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Why bankers aren't worth it

Robert Peston | 09:27 UK time, Friday, 3 July 2009

Some of the most arresting analysis of the causes and consequences of the financial crisis is being made by Andrew Haldane, the executive director of what the Bank of England calls - with no hint of irony - "financial stability".

His latest speech, "Small Lessons from a Big Crisis" [pdf link], is grist for those who believe top bankers are being paid far too much (although this is not a conclusion he draws himself).

Workers in the CityFirst, Haldane looks at the returns generated by UK banks and financial institutions since 1900, to see whether shares in the financial sector have performed better than the market in general.

What this shows is that from 1900 to 1985, the financial sector produced an average annual return of around 2% a year, relative to other stocks and shares.

So for 85 years investing in bank shares was "close to a break-even strategy" (his words), nothing special.

But in the subsequent 20 years, from 1986 to 2006, returns went through the roof: the average annual return soared to more than 16%, which was the best performance by financial-sector shares in UK financial history.

And it's no coincidence that the pay of top bankers also zoomed up to the stratosphere. Which at the time upset only a few, because the bankers seemed to be enriching the owners of the banks, their shareholders (millions of us through our pension funds).

That, of course, is not the whole story.

The collapse of banks' share prices in the past two years has wiped out most of those gains: to March this year, when the low point was touched, the fall in UK bank share prices was more than 80%, an all-time record plunge.

What this means is that in the full period from 1900 to the end of 2008, the annual average return on financial shares was less than 3%, almost identical to the market as a whole.

Which is what common sense would predict should have happened, since banks are to a large extent a utility, serving the needs of the wider economy, and its difficult to see how banks in general can therefore grow significantly faster than the wider economy.

What went so right in 1986 to 2006? Had top bankers become much more brilliant than their predecessors, such that they deserved disproportionate rewards?

Haldane answers this question by breaking down banks' return on equity - the return generated on ordinary shareholders' capital - into its two component parts, which are the return on gross assets and the leverage employed by the bank.

This is slightly complicated, but bear with me, because it is absolutely central to assessing whether bankers merited their lavish remuneration.

Now if you want to know whether bankers are particularly skilful, you have to look at the return on gross assets. If one bank earns consistently bigger margins on the loans and investments it makes, that tells you it is probably doing something cleverer than its rivals.

By contrast, leverage - or the ratio between a bank's gross assets and its stock of shareholders' equity - is the Las Vegas part of the return on equity, the contribution made by a punt or a gamble.

Here's the important point: for any rate of return earned per unit of a bank's gross assets, the return on shareholders' equity rises as the assets-to-equity ratio rises - or, to use the jargon, as leverage rises.

Which is easier to grasp by way of a practical illustration.

Suppose a bank has lent £1,000 and earns a 1% net return on this, or £10. If that £1,000 is backed by £50 of shareholders' equity - which is a leverage multiple of 20 - the return on equity is 10 divided by 50, or 20% (which, for what it's worth, is a handsome rate of return).

Now, suppose another bank lends £1,000 on a leverage multiple of 50, or supported by just £20 of shareholders' equity. In this case, the return on equity is 10 divided by 20, or 50%. So the return to shareholders is a stupendous 50%.

Or to put it another way, increasing leverage is a simple and automatic way of increasing returns to shareholders. And as I hope you've noticed, there's nothing terribly clever about it.

But if all you care about is fat returns, and you're not interested in how they're earned, you'd give the boss of the highly leveraged bank a cigar, a bottle of Krug and a £5m bonus.

As I've observed many times in this column, maximising leverage is the equivalent of buying a house with the maximum amount of debt: it looks like an awfully smart thing to do when everything's going up up up, but is the fastest way to lose money when the economy turns.

Just to prove the point: if our banks were to lose £20 on their £1,000 of loans, the bank with just £20 of equity would be wiped out, it would be bust (a big hello to Royal Bank of Scotland, which at the peak of its lending and investing had a balance sheet that was indeed 50 times the size of its core equity).

So what has Haldane discovered about the golden banking years from 1986 to 2006? Were the super-normal returns of banks the consequence of management skill, viz high returns on gross assets? Or were they casino profits, generated because banks in general increased their leverage, their ratio of assets to equity?

This is what Haldane says:

"Since 2000, rising leverage fully accounts for movements in UK banks' ROE [return on equity] - both the rise to around 24% in 2007 and the subsequent fall into negative territory in 2008."

In other words, in the seven years before the crash, British banks' bumper profits were in aggregate generated wholly by a massive increase in leverage by the industry: and in Haldane's view, these would be returns generated by gamblers' luck, the jackpot from the roulette ball landing on black.

