Tag Archives: Banking

In the kingdom of the blind

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(This is my attempt to play one-eyed man in the kingdom of the blind. And rant. About money.)

The BBC’s Have Your Say invited people to comment on whether they are “worried” about the collapse of sterling to approximately the level of the Euro.

Most people – including me – understand absolutely nothing about international exchange rates beyond whether it will cost more to go on holiday. So, you could predict that most commenters would be complaining about not being able to spend as much in their fortnight in Spain. With the odd exporter or hotelier seeing it as good for their business. Fair enough.

Harder to understand are those commenters who see the collapse in the value of the pound as the fault of the UK Labour government (which they also persist in seeing as being committed to socialism, in the face of the evidence of years of NewLabour devotion to the demands of big business. )

Ignore the fact that even Bush’s government has gone further towards nationalisation than has the UK government, making at least some demands in return for the injection of billions into the banking system. Our government can’t even make the generously-supported banks respond to the interest rate cuts that were made just so that they’d pass them on and lend money.

Can people really not see that the near collapse of the western economies is:
(a) the result of the workings of capitalism, pure and simple. Capitalist economies must have boom and bust. It’s inherent in the system. How did we delude ourselves that a few years of relative prosperity in the system somehow meant the end of history?
(b ) global. We’ve been going through decades of globalisation. No one government can shape the global economy. If any one country can have a real impact, it would have to be the US. The UK is just a bit player.

Free movement of capital, freedom of currency markets, and so on. All that Chicago School economic bullshit that convinced global governments that allowing the rich to keep on getting immeasurably richer was necessarily good for everyone.

My inherent cynicism about the economic system was shown to be actually childishly naive by the Madoff story. The BBC finally gave it a billing today, under the headline “Banks hit worldwide by US fraud” (showing that the UK is just as bad as the US when it comes to ignoring any news that doesn’t involve its own nationals. It’s news, now, only because British banks have been seen to have been ripped off as well.)

Some of the world’s biggest banks have revealed they are victims of an alleged fraud which has lost $50bn (£33bn).

$50 billion dollars. A fair proportion of the amounts that taxpayers have stumped up to prop up the banking system. That’s a good few dollars for every person on planet earth, including the millions who never see a yankee dollar’s worth of cash from one week to the next.

The head of the Nasdaq. LOL seems inadequate, but I’m saying it anyway. That’s the head of the Nasdaq. Whole economies rose and fell on the whims of the Nasdaq.

US prosecutors say Mr Madoff, a former head of the Nasdaq stock market, masterminded a fraud of massive proportions through his hedge fund and investment advisory business.
Mr Madoff is alleged to have used money from new investors to pay off existing investors in the fund. (from the BBC)

Isn’t that called a “long-firm” con, in the criminal world?

Who would imagine that national Serious Fraud Offices and Securities and Exchange regulators and the heads of international banks wouldn’t spot one of the oldest scams in the Book of Old Scams? They really should have read more crime novels and “true-life” gangster confessions. Because reading balance sheets doesn’t seem to have been their strongest suit.

I love this casual aside in the BBC report. (That’s “love” in the sense of “grudgingly admire the bare-faced cheek while being incredibly grateful that I’m too poor and profligate to have any money to invest”)

Among the potential losers is Spain’s largest bank, Santander, which owns the UK High Street banks Abbey, Alliance & Leicester and Bradford & Bingley.
The bank had a direct exposure of 17m euros ($23m; £15m), but clients of its Optimal fund management unit have another 2.3bn euros invested in the firm run by Bernard Madoff.

So the bank lost 17 million euros to the scam. Small change by the standards of current losses. On the other hand, the customers who trusted the bank’s investment nous lost 2.3 billion euros. (2.3 billion euros: savings, pension funds, jobs, services, yada yada yada.)

Inside or outside the casino, it looks as if “the bank never loses.” Well, not its own money, anyway.

Terrorism in the 21st century

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Go on home Osama Bin Laden, you are so last century in your, frankly pathetic, attempts to destroy western civilisation. For over five years now we have heard the mantra about how evil Islamic Terrorists want to destroy the decadent, freedom loving, west and how they will try to bomb us into submission.

Basically they are just impatient amateurs. If they wait long enough we do it to ourselves.

Lets look at the world of 2008:

In my job, I travel by air a lot (*) and as a result get constantly annoyed by the idiotic rules we suffer under the guise of “security.” I get monumentally annoyed by the fact that I have to check in hours before my flight, but should I want a drink during the inevitable two hour delay, I have to pay extortionate airport charges because 101mls of water is deadly (while 99mls isn’t). I get really annoyed at the obnoxious attitude most airport security staff have – although, in all fairness this is probably a reaction to suffering annoyed passengers day in, day out…

Outside work, I am a hobby photographer. I love taking pictures on my travels and feel that the cities and towns of my own country are on a par with anywhere else in the world. However in the new world of “Security” taking photos in public places of tourist landmarks results in a uniformed member of the public (**) coming up to me and asking me what I am doing. Thor forbid that a terrorist group be inexpert enough to need to overtly set up a large Digital SLR to take photographs rather than use a mobile phone or compact camera (the millions of people doing that get ignored…).

