I have been asked what I think of Mr Obama’s comments on bank regulation. I think they are good modern politics. For Mr Obama, it was bash or be bashed.
The US public – like the UK public – were not happy that so much of their money was tossed into propping up banks, or put at risk underwriting them. They became livid when those same banks, a year later, were busy paying their top executives mega bucks in bonuses as if nothing had gone wrong, as if they had earned the money by their own great talents.
Mr Obama has just had a very bruising encounter with the US electors. Both the winning and losing candidates in Massachusetts stated that the big issue was Obama’s very own unpopular health care plan. Mr Obama says he is quietly parking or delaying the offending big idea. Now he needs to change the topic and find people and institutions more unpopular than himself. Enter the bankers.
Like many modern politicians Mr Obama is good at moods and soundbites. He ought to be, as no doubt they spend a fortune tapping the mood and polling the words. So far he has proved useless when it comes to executive action, unable to develop honed policy and put it through. Closing Guantanamo was a great soundbite, but a year on it hasn’t happened. Changing the approach to the Middle East with a new kind of foreign policy sounded good, but the intensified Afghan war looks like Bush mark two. Offering healthcare to those who could not afford it sounded heroic. Instead many middle Americans feel threatened with higher cost health care and higher taxes.
So what is Mr Obama offering for his new banking policy? We do not know. There were two short paragraphs, designed to send a single message – he welcomes a fight with Wall Street. It worked with the tabloids, but it is scarcely a considered policy towards banking regulation.
He also implied that some banks were too big, without defining how big a bank should be and without naming the ones he had in mind. He wants big banks to get out of hedge fund activity, proprietary trading and private equity.
If he had bothered to thinik about the crisis we have lived through, he would have noticed that the two biggest catastrophes in the US were Freddie and Fannie. These are both specialist mortgage banks, brought down by advancing too much mortgage to too many people. His remedies do not tackle that issue. He might have spotted that Lehmans went bust. That was a specialist investment bank, that would also be unaffected by his two paragraphs. If he had looked across to the UK he would have seen that Northern Rock, Alliance and Leicester and Bradford and Bingley were also all specialist mortgage banks.
Out of his soundbites could come a sensible policy. As readers will know, I do want the two UK state owned mega banks broken up. They were too big to fail and too big to bail. The break up of banks that needed taxpayer support and might need it in the future is a good idea. Ensuring that in future they have more capital at the dangerous stages of the cycle would also be a good idea.
So was George Osborne right to back Obama? Yes, he played it shrewdly. He welcomed Obama’s interest in better banking regulation, and said it must be done globally. He also implied that Mr Obama’s message was the beginning of a long process of negotiation, not a settled answer for the world. That would be a kind way of putting it. Mr Obama came up with a bare knuckles soundbite. Maybe sometime the governments of the world will get round to getting some justice for hard pressed taxpayers, who were made to put too much into propping up some banks that did not not deserve it. They should have helped depositors, but they should not help bankers pay themselves too much.
January 23, 2010
It's too easy to extrapolate optimism from a small amount of information.
If Mr Obama forces the banks to dismantle to a manageable size, and if Mr Osborne believes in a global solution, we might all have a safer banking system eventually.
However, the more countries have to co-operate, the less chance of anything meaningful happening.
I would like to see official Tory policy being to break UK registered banks into protected retail, and lightly (properly) regulated investment. This can be done without reference to the rest of the world, leading by example.
It also means that the "genuine" banking talent can still work in the high-states investment world of the Square Mile, while leaving the poor beleagured tax-payers with less liability.
January 23, 2010
No George Osborne has not played it shrewdly, for in consistently running at the head of the populist pack that is looking to bash the bankers he has let Gordon Brown off the hook, for if its the bankers to blame then its not Gordon Brown whose to blame for our economic mess.
