It said in the Sun/Mirror/Daily rag that all bankers are bad therefore it must be true!!!!!
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 …
It said in the Sun/Mirror/Daily rag that all bankers are bad therefore it must be true!!!!!
Well it was still "bankers" to whatever extent that is a coherent group that made these mistakes.
And it's not unreasonable to speculate that part of the reason these mistakes were made is that banking culture over-promoted and over-rewarded sales regardless of the sense of the sale, and risk taking regardless of the risk.
HBOS certainly had an atmosphere amongst management that bad news was not welcome.
Bonusing corporate loan arrangers for getting big loans that they could approve themselves didn't help a great deal either I gather.
It said in the Guardian/Mirror/BBC that all bankers are bad therefore it must be true!!!!!
Re- "Well it was still "bankers" to whatever extent that is a coherent group that made these mistakes."
Not really bankers fault.Basically you are looking at:-
a peep - "We need to buy something from someone."
a bank - "ok, Here you go."
a world weary peep - "Being a responsible borrower, how can you say that", (maybe they don't ask).
a bank - "Well the people who allow people to print the money say we can"
a peep - "Yeh!, Ta, lets get our 'roof over the head' on"
from the 'people who allow the people to print money' - well this isn't going to work is it?
from the 'people who print the money' - nope.
from the 'people who allow the people to print money' - ok, crap, the only way we can get out of this is to devalue savings. We can't increase interest rates because da people will see this as a fault in our ideas.
from the 'people who print the money' - well 'da people' won't notice if we just print more money. They just like shiny.
from the 'people who allow the people to print money' - yeh!!! that will see us through our term.
HBOS are worse than most :
See the libor fixing things that Barclays did the right thing and came clean about and got loads of hassle from MP's. (And a £200 million fine) and their CEO took responsibility and resigned.
The bailed out HBOS got charged £400 million for doing the same thing and just ignored it and the government have done nothing about it. That was £200 million wasted that could have been given back out of the bail out money.
"over-promoted and over-rewarded sales regardless of the sense of the sale"
Do you know of some line of business that doesn't get snookered by their own sales department?
Ironically, in the years before the collapse I'd been (with others ofc) working on MI systems that tracked the quality of sales made over time to make sure they weren't of poor quality e.g. cancelled in a week because they were only taken out under pressure.
Stupid that they did this for current accounts but not huge corporate loans :)
Don't be conned by the report, it was the bankers pure and simple, without the bankers, no loans could have been given, no mortgages provided and no PPI sold, and no huge bonuses paid out.
Don't kid yourselves, they'll look for a few scapegoats to pin it on.
They just want to change the lasting image of the bent overpaid bankers, the report not blaming them is the beginning.
wtf? The report blames the bankers. Squarely. Did you read it?
Does this not make the boards of sale banks, the finacial watchdogs, the major share holders (thw expert pension investors), those who voted for & set in motion deregulation with associated loan fuelled econonic boom, even more culpable? After all this is their traditional business which they should know inside out by now, unless they are incompetent arrogant privileged horray Henry's!
Oh & stop calling me Shirley
The leftists in government. Bankers don't make risky loans without a damn good reason. The reason in Europe and the US is that leftists have pointed a regulatory gun to their heads if they don't make loans to people who can't afford them. In boom times this typically doesn't cause bankers a problem. Everybody's raking in cash and your profits will cover the costs. The problem is, when things start to get tight, those profits get too thin. And then, because you are over-extended on bad loans, the whole things comes crashing down like the house of cards it is.
"It said in the Sun/Mirror/Daily rag that all bankers are bad therefore it must be true!!!!!"
Well, it has been said many times in that irreproachable source, the Guardian, so it must be true. They surely take a dispassionate view of things.
"HBOS certainly had an atmosphere amongst management that bad news was not welcome.
Bonusing corporate loan arrangers for getting big loans that they could approve themselves didn't help a great deal either I gather.'
