While Goldman Sachs is being grilled by the US Senate for ripping off clients, and defending the "big short", it might be time for US regulators to start looking at the behaviour of other banks.
They should follow up on the The Wall Street Journal report telling us that US banks are betting, and making mega profits, from betting against American states, cities and municipalities. Essentially, the banks are selling financial instruments that allow investors to short sell – or bet against – cities and states. It's about placing bets that they will go broke.
Banks like J.P. Morgan Chase, Merrill Lynch, its parent, Bank of America and Citigroup are selling so-called credit default swaps. These are basically insurance contracts which investors can use to bet that other insurance contracts protecting holders of municipal bonds will default.
Naturally, the vigorous trade makes it more expensive for states and cities to borrow money, forcing up their costs and pushing them closer to bankruptcy. According to this report, many US states are now teetering on the edge of bankruptcy as they are collecting fewer taxes because of the recession.
It's totally amoral and the banks make their profits because the system is not transparent. The big money comes from buyers not having enough information.
The financial reform bill working its way through Congress might fix that. If it ever gets through.
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