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Characteristics of Casino Finance

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A Permanent Crisis

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Abstract

This chapter highlights the contradictions between the financial sector’s objectives and the entrepreneurial spirit. Salient features of casino finance are identified: big banks and hedge funds often bet with money that does not belong to them, but rather to taxpayers, pensioners, clients and shareholders. Marc Chesney analyses the financial sector’s problematic modus operandi and the complex products it issues and reveals the dangers represented by oversized off-balance sheet activities.

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Notes

  1. 1.

    Keynes, John Maynard, The General Theory of Employment, Interest and Money, Macmillan Cambridge University Press, 1936.

  2. 2.

    Source: www.dealogic.com for France and Le rôle des actions dans le financement des societes en Belgique, Revue économique, Banque Nationale de Belgique, September 2006, authors: V. Baugnet and G. Wuyts.

  3. 3.

    See article entitled: Arrêtons la cotation en temps continu sur les marchés, published by the newspaper Le Monde on 26 November 2012 written by authors: Marc Chesney, Denis Dupré and Ollivier Taramasco.

  4. 4.

    Launched at the opening of the annual meeting of market operators, the World Federation of Exchange (WFE) in Paris, Monday, 11 October 2010, continued in an article by Claire Gatinois in Le Monde on the same day: La Bourse est devenue un casino géant, selon les professionnels de la finance.

  5. 5.

    See the book: Flash Boys: A Wall Street Revolt by Michael Lewis, published by W. W. Norton & Company in March 2014.

  6. 6.

    The book is entitled: The Pity of War, author: Niall Ferguson, Allen Lane/Penguin Press, 1998.

  7. 7.

    Over-the-counter (OTC) transactions are carried out directly between buyer and seller.

  8. 8.

    Organised markets with clearing houses should limit the transmission of financial shocks and should therefore play a buffer role.

  9. 9.

    Obtaining derivatives prices is based on the unrealistic hypothesis of absence of arbitrage opportunities. But, the everyday operations of hedge funds and big banks consist precisely of taking advantage of such opportunities and creating them.

  10. 10.

    If the CDS is related to a country, European legislation apparently forbids this kind of practice. In fact, this regulation is very lax, as the most important players, i.e. in particular big banks, are exempt! This means that the great majority of these transactions are not concerned by this regulation!

  11. 11.

    See also the scientific article: Endogenous Trading in Credit Default Swaps , Marc Chesney, Delia Coculescu and Selim Gokay, Decisions in Economics and Finance, Vol. 39, April 2016.

  12. 12.

    See: Les contrats d´assurance vie qui se transforment en paris sur la mort, Marc Chesney, Christine Hirszowicz and Brigitte Maranghino-Singer, in Der Schweizer Treuhänder, Vol. 10, 2010.

  13. 13.

    Securitisation: process by which illiquid financial contracts are transformed into securities that are tradable on markets.

  14. 14.

    Structured products most often result from the bundling of a number of derivatives . By nature, they are complex and difficult to understand for the client of a bank.

  15. 15.

    At least 10% of global wealth is invested in this type of product.

  16. 16.

    See the link of the association fighting against bank abuses (CLAB): http://doublo.monde.free.fr/.

  17. 17.

    Source: ESMA Report on Trends, Risks and Vulnerabilities, No. 2, 2017. Europe is particularly active in terms of structured products.

  18. 18.

    Source: SSPA Media, 30 January 2018.

  19. 19.

    Liikanen, Erki, et al., High-Level Expert Group on Reforming the Structure of the EU Banking Sector, Brussels, 2012.

  20. 20.

    Source: Real Implications of Quantitative Easing in the Euro Area: A Complex-Network Perspective, Chiara Perillo and Stefano Battiston, Working Paper, University of Zurich, 2018.

  21. 21.

    The refinancing rate is the primary key interest rate of a central bank. It corresponds to the interest rate of the loans obtained by commercial banks from the central bank.

  22. 22.

    Sources: UBS: Annual Report 2017, Zürich, p. 5 and Credit Suisse Group AG: Annual Report 2017, Zürich, Key metrics.

  23. 23.

    Off-balance sheet commitments of a bank should correspond to those that, when in progress, have not yet generated the corresponding cash flows. It specifically concerns most derivatives-related activities. The exact definition of such commitments depends on the legal and regulatory framework considered.

  24. 24.

    Source: Credit Suisse Group AG: Annual Report 2017, p. 325, Zürich.

  25. 25.

    In the case of Lehman Brothers just before it declared bankruptcy in September 2008, the nominal value of derivatives corresponded to approximately 50 times the total balance sheet and 1500 times shareholder equity! See: The Failure Resolution of Lehman Brothers, p. 142, Federal Reserve Bank of New York, Michael J. Fleming and Asani Sarkar, December 2014, as well as: Lehman Brothers, Annual Report 2007.

  26. 26.

    Source: UBS: Annual Report 2017, Zürich, p. 363.