Yes bankers have to answer for trashing their balance sheets, BUT the architect of our economic plight was Gordon Brown, who right from day one when he raided pension funds, has raped prudence and set us on the course for a binge economy built on property speculation, collapse in savings levels, rampant consumerism, debt, public and private, trade deficits etc, the bankers imperilled their banks by feeding this binge economy though the buck stops with Brown. Yet when do we hear George Osborne lay out this argument to the public? If he has then I missed it, but I don’t believe he has and this is a serious failure of the Shadow Chancellor.
May be armed with a modern history degree and no experience in financial matters George Osborne doesn’t have the wherewithal to argue something differently , preferring instead to find out which way the mob is rushing and trying to put himself at the head of it.
January 23, 2010
Iain
You are absolutely correct.
Gordon Brown is doing an excellent job of covering his backside by constantly blaming the Bankers for all of our ills.
The ploy unfortunately seems to be working, as all of the media, and all opposition Parties seem to be joining in.
In my conversations with many of my Customers (the general public) most seem to believe in this spin, and believe that the collapse of our economy is all the Bankers fault.
The Opposition HAVE TO BREAK this argument, otherwise I fear Gordon may get away with it.
January 23, 2010
Iain, I have to say your analysis of George Osborne is dead right. Confronted with the biggest series of financial failures in half a century he has been utterly anonymous, and the latest squeak from him is farcical. Cleary a man unsuited to the post to put it mildly. Off the top of my head I can think of half a dozen MP's who would be better and some candidates are obvious.
I wonder if "Call me Dave" can see the wood for the trees?
January 23, 2010
Spot on, Geroge Osborne is a liability for the Conservative party, but it is too close to the election to change.
January 23, 2010
You are absolutely spot on…..
Unfortunately Mr Osbourne's recent performance is indicative of the Conservatives' performance in opposition as a whole.
In opposing what has surely got to be the worst government this country has seen in living memory (if not ever), the Tories should be lightyears ahead in the polls.
Their constant faffing, vagueness of policy, and (as you mentioned) chasing popular points-of-view gives no re-assurance to the millions of voters desperately seeking a way out of this socialist madness.
Of course I don't blame them entirely, given the levels of coverage given to supporting the Labour perspective by all parts of the MSM. However, the Tories have been seemingly silent whilst the country falls apart around our ears, and I refuse to accept they couldn't have made their point – or made it publically – if they wanted to – or more importantly, if they had one.
With no difference between the outcomes of voting for any of the "big three" in our elected dictatorship, I find myself hoping the Tories lose the election, as there is a miniscule chance CMD may be replaced by someone who DOES know how to talk to the electorate, and more importantly, does know how to stand up to the government.
January 24, 2010
Iain: "preferring instead to find out which way the mob is rushing and trying to put himself at the head of it."
Exactly.
This is the behavior you would expect of a party that has abandoned principle in an attempt to court popularity.
It's largely why I despise the modern Conservative party. Having voted no other for the first twenty years of my voting life.
January 23, 2010
Politicians use the media to gain votes and re election: banks handle money and mortgages. For this reason, I think politicians ought, as far as is humanly possible, to keep well away from banks.
I just hope that Mr Osborne, if elected, is going to withdraw the guarantee from the banks so that we do not have another Iceland.
But, having said that, thank you for putting it so very clearly. It is always nice for an ordinary punter to know what is going on!
January 23, 2010
JR: "It worked with the tabloids"
It also "worked" with the stock markets judging by their falls.
January 23, 2010
Well, Obama's and Brown's doing all they can for hard pressed taxpayers hasn't extended to holding Skipton's rates as pledged and promised. The pair are truly pathetic.
January 23, 2010
Skipton are absolutely correct in their action. You can't have a banking system perpetually run on the principle of savers giving to borrowers, as the government have effectively forced at present. Eventually, people will wise up and simply move their money into foreign banks, commodities, and other investments.
January 23, 2010
I totally agree. My point with regard to Skipton is that they should never have been put in this position of welching on their promises. Ergo, the whole bail out was wrong and interest rates were and are, far too low.
January 23, 2010
Agree completely. My own MP (Vince Cable) is extremely disingenuous on the subject. Whenever he can he seems to bang on about 'Casino Banking' – referring to the investment banks.