What follows?

Well, it's uncontroversial that we all paid something of a price, in the form of the worst global recession since the 1930s, when the bankers' luck ran out, when the wheel spun to red.

Which means that we all have an interest in preventing bankers from repeating these reckless gambles.

These would be a few useful lessons.

Stephen Hester1) The overall level of bankers' pay was inflated over the past few years by the rewards they scooped from the leverage gamble. It should be cut to a level commensurate with an industry that's closer to a boring utility than to a wealth-creating, entrepreneurial venture. This has not happened yet. In fact, if anything, bankers are pumping up their pay packages again (the recent remuneration deal made by Royal Bank of Scotland with its chief executive, Stephen Hester, would not have looked mean in the boom-boom era).

2) Regulators should impose a legally binding maximum - and at a relatively modest level - for the ratio of a bank's gross assets to its equity, the leverage multiple, to restrict bankers' freedom to gamble.

3) Owners of banks should be very cautious indeed about rewarding bankers for the returns they generate on equity, and should focus rather more on the returns earned on gross assets.

If you're still with me (wakey, wakey), there's one other important related issue I want to explore, which is how to re-introduce moral hazard into banking, how to persuade bank chief executives that they'll really suffer if they place reckless bets that go wrong.

The problem is that no one can possibly any longer believe that there are any circumstances in which our government will let one of our biggest banks collapse.

Which is an enormous comfort to the chief executive of a bank. It means he or she can do something spectacularly stupid, safe in the knowledge that taxpayers will bail out the bank as and when it all goes wrong.

The best deterrent against greed-fuelled gambling by banks is the threat of being sacked when it all goes pear-shaped. But that's not a particularly scary threat to any banker who's earned enough in the preceding years never to need to work again.

That rather implies that bankers should be paid a decent wage, but should not be able to get their mits on any serious wealth for years and years and years.

Arguably they shouldn't be allowed the big haul till they retire and it's clear beyond a scintilla of doubt that they haven't dangerously over-mortgaged their respective institutions.

And once again we're back to the serious critique of Royal Bank of Scotland's board for sanctioning Sir Fred Goodwin's never-have-to-work-again pension.

But Sir Fred is just one embodiment of how banking became a casino run for the benefit of bank executives: the sucker punters were the shareholders and - little did we know it - taxpayers.

Comments

Page 1 of 3

  • Comment number 1.

    This is a good article but I also think we need to look at banks, their leaders and their shareholders in the context of what they achieved for the country.

    In the UK's case their activity did huge amounts of damage to manufacturing, slashed the business birth rate, pushed house prices through the roof, created record household debt levels, created a record trade deficit and so on and so forth.

    And what's more, this was all pretty unique to the UK because in mainland Europe manufacturing and high tech stuff has survived and in the USA there was and still is plenty of tech innovation going and new companies being formed and properly funded especially in the clean tech sector which of course is supposed to be a UK political priority.



  • Comment number 2.

    This is just fraud on a massive scale.

    ...but who will grow some cajones to go after these banksters and start prosecuting these vermin.

    The discussions on regulation reform are shaping up to be a complete whitewash.

    We have been soft soaped and shafted by The City...and they are being given carte blanche to do it all over again!

    GIVE US A NEW GLASS-STEAGALL (EQUIVALENT) LAW - NOW!

  • Comment number 3.

    Great blog Robert. Nice bit of analysis and spot on.

  • Comment number 4.

  • Comment number 5.

    Robert wrote,

    "from 1986 to 2006, returns went through the roof: the average annual return soared to more than 16%"

    At the risk of preaching the blindingly obvious: This was the time of the worst excesses of Thatcherism /Reaganomics and Milton Firedman's 'Boys from Chicago' monetarism! The 'fault', we overlooked, was to provide a protectionist environment to existing bankers, by regulating to protect existing bankers by making it very much more difficult to set up a new bank and at the same time the relinquishing of all regulatory control over the international activities of banks by abolishing exchange control. This latter process enabled the hugely protected home markets of banks to provide them with the capital and, at the same time, allow them to act without any control internationally. Banks were exempted from the market!

    The other critical element in the explosion of the 'fake' returns of banks was to permit asset price inflation to be seen as a good thing (which of course it is not, and has never been, and if we are to get a recovery this must be fully understood). This was achieved through successful lobbying of the banks and their economic friends educated in institutions which themselves became dependent of the finance sector (See Harvard) to have mortgage costs and house prices removed from all inflation indices (these indices being used to measure the effectiveness of monetary control) This was insane and inevitably led to the collapse in the price of money, which itself let to the 'necessity' to loan this worthless money to less and less creditworthy customers on poorer and poorer security which let the CDSs and CDOs etc. etc. which led to the global collapse.

