How banks almost always win

This article was originally covered by PRI’s The Takeaway. For more, listen to the audio above.

Banks seem to have created a system where it’s nearly impossible for them to lose money. Speaking with The Takeaway, Louise Story of the New York Times calls attention to “securities lending” as another example of  how banks to rig transactions to make money, without taking any of the risks.

In securities lending, a pension fund or other financial entity will partner with a bank to invest money in the market. If the investment makes money, both the bank and the pension fund benefit. If, however, the investment loses money, the bank owes nothing, because it wasn’t the bank’s money to begin with. Instead, the pension fund will suffer the losses of the investment alone.

One example of this was the case of the City of New Orleans’ Pension Fund, Story reports. This fund put money in the “securities lending” program with the bank J.P. Morgan. During the financial crisis, J.P. Morgan made some bad investments on behalf of the pension fund. J.P. Morgan’s bad investments collapsed, and the City of New Orleans’ Pension Fund was forced to pay the losses.

The loss led “many of the customers of J.P. Morgan to feel that this is a bank looking out for itself but not looking out for me,” Story reports. The bank had money in some of the same bad investments as the City of New Orleans’ Pension Fund, but J.P. Morgan got out before it was hurt directly.

The effects of this trade mean the city of New Orleans pensions lost some $400,000. This equals the operating budget for a year of this pension fund. Even when it did make money, the fund didn’t make much more than that. Story says that because of this, the pension fund will be forced to run for six or seven years and pay all of their earnings to the debt, rather than to pensions.

The recent banking reform bill has brought on a lot of changes, according to Story, but there still aren’t a lot of reforms for protecting the victims of banks trading. She says that the big question is, “can the banks do their duty for shareholders, make a good profit, while also treating their customers fairly?”

The head of the New Orleans Pension Fund said, “after this experience, I wish that my pension fund were a J.P. Morgan shareholder, not a customer, because seeing the way J.P. Morgan treats its customers lets me know that they’re eking every last penny out for their own profit.”

“The Takeaway” is a national morning news program, delivering the news and analysis you need to catch up, start your day, and prepare for what’s ahead. The show is a co-production of WNYC and PRI, in editorial collaboration with the BBC, The New York Times Radio, and WGBH. More at thetakeaway.org