Banks Fumble, Taxpayers Punished

The current “banking crisis” has been pretty hard to ignore of late, but here in the WhyDontYou ivory towers, we have tried. Partly this is because both of us are in (largely) economy immune employment sectors and partly (mainly) because neither of us can really fathom the nonsense being thrown about in the news. Given that both of us are required by profession to be mathematically astute (yes, really) it could be taken to imply that the average citizen would be even more lost.

With this in mind, it is entertaining to watch the news about the crisis when it pretty much only shows scared-to-death financial experts going on about weird ways of selling things you dont have (short selling) and how important the banking risk takers are to society. They are so important that the rest of society has to protect them should their risk taking go wrong. Being ignorant of the financial wizardry, this strikes me as being totally insane, let alone unfair. This post (long, sorry) is pretty much a way for me to let off steam about something that is destroying peoples lives and, basically, really annoys me. I would welcome your comments and feedback on my take – if I am wrong, please educate me.

There are two headline examples today (in the UK at least) – The UK Government take ownership of the crap part of Bradford & Bingley, after selling the good bits to a Spanish bank; The American government fails to secure a $700bn line of funding for its banks to keep them safe. (Neither are good news items. Neither are going to reassure people that their future is safe. Do not mistake a light tone here for a lack of concern)

Some Background

UK first. Starting about 20 years ago there was a big rush for building societies to become banks – changing from being basically there for a group of people in one area (eg. Bradford, Halifax) where everyone who paid in was a member to becoming a limited company, where some of the members became shareholders. In the process, especially throughout the 1990s the drive was on for these banks to press hard and return massive profits for the shareholders (often a tiny subset of the Building Societies membership). At the time (and in principle it still does) this seemed a good idea. Most people got a bit of money (sadly for most of the members this was just a bit – around £100) and a few people got lots and lots of money. Everyone was happy.

From this, there was a drive in the finance sector to target more and more high risk trades, where often the winnings were large beyond the avarice of mortal man. City bonuses in the millions ceased to be newsworthy and sales of high end sports cars went through the roof. Being a “risk taker” became the nicest thing you could say about someone. We (the public) were dimly aware that there was a risk it could fall down on the bank (Barings) so we accepted the ostentatious lifestyle of the successful. For some reason we were convinced it was down to skill and intelligence rather than basically throwing dice and hoping for the best. These were people who worked hard predicting the markets and had a rare skill in knowing where the trades were. Or so we thought.

Hidden for most of the time were the downsides to this.

Insane wages in London made the already insane prices there spiral out of control. People began to think that paying £750,000 on a one bedroom apartment was a “good investment.” In turn, this priced even well paid people out of the city, so prices near London went up (often even faster if it was commutable and “nice”). For the last ten years it has been impossible for anyone on less than twice the average wage to even think of buying a house in the south of England, without a hugely fiddling their application – so they did. People overstated their income, understated their expenses, and took insane repayment terms hoping they’d get on the gravy train before they had to pay the capital. Lots of these people had “normal” jobs and were not aware that they were bearing the same risk that the Ferrari driving millionaires living in central London appartments had. The public never benefited from the wins so, rightly you would think, assumed it was safe from the risks.

Wrong. (More on that in a minute)

A similar story in the US (I assume, I have no idea of the background). From my visits, the gulf between rich and poor in America vastly outstrips that in the UK. I have always thought that if you were filthy rich, there is no better place to live than the US, but if you were penniless poor the UK wins. Rich people in America are really rich. I am amazed the poor survive one day to another.

In recent years, the risk loving traders have really had a few field days in the US. Massive windfalls made rich people richer. They took huge risks, which often paid off. People applauded them for having the guts to risk so much, making it hard to condemn them for their salaries and bonuses. As with the UK, most Americans had some fallout from this (house prices going up for example) and people begin to think that property is the best investment, so take some personal risks to buy a house. In turn the bank takes a bit of a risk lending to them, but often at crippling interest rates that will see the bank get its money back in spades.

