SABOTAGE

Two London-based economics professors argue that banks make much of their profit not by serving depositors and borrowers fairly but rather by cheating.

Nesvetailova (Financial Alchemy in Crisis: The Great Liquidity Illusion, 2010, etc.) and Palan (The Offshore World: Sovereign Markets, Virtual Places, and Nomad Millionaires, 2003, etc.) explain that they chose the title after extensive consideration about its explosive implications. As the authors clearly show, the institutions highlighted in the book—Goldman Sachs, Wells Fargo, Royal Bank of Scotland, Bear Stearns, Deutsche Bank, among others—act dishonestly with their clients, their competitors, and their national governments as a matter of everyday operations. Even if they observe the letter of the law, they rarely observe the spirit of the law. At times, note the authors, the cheating crosses into the realm of criminal conduct. Of course, greed underlies much of this behavior; operating honestly can lead to lower-than-desired earnings and limited bonuses. Government regulators become so focused on maintaining the financial stability of the banks—an admirable goal—that unsavory practices go unnoticed or at least mostly unpunished. The authors look backward for much of their evidence, relying heavily on the economic theories of American economist and sociologist Thorstein Veblen and on a congressional investigation from the 1930s led by Sen. Ferdinand Pecora. Nesvetailova and Palan state that the findings from the Pecora investigation closely resemble banking industry sabotage that is widespread in the current markets. As the authors consider reform, they insist that everybody involved must abandon the traditional binary dichotomy of “market vs. regulation.” The dilemma of excessive profitability should become the core of how to proceed with reform. They close with a series of “simple but important intellectual steps towards a more adequate regulatory framework.” The last step is “to stop thinking about finance as a business for managing ‘other people’s money.’ Finance is the business of creating and managing our wealth, and it needs to be understood and regulated as such.”

Useful reading for readers seeking a mostly accessible overview of the banking industry.