91Èȱ¬

Life should not be about greed, but our whole society is full of it

Doh, just as I post a request for a business blog on the last blog (women in banking) we get....tada! A banking blog...I may descend into a monoblogue on another beeb person and try to ransom them to do some business news, maybe Nick Bryant or Robinson. Does Brian Moore have a blog? Dear o' dear LBC (London Broadcasting Company).

Onward ho.....cheer me up?!

That's it, I'm trying this Bryant character.

The UK government is under increasing pressure to explain its world record bailouts of financial institutions using taxpayers' money. We are told that loose regulation wasn't to blame, it was instead the fault of the global markets [unfettered] and shareholders.

This seems a hasty response to the claim from nobel laureate Paul Krugman earlier in the week that "regulatory imprudence" by governments in some countries was the cause.

The meanderings of L Myners confirms that the government still have not found their way to deal with the finance sector. How can someone like Myners who some see as some sort city guru even use the word irresponsible in analysing the problems of the banking sector? Demonisation will produce no lasting solution to these issues. Too big to fail means cant be left to the 'free' market and cant be left to 'free' enterprise. There needs to be a mixed economy, break up of the large institutions (HMG stands idly by while Lloyds bloats up on Halifax)and supervision not regulation with legally enforceable governance and the prospects of surcharge (like local councillors) or long periods at Her Majesty's pleasure.

"Time to protect bidders from their greed?"

No, it is time that governments stopped interfering with the markets.

Or perhaps the state should run everything for us - oops, that doesn't work does it.

So the common thread here is that the state foul things up!

"Time to protect bidders from their greed?"

It all starts with education. Education is supposed to 'lift' the poor out of poverty. But as can be seen over the last decade it does not work. The institutional failures that caused the bubble and crash are partly the result of greed, but so is the idea that we can somehow 'lift' the poor at the same time as insisting that the rich can get ever richer. Trickle-down does not work!

I don't think that Lord Myners has thought through his ideas thoroughly - if he has, he has rejected the, what to my mind, obvious conclusion that whilst regulated markets make the rich richer they also, because of the barriers to entry, (Non Educational!) make the poor poorer. This is particularly so when the only industry that is favourably supported by the country is banking and financial services where 'honest' toil, if not deprecated openly, is not required.

Personal and corporate greed, allied to regulatory protectionism, gave us the boom and crash. Education will not 'fix' the situation of ever increasing inequality and something else needs to be added to the mix. To my way of thinking the only way to actually reduce inequality is to hold down the income and wealth of the rich. This is why I see that a National Maximum Wage is one of the few practical solutions. Remove the benefits of unbridled greed than we can look forward to a more sustainable economic model.

PS We will also need to undergo a programme of controlled debt deflation to unwind the over borrowed/leveraged public and private sectors. This will be painful but is necessary for the recommencement of stable sustainable economic activity. We will also need to work towards re-enlivening businesses based on scientific skills and away from business that rely solely on high stakes gambling (i.e. international banking and finance.)

Unless we start talking about the REAL cause, money creation and the system of central banking, all other talks are just smoke and mirror. The three points raised by Myners are not new and are secondary.

Are you brave enough to talk about money creation, Robert?

> But there's a problem with creating a blanket insurance scheme of
> that sort: it would provide an unwelcome new incentive to unscrupulous
> banks and bankers to take crazy risks in pursuit of short-term profits
> and bonuses; if the bankers' bets went wrong, the insurance scheme would
> pick up the tab.

Any well-run insurance scheme would ensure that the premiums for banks that operate that way are astronomical, thus quenching any appetite for high risks.

But the easiest way to quenching high risk ideas is a a no-brainer. We just delay profit distribution until the risks have played out. Previous banking profits are held in escrow by the government until no residual risk exists on the current operations over a (say) twenty year span. Once the bank is in the clear, its cash can be released (with interest) as a reward. If the bank can't get clear of its past, then we bail it out with its own profits at no cost to the taxpayer. The traders will learn to be patient – maybe they could get a loan to tide them over!!!

But what worries me most is the long delay. The remedy is obvious, as I've made clear.

No, bidders shouldn't be protected from their own greed but the public should be protected from some of the consequences of this behaviour.

A cap on leverage would be a start - for both bidders and for anyone supplying funds.

Would need to be done in all major markets so will never happen as GS (i.e. the omnipitent ones) would veto it as this is how they generate their vast profits and bonuses.

And don't think for one minute goevernments have the power here they are all over a barrel.

This comment was removed because the moderators found it broke the house rules. Explain.

PPS #7

"The UK goods trade deficit widens to worst in 17 months" (91Èȱ¬ news story today)

We are getting deeper in the mire.... Banking will not save us! It has killed us and we MUST not let bailing it out with QE and zero interest rates deflect us from returning to rational economic policies (i.e. putting up interest rates to re establish economic rationality and the price mechanism that supports the economic use of capital). All zero interest rates has done for us, and importantly is ever likely to do for us, is to put-off the taking of the necessary economic actions that will lead to recovery. We all know this and we are all conspiring to remain in denial!

> we are still a long way from consensus on the appropriate prescriptions.

