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.