Gov report: Actually, evil City traders DIDN'T cause the banking crash So we've now got the official report on the glorious cock-up that was Halifax Bank of Scotland. There will of course be cries that lessons must be learned, such things must never be allowed to happen again and that the guilty must be punished, as is traditional in such post mortems. But the important thing is that the right …
Your facts are time-reversed. Northern Rock's bank run was in 2007 not in 2008.
Also, Lehman was not a bank in the traditional lending sense. It was a pure investment bank without investor deposits. Think of it as a large investment fund which provides financial services (trading, M&A advice, IPOs etc)
You're missing the elephant in the room that is linked to casino banking, Collateralised Debt Obligations or CDO's*.
HBoS was selling mortgages twice, once to the person(s) wanting to buy a property and then bundling that debt with bunch of other mortgages to create a CDO to sell on the financial markets. This raises money that can again be loaned out as mortgages, which are bundled and sold on to raise more money and so the process repeats itself. Commissions get paid at both ends, but especially when the CDO's get sold.
It reached the point where HBoS and the like were not especially interested in the ability of the mortgagee to re-pay the loan over the next 25 years. They just wanted the completed mortgage transactions to bundle and sell on, at which point re-payment becomes somebody elses problem.
* - CDO's were sold as bonds to supposedly sophisticated buyers such as pension funds and the local German banks mentioned in the comments earlier. CDO's are structured to pay varying rates of interest depending on the level of associated risk. The top tranche was highest rated and was paid first, the lower tranches cost less for the same % return, but crucially didn't pay out if there was a shortfall because one of the mortgages defaulted.
B**ll*ock. How can you sell something twice. The bank took the loan which they owned and then sold it to someone else packaged in a CDO. In the end, the buyer of the CDO ended up with the mortgage and the bank ended up back where it started. Yes, fees were taken - I suppose you work for nothing.
You mean 'when it is a finite resource'. Unfortunately, PPE is not as good as being a real economist, and since 2000, real economists have been subject to Gresham's Law, being driven out by 'bank economists and 'free market economists' - the kind of economist who knows what the answer is, now what was your question?
... the obvious culprit has, to my knowledge, never been publicaly stated: the Fed kept interest rates artificially low, so money was cheap and plentiful, and when a commodity gets cheap and pletiful, people waste it, until it becomes scarce then they scramble to get it all back.
Seems obvious, fits the empirical data, and can be explained by basic economics. No wonder the politicians and journalists haven't mentioned it.
The analysis in the article seems too simplistic to me. The credit markets froze due to a lot of casino banking going on worldwide (do read up on AIG, which was somewhat instrumental in getting that going) -- and going bad quickly. When money gets scarce, this hits all types of borrowers, affecting those all-too-ordinary credits which were the business of HBOS. They obviously weren't careful enough to prepare for such a crisis (shame on them), but they surely would have been considered good managers if the worldwide banking casino had survived another decade.
About the 'Robin Hood tax', I would be very interested to hear your reasoning why that's "so wrong-headed in itself". If you do business, you pay tax. This does suppress business (you'll have to factor in VAT if you want to make profit selling something). It also keeps people from wasting their time trying to get some marginal benefit from trading stuff around.
The banking system looks like it might need some kind of tax to focus minds. There are too many bankers dealing with bankers, dealing with other members of the financial industry -- all of them hunting some marginal benefits (and creating a big systemic risk by introducing extra complexity into the markets). Tax their business transactions and you'll see a lot of wasteful activities end.
Wrong. AIG was not doing casino banking. They are an insurance company. They were simply providing insurance on the senior tranches of CDOs. That is an insurance business. Like providing hurricane protection. In the end, these senior tranches all paid up in full and the government of the US made a load of money on AIG. What happened was the market panicked in 2008 after Lehman blew and all of a sudden people lost confidence in CDOs and their prices fell even though as I have already said, they were actually fine.,
Re the RHT.
http://www.iea.org.uk/publications/research/the-case-against-a-financial-transactions-tax-web-publication
That also formed the basis of my evidence to the Lords Committee on the tax.
Essemtially, it'll shrink the economy so much that total tax revenues will fall. Plus, it will reduce liqudity so much that prices will become *more* volatile, not less.
There's also a much more general point. Transactions taxes are simply a bad idea. Taxes on incomes, final consumption and the like might not be all that good: but transactions taxes are definitely worse.
Of course the Tories are going to let the bankers off - they must be seen as innocent so that when they come for your savings and wages, there can be plausible deniability over the theft.
At what point is the penny going to drop? The Government is at war with us and they fired the opening shots. Therefore resistance is righteous.