It's obvious what to do if we ignore the nutters. The trouble is that parliament is profoundly deaf. It allowed bankers to build this crisis over the years, despite many warnings about derivatives, fat cats and moral hazard. It only reacted once we reached the edge of the precipice and the ground was crumbling beneath us!

It's obvious how to fix banks (use escrow to delay profit distribution until risks are played out), but first we have to give parliament a hearing aid.

@londonunderground

Yes, society is riven with greed - which shows why those who decry it may as well believe in unicorns. It's an integral part of us, and no doubt the desire to acquire more is what has driven us to the modern world with all its pluses and minuses.

Removing greed isn't an option, educating people to understand it and use it for long-term benefits rather than short-term grasping is.

A valid point about shareholders holding company boards to account. Unfortunately most company shares are held by the likes of pension funds on behalf of individual workers and voting decisions on pay and takeovers etc are made on their behalf by the fund managers who tend to follow the status quo and believe that the shareholdrs best interests are upheld by agreeing to premium takeover bids. I think that shareholders, if consulted directly might have different opinions. It was obvious that Kraft were to load Cadbury with debt and thus force the business to significantly increase short term profit margin, probably to the detriment of the long term business, more than likely erode pension benefits and move production to larger scale lower cost base centres. I don't believe UK pension fund contributors, if asked directly, would agree that this was a descision they would support as their event horizon for adding value is 20+ years.

How decisions can be delegated to pension fund contributors, the actual shareholders, I don't know.

Careful Robert. You are in danger of scaring the talent away to the Piste.
pmsl

Sorry but Myners is talking rubbish:

1) Markets are a good mechanism for distributing capital, goods and services, but not a perfect one - so we must recognise that those who worship a deified perfect market are worshipping a false god;

The free market is like democracy, it is a bad system until you consider the alternatives. There is no such thing as the perfect market except in the fevered minds of economists. All markets are imperfect, all require some sort of regulation (for example to prohibit dangerous goods being peddled). The issue is merely at what point does regulation stop enhancing the market and instead get in the way. In the banking market the problem with regulation was that it was inept and failed to take into account the inevitable consequences of basel II and mark to market accounting.

2) It's unfortunate that wholesale and professional lenders to the likes of Royal Bank of Scotland and HBOS, and even providers of putative risk capital, were bailed out by taxpayers - because it proved that these banks could behave irresponsibly and more-or-less get away with it, thus undermining any incentive for them to behave more responsibly;

This is not exactly a new point - probably been around for several hundred years. The only new feature of the landscape is the size of banks compared to the economy.

3) There has been a systemic, long-running failure of institutional investors to exercise their ownership rights over companies in a rational way, to prevent those companies - especially but not exclusively banks - from taking actions that damage the interests of owners.

Total nonsense. By rational Myners clearly means they have failed to exercise their rights in the way he wanted them to. The owners can be entirely rational but nevertheless wrong. Even the HBOS/lloyds merger can be viewed as an entirely rational but with hindsight dreadful idea (ah but as that was Gordon Brown's idea maybe Myners can be excused for not mentioning it). In the UK institutional shareholders of large companies (including but not only banks) have traditionally kept a low profile and only stepped in when they think serious failings are coming to light. That does not mean they will not step in and force management to rethink (there are plenty of examples of this) it is just that they do so carefully. I understand that in US different rules apply and shareholders have very limited power

As for the Pru takeover, Myners may not have noticed but the big shareholders are clearly sceptical as indicated by share price and headlines. The Pru takeover is a perfectly rational idea, the question for shareholders is whether the underlying assumptions for the takeover make sense and whether the price is too high

"Biddee" ... can't we just use the word target. I would have thought the biddee, if there is one, is/are the shareholders of the target ... the ones to whom the bid is made.

Penalties against banks, as institutions, are useless. The only way to prevent another crisis is to have the threat of penalties against bankers, as individuals. If Sir Fred Goodwin was now in prison, facing a ten year stretch, then that would send a powerful signal to other banks. As it is, Goodwin and his heirs have more money than they can possibly spend in their lifetimes. Go figure!

Myners is a real goon

He missed out all of the important stuff:

golden troughs
golden ladders
stakeholdership
constitutional rights and privileges
fairness (central strategy of Labour election campaign)
responsibility
education - very important per John from Hendon
outlawing 'negative trading' (are you listening Goldmen's Sacks and Soros and other back stab parasites)
proper accounting practice
constitutonal limits on government spending

and also,

full government fiscal responsibility and budgetry control

That'll do for now me thinks

points 1, and 3 i and most people on this blog have been saying from the beginning. point 2 is the contencious one for me

" It's unfortunate that wholesale and professional lenders to the likes of Royal Bank of Scotland and HBOS, and even providers of putative risk capital, were bailed out by taxpayers - because it proved that these banks could behave irresponsibly and more-or-less get away with it, thus undermining any incentive for them to behave more responsibly"

1)is there any evedience that banks have behaved any more irresponsibly since they were bailed out
2) Surely its only unfortunate if not bailing out the banks would have been better ( i accept im in the minority here but its difficult to be conclusive on a what would have happened scenario)

i do agree Banks would be at least as happy to take an insurance companys money as they would to take the taxpayers so can't see why a scenario where we may end up bailing out the insurance companys as well as the banks as any better.

maybe any growth above a size which is too big to fail is prohibited full stop. All (investment )Banks above this size looked at on a case by case bases to see how they can be broken up

First we had "Light Touch" Regulation, now we're getting "Light Touch Analysis" from the likes of Mynors.