  27. 27.

    See: Annual Report, Deutsche Bank, 2017, Frankfurt, pp. 28 and 109.

  28. 28.

    International Monetary Fund, Global Financial Stability Report, Moving from Liquidity- to Growth-Driven Markets, April 2014, Washington, DC, p. 114.

  29. 29.

    This value creation of the financial sector dropped to reach CHF32 billion in 2015. See: Pharmafirmen schlagen Banken, Birgit Volgt, NZZ am Sonntag, 29 January 2017.

  30. 30.

    A Bad Bank’s task consists in taking charge and then liquidating the bad assets of the bank that created them. If this bank is unfortunately too big to fail, the taxpayers will very often take it upon themselves to dispose of the waste and as a last resort bail it out.

  31. 31.

    The Swiss Federal Court decided in late October 2016 that this privilege should disappear. Cf. Unternehmen können Bussen steuerlich nicht absetzen, NZZ, 12 October 2016.

  32. 32.

    See article in the NZZ am Sonntag of 5 April 2015: Bank BSI muss Busse von 211 Millionen innert sieben Tagen an die USA bezahlen.

  33. 33.

    Vitali, Stefania, Glattfelder, James B., and Battiston, Stefano, The Network of Global Corporate Control, PLoS One, Vol. 6, No. 10, 2011.

  34. 34.

    Cf. Iceland to Sentence Ninth Banker Found Guilty of Market Manipulation That Helped Caused 2008 Crash, Independent, 7 October 2016, as well as: How Big Was the Fall of the Banks in an International Context? Morgunblaðið (Iceland’s oldest newspaper), Jared Bibler, 11 March 2010 and finally: When Kaupthing Tried to Move Its CDS (in 2008) with a Little Help from a Friend, in link: http://uti.is/2015/12/when-kaupthing-tried-to-move-its-cds-in-2008-with-a-little-help-from-a-friend/ posted by Sigrún Davídsdóttir, 8 December 2015. According to these sources, the Kaupthing Bank manipulated its stock prices by way of a large scale and fraudulent repurchase of its own shares. It also tried to manipulate the price of its CDS (defined above in this chapter) by arranging with the Deutsche Bank for it to issue huge volumes in the hope of bringing down their price.

  35. 35.

    See the report entitled: The Supervisory Capital Assessment Program: Design and Implementation, 24 April 2009, p. 5.

  36. 36.

    Press release from the Bank of France and the Prudential Supervisory Authority dated 23 July 2010. Results of the European stress test : French Banks Among the Most Solid in Europe.

  37. 37.

    See: Secteur bancaire: Tout va très bien, madame la Marquise, Le Monde, 28 October 2014 à 11h53, Jézabel Couppey-Soubeyran.

  38. 38.

    The loans are thus “securitised”, i.e., they have been transformed into financial securities tradable on the markets. See in this chapter, the second example of bets of casino finance .

  39. 39.

    See Rügemer, Werner, Rating-Agenturen, Einblicke in die Kapitalmacht der Gegenwart, Bielefeld, Transcript Verlag, 2012, p. 93 and Credit Rater’s Power Leads to Abuses, Some Borrowers Says, in Washington Post, 24 November 2004.

  40. 40.

    Ibid., the above-mentioned book.

  41. 41.

    See: Libor’s Rise Matters for Trillions of Debt, Liz McCormick, Bloomberg, 13 Decmeber 2017.

  42. 42.

    These are derivatives , defined in Chapter 2, but associated to an interest rate and not for example to a stock.

  43. 43.

    Hosp, Gerald, Vom Referenzzinssatz zum Skandalwert, NZZ, 20 December 2012, p. 27.

  44. 44.

    Schöchli, Hansueli, Hohe Hürden für Strafbehörden im Libor-Fall, NZZ, 24 January 2013, p. 9.

  45. 45.

    Bräuer, Sebastian, and Hug, Daniel, UBS in Konflikt mit Aktionären, NZZ am Sonntag, 23 December 2012.

  46. 46.

    Ibid.

  47. 47.

    Deutsche Bank is expected to pay a fine of $70 million in the USA for its 2007–2012 manipulation of the ISDAFIX, a rate used for derivative contracts.

  48. 48.

    See: Over $9tn of Bonds Trade with Negative Yields Article, Financial Times of 17 August 2017.

  49. 49.

    See: Toxische Verschuldung, Andreas Uhlig, NZZ, 31 October 2016.

  50. 50.

    Financial Times, Banks Prepare to Settle with Brussel over Forex Cartel Probe, 19 November 2017.

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Authors and Affiliations

  1. Department of Banking and Finance, University of Zurich, Zürich, Switzerland

    Marc Chesney

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Correspondence to Marc Chesney .

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Chesney, M. (2018). Characteristics of Casino Finance. In: A Permanent Crisis. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-00518-4_4

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  • DOI: https://doi.org/10.1007/978-3-030-00518-4_4

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