*desperately dredging up long forgotton finance lectures from Uni*
I do like Tim's articles, but I find the conclusion a little too simplistic, as the third dimension to weigh is the risk of collapse of an institution weighed against the incentives this drives through the system - i.e. if my bank can collapse if I'm reckless, but I know the risk to me is small as I'm too big to fail, then I may continue being an idiot.
Probably the subject of another article, but you get into discussions about living wills and depositor guarantees. Some really interesting things have been proposed around this, but unfortunately the better and more radical proposals have been ignored and the status quo continuation of oligopoly and croney capitalism that seems to have infected the city continues.
@ Schultz
I agree that financial services seemed have evolved far beyond their proper use in a capitalist system, but the Robin Hood tax is not the method to use to fix it. Other far cleverer than me (not hard) have written about why - quick google should pull up some interesting stuff
I thought it was HBoS buying up all that toxic sub-prime debt from the US domestic market.
"Halifax owner HBOS today said profits more than halved in the first six months of the year after it took a £1.1bn hit on investments hammered by the credit crunch .. HBOS .. was also forced to write down £1.1bn on investments linked to the toxic US subprime mortgage market". link
"HBOS .. reported 2.8 billion pounds ($5.5 billion) of writedowns last week .. The charges stem from the collapse of the U.S. subprime- mortgage market". link
Institution picks up short term money market borrowing to cover short fall between assets and loans, relying on house price inflation and sufficient good payers to keep the cash rolling over.
Something rather like this happened in the early 1970s.
It will happen again because all bankers know that "liquidity" requirement (of X% of all funds staying in the bank and being available) is set by regulators who a) Lack banking experience b)Have an exaggerated sense of risk about investments c)Are Guardian reading pinko Liberals.
So whatever limit the regulators set it will just seem far to high (CDOs were exactly a way to fame the system but that's another story).
The notion that their pursuit of ever bigger bonuses might be skewing their judgement (or they might have their heads buried firmly up their own arse) of course never enters their thinking.
"I thought the idea of the RHT wasn't so much to curb excessive trading, but rather to provide a fund to pay for the banking bail outs, both the current one and any future ones?"
A bit like petrol taxes were originally intended to finance roading systems, etc?
We all know how that one ended up. RHT will get diverted into something else and not be available when the next bubble (housing)/ponzi scheme (onselling toxic mortgage bundles) collapses.
even with the five hundred year 'tulpenmanie' created by Wall Street, the English banks would have thriven and prospered in the terrible global economy -- EXCEPT for all the borrowers they lent to who couldn't pay their loans back.
Is this a case of not seeing the forest for the tulips?
The conclusion suggest that, as many suspected, the right thing to have done would have been to let RBS, Northern Rock etc. go to the wall. That would certainly be the right thing in any ordinary market. But banks aren't part of an ordinary market. The deposits they safeguard, or fail to safeguard, aren't safeguarded by them at all. They're underwritten, at least to an extent that matters, by the taxpayer. So we had to bail them out.
The failure of Lehman's, and the need for a wider bail-out, was a largely separate matter. But that was at least partly triggered by unsustainable lending, albeit elsewhere, and gambling on the derivatives based on them. That might not have brought HBOS itself down, but that doesn't make it a good thing. Especially where there's a lack of regulation and especially in markets where retail and investment banks can be the same thing. To claim that this report suggests banking reform is unnecessary is like claiming that, because some people die of drowning, we shouldn't worry about malaria.
"To claim that this report suggests banking reform is unnecessary is like claiming that, because some people die of drowning, we shouldn't worry about malaria."
Actually, the lesson of this report is that the banking crisis was, as almost all systemic banking crises in history have been, caused by loose monetary policy. And that means that regulating the banks never has, and never will prevent these problems recurring.
At this very moment the turds of government are repeating this policy of loose money by "quantitative easing", "funding for lending", the "newbuy" scheme, and more. If cheap, easy credit is on offer, people use it. It's what it is meant for, even if the clowns who mandate it aren't then happy with the outcome. Look at "newbuy" - we taxpayers stomach the losses if somebody borrows more than they can afford. Ultimately that's like Subprime 2.0, in that we simply cut out the stage where the bank takes the hit, and we then bail out the bank, and this time round taxpayers can take the hit on the chin.
If reform is needed, it needs to be in the rules of eligibility to be an MP. Like having at least ten year's proper work experience behind you (that includes dustmen, but excludes PR managers, towel folders, "researchers", or anybody employed by a political party). And in particular, a complete ban on Oxbridge twats, lawyers, and economists - you lot have had your chance, and you useless, clueless bastards screwed it up.
I am an 'Oxbridge twat'. I've developed products that have earned millions from export, at least one because a Cambridge degree can give you the confidence to believe your own research and calculation and back it against the people who tell you something isn't possible. The thing is, there are lots of Oxbridge people much cleverer than me who are far too busy designing aircraft and revolutionising mobile phone technology. We are mostly too busy to get involved in politics. And probably just as well. We aren't all Clegg or Cameron.