What Vince knows is this: Washington Mutual, Northern Rock, HBOS : all failed without the help of an internal investment bank.
Just as you've mentioned in the US, Fannie and Freddie the biggest train wrecks of them all.
So, whilst the issue – do you split wholesale from investment banking may be valid, it is disingenuous of politicians (like Vince) to imply that the economic recession was due squarely to investment banking.
Obama and the Democrats lost of the Massachusetts election, so this was angry Mr. Obama's response.
January 23, 2010
All true.
A thought on Obama. My view is that he is a Black Blair. All mouth and trousers. A great rep with a crap product.
But, as an emblem of what a great people can achieve he is unmatched. Voting in a black (or mixed race if you prefer) man as President of the USA is a massive one in the eye for all the totalitarian theocratic or other fanatics around the world. It demonstrates an astonishing commitment to the principle that any US citizen can become presisdent. Proper democracy.
January 23, 2010
As to "emblem" I agree.
Obama would probably make a better fist of a very difficult job with twenty years more experience so better to know the value of conflicting, "expert" advice available to him.
January 23, 2010
It is sensible electoral tactics to find somebody else to blame & divert attention to beating them. It worked with the German nationalists after WW1 & has had some success with Brown blaming the bankers for how badly the ciountry has been run. It is not however good administraive tactics unless the terget really is responsible – I would like to see the Conservatives making the fact that more than 50% of the economy is government spending & that this & the consequent regulations are the prime reason for our failing economy.
January 23, 2010
I welcome Obama's entry into the fight against bankers. The bankers attitude of heads we win ,tails you lose is maddening to investors, borrowers and savers alike.
The parasites must be dealt with.
January 23, 2010
Well you might wish to ponder who has created the moral hazard, no-lose position for the bankers in the first place?
January 23, 2010
I think that the solution will only come from market forces.
We need two or three new players who will provide serious, safe narrow banking for the general public. My estimate is that 80% of the public do not need full service banks 'too big to fail'. Most people just want a basic service, their money kept safe, high customer service standards and reasonable charges. The existing banking oligopoly does not provide this. The public dislikes casino banking and the telephone number bonuses associated with it.
I think that the mantra expounded by Lord Mynors – that the state-owned banks are perfect and do not need to be broken up – is completely inexplicable. Who is writing his script for him?
I hope that if a Conservative government is elected they will create an environment conducive to the entrance of new players.
January 23, 2010
Obama's announcement has already thrown one deal into an uncertain future. RBS is in negotiations with JP Morgan's Blythe Masters (she who invented credit derivatives) to sell their 51% share in Sempra, the commodity trading arm for $2bn, according to "The Times". It does at least represent a profit on the $1.35bn they paid for the stake just as the financial bubble was bursting in 2007, albeit Sempra (a Californian utility business originally) bought the whole business as AIG Trading Corp. in 1997 for $200m (perhaps AIG would have done better to remain in commodities rather than expanding in credit derivatives). The threat is that profitability would be impaired if the unit was banned from proprietary trading under JP Morgan ownership, and thus its value is said to be in doubt.
The logic of this is that the business would be worth less on a stand alone basis, rather than being part of a megabank. Presumably as a stand alone business, it would be as free to indulge in proprietary trading as say Glencore, and there is no reason to suspect that the traders' acumen is affected by who owns the business they work for. As part of a megabank, if anything a commodity trader would have improved access to a client base for so called non-proprietary customer business – but a ban on proprietary trading would not prevent this part of the business being retained. The synergistic value of the proprietary trading element must therefore come from plentiful access to capital on more favourable terms and the added insight gained from observing customer order flows.
At the same time, there is more discussion of the Skipton Building Society. Its problems stem from lack of access to preferential rate funding from the BoE that many of its competitors enjoy (at least unless it fails and is bailed out) and strong competition from e.g. NS&I for retail deposits (another arm of government borrowing paying out 3.95%).