    That is my thumbnail analysis.

    Fixing the problem - without killing the global economy is another book. We have the problem that if we wanted to get there we should not be starting here! However it seems obvious to me that 'money needs to have a sensible price' is a prerequisite to any recovery.

  • Comment number 6.

    Oh yeah, forgot to add: it's a shame that Darling seems reluctant to do anything about this and that Brown's boys are trying to stop any EU measures to regulate the banksters.

  • Comment number 7.

    Robert, you have explained the issue perfectly with regards to the leveraging and share equity backing. But the underlying point has to be that lenders were prepared to extend credit to other lenders based solely on the perception of a no lose world. But up until the time that the wheel stopped turning, no one really knew that the government would step in to support failed banks so is there a more sinister back drop to the willingness of big lenders to extend credit to other lenders that was potentially risky believing that when they went pop, they could be bought up for a fraction of their value

  • Comment number 8.

    #2. BankSlickerminustheR wrote:

    "GIVE US A NEW GLASS-STEAGALL (EQUIVALENT) LAW - NOW!"

    Yes, but without national controls over transnational moneyflows it can't work, can it?

  • Comment number 9.

    Oh Labour - What have you done to us while you were making a few pieces of silver in the rising housing market??

  • Comment number 10.

    It is naive to impose a leverage cap based on gross assets, and not risk-weighted assets.

  • Comment number 11.

    Wholeheartedly agree Mr Peston.

    Very well explained.
    These bankers are clearly exposed as the disgrace to society that they are.

    Now what are we seriously going to do about them? Is hanging to good?

    No problem staying awake.

  • Comment number 12.

    I am at a loss with Brown/Darling - they say they "won't legislate" to stop excessive bonuses - do they still not get it? We/they own the banks just tell them what to do! This doesn't need legislation just an instruction "or you will be sacked!". The bankers are running the asylum now and until we get some strong honest politicians in number 10 nothing will change.

  • Comment number 13.

    good article but could you explain your maths?

    "the return on equity is 10 divided by 50, or 20% ".... err 0.2% surely?
    "the return on equity is 10 divided by 20, or 50%."....err 0.5%

  • Comment number 14.

    Robert, a calm and measured post which is important at this point in time. The issue of regulation to make banking a bit more boring (and, therefore, useful to us in the real economy) is coming up at the Aquila meeting later this month.
    I look forward to your comments on this in due course.
    There is a feeling among some that UK is dragging its heels a bit on cutting the banks down to size.
    Is there any truth in the observation?

  • Comment number 15.

    #9 - Oh Labour - What have you done to us while you were making a few pieces of silver in the rising housing market??

    And why oh why oh why are you not peddling stories about reasessing everyone council tax bands now??#



  • Comment number 16.

    "how to re-introduce moral hazard into banking, how to persuade bank chief executives that they'll really suffer if they place reckless bets that go wrong."

    that's easy - jail time and asset forfeiture for the fraudulent b*****ds. if you ban the making of those bets in the first place, anyone who does screw up by making them will be subject to the penalties.

    Of course, a better system of regulation by shareholders - perhaps abstentions from voting should count as an abstention rather than an automatic vote in favour of the board. Also, we could try putting some focus on the big shareholders to make sure they work in the interest of themselves. During the boom they had a very hands-off approach, and as they hold the vast majority of shares, no-one else effectively has a say in how the company is managed.

    Mind you, like at Shell, even if the board is voted against by shareholders, they just ignore them anyway. The whole system is pretty broken.

  • Comment number 17.

    Yet Gordon recently told his puppet chancellor to say that little changes to regulation were needed and that the FSA was a fine tool for reining in the banks. Especially now they know what to look out for. Will Alistair really demand some changes next week? Does he have the will to against the man who cannot be blamed for light touch regulation?
    Bill Quango

  • Comment number 18.

    Good analysis. Sadly, excessive leverage is only one of the many tricks that were employed by bankers to make profits without any concern for the consequences for the larger society or even their own shareholders. There are many more tricks in the bankers books that need to be exposed.
    For example, the four big UK banks have set up 1000 subsidiaries in tax havens around the world to avoid tax for themselves and assist rich individuals to do the same (this insight comes courtesy of the TUC).
    There is a moral recklessness in mainstream banking which is truly astonishing. Basically, it is the behaviour of people who believe they are untouchable and that money can buy anything (governments, lawyers to escape the law, etc).
    Banks needs to be under the law, not above the law and need to be reigned in. Otherwise societies (and their taxpayers) will be bankrupted again and again. Think about that word: bank-rupted. Apparently it comes from the Italian banca rotta, 'broken counter' (from the practice of breaking the counters of bankrupt bankers).
    Societies should be intelligent enough in a global media age to act on
    what they have learned over the past year and reign in the self-proclaimed masters of the universe and stop their addiction to picking the pockets of value creating economies.
    Please find more relevant facts and details at:
    http://globalinsights.wordpress.com/

  • Comment number 19.