Agree, I don't see the distinction between a retail banker making bad loans to collect bonuses in the short term and an investment banker levering up to 40 to 1 to make huge bonuses selling a large bundles of bad loans. Both were taking excessive longer term risks, probably knowingly so, for short term gains. Scale is the only difference.
Quite right - check out Bill Clinton and the Community Reinvestment Act (CRA) putting immense legal pressure on banks to make bad loans to 'subprime' customers who were unlikely to repay their mortgage. It was a way for the lefties to procure houses for their poorer supporters, and retain their votes.
If you don't believe me then look it up. Carter started the CRA decades ago and Clinton spun it up out of control. Bush Jnr tried to do something about it but the other houses were under democrat control and refused. It's simple left-wing political corruption really.
I'm reading chapters 1-15 of the BOFH operating manual and modifying appropriately. So far I've got:
- with a bat.
- with an axe.
- with an over-voltage, illegal cattleprod.
- with fire.
- with skips full of glass.
Did you, perhaps, forget the word 'and' between each of those items?
I'd add a gallon of petrol and a gelding instrument to prevent them breeding.
That we are trying to force the banks to lend to businesses when that was half (or indeed it seems now, nearly all) the problem in the first place.
Banks work on a process of Risk Weighted Assets and all lending is attributed a risk, pre 2008 any lending to governments would carry a 0-10% risk (now much higher) and an unsecured loan was considered up to 100% risk.
Therefore the bank would need to keep a portion of money aside (a percentage of a percentage) to cover the losses that could be incurred from the loan not being repaid.
Quite simply this means that to lend more money in this current climate means they have to keep more money locked up (Capital Ratio) which costs more money to the banks. So they aren't going to lend to small riskier businesses unless someone gives them a guarantee which reduces the risk.
What SME's seem to fail to realise is that they are high risk ventures, but unfortunately this doesn't account for the fact that a business is a good idea and can indeed profitable (you hear the success stories despite the lack of lending) but banks dont care about potential, they care about getting their money and interest back. The only entity that can fill the gap is the Government.
"Banks work on a process of Risk Weighted Assets and all lending is attributed a risk"
Ah yes, and fat lot of good those value-at-risk models were. Not just because they didn't provide enough capital, but because they understated the exposure of the bank's equity holders to risk by at least one if not two orders of magnitude. Nobody has been held to account for those duff models and careless assumptions.
You mention SME's as a significant source of risk, but Leveraged Buy Outs were a far faster growth area of lending in the years up until 2008, and far more risky. And the banks, greedy fools that they were, thought that if they clubbed together to lend money, then they'd spread the risk. Which ignored the obvious rising tide of indebtedness that could never be repaid. I was working in the City at that time, and there were voices saying that the multiples were not sustainable and it would end in tears. But the banks continued to lend idiotic multiples to private equity buyouts, in return for fat arrangement fees and big bonuses. And a major, major spreader of this contagion was none other than our old and crooked friends at RBS, who were, in the words of a competitor bidding for lead arranger status on these LBOs, "all over Europe, like a rash". But because the turds at RBS who led this charge to lend anything to anyone then syndicated the debt to other buyers, the gormless herd bit into RBS' poisoned apple, and Notsir Fred's demonic influence was multiplied and spread.
I'd take issue with the claim by the article that RBS fell to bits because it over-paid for ABN. That's true against any accurate retrospective valuation of ABN, but the true cause was that RBS had a rotten lending portfolio full of steaming ordure, and ABN's was even worse. They were in such a rush to buy ABN that they didn't bother to check the asset base, and happily ponied up a vast sum of cash to worsen their position, as we all know. But the root cause isn't that overpayment, because the goodwill element could (as with all such things) be amortised over time, the root cause was that both banks engaged in bad lending.
And as for government filling the gap, since when have governments backed winners? Why will good old government be any better at avoiding the losers than the banking sector would? And in a portfolio approach that you need to take to any investment, that means higher interest rates to sectors with higher default rates, ergo no material difference to asking for a loan from the bank.