As I mention above, there has been some very good thinking on reducing the systemic risk using living wills or other devices to allow an orderly winding down of a bank or two, without putting the whole system at risk. That way you can avoid the moral hazard of being too big to fail - unfortunately they don't seem to be taken forward but gov or regulator.
"The conclusion suggest that, as many suspected, the right thing to have done would have been to let RBS, Northern Rock etc. go to the wall. That would certainly be the right thing in any ordinary market."
Correct. In terms of the real world what would have happened that would be so bad?
"But banks aren't part of an ordinary market. The deposits they safeguard, or fail to safeguard, aren't safeguarded by them at all. "
Then perhaps it's time they stopped pretending they were and people accepted that putting money in a bank is no more or less safe than taking shares in say a book maker.
"They're underwritten, at least to an extent that matters, by the taxpayer. So we had to bail them out."
Assertion <> to conclusion. The underwriting is up to a fixed limit. So no the UK Govt did not have to bail them out. They were convinced that they had to do so. That's not the same thing.
I've never really, /really/ understood why (i) banks are seen as necessary, (ii) interest rates are seen as necessary.
0% interest, 0% inflation, buy when you have saved enough money, don't live in a fantasy world.
There, problem solved for everyone except (i) finance people of all sorts, who exist by passing other people's money around and creaming off a cut at every move (or charge for being 'experts' in the whole smoke-and-mirrors trade); people without the self-control to wait until they have the money for something before acquiring it, thus building an ever bigger mountain of world-wide-never-never.
Guess a lot of folks are in one of those categories and fantasise that it won't all come crashing down, one day.
Very few businesses can be started or even expanded without borrowing money.
The startup costs for a business are very high - you need your premises, machinery and the ability to pay your staff in the first few months before you actually get paid for any of your products.
Without borrowing involved, everybody must pay cash-on-delivery of the product/service.
You are a start-up, so you haven't built anything to sell yet - where can the money come from?
The same thing occurs domestically - even ignoring the land, just the labour and materials to build a house costs a lot, and again you have to pay that before the house is actually built.
If its anything other than a detached property, it's got to be built in concert with other homes, magnifying the problem.
Very few people could manage to save £100k or so before moving out of their parents home, ask a hundred people to save most of that before a block of flats can be built? Not likely.
Credit is necessary once a civilisation goes beyond the hunter-gatherer stage.
"Very few people could manage to save £100k or so before moving out of their parents home"
But they can afford to pay several times as much in interest for the next 20-30 years?
The problem is that expectations have changed in a way that depends on pretend, toy money (cf. fractional reserve) to fulfil must-have-it-now fantasies. Or, rather, to live out their fantasies whilst building vast edifices of hot air for the next generation and beyond.
Notce how the age for a first mortgage has gone up during the last 20-30 years? Wonder why? Because of the parents who smugly grew their property bubbles, singing LaLaLa to the idea that it would be their children paying the price. Well, it's those same children who are going to have one hell of a problem paying for the dotage of said MeMeMe parents, even if they feel inclined to. And beyond that little ripple, when the whole Hindenberg falls blazing down, it will be those children and their children consumed by the conflagration. Why? For a the fantasy-living of a feckless, look-at-me, welfy-innit generation.
(Had to tone that down a bit because there are those still building their fantasy finance bubbles.
"Very few businesses can be started or even expanded without borrowing money."
Very few businesses can be started or even expanded before I run out of patience, and squeam and squeam to politicos and *ankers (who all agree with me because their living comes from propogating and milking the putrifying finance edifice) because I want it NOW/A/, without borrowing money.
There, fixed.
There's a time value to money. Perhaps there shouldn't be but there is. Humans just behave as if £1 today is worth more than £1 in 365 days time.
Thus interest.
I'm afraid that really is it.
As to banks, the real thing they do is maturity transformation. They take in short term savings (their deposits) and transform them into long term loans. Very few people want to save cash for 30 years but there's an awful lot of people who would like to borrow it for that time. Thus, someone, somewhere, must collect the shrt term deposits and make them into long term loans.
And that's banking. If you borrow short and lend long you're a bank. If you don't, you're not.
This doesn't mean that banks or interest have to be the way they are right now: but something or other that performs the same function as both of them will indeed exist.
"I've never really, /really/ understood why (i) banks are seen as necessary, (ii) interest rates are seen as necessary."
You might want to acquiant yourself with the history of mideval moneylending.