At least he's bothered to go this far. Our fabulous leadership, as you say Robert, "I don't recall any Minister attempting this kind of overview," can't even bring themselves to do this! Why NOT??? We're £Billions in debt, we're going to be taxed to death, unemployment is way over 2 million, growth? (don't even go there,) the rabid capitalists are still demanding bonuses for failure and NOTHING has changed!

For Ch..st's sake Britain wake up!

No mention of regulatory failure by those employed ( numpties- your word) to avoid this mess? The Tripartite Authority and the army employed to scan the system for systemic risks?

To quote the UK Treasury Committee " By any measure the FSA has failed dreadfully in its supervision of the banking sector...... The FSA should only permit banking activities that it understands, and that it has confidence that the bank concerned understands. (Paragraph 62)"

Just think about those two statements!

To blame institutional investors is to distract from Government responsibility, in my view.

"Markets are a good mechanism for distributing capital, goods and services, but not a perfect one - so we must recognise that those who worship a deified perfect market are worshipping a false god"

Not perfect?

That's an understatement, a system which overproduces for 10 years and then under produces for the next 10 - and all the waste and damage that the cycle causes - surely it would be better for humans to take control?

The reason why the markets are treated like a god is because man does not understand how it works (well the men who play them don't) - hence treating it like anything else we don't understand and worshipping it as a diety.

"There has been a systemic, long-running failure of institutional investors to exercise their ownership rights over companies in a rational way, to prevent those companies - especially but not exclusively banks - from taking actions that damage the interests of owners."

That's because all the rational ones have so little influence (the small shareholder) and the wealthy control the companies through their cartels of majority shareholding.
Rationality does not mean self interest - which is what Lord Myners seems to be hoping. This is the free market lie - that by acting in your own self interest you will be acting rationally - well obviously never heard of a market sell off, or panic buying then.
That's why banks risk modelling doesn't work - it's why LTCM failed, it's why thousands have tried and failed, nearly collapsing the entire system in some cases.

I think the amazing thing is Lord Myners doesn't know his market history, he can go back to several points in the last 100 years of Capitalism and find almost identical situations with almost identical solutions proposed - not one of them worked - so what make Myners think he's the chosen one to sort this mess out?

The goal of all business is to expand and generate profit. The system allows them to expand and generate profit without there being any underlying increase in demand or development of new markets. This is because from the end of the previous bust, price moves faster than value - thanks to the ability of banking to bring forward un-earned profits from the future. Bringing forward demand is why so many small and medium sized businesses were keen to expand in 2006 / 2007 - but now are over-extended.

When those profits don't come - then there is a giant hole. The Banks passed it to goverment and then absolve themselves of any blame for the impending sovereign crisis.

..it happens every single time - it seem Lord Myners must be new to all this - despite his years.

It really is pathetic how stupid Government ministers are - what are their degrees worth when they can't get their heads around a simple problem like the contradictions or Capitalism - I mean it's not like there isn't enough historical evidence!!

As Henry II said.
"Will no one rid me of this turbulent priest?"

It's time for the people to take control, the leaders have all tried and failed to see the GIANT ELEPHANT GORRILA GIRAFFE HYBRID IN THE TINY ROOM - which are the contradictions of Capitalism.

6. At 09:39am on 09 Mar 2010, yam yzf wrote:

"No, it is time that governments stopped interfering with the markets."

You need to read up on history boy....

Central banks were introduced to prevent Governments having to go 'cap in hand' to private sector banks when collapses occured in the private sector.
They also try (and of course fail) to temper the booms and busts of Capitalism.

....or do you think they were invented to simply control the markets for some Communist conspiracy?

Once again, the Austrian school strikes with it's poor recollection of history...

Would it not be better to release the strangle hold of the banking cartel from the banking industry.

It used to be that significantly funded operations like Virgin were ostensibly stopped from opening up a business bank because of pressure from the other banks and the banking cartel closing out new competition.

Maybe now is the time to regulate the options and open up the market to create more open banking opportunties.

Where I understand that in itself is a risk, surely no more of a risk than allowing a major High Street bank like Barclays to bet on the markets and risk the entire Barclays edifice.

With greater competition there would be more consumer choice and more structured business thinking rather than the state of levity that was primarily behind this collapse.

I am not convinced that separating the Investment banking from retail will really allow the banks to effectively compete in the international markets, but rather it would push more of the costs for their recovery onto the consumer, with the more profitable arm getting all the investment poured back into it.

I would think that most banks would then look at the retail sector as a necessary evil and being more of an encumberance. I just can't see how anyone would really benefit from this?

The trade gap problem simply serves to reinforce the myth that the financial services sector is populated by intelligent, patriotic and strategically minded individuals who having recognised the need to rebalance the economy are now setting out to build a strong manufacturing sector.

