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Will Bad Banks Take Down The Economy (Again?)

|About: Wells Fargo & Co. (WFC), Includes: BAC, BCS, BRK.A, C, DB, HSBC, JPM

Summary

Congress is posturing today over the Wells Fargo scandal.

The bigger problem is how big customers are being systematically robbed in rigged markets.

Global regulation is needed to save global capitalism.

The Wells Fargo (NYSE:WFC) scandal looks bad, and it is fairly easy to understand. But even with this scandal, Wells remains the "most honest" among America's big banks, and consumers are not usually the victims of banking crime.

The fines levied against Wells, at $10 billion so far this decade, are dwarfed by the $13 billion paid by Citigroup (NYSE:C), the $31 billion paid by JP Morgan Chase (NYSE:JPM) and Bank of America's (NYSE:BAC) $58 billion. CBS News reports that Chase may also be creating phony customer accounts.

What is at issue is sandbagging, the creation of phony sales, and profits, that had the result of doubling Wells' stock price between 2011 and 2015, which caused a lot of people (including me, including Warren Buffett (NYSE:BRK.A)) to decide it was a good investment, and which of course enriched the management.

Worse may be coming, because consumers aren't the biggest victims of banking's culture of fraud.

The New Yorker ran a feature last month about a $10 billion mirror-trade scandal involving Deutsche Bank (NYSE:DB), which mainly impacted large customers, and that may just be the rip of the iceberg concerning coming losses. The bank has a $45 TRILLION derivatives book, whose collapse could take down the entire global economy.

It is beyond stupid, at this point, for Seeking Alpha readers to be fretting about whether Deutsche Bank can pay its fines. As with the U.S. banks, fines have proven inadequate at preventing abuses. Worrying about clawbacks against Wells CEO's John Stumpf is also beside the point.

Nobel Prize winner Joseph Stiglitz said six years ago bankers need to go to jail and nothing like that has happened. Opponents call the effort impossible, or insist it won't work against market abuses.

Once the current election season is over, my hope as an investor is that politicians will stop posturing and get back to work. Global capital requirements are still inadequate. Bank regulation is too disjointed, with too many regulators having too many overlapping responsibilities. It needs to be streamlined under a single agency, either the Department of the Treasury or Federal Reserve, with the power to close banks down and jail bankers long before we reach this point.

In that effort, what is happening to America's "most honest" bank should be salutary, and at some point I'll be buying more Wells Fargo shares. My bigger concern is that this is a global problem - in addition to Deutsche Bank there is corruption at HSBC (NYSE:HSBC), Barclay's (NYSE:BCS), and at least two large Chinese banks. (And we're not even counting banks' role in money laundering as described by the Panama Papers.)

What should scare Seeking Alpha readers is this. If we can't trust the banks we can't trust the economic system. And if we can't trust the economic system, then no one's money is safe.

Maybe Iceland has it right.

Disclosure: I am/we are long WFC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.