Some Labour figures seem to see this recession as pay back time for past recessions. This was to be the recession that hit the south more than the North, hit higher earning services more than manufacturing. This view is as wrong as it is unpleasant.
Today’s news of big job losses at Corus follows hard on the heels of short time and job shedding at the major car assemblers and component makers, and in many other manufacturing companies across the country. This recession is hitting manufacturing all too hard. A number of the companies sacking people are efficient and well run by world standards. Their managements have caught up with the best in the world, and their workforces have done what has been asked of them. The UK is no longer the sick manufacturing man of Europe, bedevilled by weak management and striking workforces. At its best there is a common purpose between leaders and led, a willingness to do what it takes to be competitive in a very competitive world.
At the same time we see the sorry spectacle of a couple of banks, RBS and Northern Rock, still paying huge salaries and bonuses to senior executives who have presided over disaster for their institutions. Their business models failed to survive in the dangerous waters of UK banking and monetary policy. They paid themselves too much for doing things that lost their banks huge sums of money as asset prices fell and financial instrument markets became untuned. They became huge , costly and complex bureaucracies that did not necessarily serve their banking customers well. RBS was allowed by shareholders and Regulators alike to go on a bizarre acquisition spree near the top of the market, heaping debt on debt on its huge balance sheet. Why can’t the government see this, and at very least cut the pay and bonus extravagances at the top end dramatically?
The government claims to be interested in social justice. Few of us can see much justice in subsidy for the banks and tough rations for the manufacturers. The government is right in one thing – lettting a major bank go under would not be a pretty sight. They are wrong that they needed to buy shares and effectively subsidise their bloated costs and wrong business model. They needed to lend short term, whilst putting pressure on the borrowing banks to cut their costs substantially and quickly, and to dispose of activities that did not relate to core banking in the least damaging way.
I am pleased that at last the regulatory authorities have taken the point that I and a few others have been making that they need temporarily to relax the capital requirements on UK banks. I read in the week-end press they now want the banks to have a minimum ratio of 6% share capital to total liabilities, instead of 10%. That means that for every pound of share capital a bank could now put £17 to work, instead of £10, which will help ease the squeeze. It will not mean that foreign banks, also reining in, will necessarily become very active again in the UK. I also detect in the latest briefings to the press from the government, Bank and UKFI, signs that they are now ready to look at cutting the huge risk taxpayers are running in RBS by selling or winding down the investment banking activities and selling some more of the non UK businesses. Please may this be true – it is much needed to try to make RBS a profitable organisation again, and is certainly needed to protect the taxpayer from yet more scandalous losses.
January 26, 2009
Banking is plagued by overcapacity and thin spreads because costs were not under control. They thus expanded into ever-riskier areas of business in search of speculative profits even to the point of investing capital in buyouts – what Wall Street called “Merchant Banking” – direct opposite of traditional Merchant Banking and Trade Finance.
Deutsche Bank was founded by Siemens and banks as ancillary to industry and commerce is preferable to own-account trading and churning of real businesses for transactional fees and leveraged re-capitalisation.
Lloyds was the only major UK bank not to have an investment banking presence and rated sixth safest in the world, but Brown and Blank loaded it with HBOS to drag it down. Banks need to return to Branch Banking with local knowledge and financing local businesses they know and understand. It is centralised corporate banking that has destroyed Trust just as centralised government has destroyed Trust.
The Government lauded globalisation but it was never more than subjecting local economies to hot money flows channelled into the banking system for credit expansion – the downside risk was ignored. There are only two sides to a balance sheet yet PFI and Derivatives are hidden in a distinctly third area of SIVs and in tax havens. It is time to truncate RBS risk and cut them adrift
January 26, 2009
TOMTOM…Don’t let’s forget that Mr Brown heaped praise on the City with this memorable line at a dinner less than 3 years ago:
21st JUNE 2006
Your dynamism has led Britain to innovate in the most modern instruments of finance”.
No doubt he was as pleased with them for helping devise derivatives as he was with himself for the deceit of PFI!
It probably goes alongside that other memorable quote of his, also to a City audience:
26th SEPTEMBER 2005
“Britain uniquely has continued to grow. In any other decade a house price bubble would have pushed Britain from boom to bust.”
No wonder, just 3 years on, The Great Leader’s decade is known as The Noughties!
Just what qualifications did he ever have to become our Head Honcho – Finance?
January 26, 2009
‘Needed ….. putting pressure on the borrowing banks to cut their costs substantially and quickly’
Look however at where the principal offenders, RBS and HBOS are located – Scotland and the North. These are areas that are regarded by Labour as key electoral assets. This is why the inevitable and necessary culling of jobs and other oveheads to reflect the new realities of scale and the need to return to profitability and capital stability is not happening. Instead tens of billions of taxpayers’ cash and future debt is being used, in part at least to underwrite this government’s prospects come the next election.
January 26, 2009
Is this the banking industry’s equivalent to the LMX spiral which devasted the insurance market in the 80s?
The Banks were confined to lending by capital constraints as per BIS weightings and FSA regulation. They devised smart ways to circumvent these constraints (“CDS etc”). They lent ever larger amounts of money to companies, banks and governments worldwide and sold the “risk” on, thus enabling them to pitch for the next ever larger deal without seemingly impacting their balance sheet. The deals for the borrowers became cheaper and cheaper because of the false liquidity pumped into the system and the margins became divorced from reality. When people questioned pricing they were told there was so much liquidity in the market which had to go somewhere. Only an event which impacted liquidity would enable pricing to return to correct levels.So we now accept that this excess liquidity was largely illusory. The credit derivative market alone which started in 1998 now represents globally approx $70,000bn.