As to Myners. Well what can one say? We can only hope that he loses his job as soon as possible.

I'm tired of banking - I've said all I have to say on lots of different occasions.

The system is wrong.
The profits are wrong.
The pay is wrong.
The people are wrong.
The concentration of wealth in the City is wrong.
The political involvement is wrong.
The post political banking board jobs are wrong.

There are too many blogs about banking when manufacturing and the wider future of the country is what should be being blogged about - banking will not save us, most posters also agree this point and have done for the last 365 days on countless Peston blogs.

Oh dear it seems that RBS has pension problems



How is this possible, what with these guys being so clever and all. It was only last week everyone was banging on about how these guys could go anywhere in the world and make loads of money. Why can´t they make their pension fund make loads of money?

Maybe organisations such as unit trust/pension/etc funds should have to account to their stakeholders how they vote on takeovers etc. To take it further, maybe any major shareholder decisions they make where they hold a significant shareholding should be delegated to the funds' stakeholders.

2) It's unfortunate that wholesale and professional lenders ... were bailed out by taxpayers

Yes! Reckless lenders were bailed out, and didn't suffer the consequence of their negligence in lending to the like of RBoS and HBoS.

3) There has been a systemic, long-running failure of institutional investors to exercise their ownership rights over companies in a rational way, to prevent those companies - especially but not exclusively banks - from taking actions that damage the interests of owners.

Exactly! The institutional investors (pension fund managers) behaved in a totally irresponsible way. They should have been aware of the risks the directors were taking, and should have taken action to stop it. Instead they turned a blind eye to what was happening. There needs to be an investigation into this - how much of their actions were, for example, influenced by their own bonuses - paid as a result of their investment in the banks doing very well, until the whole sham collapsed?

I was amused at the idea that bankers should take out insurance policies against their activities. As any householder knows - try claiming against an insurance policy. What's the betting that if these bankers were insured and the worse happened, that the insurance people simply turned around and told them that they were not covered under the insurance.
"Read the small print!"
The only way to protect against these sorts of excesses is to force the financial services industries to re-structure into smaller units. Then they can fail.
If someone working in a bank thinks that they can lose their job and end up in the local job-center - I think this will focus their minds more.

I hate to disappoint so many of you but the regulation road is a dead end - for 2 fundamental reasons.

1) It's never worked in the past, simply because banks have become too powerful and no longer need to follow rules. Just as some Lords don't need to pay tax, and some people can drive as fast as they like and park where they want because they can afford to pay the fines - or worse still, get off serious crimes because expensive Lawyers find loopholes. The law is unapplicable to the wealthy.

2) Increased regulation allows the Austrian school to cite regulation as the reason for the crisis (forgetting the crisis existed long before regulation) - this creates a never ending 'chicken and egg' argument which allows Lassez Faire economists to present unqualifiable arguments as 'fact'

The service of lending must be controlled by the (working) people, not Government, not Banks, but the people - after all they are the only wealth creators in existence - despite the claims of the bankers and the gullability of Government ministers.

25. At 10:52am on 09 Mar 2010, writingsonthewall wrote:
Central banks were introduced to prevent Governments having to go 'cap in hand' to private sector banks when collapses occured in the private sector.
They also try (and of course fail) to temper the booms and busts of Capitalism.
---------------------

Haha, WOTW, I thought you had more profound wisdom. Central Banks ARE behind the boom and bust cycles. I don't want to go into details as whoever wishes to know there are plenty of resources on the Internet to educate yourself on the matter.

25. At 10:52am on 09 Mar 2010, writingsonthewall wrote:
Once again, the Austrian school strikes with it's poor recollection of history...
-----------------------

Once again, do not get fooled by the "Austrian" priests, they are ALL part from the same team!


But let me tell you again that all will be revealed in 2012 for 100th birthday of the FED.

The finacial institutions of the City grew up to service the industrial and maritime trade sector. Now the ignored industrial sector will have to finance the City out of debt. Something went badly wrong. The sooner retail and investment banking is separated the better.

29. At 11:31am on 09 Mar 2010, armagediontimes wrote:

"How is this possible, what with these guys being so clever and all. It was only last week everyone was banging on about how these guys could go anywhere in the world and make loads of money. Why can´t they make their pension fund make loads of money?"

Oh dear - what a shame.....it looks like the game is up bankers. You are useless and pointless - how does it feel to know the world hates you?

Maybe with hindsight you should have built those banks out of mortar and stone rather than glass, as it will offer no protection from the angry masses...

Ah, and now a new Shaky Super Bank is trying to monopolise Retail Banking (Santander).

What is needed is smaller independent Retail Banks (more of them in order to create competition).

The Investment Banks, should not be owned by, or owners of, Retail Banks, as Jobbers and Stockbrokers used to be divided, so should Investment Banks from the Retail side.

Otherwise, the Investment Banks will continue to subsidise their losses with the Capital and profits of the Retail operations.

..meanwhile at street level Gordon Brown is taking the British economy back to the Sone Age

GC

# 6. At 09:39am on 09 Mar 2010, yam yzf wrote:

> No, it is time that governments stopped interfering with the markets.