Eventually, as everyone with hindsight knew it would, the whole system explodes. That is the thing with taking a risk, sometimes you get hurt.

Here is where my understanding and reality part company.

Current events

I have always thought that you took a risk, gambled something for example, sometimes it would pay off and other times it wouldn’t. Some risks are “low risk”: for example, betting that a tossed coin will land on either heads or tails rather than its side is quite a low risk bet – you are a lot more likely to win than lose. Some are “medium risks”: betting on heads in our example. Some are “high risk”: betting the coin will land on its side. They all make sense to us and we live with this sort of understanding on a day to day basis.

The world banks have paid their “High Risk takers” absolute fortunes because they take high risks. This is fair. If I bet £1000 on the coin landing on its side and I won, I would expect to win big, if I bet £1000 on the coin not landing on its side, I would expect to win a tiny amount simply because I wouldn’t expect to lose.

For most of the last two decades, the amazing thing is the risks have (on the whole won). The coin has landed on its side a lot. People have won big.

The problem is people then forgot what a risk it was. If you win something that is high risk enough times, you forget that it is high risk and assume the opposite. The merchant banks have been so successful with high risk ventures, they forgot that “high risk” meant dangerous and plowed more and more money into it. They still throw around the terms, they certainly still paid the bonuses, but everyone assumed it would never happen.

Then the coin came up tails and everyone lost. Everyone who had bet big, lost big.

Oddly, this came as a shock. The great and bold risk takers were mortified. Nothing hits a herd as fast as panic and the trading centres of the west are no different. Contagious fear spread everywhere and a generation of “risk takers” who actually had no idea about risk were the most affected. The less scrupulous traders saw a chance to strip the foundations of fragile structures and asset rich, stable organisations took a massive hit (Bye, bye HBOS). The wonders of a free market allowed short-selling and a few scares to destroy a company with solid resources – can you imagine how scared the rest must have become.


So, in the interests of a free market, the government steps in and saves the companies. The government spends billions of the taxpayers money to rescue institutions that have, basically, gambled themselves out into the street.

This is where I am confused.

In the UK, the government has reportedly taken over a £50billion debt on behalf of Bradford and Bingley. That is effectively £1000 per person so that the demutualised, risk taking, company can survive. Although we were not aware of the risk we were taking, nor did we share in the rewards, everyone of us in the UK was involved in the gambles these people were taking.

The US has the same problem. The $700bn bail out (good idea or not) is a phenomenal sum of money. The high flier financial wizz-kids and their high risk lifestyle would cost every one of the 300 million people in the US over $2000. For someone on federal minimum wage, that is 321 hours work – 40 working days – to save the rich from becoming poor (I know it is not quite that simple). Instead, the poor get a little bit poorer. Wonderful.

The US must be the only modern democracy where funding the rich bankers is a more appealing proposition than giving healthcare to the sick. That confuses me.

To confuse me even more, the news today had lots of talking heads on both sides of the Atlantic saying how it might seem strange but it was vital that the taxpayer (poor) bail out the bankers (rich) because. Often simply because. Sometimes there were vague, dire, warnings about the economy, but most of the time it was just a simple statement. We have to do it.


I don’t doubt that letting one or two banks slip will cause even more panic which will destabilise the economies, but if the US has $700bn and the UK has £20bn going spare, then surely we can weather some rough times. When the average person on the street still has money for shops to take off them, then the economy will still work. In my mind that is where the salvation needs to be pointed.

Equally odd, is this new definition of risk.

If I gamble my house on a high risk deal and lose, I lose my house. Will the government bail me out? (Well, in the UK we have social housing but that is different) It is unlikely. For me, betting on high risk stocks is just that – high risk. I stand to gain but I also stand to lose everything.

If a bank gambles the houses of 20 million people and loses, well they really lose nothing. Poorly paid staff will get laid off but the “risk takers” are immune. The organisation is immune because as long as it cries loudly enough the government helps. For the banks, betting on a high risk is actually risk free. They will either gain a lot, or lose nothing.