Travel around the UK and you will be recorded on CCTV along pretty much every urban street. Go into a shop and you will be recorded on CCTV. Drive along the road and you will be subjected to all manner of electronic surveillance – because, basically, you cant have any expectation of privacy in a public place (***). Despite the idea all people are innocent until proven guilty, the government have decided that Islamic Terrorists are different and the state should be able to imprison them for 42 days before it has to show enough evidence to make a charge, let alone convict. Thank the Lords this has been rejected (for now).

In the UK, religion has always been a minor part of public life and thank Odin, this is still pretty much the case. However, since the Evil Islamic Terrorists appeared, there has been a (so far minor) upsurge in people equating “Christian” with “British.” As such, an attack by Islam on Christianity is being sold as an attack on our fundamental “Britishness” to the point at which the tabloids and tacky local TV have people talking in all seriousness about how the United Kingdom is a “Christian nation” and “Britain was founded by Christians for Christians” – obviously these historically challenged dullards are watching too much American propaganda but that is another issue.

This is the non-religious, freedom loving, civilisation that is so threatened by Islamic terrorists. Hmm. Osama would love it here. Ironically, even our recent fear-inspired legislation wasn’t quite enough to smash western civilisation.

Trumping an army of Osama Bin Ladens, when it comes to smashing down western civilisation the real master is simple free market economics.

It is a sad state of affairs that we can pass laws regulating every aspect of your private life, but even in the face of an economic melt down the thought of regulating “The City” is beyond the pale. City traders can, effectively, lose millions of other peoples money with not even a hint of censure – still getting huge bonuses on the eve of begging the taxpayer for a fortune to cover their losses. The crazy irony of this sees us giving them money so they can give it back to us and tell us it is our own savings… Despite their monumental failings, and complete lack of anything resembling expertise, the banking sector still claims it “knows what it is doing” and should be allowed to function unregulated. Can you imagine catching a con-artist stealing your money, then giving them more money because they know how best to get your money back!!! Insane is an understatement.

The collapse of Iceland’s banks, and their governments apparent refusal to honour international agreements, has caused huge damage to the UK economy – on greater scale than any caused by terrorist attacks (if you ignore the cost of ensuing wars). If I deprived my next door neighbour of £100 I would expect to be arrested and probably jailed, however it seems if you add a few extra zeros everyone forgets about it. Iceland basically have held a gun to the governments head and taken our money. Wars have been fought over much, much less.

In an amazingly scary example of economic understanding, the Conservative shadow Chancellor said that the government should reimburse the councils that lost money to Iceland otherwise council tax would have to be increased to cover the loss. This seems sensible until you realise the effect would be to increase the tax burden on everyone to cover the mistakes made by a few. How would that be fair? Is this what we are to expect from a Conservative government?

I agree with the Government that the national banks and banking infrastructure is critical to the well being of the United Kingdom. I also accept the assertion that it is so important, spending £50,000,000,000 to shore up a system broken by greedy, selfish scumbags is in the public interest. I accept that this will mean other aspects of the national infrastructure will suffer and I accept that this is a necessary evil.

What I cant understand is:

  1. How can something so vital to the nation be outside complete government control? More importantly, how can something so vital be so heavily influenced by foreign nations which, when push comes to shove, have national self interest at stake? This really confuses me.
  2. Why is no one being punished for this? The bank failings are either malicious (in which case why don’t we invade a random country like we’ve done in the past) or negligent. Or both. The claim this is just the “market” is nonsense – the city traders claim to be financial wizards but abjectly failed to see this happening – either they are crap or they were played. Either way someone should be held accountable.
  3. Why the **** haven’t we enforced rock solid legislation to control such a critical asset? We’ve spent over £1000 per living person in the UK on them, why aren’t we having any say in them?
  4. How on Earth are the bankers getting away with claiming they “know best” on how to handle the current situation? (See 2) Blatantly they don’t or if they do, they are working against the national interest.
  5. Why are UK public bodies (Police and councils) allowed to invest money in foreign institutions? The quest for an extra percent of interest has meant public money is being sent to a foreign nation. Let me reword that – money paid by UK taxpayers has been given to a foreign country. Rather than invest in the UK economy dozens of UK public bodies chose to throw it down an Icelandic toilet and when they inevitable happened they cry to the government for more money….

I am going to have to stop here. The madness makes me want to scream. If anyone can explain this to me I would be very grateful.

—

* Apologies to environmentalists, but unless you are willing to pay me not to fly, my choices are limited.

** Sometimes referred to a “Police Community Support Officers” but that implies they are trained members of the law enforcement community, when in reality 75% of them are nothing more than jumped up busy bodies who get to wear a hat.

*** Well, this is true by definition. However there is a “spirit” of the law thing to consider. While you cant realisitically expect to be private walking down the street you can expect the state to not surveil your every movements. While it can be argued that the almost blanket CCTV coverage is not directed against you, the fact remains it is possible for someone to retrospectively search the databases and track your every movement. The fact the surveillance is directed against 65 million people doesn’t stop it being directed.

Links regarding current credit crisis

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Well, this is still quite big news globally so here are a couple of interesting links that give viewpoints and opinions regarding the whole deal:

First off – I detest Michael Moore but this is interesting: http://www.michaelmoore.com/words/message/index.php?messageDate=2008-09-30.

An argument from the other side: http://www.americablog.com/2008/09/why-im-still-concerned-about-yesterdays.html. The comments here are a mixed bag and, IMHO, capture a great snapshot of the confusion most people are experiencing regarding this.

Banks Fumble, Taxpayers Punished

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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.

Risk?

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.

Why?

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?