So you are proposing that we immediately cease support for Northern Rock, RBS, HBOS, Lloyds, Bradford and Bingley, Icelandic Banks etc. etc.

Nope – markets don't need governments to screw things up totally – they can do it easily on their own.

If such an insurance scheme was introduced then it should work like insurance does elsewhere in the world.
Namely, if you make a claim, your future premium goes up.
If this was structured as a known punitive rise then this ought to provide some disincentive for banks to enter risky businesses.

I don't fully buy the argument that banks will make irrational risky bets in the hope of upside. The big banks have experienced a massive loss in stock value which (due to being paid in shares and due to some forgoing bonuses completely) has also had personal financial impact for most.

Tarring all banks as 'gamblers' is inaccurate (but makes a nice soundbite for the media). In fact most of trading businesses profits are made from the margins, not open risk.

# 29. At 11:31am on 09 Mar 2010, armagediontimes wrote:

"Oh dear it seems that RBS has pension problems".

Quite simple really - they've paid it out in bonuses and private pensions for executives!!

I wonder how much the last 10 years of the above adds up to? I bet it's more than the deficit.

#32. At 11:43am on 09 Mar 2010, EuroSider wrote:

"I was amused at the idea that bankers should take out insurance policies against their activities. As any householder knows - try claiming against an insurance policy."

Quite right and one of the major reasons the whole pack of cards came tumbling down. It's the madness of the leveraging and endless re-packaging / insuring of debt that got us into this mess and insurance is no good when you've got hundreds of billions in liabilities - we whole thing collapses.

Your idea of smaller units has it's merits but what's to stop 100 smaller units going bust and causing the same tidal wave of failures?

Nothing that I can see at the moment .........

#24. At 10:48am on 09 Mar 2010, writingsonthewall wrote:

"It's time for the people to take control, the leaders have all tried and failed to see the GIANT ELEPHANT GORRILA GIRAFFE HYBRID IN THE TINY ROOM - which are the contradictions of Capitalism."

Always love your posts!! What exactly do you propose that 'the people' do if you don't mind me asking!

An appropriate prescription: unlimited liability for shareholders. It has worked in the insurance market and seems to take care of issues 2 and 3 quite nicely. It would also provide a good disincentive to the risk taking/bonus culture if bonuses were paid in shares that could potentially have a negative value. Lloyds Bank puc anyone?

#35

What went wrong is the quality of the people now working in the financial services sector. Their greed, short termism and strategic ineptitude points clearly to a lack of intelligence.

#37 supercalmdown

Yes

Whilst huge blame rests on the shoulders of individual "bankers" (notably the likes of Goodwin), rather than "banks" per se - which was probably the only worthy point in Myners' underwhelming speech but not recounted in Peston's piece (which largely like Myners, doesn't say anything new)... even greater blame rests with the Government, whom the banks' activities suited very well, thank you, in the good times. The deregulation of the nineties - ushered in by the politicians of the day - and the continual lack of understanding and oversight since then - led to the inevitable consequences. Byron Dorgan, a Democratic senator in the US was one of lone voices back in '99, saying at the time: "I think we will look back in 10 years' time and say we should not have done this, but we did because we forgot the lessons of the past and that that which is true in the 1930s is true in 2010."

But in the mean time, how about something meaningful on the blog, Robert - how about a challenge - nothing about banks for a week maybe? Some more general "business" stories and issues - now that would be novel...

Before we start reinventing the wheel, it is quite obvious what we should do.

Taxpayers should offer a lendor of last resort facility. This facility should come with a penalative rate of interest.

This achieves the object of punishing banks that have overlent and gives them time to correct the problem whilst encouraging them to do so in the shortest possible period of time.

There is no need for the knee jerk reactions such as forcing banks to merge, seek new owners, be nationalised or increase capital. All of the above were stupid actions that did more harm than good and have left us with a zombie banking system.

The treacherous are caught by their own greed and the bailout is only delaying the Inevitable, the investors in failure must fall.

43. At 12:36pm on 09 Mar 2010, Ian wrote:

"Always love your posts!! What exactly do you propose that 'the people' do if you don't mind me asking!"

The people should just start out, by starting to actually do something! Wanting change then taking THEIR power back from the losers who they've given it away to! It's called taking responsibility back from the establishment that has delivered failure for the vast majority of the population, millions of whom exist in conditions of virtual squalor and shame.

But that's the broad social and political idea. This blog is NOT about that per se. This blog is more tightly constrained to the financial and business environment. Some obviously don't think it's important and moan about too many banking stories, (on a financial blog no less!). But most of us still want to take it seriously - BECAUSE IT IS!

The points made by Myners are just chilling. He's calling for little more than a bit more bank regulation here, a bit more capital there and insurance cover. PATHETIC! It really is. Insurance cover? Has Myners never heard of A.I.G ???? That company was supposed to be the linchpin around which all of Lehman's, Goldman's, J.P.Morgan etc were going to be saved, from themselves and their debt securitisation trading - it failed spectacularly. It failed to pay out because all its policies suffered claims, all at the same time, when the markets imploded.