    #13

    "the return on equity is 10 divided by 50, or 20% ".... err 0.2% surely?
    "the return on equity is 10 divided by 20, or 50%."....err 0.5%

    NO

    10/50 = 0.2 which is equivalent to 20% (of 1)
    10/20 = 0.5 or 50% (of 1)

  • Comment number 20.

    Hi Rob,

    Is it any wonder that the country is suffering at the moment. I recently enquired about moving home, only to be told that for the extra £2ok i wanted to put on the mortgage it would more than double my repayments!(And my credit rating is good!)

    Charging 5-6-7%APR on mortgages when the base rate is 1/2% is tantamount to theft. Ditto for the credit card industry.

    The banks were the root cause of the recession, and it seems to me that the banks are the ones busy prolonging it. They need to be exposed by the media for the greedy bloodsucking parasites they really are!

  • Comment number 21.

    Spot on Robert, finally the bleedin obviousis being debated in the media. I certainly hope that THIS is taken up bythe media in a far bigger way than the MP expenses 'scandal' where the collective misdeeds os 1,000 MPs and Lords would stil not add up to a single RBS or Citigroup bonus for a top banker.
    I think some of our work will be done for us by the markets. As demographics automatically prevents asset bubbles, the banks will not be able to skim off fees from those bubbles to add to their bonus pots. The UK is on the verge of following Japan, and now Germany into a demographic stagnation/slump in asset prices. There's nothing wrong with this, it is simply the realization that we have reached the limit of ever increasing the debt burdens of future generations through deficits/inflation because we simply haven't bred enough of em.

    It is high time we realize that standard of living should be bettered on a per capita basis, not just aggregate growth, and also that improved standard of life is based on prductivity and technology, not alleged 'gains' from asset inflation which is simply robbing our kids blind.

  • Comment number 22.

    Who checks the pictures used in the posts?

    As they would say in Private Eye "any fule would know" that the building in the picture is actually the Lloyds of London building home of the famous insurance market.

    As such the man in the pinstripe suit is almost certainly an insurance broker or underwriter.

    Perhaps your editor needs to be shown the difference between EC3 and EC2 on a map!

  • Comment number 23.

    An excellent understandable piece of analysis - essentially you can always win more by gambling more, but that ultimately sets you up to lose more when you inevitably get a gamble wrong.

  • Comment number 24.

    I think jolo13 epitomises the lack of arithmetical ability common in many of the banks !!

  • Comment number 25.

    What no one seems to understand is how expensive our high street banking system is. It is business current accounts, savers and borrowers who pay for the 6 branchs on the high streets, their staff, etc. Surely the transfer of wealth is a matter for an elected govt not the banks.

    IMO the current account system is the modern equivalent of cash and should be owned and run by the state through the BoE. It's all computerised. Every shop can take debit cards. Biometrics can resolve any security issues. And it means no more illegal workers, tax dodgers, etc. Imagine the benefit to the tax take, the falling unemployment levels.

    Let banks do the lending and saving business, and all that goes with it.

    As a nation, we may all despise the bankers for their deliberate negligence, But we need to stay at the front of international finance. Soon a govt somewhere is going to do this to get business capital flowing again. If we did it, the central position of the UK in international finance would be assured for the future. We should go for it now.

    Coins were first minted by private business in ancient Lydia. The idea spread and within a relatively short time states became the principal issuers of coins. And it was these state backed standard, reliable gold/silver content coins that enabled the explosion in trade that spread enlightened civillisation across the Med. We need another such explosion.

    We have the technology. We have the expertise. We lack the vision and leadership. Our elite are complacent in their extreme wealth. If we continue as we have, our decline is assured.

  • Comment number 26.

    Robert,

    "Or to put it another way, increasing leverage is a simple and automatic way of increasing returns to shareholders. And as I hope you've noticed, there's nothing terribly clever about it."

    Clarity personified!

    Leverage is not innovation or competitive advantage - it is instead the achilles heel of any financial investment. Not just for companies, but individuals' debt (you quite rightly mention mortgages) but ALSO Governments!! It only works if the good times roll.

    Regrettably, if an individual or a company overstretches itself - it will collapse.

