...a blog by Richard Flowers

Wednesday, September 24, 2008

Day 2818: Ban My Shorts


So we return home from Conference. Has anything been happening in the World? Oh crumbs…

The current scores on the (repossessed) doors appear to be as follows:

Of the "Big Five" American Investment Banks, Bear Sterns went under last March; Merrill Lynch was quietly bought out by Bank of America; Lehman Brothers went spectacularly bust*; and Morgan Stanley and Goldman Sachs are busily turning themselves into ordinary banks to try and get some depositors to shore up their remaining assets. That leaves NONE.

Meanwhile, Great Britain has lost another bank and competition law was chucked out of the window to let Halifax Bank of Scotland get gobbled up by Lloyds TSB.

(*Hilariously, the Financial Times was reporting the collapse of Lehman Brothers as the biggest banking failure since, er, the LAST time Lehman Brothers went bust back in the 1980s)

All of this is being blamed on City Traders who have had the fluffy foot pointed at them as Scapegoat du Jour, for their habit of making money off of shares that are plummeting in value – so called SHORT SELLING.

The problem is that they aren't really the problem. They are just the buzzy insects come to swarm over the bleeding wounds of the broken animal that is the financial industry. Not very nice, it is true, but just taking advantage of bigger problems, and swatting a few flies is not going to get the banks back on their fluffy feet.

Equally, there seems to be developing a TREND to identify KEY players – like Mr Dick Fuld, chairperson of fallen Lehman Bros. – and blame them INDIVIDUALLY. The word HUBRIS has been flying about a lot. Clearly, the idea is to say that "no, no, we bankers are good and true, and it is only these few madpersons who have ruined it all for all of us, please give us some more money…"

It just won't do.

The root of the problem remains the fact that the banks got too big and too greedy. They loaned out more money than they should to people who couldn't pay it back. When the price of houses fell, the security for those loans got smaller, making the loans more RISKY and therefore worth less. Or in all too many cases worthless. That was the Halifax's problem – suddenly and uncontrollably they had fewer assets to balance against their borrowings.

(It didn't help that their attempt to raise more capital was a flop, meaning that underwriters AIG – yes, them – ended up with a huge bill for unwanted HBoS shares.)

The investment banks thought that they could do something terribly clever to make bad debts less bad by mixing them with good debts. Instead they have made the good debts just as bad as the bad ones.

That is why the American government's offer to buy ALL of the mortgage debts cuts the Gordian Knot – take all the mixed up good and bad debt out of the system and start again. Fair enough, if you are a bank, but jolly free with other people's money of you are a taxpayer who didn't gain squillions during the banking boom.

Because this is NOT the fault of one or two too-clever-by-five-and-three-quarters individuals. Nor is it down to City Sharks picking off the weakest swimmers. It is endemic in a system that allows banks to get bigger and bigger, making bigger and bigger loans and calling it a "profit" because they borrower MIGHT one day pay back the silly-money interest.

This isn't even ORIGINAL. The Midland Bank, once the biggest in the World, blew itself to pieces by loaning titanic sums to Latin America and then hitting the iceberg of them all defaulting. Natwest almost went the same way.

And allowing Lloyds and HBoS to merge into a Super-Bank is about as far from a solution as we are going to get. It just puts us all at even MORE risk that there will have to be a VAST Government bailout if this far-too-big-to-let-fail bank does something unspeakably silly. Because bankers, it would appear, have NO track record of NOT doing something unspeakably silly, if the opportunity for a fast buck arises.

What we want is SMALLER banks, banks that are less likely to overextend themselves precisely because they have a smaller asset base, banks that are easier to regulate because they are not vast sprawling empires with tentacles in pies all over the globe, banks where there are fewer depositors so the government can afford to rescue the depositors in the event that the bank does go bust.

If political power should be devolved to local levels, then so should FINANCIAL power.

Break up the banks!

1 comment:

Costigan Quist said...

Interesting post. Just wish I had a good enough grasp of economics to make a sensible judgement on whether economic stability is better served by lots of small banks or a few big ones. Maybe in my next lifetime.