Both these examples illustrate the dangers of rigging markets to permit banks to re-capitalise, and point to elements that will be needed in the future to produce level playing fields.
January 23, 2010
If one or other of our major parties wishes to trump President Obama's proposals may I suggest legislation to reopen Execution Dock as part of a new drive for financial regulation?
January 23, 2010
The crux of the problem is to insure bank deposits so that in the event of a bank collapse depositors are reimbursed. That's what the people want.
The obvious solution is to make available safe accounts which are certified and indemnified by the government. Banks offering such accounts (within their range of offerings) will be restricted in the risks they can take with that money and have to report frequently to the FSA about those accounts.
If a bank collapses then depositors in the certified accounts will be reimbursed and other money will be deemed to have been invested at the customers' risk and therefore lost.
There would be no need for difficult legislation defining whether or not banks are investment banks or how big they can be.
The simple answer is the best.
January 23, 2010
How about inviting all those nice American banks to relocate to London?
January 23, 2010
The collapse of our building societies and Fannie Mae and Mac are symptoms of the disease – the festering sores of the plague, but not the plague itself. The real problem is CDOs; the slicing and dicing of debt obligations into packages, sold on supposedly to spread risk but in practice spreading the plague. These CDOs were all rated highly by the credit rating agencies, whose fees are paid by the banks. Such were the fees obtained from buying and selling these instruments that almost all banks had to get their snouts in the trough – to the extent that they ended up without any idea of the extent of the risk involved. A classic case of "pass the parcel."
It is not good enough to blame the mortgage boys. The blame falls squarely on the banks and the sooner we return to a form of Glass-Steagall, separating utility from casino banks, the better.
I find it instructive that John Redwood deliberately sidesteps the main issue. Does he work for an investment bank?
Reply: No, I do not work for an investment bank. The main part of the Crunch occurred in mortgage related areas.
January 23, 2010
Aren't the bankers' bonuses a sign of super-profits? In a free competitive market wouldn't these be competed away? In a normal company wouldn't the shareholders benefit? Why do the pension funds etc let them give away these profits as bonuses?
I'd really like some answers
January 24, 2010
And now Obama is a star. He is featured in a movie– exposing greedy hedge funds and market manipulation called "Stock Shock." Even though the movie mostly focuses on Sirius XM stock being naked short sold to hell, I liked it because it shows the dark side of Wall Street. DVD is everywhere (ad left out)
January 24, 2010
Could it be bankers' bonuses are just part of reducing risk (assuming the products they're trading in aren't systemically toxic)?
In defence of bankers' bonuses
January 24, 2010
Gordon Brown, and not the bankers, caused this crisis. It was he that allowed
the money supply to grow by 300%, he cut the minimum reserves for banks to
a quarter of their historic levels, and he left a 60 trillion dollar
credit derivatives market completely unregulated and traded OTC ( over the
counter ). Blaming the bankers is just the politics of envy and lets the
government off the hook.
Secondly, breaking up the banks is pointless and IMHO a mistake. In the first
place it is a misnomer that the banks were to big to fail. The banking
industry is extremely competitive but because of mis-regulation the whole
industry was tetering on the brink. They had inadequate reserves due to
government regulation and the credit derivatives market was and is necessary
for liquidity in the inter-bank lending market. Lehmans was the first to fail
( go into bankruptcy ) but if any of the global players had failed in that market
then the whole lot was ready to fall like a pack of cards.
If BICC or Kleinworts had failed at the time lehmans failed then they would
have caused to domino effect. It was the whole banking system that was unstable
not individual banks that were to big to fail.
Also, breaking up banks can not increase lending. The banks have a fixed
quantity of capital and if you break them up then you split up their capital.
This in tern makes the broken up banks weaker. In the current market, any bank
that is perceived to be small enough to be allowed to fail will not be leant
money by other banks and therefore will fail.
Obama may have made a good sound bite, but in practical terms he is clueless.