Yes, they went bust the 'old-fashioned' way, but WHY were they making the wrong loan decisions? Why were they simply not saying no to loan applications? They were simply taking too much risks, and the reason for tha is that they were too greedy.
Also, one of te bad ideas in banking - fractional reserve banking at ratios of 10 or 20:1, which means top bods at the bank would have been looking at their balance shets and thinking that they're not issuing enough loans... and putting pressure on branch managers to approve loans.
Was there not 1 branch manager in all the bank who resisted giving easy loans to non-credit-worthy people / companies? I bet there probably were, and they were probably circumvented / undermined within the bank or let go
The other half of the problem is the "wholesale" market. HBOS would have never gone that far down the "classic bank failure" path if it was not able to rely on cheap wholesale credit. Similarly, dunfermine, northern rock, etc would have never managed to lend out that much unless they could dip into that bucket too. That bucket in 2007 was overflowing with "fake" and "oversold multiple times" credit during the crisis and the reason for that was derivative trading. By the way it still is and will overflow again because none of the regulations have addressed this so far. In fact some of the "anti-crisis" moves by governments have tried to "revive" that too instead of killing it once and for all (in its current form).
So while Halifax failed conventionally (and so did NR) the derivtive trading did have a role in it - it produced credit not backed up by reality for them to consume and resell to customers.
Branch managers have next to nothing to do with loans in this day and age. It's not Captain Mainwaring any more. Personal loans and mortgages were all approved by computer systems. I'd imagine there was constant pressure from the top to slacken the algorithms used to be more generous.
Australia has a 'four pillars' policy; basically a government-regulated oligopoly. The result is that everyone pays more for all banking services that they would under an open competition model, but there are less nasty surprises. No system is perfect, but this seems better than what is currently happening, or is proposed, for the US and UK.
Why were they simply not saying no to loan applications?
Because of Securitisation - The banks found out that they do no need to hold the debt themselves. Instead, they could outsource the risk by converting the loans they issue into bonds, which can then be sold to suckers, aided and abetted by Ratings Agencies - whom the banks outsourced the credit valuations to. In the end, they ran out of suckers and the banks bought their own thrash via off-shore vehicles to make a market for it.
Securitisation is also a reason banks hate lending to SME's: Those loans are too small to be securitised so the bank must carry them, which they hate.
<quote> Securitisation is also a reason banks hate lending to SME's: Those loans are too small to be securitised so the bank must carry them, which they hate.</quote>
Almost all loans, including mortgages, are too small to be securitised on their own. Which is why banks package them up and then securitise them.
LBOs had NOTHING to do with the morass of NINJA home loans issued with government backing to people with no prospect of paying them back. Neither did the risk asset models BECAUSE the government claimed it was assuming the risk. This was the root of the problem. And I hear that to juice up the economy again, they are going back to that failed policy.
Yes, this was the problem, but foisted on the banks in order to comply with government policy. If you don't make enough "minority loans" you are accused of redlining and lose your banking license. You can't give bonus points to minorities because of SCOTUS reverse discrimination cases. So the only way to get the "minority loans" is to lower the standards far enough that you pick up enough of them. Of course at that point your whole risk/reserve model is shot to hell and collapse during what should have been a correction becomes inevitable.
A voice of sanity observes that the Emperor's new clothes are not what he said they are.
Thanks for the good article, Tim!
The management were too interested in profit to see the risks. If they had kept to 80% loans then they would not have gone bust - it was the 90% and higher loan to value mortgages that caused the problem. Of course if they had stayed with 80% LTV they would not have made as much profit in the good years and would have had smaller pay packets.
Duncan, it was not necessarily the mortgages that blew them away, it was the personal loan portions to the 'unique' products that NR sold. Some deals allowed you to have a 115% LTV deal with a 90% mortgage and a 25% personal loan portion. It used to be the personal loan that tanked people, not the mortgage, since that portion had a higher interest rate.