Why is this acceptable? Why is this considered normal? Why are we still hearing that it is all down to the taxpayers to save these banks? Why not claw back the multimillion bonuses? Why not fine the fund managers? Why are they allowed to gamble without risk, yet still be thought of as “cool” risk takers?

Crime and Punishment

The most sickening thing about the whole deal is not just that the taxpayer has to suffer.

If, through negligence or design, I caused someone to lose out to the tune of £1000 there are laws that would punish me. If I gambled £1000 of someone else’s money without their knowledge and lost it, I would expect the police to visit me and to end up in jail.

It seems, however, if you do it with enough people then not only does the government step in to cover your debts, but you dont even get punished. In the middle of the credit crunch, UK stockbrokers were still getting massive Christmas bonuses (just not as massive… poor things).

While it often smacks of unscientific voodoo, I accept what the “finance experts” say and that the state has to prop up these failing institutions. However, why should the people who have caused this problem be allowed to walk away? If, for example, the fund managers and directors of each organisation were to be fined in proportion to their participation, the rescue plan’s tax burden would be a sweeter pill.

Alternatively, if this heralds a new era of tightly controlled financial markets, where crazy risks are punished, and these people are not simply able to start ripping the world off again in a few years then, again, it becomes a bit more acceptable.

I think the problem is, this will never happen. The hint that the US bail-out would be followed with government involvement meant that the Republicans stood against the great George Bush and turned down the bill (*). It seems the only way a rescue plan will be approved is if it carries no strings or punishments. Basically, the bankers are free to risk all our money without having to worry…. (Slightly better over here, where we are more accepting of government control and oversight).

What a wonderful world.

(*) This adds an ironic twist. I strongly think that the Republican party expect to lose the next election. McCain/Palin are their idea of a joke. They know the country and the economy is about to tank, and the war in Iraq has gone badly. If they lose the election, Obama will be handed a hospital ball of a presidency. Unless he is truly Odin’s chosen one, come the next elections people will still be smarting from the economic crisis and will be ready to turn to the Republicans once more. Taken in this light, both Bush’s plan to asset strip the country, and the parties refusal to do something that (on the surface) benefits the public makes sense.

Can you be too cynical?

9 thoughts on “Banks Fumble, Taxpayers Punished

  1. T_W

    Reallly good post. I think, if anything, the cost to the average taxpayer must be a lot higher because of the all the children and non-taxpayers who make up the population.

    With regard to the UK, all the public utilities were sold off for peanuts, at the same time and all the traditional bullding societies became “banks”, supposedly because of the wonderful efficiencies of monetarist capitalism. BUT – at the first sign that monetarist capitalism (which is basically completely non-productive) can’t make money by its usual magic tricks, then we all have to pay for it…

    I don’t understand it at all, so much kudos to you for a clear explanation.

  2. Thanks.

    I think, if anything, the cost to the average taxpayer must be a lot higher because of the all the children and non-taxpayers who make up the population.

    Very true – for example my tax burden would be in the region of £4000. Great isn’t it. I feel so pleased I have been part of this risk taking strategy. I have benefited so much from it, the risk seems justified to me…..

  3. I’m not sure not everybody got any benefit. Everyone probably got some benefit (if only perceived) – rising house prices for example, low unemployment during the boom times, and so forth. Although relatively speaking it may be so low as to be worthless, or even negative, as regards to any inflation the boom also helped cause (look at the price of food now). Still, a few people made a decent amount of money as well as the few who made an obscene amount.

    Secondly, is it really the `punitive’ measures which scuttled the bill? At least from the few reports I’ve read so far it seems other issues were at stake. The capitalist `purists’ are upset that it is ‘the first step on the slippery slope to socialism’ – worried about basically nationalising the assets and ‘government interference’. The popularists are basically listening to your line of reasoning – it’s offering a golden parachute to the risk takers while offering a golden shower to the rest of the nation. It’s probably also not insignificantly related to some form of denial of responsibility – if the republicans admit this sort of unprecedented response is necessary, they are also admitting they were a significant element in the worst financial crisis in history. And whomever gets voted in next will be worried about having all that money tied up. And … if it wasn’t going to work anyway, there’s probably about enough time for everything to fall in a heap by the election, whereas doing nothing provides a distraction, and an opportunity to blame others.