The way this is going at the moment reflects a complete failure of Government. Myners is an affable sort of chap, trying to be the steady one in the pefect storm delivered by his precious markets. Someone needs to step in and take the helm off him pronto, before we just sink!

Nice article, Robert. Thank you.

I really am fed up about debating the banks, whilst the vast number of businesses in this country are having a tough time because of the banks.

As far as legislation and rules and codes of conduct for banks are concerned there are only two issues which need to be addressed by legislation, or rules for running a bank:
1. that all deposits are covered by insurance paid by the bank
2. that all mortgage books are covered by equity plus retained capital.

Everything else is down to the board of the bank. The man in the street has his assets safe and banks can play outside of those specific areas.

To get these done, insurance must be sought and put on cover, without the mealy mouthed caveats that insurance often has. The bank must insure the total amount of deposits. Full stop.

The second point may well take a while because of the differing short falls. But plans from each bank as to how and when they can achieve it can be taken into account in their rating with S&P.

M&A activity often ends in tears. Many mergers simply do not work. Mergers that began 3 years ago in major financial institutions are still not fully integrated either in back office systems or in personnel, where battles for dominance still occur between the two parties depending on their origins.

As far as Santander is concerned it needs to be referred to the competition commission or whatever body currently sits in that role.

As far as protection for bidees and well as bidders goes, the code of conduct for M&As may well favour one, but the chairman of each company has an express brief and responsibility to look after the shareholders of his/her own company, and not to cave in to the overtures of another which might do them down. Looking out for Chairman leaving post unexpectedly could indicate that imbalance is on the horizon in M&A somewhere.

3) There has been a systemic, long-running failure of institutional investors to exercise their ownership rights over companies in a rational way, to prevent those companies - especially but not exclusively banks - from taking actions that damage the interests of owners.

To bang on like a stuck record - as the institutional investor appropriated those rights from me as an investor in unit trusts/ISA's and my Pension how does having one set of financial firms police another bit take us forward?

So Scottish Widows is going to crawl all over Barclays I think NOT.

One of Myners points:

3) There has been a systemic, long-running failure of institutional investors to exercise their ownership rights over companies in a rational way, to prevent those companies - especially but not exclusively banks - from taking actions that damage the interests of owners.

The ONLY way you are going to stand ANY chance of influencing this is to change Company Law. Nothing less. At the moment it is skewed in favour of the majority shareholders. Inevitably if you own most of something you are understandably going to insist you make the rules. Which is fine, right up until you screw up so badly that you have to come running in the direction of taxpayers for a bailout!

Hopefully the Government won't EVER give back LLoyds or RBS to the private sector. Once we've done all the hard work raising this lot from the ashes, we sell it back to the private sector, (as in past privatisations, for a rock bottom price by any chance as well??) No!

If the public sector can bring a formerly private bank back to rude health it shows it can run one side-by-side, in full competition, with the private alternative! The Government often spouts on at the private sector for being too short-termist, quite rightly. So now it should put it's foot where its mouth is, (I know and pigs might fly.)

34. At 11:53am on 09 Mar 2010, plamski wrote:

"Haha, WOTW, I thought you had more profound wisdom. Central Banks ARE behind the boom and bust cycles. I don't want to go into details as whoever wishes to know there are plenty of resources on the Internet to educate yourself on the matter."

So can you explain the panic of 1907 in the US - which happened before the Fed was even created????

It is you that needs re-educating.

The Fed was created because of the panic and to attempt to prevent it in future (which of course never works anyway - but it gives the Austrians someone to blame)

....or are the Austrian school re-writing history too as well as Economics?

Sorry to disappoint you but boom and bust has been around as long as Capitalism - it was not invented by central banks.

39. At 12:12pm on 09 Mar 2010, Jacques Cartier wrote:

"Nope – markets don't need governments to screw things up totally – they can do it easily on their own."

...and as I have said before - they were doing it long before Governments got involved!

Here is your list of crises in the US



....and anything before 1912 occured before central banking in the US.

(The UK is slightly different as it already had a central bank - which was essentially a private bank (for the Government) before it became a true central bank and given interest rate control in 1870 - after many panics, recessions and depression had already occurred)

43. At 12:36pm on 09 Mar 2010, Ian wrote:

"Always love your posts!! What exactly do you propose that 'the people' do if you don't mind me asking!"

...oh they know what to do.....they're just waiting for the trigger. Some are in denial, but they will evaporate when they see their new tax codes and it finally danws on them who is expected to pay for all this largess...

#49

I know what has to happen in Scotland. We have to get out from under the malign influence of the City and the Treasury if we're to survive.

Independence please.

29. At 11:31am on 09 Mar 2010, armagediontimes wrote:
Oh dear it seems that RBS has pension problems


"How is this possible, what with these guys being so clever and all. It was only last week everyone was banging on about how these guys could go anywhere in the world and make loads of money. Why can´t they make their pension fund make loads of money?"


And

8. At 09:43am on 09 Mar 2010, plamski wrote:
Unless we start talking about the REAL cause, money creation and the system of central banking, all other talks are just smoke and mirrors. The three points raised by Myners are not new and are secondary.