Look at the incentives: If management grows the business at an unsustainable rate stocks will rise, bonuses grow and stock options turn into Real Money. When the business tanks, there will be golden parachutes and new, cushier positions. If management do not meet the "growth targets", is is replaced and does not collect on the goodies.
These people are not stupid, they knew this was not going to last so they went "all in" to get as much as possible on the way out.
RBS went bust because it bought ABN Amro for too much money.
It was only too much money because ABN Amro was lying about the value of it's mortgage assets, with the connivance of the rating agencies. It's like saying someone who drowns has died of suffocation, technically it is accurate, but it's missing the bloody point.
"It was only too much money because ABN Amro was lying about the value of it's mortgage assets"
It might have been a good plan to give the tyres a kick before splashing out, don't you think? I mean, when ABM Amro only provided RBS with "two lever arch folders and one CD ROM of information"* then I would guess that they were trying to be evasive.
"It might have been a good plan to give the tyres a kick before splashing out, don't you think?"
Most certainly. But the cavalier attitude to the "target" is not a financial sector prerogative. Look at HP.
Unfortunately, unless the current UK class action against RBS and its former directors succeeds (which I doubt), then there will continue to be no means by which idiot directors can be held to account,, and the US situation appears no different, with HP paying off the last set of idiots most handsomely, only to hire yet more idiots.
Actually ABN/AMRO never gave any value and nor was the problem their mortgage assetts. Their valuation was a public evalation one (from the likes or Poors & Standard or Fitch), their bad debt book (which was down to US bad debt investments, not just Dutch mortgages) was unknown at that time. Sor Fred went in with a silly offer despite doing no due dilligence, where as Barclays (who were the prefered bidder) walked away for undisclosed reasons.
Anonymous as I used to work for RBS, plus have some connections from much further up the food chain who had to deal with the mess Sir Fred dropepd even before it killed the bank.
It wasn't the mortgages that banks themselves loaned out that was the problem, it was the mortgages that other companies sold, which were then packaged up into financial instruments offering a high rate of return for apparently zero risk.
These instruments were then sold around the world to other banks. It is these debts which became toxic, the liquidity issue was due to the fact that all these banks had these toxic instruments, but no-one could tell, or was willing to find out, the true value/risk associated with them.
ABN Amro wasn't saddled with massive debts because the Dutch don't pay their mortgages, it was because it used it's assets to buy this external debt that turned out to be worthless.
This crisis was caused by the creation, marketing, selling of these financial instruments, all of which came with AAA ratings from the people who are supposed to assess risk. The ratings agencies made fuckloads of money rating these bonds, the companies creating and bundling these mortgages made a fortune turning worthless sub-prime into AAA gold.
None of these people have ever had to answer for fucking us all in the ass.
"It wasn't the mortgages that banks themselves loaned out that was the problem...." Actually it was. The realisation that those mortgages were valueless as they would never be repayed that led to the subprime collapse when traders stopped buying the mortgage bundles. If the mortgages had still be good investments then the trading would have continued.
Only if housing prices continued to inflate. Once prices flatten and decline, the bubble is burst and here we are.
Unfortunately, that would only have started the Great Recession earlier. Much like Enron, the bad loans were already on the books. Although you'd think a good tire kick (something the Germans are good at and incidentally was the spark for the Enron collapse) would have only hit the bad guys at ABM, with the asset size it still would have seized up the whole system just like AGI did. At which point the rest of the banking system was at risk. In short, everybody had a vested interest in not noticing the problem and hoping it would go away.