    Your last point about messing things up for the next government is something that’s crossed my mind too. 700B would really dent any spending plans for instance. And people’s memories are alarmingly short – a few people are losing houses now, but the hard times are just starting to kick in, and they wont be fixed in 4 years. So who will people remember as causing all the hurt? Then the ‘fiscally responsible’ conservatives (how they get away with that utter lie still is way beyond me) can come to the rescue …

    However, I don’t think McCain and Palin were chosen as a joke … which is a lot more worrisome than if they had have been. Palin was probably a cynical (and apparently successful) appeal to the religious-nut-right and an even more cynical (and hopefully futile) appeal to white women upset with the Democrats over Clinton. Hopefully the VP debate can completely crush Palin, she’s a nasty piece of work. Winning US elections doesn’t appear to be about appealing to the majority of voters, but appealing to just enough of the minorities to cross the line (with a bit of fraud thrown in).

  4. Michael, thanks for your excellent comment.

    I agree, that it is probably right to say there was a larger circle of benefit than I originally allowed – although I claim poetic licence. However, I think that a lot of this benefit was illusionary. If we take house prices as an example: Here in the UK house prices have risen at phenomenal rates over the last 11 years (and plummeted over the last six months…). Other than a small group of home owners who are downsizing, increased house prices across the board provide no real benefit. Sticking with the UK the effect of this monstrous rise has been the gap between “house bands” has vastly outstripped people’s ability to jump – by this, I mean the jump from a 2-bed to a 3-bed to a 4-bed, or from semi-detached to detached. In effect, while the value of a persons house has increased, the money they need to spend to get a better house has increased more.

    I fully agree that the reasons the bill failed (and continues to fail) are much more complex than I could ever understand, let alone explain here. I was, on the whole, simply trying to put forward the objections I would have had against it – had I any say (which I dont).

    I loved your comment about the fiscally responsible conservatives – the mind truly boggles at the denial and self delusion that allows people to hold to that in the face of the current evidence.

    My comment about McCain/Palin was a touch tongue in cheek – although having seen occasional bits of them both, I cant for a moment accept that someone thought either of them would be functional in a position of national command….

  5. Pingback: Do anything when in crisis » Why Dont You Blog?

  6. We had nearly 20 years of good times and this is the mother of hangovers. The people I really feel sorry for are ‘joe public’ who will be paying for this for the years to come.

    Let us hope that we learn the lessons of what pure greed does for the economy and legislate.

    Capitalism with a moral framework is my suggestion. Possible?

  7. Capitalism with a moral framework is my suggestion. Possible?

    Well, I’d like to think it was. The real challenge would be in finding that fine line between allowing the free market to run, while making sure it was regulated enough to keep it on track.

  8. Pingback: Palin - Joke or legitimate candidate? » Why Dont You Blog?

  9. I am a professional and will not be hit very hard by this recession, as I have a secure government job and no mortgage. This is an important statement, as anyone who has a mortgage and an unsecure job will be hit the hardest and that makes up the majority of the population. This portion of the population are going to have to serve a lifetime of hard work to pay of the banks that cause this problem. The same banks that lent them money in the first place , and not cheaply. In Australia the median house price is 350 000 AUD that plus the interest over 25 years and it comes to about 700 000 AUD. The same banks that dont really do anything, they just use your money to make more loans and charge you more interest. They are the keepers of money, they govern whether a country goes to war, they fund the war and sometimes the other side, its historical. Why cant banks just look after the money and charge an fixed interest rate and leave it there? Why should they parasitically steal money from the existing pool of wealth.The unchallenged institution that until now has not really been questioned, should be revised, broken down and re-established for the peoples interests. It is important for us all to knock our heads together and build a new world. One in which education, health with a global community working together to feed everyone and drive technology beyond its restricted monetary system shackles. I believe that this is possible.

Comments are closed.