They weren't unpopular because they were jewish (most weren't). They were unpopular because the prevailing rate of interest was 30-40% per annum. HIgher for shorter periods - and needed to be, because there was a high rate of "dead loss" - often literally, if a creditor and his entire family exited his house in a wodden box. Most moneylenders weren't much better off than the people they loaned money to despite the shakespeare stereotype.
Banks were a way of spreading the risk over a wider group than a moneylender could handle and thus lower the costs. The Bank of England was rather famously founded on a bad debt which remains unpaid to to this day.
If I have a major job coming in which can't be done unless I buy new equipment I don't have money for, financing is the only way to proceed. Interest is there to cover risks and because a full-time moneylender needs it in order to generate an income, to eat.
Problems ensue when bankers get reckless, which is easy to do when it's "other people's money", in the same way that some of my employees would abuse deals cut to give them some perks, to the point where they'd become major financial drains and have to be shut down for everyone.
We all know what the political narrative about the banking failures - the Great Crash of 2007 - is. Excessive speculation, trading in swaps and options and futures using high speed trading algorithms. Greed and financial capitalism run mad in free markets led to the collapse of the economy and we've got to do something about it.
Wait, what? Has everyone had some kind of collective memory failure? Nobody ever said that, did they? I can actually remember 2007-2008, and all the news stories at the time were talking about toxic mortgages and these collateralised debt thingies - some kind of bundles into which they'd all been put and sold by and between banks and investment houses. I don't remember anyone at the time suggesting that it had to do with "swaps and options and futures using high speed trading algorithms", but greed and capitalism were certainly responsible for those involved, many of whom were indeed "City traders", having a collective failure of judgement and putting their bonuses and assorted other personal interests ahead of the interests of their employers, the financial system and society at large.
Also, how does this report into the failure of HBOS change anything we should learn from all the other failures at the time - Lehman brothers, Freddie Mac/Fannie May, etc., etc., etc.?
The argument presented in this article looks like a classic strawman attempt to divert the debate to me. I think I tend to agree with those who cry "revisionism" here.
As you write, they " they made loans to people who said they had a great plan.".
In Ireland 2002, Anglo Irish Bank had a loan book of €20 billion. They announced plans to treble this in 4 years to €60 billion. And they did. Half a billion here to a state entity to purchase a toxic waste dump, 150 million there to buy a hotel that was barely profitable. €15 million for a field which can't find a buyer now at €250,000.
An anecdotal talk I had was with a part-time self employed builder was invited for a talk with the bank manager and straight out offered 5 million to build a housing estate, which the builder chose to reject.
So half of the loan book went bad.
The book of risk management was thrown out the window. The one bank CEO that took a prudent approach was ousted by institutional shareholders that wanted the loan book to bloat like the others.
The pension fund managers didn't want single digit growth of their share portfolios.
How is it that when a bank lends you money for a mortgage, 90% of the loan value is conjured out of thin air and created as 'new money' that the bank never had in the first place, but will expect to be paid back by the mortgagee. This is called the Fractional Reserve System, which is ubiquitous in modern banking.
Under such circumstances, how the hell could a bank lose money? That's quite an achievement. If I lent 10 of my mates down the pub £100 each I would need to have £1000 in my pocket to start with. The banks, in collusion with the government, would only need £100. The rest is just made up!
Sorry, but your being deliberately obtuse. The bank makes the purchase of the property when a mortgage is taken out, so "real" money does get taken off the bank's books. And without that mortgage system only the rich would be able to buy houses, and just imagine how much the Lefties would scream then.
"And without that mortgage system only the rich would be able to buy houses, and just imagine how much the Lefties would scream then."
And with it only the rich would be able to buy houses, and the poor will be able to pretend they have by creating a debt for their children and children's children.
Only, of course as every horse race punter and lottery card buyer knows: "Something lucky and magical is just about to happen to me and make me rich and happy. It's the others who haven't backed the winner - I can feel it in my bones".
"Re: Mike Bell Re: Fractional Reserve Bollocks
Sorry, but your being deliberately obtuse. The bank makes the purchase of the property when a mortgage is taken out, so "real" money does get taken off the bank's books."
Or, you're being accidentally obtuse. The money got onto their books in the first place because they invented it every time they made a loan and put it there. It's the way that a piece of paper telling the bank that someone owes them money can immediately be put on their books /as if it were actual money/ that puts most 'money' into the economy. A little research on fractional banking (fantasy money) will reveal all.
"The money got onto their books in the first place because they invented it every time they made a loan and put it there. It's the way that a piece of paper telling the bank that someone owes them money can immediately be put on their books /as if it were actual money/ that puts most 'money' into the economy"
Yes, it's the selling and accounting of a loan (liability) as an assett which made this particular sorry mess blow up.
That's the kind of creative accounting which needs to be stomped on, however it may well be too late to legislate it out of existance.
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