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  The Return of Greed: Banks Reopen Global Casino

The Return of Greed Banks Reopen Global Casino

By Frank Hornig, Christoph Pauly and Wolfgang Reuter

Part 2: Warding Off Efforts to Tighten Regulations

The investment banks have even returned to the kinds of transactions that played a key role in bringing down the system. JP Morgan, for example, is reporting record earnings once again. In the 1990s, the New York financial group developed credit default swaps (CDS), the form of derivative security that turned explosive in the world economy last year. Nevertheless, in March JP Morgan still held derivatives worth $81 trillion, making it the major player in the market.

The investment banks continue to earn handsome profits by helping their major customers with over-the-counter derivative deals, which are still virtually unregulated. JP Morgan Chase CEO Jamie Dimon has aggressively fended off all of Washington's attempts to regulate these explosive products.

Never again could a single financial institution be allowed to become so big that its failure could bring down entire markets -- that was the central lesson learned from the collapse of Citigroup and AIG. These were institutions that were considered "too big to fail." Today, such concerns are hardly relevant on Wall Street. JP Morgan is considered a healthy company that has its $81 trillion in derivatives under control. According to the business magazine Forbes, "Wall Street learned nothing."

Financial products like collateralized debt obligations (CDOs), treated as ticking time bombs until recently, are in demand once again, and the process of collateralization, frowned upon since the financial crisis erupted, is back. As if nothing had happened, Morgan Stanley is packaging ("securitizing") downgraded CDOs into new securities, some of which are expected to receive the coveted AAA rating from Moody's.

"People say that derivative products are out of fashion. But we are constantly making more of them, with higher profit margins," says Deutsche Bank's Jain, noting that the complex products are doing especially well. Particularly in times of crisis, he says, nervous customers want to hedge again all possible types of currency or interest rate risks.

But not all investment banks are successful. Bank of America, the largest financial company in the United States, reported a 24 percent decline in profits over the previous quarter. John Mack, the CEO of Morgan Stanley, even had to report a loss, and Citigroup is struggling with massive loan defaults.

An Oligopoly of Large Investment Banks

On the whole, however, the days of humility are over, replaced by a new motto: We're somebody again. The survivors of the crisis see the thinned out field of competitors as a historic opportunity, and they are taking advantage of it. "Right now, (Goldman is) one of only a few people on the beach, so they're getting all the girls," New York finance professor and former Goldman partner Roy Smith told the Wall Street Journal.

Deutsche Bank has also become part of an oligopoly of large investment banks that has politicians in the major industrialized nations intimidated. The institution is an important player in the issue of bonds and has been the top player in worldwide foreign currency trading, a market in which it now holds a 21-percent share. Even Jain believes that the bank can hardly do better than that, probably because customers will still want an alternative in the future.

Getting Rich off the Taxpayers

Commerzbank is among those banks that can no longer compete on most playing fields. To some extent, this was intentional. After acquiring Dresdner Bank early in the year, the bank is systematically reducing its risks. But Commerzbank, Germany's second-largest bank, is also losing more and more of the specialists it needs for the more profitable aspects of its business. "Someone who doesn't pay more than €500,000 will have trouble remaining competitive in investment banking," says Tim Zühlke, a partner at Indigo Headhunters. He is referring to the cap on executive compensation that the federal government pushed through at Commerzbank.

In many cases, salaries are rising rapidly once again. Even ailing Citigroup plans to increase salaries by 50 percent this year to offset low bonuses, despite the fact that the US government made bailout funds in the double-digit billions available to the bank.

Other banks, including UBS and Morgan Stanley, are also giving their employees hefty pay raises, sometimes ranging from 30 to 60 percent.

According to an estimate by the consulting firm Johnson Associates, salaries throughout the banking industry are expected to rise by 20 to 30 percent on average this year. Bankers at Goldman, unless something unexpected happens, can expect to earn an average income of $770,000 this year -- the highest average annual compensation in the bank's history.

Just a few months ago, Wall Street's CEOs were sitting contritely in hearings at the US Congress, quietly enduring the politicians' fury.

But now the bankers, after regaining their self-confidence, are unscrupulously campaigning against the government's plans to impose more regulation on the industry.

At the most recent hearings, industry representatives loudly sang the praises of the White House's intentions. "Change is necessary," said a man from the American Bankers Association. "CBA supports the goals of transparency, simplicity, fairness, responsibility," his counterpart from the Consumer Bankers Association vowed.

Nevertheless, the people on Wall Street have a low opinion of the government's specific measures. They are not even prepared to tolerate tighter regulation of credit default swaps, which were partly responsible for the massive problems in the financial markets. Together with partners, JP Morgan and Goldman Sachs formed a lobbying group, the CDS Dealers Consortium, specifically to prevent decisive government intervention.

The image of Wall Street bankers is unlikely to change from greedy to responsible anytime soon, even if the return of old habits is unsettling to some in the industry.

"A few years ago, the investment banks got rich on their customers' money," says a former high-flier in the industry. "When that resource became too small, they fell back on their shareholders' money. Now they've reached the biggest pool the world can offer: taxpayers' money."

Translated from the German by Christopher Sultan.