The hedge funds also evolved in part to circumvent the regulatory burdens the banks were subjected to. That was fine whilst the funds were using their own money. Banks were, to a great extent, genuinely selling their risk off balance sheet. The spiral/circle kicked in once the banks started lending to the hedge funds, which were created to circumvent regulation which broke the house that Jack built.
What concerns me now is the clamouring for more regulation. Yes, regulation failed and is at the heart of today’s problem , but we need to be extremely careful. We are where we are today, due to the unforeseen and unintended consequences of guess what, regulation.
The present system of regulators, senior management and auditors have failed totally. They can not feign ignorance since it was known by all in 1998 that systemic risk and contagion from the failure of just one hedge fund, LTCM was so great that the US Banks had to bail out LTCM. Given that Alan Greenspan and senior bankers, auditors and regulators were aware of the risks in 1998 why did they permit both the hedge funds and the CDS market to grow exponentially?
I have a friend who is a consultant surgeon. If he is negligent he could be imprisoned. If one of his team working under him was found to be negligent my friend could still be imprisoned. Why should bankers be treated differently?
I was always taught that there was a link between risk and reward? What risks have these senior bankers exposed themselves to?
I truly hope we in Britain ensure that we pursue in our courts those regulators, senior bank managers and auditors who are found to be negligent , fraudulent or both.
January 26, 2009
When the Bank of England was in charge up to 1997, alongside Kenneth Clarke, the then existent regulations avoided the current mess.
Now the Treasury, the FSA and Bank of England (let alone the MPC) seem to be all at loggerheads.
My question is this:
Is the FSA a tool of the EU?
If it is, is it actually within the power of the Treasury or the government to control/abolish it?
Reply: No a tool, but there is now a lot of EU and global regulation, some of which was dangerous.
January 26, 2009
Doesn’t this just confirm that Westminster is run for the Benefit of the International Moneylenders.
The Current crisis will be a fantastic buying opportunity for them to further consolidate their grip on the Worlld
http://adrianpeirson.spaces.live.com/default.aspx
January 26, 2009
Charles Clarke in the Telegraph last Saturday made the excellent point that the government is much too close to the bankers. We have already heard a lot about tennis and Lord Levy. We have seen Peter Mandelson on M. Deripaska’s yacht. We have read about the knighthood of the RBS chief.
All a bit cosy.
Did you see the excellent programme on TV about the Great Crash of 1929? FDR’s first act was to sort out the banks. Then he put Kennedy – one of the chief players – in charge of regulation (a fox in the chicken run). That regulation lasted right up until President Clinton.
We, the general public need some justice for our money. We need to see that they, who caused all this anger and worry, get what they deserve.
At the moment we do not see that at all. Just the opposite.
January 26, 2009
It was chilling to see how many similarities there were in 1929 to today’s sad situation. We were led to believe that Bernanke was an expert on the events of 1929 – 39 (or was he not looking from the sidelines as all this was building?) – and of course that The Great Leader was not only a keen student of history but an expert on all things financial!
January 26, 2009
JR wrote:
> I read in the week-end press they now want the banks to have
> a minimum ratio of 6% share capital to total liabilities, instead of
> 10%.
Dear God, how long did it take them to realise this most basic of ideas? and these are the people with legal power to impose arbitrary new rules on the banking industry!
This will help in its way, but the basic problem is that private investors are absolutely avoiding British banks because of the arbitrary, unpredictable and unfair actions of the UK Government.
Private capital will only invest when they know that if the bank goes under, they will receive what they ought to receive – typically a partial return of their investment. Right now, they know well that there’s a perfectly good chance the UK Gov will act in such a way they get wiped out.
Because of this we are now experience *creeping nationalisation*.
By this, I mean that the Governments actions to date in handling the crisis have ensured that it and it alone will pony up capital for the banks – no private capital will, because of fear of Government.
Since the Government is the only source of capital, sure enough, it will as the crisis proceeds and further losses become public, commit more and more money to the banks, taking more and more of them over.
Basically, the UK Government has arranged its own fate by its own actions – a self-fufilling prophecy.
We would have done better, I think, if there quite literally had been *no Government intervention at all* and instead, we permitted banks to find private capital sources and conducted the game by the existing and well understood rules and regulations for handling companies in difficult situations.
Introducing a whole bunch of new, unpredictable behaviour where private capital is wiped out will, surprise surprise, ensure that private capital plays no future part in recapitalizing the British banks.
At this point, I predict the nationalisation of almost all UK banks – HSBC being the exception. The pound will I think be completely hammered by this outcome – parity with dollar, perhaps 0.65 euro to the pound. I’ve recently been advising friends to move 20% of their assets into a euro denominated account, just in case – you can get these from any UK bank.
January 27, 2009
I wonder whether a relaxation of the capitalisation requirements will have the effect intended. It seems to assume that the banks are itching to lend more but cannot because of the need for a 10% reserve of capital.
If I were responsible for taking lending decisions my mind would be set firmly on the risk presented by the customer and business proposition put before me. Only once he gets over the hurdle of satisfying me that the money advanced is very likely to be repaid does the question arise whether the bank actually has the money available.
We are seeing already that overextended house buyers are starting to default in significant numbers. No sensible bank will return (in a hurry) to that type of risky lending. We can expect them to apply stringent LTV limits and lower multiples of earnings for quite some time.
Now attention is being concentrated in some corners on the massive increase in business credit over the last decade. The current recession will cause increased default in this area as well, thereby adding to the pressure on banks to be cautious in their lending policies.