The only thing that will get the banks lending again is to fix the credit
derivatives market. They only way to do this is to force new CDO's to be
traded on exchanges with reporting requirements that mean that they can not
turn into toxic assets. This will give transparency and liquidity. Then the
banks need to be encouraged to move their currently toxic assets onto the
exchanges. Once they are on an exchange with quarterly reporting they will
no longer be toxic.
BTW toxic assets are toxic, not because they are valueless but because nobody
knows if a particular CDO is worth 95% of face value or 75% or 50%. This make
them impossible to value and many of the banks have written them off completely
because they can not value them.
This is why bailing the banks out for equity was a good idea as long as we
hold the investment for between 5 and 10 years because there will be a huge
recovery of monies written off as the banks unravel the CDOs.
Finally, please stop moaning about bankers bonuses. It plays directly into
Labour hands and lets the government off. The vast majority of big bonuses
are paid to traders, not executives. They are they equivalent of a salesman's
commission. If you want to drive banking business out of London, you are going
about it in the right way. Because there is a general election on they way,
the bankers will wait to see which way things blow when there is a new
government. If they don't like what they see, then huge chunks of business will
be off to Dubai.
/ikh
January 24, 2010
Your argument that "this was not the problem in the case of Lehman, Fannie Freddie et. al." is not only reminiscent of Alistair Darling, but misconstrued and tends to mislead.
The bank bailout was not neccesary FOR Lehman (which, lets remember, was allowed to fail) but rather BECAUSE OF the fact that retail banks had direct exposure to Lehman and many other similar Investment Bank balance sheets (more specifically, to the packages which originated there). It is this direct participation of the utility banks – which like it or not amount to a social service with the attendant guarantees – which needs to be removed and which a new separation, hopefully carefully thought out, would achieve.
Had retail money not been on the line, A (considerably smaller) Lehman would have failed, Northern Rock might never have existed in the form we saw, RBS would have remained a retail bank with a Scottish accent, and there would have been few if any holes for taxpayers to plug in the utlity bank balance sheets.
Cassius makes a handsome living trading books of dangerous assets, but even he blushes at the thought of levering up the contents of thousands risk protected current accounts and trousering the profits in the name of global banking.
Separate – Innovate, and concentrate on the levels of margin required between the utility banks and the investment banks.
January 24, 2010
Mr Redwood is quite right to identify the banks Achilles' heel as the mortgage market. The banking system tended to became bloated with the mortgage repayments from the majority of whole populations where I can remember working -people managing without current accounts,their single Post Office account being a kind of deposit account, any transactions by Billy Bunter type Postal Orders. Banks became far too reliant on mortgage cash flows using their tame propellor heads to come up with financial instruments ,laughably called "securities", entirely based on minced mortgage repayments.Once Americans stopped paying when they realised they could n't flip their properties and that there had been simply too much building the whole house of cards came tumbling down.In the Uk the situation was quite different: people showed more commitment to honouring their mortgage commitments,partly because house prices would not fall so much since here property developers carefully keep prices up by rationing supply.In either national case a swift dose of property taxation would not come amiss be it Schedule A,a straight percentage tax of property values a la Northern Ireland or ,much the best, Land value Tax which stops house rationing by making land hoarding too expensive.
And of course banks should be made to return housing finance to building societies with their much less leveraged banking practices.
January 24, 2010
#ikh – "Gordon Brown, and not the bankers, caused this crisis"
so you are saying that bankers are not capable of deciding what is prudent and sensible and good business practice for themselves?
Just because there are no speed cameras doesn't mean that it is safe to speed.
And blaming Gordon rather ignores the international dimension doncha think?
January 24, 2010
No Gordon Brown set the binge economic culture which directly led to our economic problems, that the US also pursued this binge economic model doesn't absolve Gordon Brown from his part in the economic mess. As I said earlier Gordon Brown raped prudence, he trashed pensions and savings making property speculation a national past time and made us THE most indebted people EVER!
January 25, 2010
Oh yes, notice the subtlety, bashers the Banks, not the Bankers, so who pays in the end, that's right, the customer again.
We need a party that believes the state and corporations should serve the people, at the moment, we are being farmed.