Actually, it was a lot more complicated than that. Remember that German tire kicking I mentioned above? Until the Germans tried to foreclose on a house to collect money that was due to them, the assumption was that the securities were equivalent to mortgages. Since they were in parallel, the risk of the whole thing breaking is less than the risk of any one of them breaking. So as long as the proper adjustment is made to the receipts expected, it should have been okay. But when the Germans tried to foreclose because they didn't get their payment, a judge rightly said they didn't own the mortgage so couldn't foreclose. At which point they realized NOBODY owned the mortgage anymore. At that point nobody knew what the right price for any of the SBMs. So trading in them stopped completely. Worse, because the trading stopped, the book value for people who held them as assets immediately fell to zero, wiping out what should have been reasonably secure reserves. Now, if you actually had the portfolio of mortgages they were certainly worth more than zero. You might not have gotten 95% of the loan back, but you probably would have gotten 50%, possibly as much as 75%. But the banking system nearly collapsed anyway.
If it wasnt the bankers fault. Then who was making the decisions to lend people money?
Oh, yes, the banks. Because they could get credit cheap from each other, they passed it on to the likes of you,me, and them.
But the 'them' couldnt really afford the credit the banks gave them. Because credit was cheap the banks didnt look too closely at the amount of money you wanted to borrow or how much you could pay.
So long as the money kept moving it was okay wasnt it. Errr...no.
Still sounds like it was the banks fault to me.
But they were still only part of the problem and not the problem itself. Most of the problems can be back-tracked to the unregulated boom (and subsequent burst) of the housing market bubble.
My parents bought a 2 bedroom house for £35k about 15 years ago, with no changes to the property the house was valued at over £120k 5-10 years later just because that was what the market dictated. People were buying houses as pension pots or to make a quick buck not as homes and as the prices rose banks needed to take the risks with new home owners and had to offer cheaper rates otherwise the entire market would stall.
We can blame the bankers for making the cheap money available but we the public have to also take responsibility for creating the situation that made cheap money becme a necessity.
Well - the Gospel According to Worstall is that the City and its leather-faced troll minions never make mistakes, and are never wrong about anything.
So there was no fixing of LIBOR. No mis-selling of PPI. No creative reporting of capital reserves. Enron never happened - and if it did, it should be blamed on widows and orphans. Or SMEs, uncannily often run by people who have now lost their homes after remortgaging them as security.
So if they did dodgy lending. it was the fault of the people who borrowed, not the people who lent - the old 'It's all the fault of people living beyond their means' bollocks. And nothing to do with the fact that income has been dropping steadily for most of the population as a percentage of GDP since the 80s, while inflation and unemployment have been raised deliberately - and immigrants imported - to keep pay down.
Bottom line is that dodgy lending is actually quite profitable in the short term. It blows up in the long term, but you'll have pocketed your bonus money by then, and you can always rely on someone like Worstall to come along with the party line about how it's not your fault, oh boo hoo.
Meanwhile, how about a share of that dodgy 32 trillion in offshore accounts? Let's not ask how that got there, shall we?
Politics of envy, old chap. Couldn't possibly be more to it than that.
"We can blame the bankers for making the cheap money available"
Actually, the bankers were merely following the lead of central bankers, who set the interest rates. Central banks denied there was any boom, preferring to say that this was "growth", and with easy money being made from asset price inflation, and ludicrously low interest rates, the scene was set for disaster.
The banks are to blame for their part, and that is a big one in the shape of irresponsible lending. But state controlled central banks are primarily responsible for the daft interest rate policies that created cheap money and made it all possible. Government is also responsible for the lax regulation. And borrowers are responsible if they borrow more than they could repay. And in the case of mortgage lending, government have a further malign influence, in that the planning laws restrict new house building to lower levels than new demand, pushing up prices per se, but also creating the erroneous idea that housing is an "investment".
"Actually, the bankers were merely following the lead of central bankers, who set the interest rates."
And the governments, who encouraged them to provide cheap money to as wide a population as possible so as to get more votes during elections.
I am looking at you, Tony "I Could Have Done Better" Blair, by the way. Those were your cronies installed in the big banks' management who were presiding over the disaster and getting peerages and invitations to Royal banquets in exchange for digging big holes under their banks.
fscked by SHA-1 collision? Not so fast, says Linus Torvalds