Two good posts for sure.

Oh... I just love reading all this bile and envy directed at those fortunate enough to earn more than the average wage! It really does fill my heart with superiority and disdain for the great unwashed.

In life there are tough choices: if you *chose* not to work in a lucrative industry, then you really have no reason to complain when you aren't remunerated. For those who claim that it's a "boys club" then all I will ask is have they ever tried to work in the financial industry? The industry is open to anybody with a brain cell and sufficient desire to work in it. Yes, I will freely admit that above average salaries can be earned without being a genius. Is that so bad?

But I tell you what: this recession is starting to really hurt-- can't even drive my Porsche through London coz of the potholes. Anybody else noticed that they're not even bothering to repair the roads any more? Bloody scandal.

Hey (onward) ho: off to a low tax jurisdiction for me anyway. This country needs to pull its collective finger out and expel the communists before I consider giving any of my hard-earned £s back to it. Plenty of good things about UK to be rightly proud of, but the perpetual hatred, envy and narrow-minded bigotry towards those contributing to society through the financial industry is really not one of them.

I look forward to watching the unfolding people's revolution from a distant land and laughing all the way to the bank while the despised "system" reminds the lunatics that money is power. Not nice, I know, but true. Wake up, smell the coffee: get into the real world; capitalism is the least bad known way of running our societies.

Ciao.

#25 WOTW
Again I am sorry to say your history is a little wrong.

The BoE was a private institution until nationalised in 1946. It was set up as a national bank to mobilise the nationa's resources rather than many local banks.

#39 JC

Yes I am. Bigger banks, or new market entrants, would have picked up the pieces. Just like they are doing now as the failed baks sell off parts.

There were two parts to the financial crises:

1) Wholesale funding drying up
2) Bad/risky investments

They were two totally different aspects.

1) Dried up because 'inclusive' rules drawn up by govts forced lending to those to whom banks would not normally lend
2) Sometimes you win, sometimes you don't

I would add that insurance schemes sound all very well and good, but if banks are involved they will set up their 'insurance scheme' in the same way as they set up their Credit default swaps.

All based on the presumption that historically defaults have never passed 0.1% on investment grade debt.

....which is similar to the presumption LTCM made that 'spreads will always converge over time' - which didn't quite go to plan.

...or the assumption all hedge funds make which is they can only loose x amount in a single day (VaR) - until it breaches that value - or merely loses that value every day for 6 weeks.

...they call it rolling snake eyes - sure we might do it once with a set of dice, but in Capitalism you can get 50 in a row if your timing it right (or rather wrong).

All the PHD's in the world cannot defeat logical analysis of risk - and still they try....

As WOTW posts from a decidedly Marxist viewpoint it should be interesting to see if his definition of the "people" bears more than a passing similarity to "all animals are equal" concept in Animal Farm

Of course as I think the Marxist viewpoint is complete rubbish, I may just being overly cynical

The size of the banks is I think a serious problem. An old saying says that if you owe the bank a pound you have a problem, if you owe the bank a billion, it's the bank that has the problem. If we had much smaller properly competing banks, operating across all sectors of banking, commercial imperative would apply it's own restraints and stop the goliaths acting irresponsibly and arrogantly. I think once the markets have recovered action should be taken to split up some of the bigger banks, both here and in the US. No bank should ever be allowed to be too big to fail and that should be the simple test. If a bank through natural growth becomes too big then it should firstly be required to hold a higher level of capital or sell off part of it's operation.

Capitalism under the wing of Captain Mainwaring worked.....it was good, honest and successful, and ran on common sense.
Capitalism under the wing of Gordon Ghecko, Bonus Barry and Billionaire Billy is a disaster.
Myners is right, more power to his elbow.
The trade unions are venting their long-awaited anger.
None of us want to vote communist, but.........

We have to get to a point where there are NO guarantees on any savings and NO bail outs..., it might be harsh but it will be the only system that can ever work without constant appraisal by Government/tax payers.

58. At 3:21pm on 09 Mar 2010, mad99

Is that what you tell yourself? - that you're allocated a greater share of the worlds resources because you're fortunate?

....you then claim that you have 'hard earned ££' - well what a contradictory life you lead - how confusing for you.

Well at least you didn't try to claim that high earners have more talent than low earners (as most try to claim) - because you're not really putting the case forward for yourself as being highly talented.

Still, I'd like to know which 'low tax regime' you intend to go to - it could be interesting because most of them either have low tax but huge living expenses, or they have downsides - like the occasional dictatorship when a mmilitary coup occurs. Of course you know that during a worldwide recession, military coups are the only industry which is on the rise.

Let us know when you're going - we'll send you a postcard from liberated Britain!

#25 WOTW
"Again I am sorry to say your history is a little wrong."

Me?

"In 1870 the bank was given responsibility for interest rate policy"

i.e. when the central bank was tasked with managing the Economy and reducing the pain of capitalist boom and bust - private or not was not the issue - purpose and when that purpose started was the issue.

61. At 3:57pm on 09 Mar 2010, Justin150 wrote:

"As WOTW posts from a decidedly Marxist viewpoint it should be interesting to see if his definition of the "people" bears more than a passing similarity to "all animals are equal" concept in Animal Farm"

I don't take my viewpoint on Liberalism from a Dandy comic - so why take your definition of Marxism from a cartoon?

Better to read books by origional artists than watch a simplified effort to explain the complications of transition from a Capitalist state to a Communist one.

"Of course as I think the Marxist viewpoint is complete rubbish, I may just being overly cynical"

I can't really take that as being an 'intellectual assessment' of Marxism as Animal farm was about Stalinism / Bolshevism and nothing to do with Marxism.

Better stick to your current system where it's no secret that 'some are more equal than others' and in fact 'even less are more equal than others than there were 3 years ago'

Sustainable? - clearly not.
The contradictions of Capitalism will come face to face with the social elements markets ignore.

63. At 4:20pm on 09 Mar 2010, stevewo wrote:

"None of us want to vote communist, but........."


....you don't need to - just wait for Capitalism to collapse and then the only solution will be to revert to the local communities for provision of food, shelter, water etc.

All these Capitalist supporters spout that this is the 'next best option' - but really they know it died a long time ago - the first time it was bailed out by 'interfering Government'. They know the end is nigh, they're merely putting their hopeful self interest before accepting reality.

...a bit like banks.

I do not think that making the banks smaller will work. I suspect that deals like the Kraft take over of Cadbury's will still require major funding, probably much larger than any of these smaller banks could manage so their logical move will be a consortium of small banks to finance these takeovers. Now if the take over fails it will be a collection of small banks that are in trouble. I think any problem that may be addressed by shrinking the banks is defeated by a consortium of small banks. I think it will help to separate the casino operation of the banks but better still is adequate legislation.

I understand that Canada have not experienced anything like the rest of the western world during this crisis simply because they were not allowed to participate by law. For years they watched the rest of the industry make apparent spectacular profits in an area they were not allowed to play and they were not happy about it. However, when the brown stuff hit the fan I think they breathed a collective sigh of relief. Similar laws across the board would have prevented the whole disaster and is perhaps all we need to implement now.

WOTW, Overall I agree. Banks, and in fact any company run by us humans would try to game the system.

But some quick notes on your examples:

Actually, LTCM were right about the spreads in the end. They fell foul because they forgot the rule that the market can remain irrational longer than you can remain solvent (or something like that). Their positions made money for the people who stepped in and picked them up.

Also VAR doesn't (and isn't even supposed to) tell you how much you will/can lose. It is supposed to tell you what you won't lose more than _most_ of the time. The problem being the part of time that isn't "most of the time" is the part that kills. So a 99% should be exceed at least 3 times a year... we just don't know how much.

I am not defending VAR, its faults are manifold and well documented, but we may as well describe it correctly.

In the Big Picture Overall and Scheme of Things:
Maybe the greed culture is due to their recessive gene

No. 69 is right about Canada. A recent article in The Weekend Financial Times described how they have very close regulation of banks and mortgage sellers and thus avoided all the nonsense we allowed. So good is their regulation that the Government insures all mortgage loans.

And in case you are wondering, you have to have a 20 per cent deposit to qualify for a mortgage. What price Northern Rock and its 125 per cent mortagges for those who could not afford the house alone?

Protecting bidder shareholders?

Why don't they just sell their shares?

Pru's shareholders certainly did!

This comment was removed because the moderators found it broke the house rules. Explain.

Love the comment about Governments not intervening/making a mess when they do - has anyone heard the sound of 50 million bank customers seeing their bank and their money disappearing in a puff of smoke? Including your correspondents. Sure the bankers should be a bit more conscious of who and what pulled their nuts out of the fire, but voters losing savings? No chance...

'it would provide an unwelcome new incentive to unscrupulous banks and bankers to take crazy risks in pursuit of short-term profits and bonuses; if the bankers' bets went wrong, the insurance scheme would pick up the tab.'

Not if it was just the 'basic' banking that was being insured/bonded/protected. The depositors and borrowers would get their money back or their loans protected, but the bank itself would fail, and the shareholders would lose.

It happens like this for tour operators (but not airlines - yet) - the passengers who have paid deposits get their money back (or a flight home if they are stuck) when their tour op. goes bust - but the tour op is still allowed to go bust.

70. At 5:53pm on 09 Mar 2010, malcom

I do not disagree - but walk into any hedge fund (if they will allow you to) - and they will tell you they are using VaR to 'assess their risk'.

They still use thin tail models and normal distribution.

Whilst LTCM believed the spreads would eventually narrowed - I would argue the spreads only narrowed because LTCM failed. Had they been given more and more liquidity they would have sucked up more and more - unbalancing the markets and creating a contradiction that would eventually bring down every bank, investment house and anything to do with finance.

This is because the longer that contradiction was supported - the more irrational investors would become. I mean who acts rationally in a contradictory environment?

If they passed a law tomorrow banning the wearing of hats, how many people would put pineapples, cardboard boxes, buckets - anything that isn't strictly a hat - in protest, demonstrating their annoyance through an emotional 'irrational' response.