    If a bank overstretches and gets bailed out by a Gvt, then society takes on the risk. As banks can't collapse, then our economy is put at much higher risk of collapse. Therefore, as banks are the only type of company that can bring down the whole economy then not only were bankers overpaid, but they nigh on conducted treason to our country.

  • Comment number 27.

    One thought that keeps crossing my mind is whether we should consider making some legal distinction between current accounts and savings accounts? The two have got very blurred in recent years. If we said that savings accounts could be invested by the banks as they saw fit but would not be backed by any Government guarantees, whereas current accounts would be guaranteed by the Government but could only be used by the banks to buy Gilts, wouldn't that remove most of the risk in the system?

    We as customers could decide whether we wanted our money safe, or whether we wanted to take some risk for higher return.

  • Comment number 28.

    Robert, you should get your colleague Mark Easton to explain to you about misleading statistics. Andrew Haldane's figures which you approvingly quote are very suspect.

    Actually, bank shareholders made out like gangbusters and will continue to do so if allowed - the losers are elsewhere in the system:

    http://www.knowingandmaking.com/2009/07/bad-mathematics-and-dodgy-economics.html

  • Comment number 29.

    There is a missing link here, in that the government clearly were not aware of the banks level of threat to our nation, even after the Northern Rock wake-up call. I do not buy the ludicrous arguement that it was something obscure called American subprime loans that can possibly be resposible. No, I rather think it was human nature, in this case greed, that caused the collapse, and the real guilty party are those charged with steering the nation during their watch, that failed utterly, in that task. What has now emerged, is an unholy alliance between the poacher and the gamekeeper, which in no way will keep the herd safe in the future, but certainly suits the both of them. The power to inflict further damage must be removed from the pair of them immediatly, if not sooner.

  • Comment number 30.

    I know Labour can't spell it let alone live it but what we need is some social justice. Stories abound of civil action being taken by government against bankers in the US. Why not here, why not Goodwin et al? Some of the offenders are being re-employed in quangos by this government?!!

    It won't hurt Labour in the year running up to the election if they allow the gambling to start again. If if provides some false green shoots of recovery then they might just get in again on the back of the same illusion that supported them the last two times (the first time was genuine hatred of the previous incumbent).

    Even if they lose the next election, somebody is going to have to reign the banks in again and so this is just another example of scorched earth policy by this treacherous government. They don't care who gets hurt so long as they stay in power. If they get back in then the joke may then be on them, but I think they feel there is precious little chance and so this will be a gamble to limit the Tories to a minority government, blamed for the tough medicine required, with a Labour government returning in 3-5 years when the electorate can't take the pain any more and think that change will once again affect their fortunes.

    Does nobody in Labour have any love at all for our country any more? I feel sick.

  • Comment number 31.


    All of which begs the question: Why is there no political will to truly sort this out?

    "But if all you care about is fat returns, and you're not interested in how they're earned, you'd give the boss of the highly leveraged bank a cigar, a bottle of Krug and a £5m bonus." Indeed what has happened and is happening...

    So let's introduce bonuses into the education system. Teachers provide the pupils with the answers before the exams and hey presto! Suddenly we have all these great amazing high returns. Teachers are just so amazingly clever...

    There is nothing remotely clever about being corrupt or incompetent. So the next question is which politician is going to stand up and come clean about this.

  • Comment number 32.

    This is more than just a good article. It is a key article which - though I'm afraid I nodded even more than usual through the maths - should be disseminated widely before any more of our dozy government representatives on bank boards wave through pay packages from a past era.

    The Reith Lectures this year were pushing in broadly the same direction
    http://www.bbc.co.uk/programmes/b00729d9

    It's not the revolution some were predicting months ago, but the pace of evolution sure needs to speed up.

  • Comment number 33.

    I assume that the business journalists at the BBC are aware that Lloyds of London isn't part of Lloyds Banking Group?



  • Comment number 34.

    One point your analysis does not mention is that on the way up the leverage ladder, the spiral was largely self-fulfilling. More leverage-->more money-->more demand for assets-->higher asset prices-->more equity-->more leverage, and so on. The removal of moral hazard, and the political encouragement of the ever-growing spiral made the bank behaviour inevitable. It's not as though the bankers of 1990s through to 2007 had any real option. They either used their ingenuity to prosper in the spiral, or they found another job. Simple as that.

    So your reluctance to veer away from the politician-saving constructed public mood of bankers' venality does you no credit. When all the outlets for moral behaviour are removed, people will act immorally rather than starve. It's like blaming the Germans for electing Hitler, when in reality it was the victors' justice of 1918 that caused Germany to be ungovernable in a rational way.

  • Comment number 35.

    Maybe bankers "aren't worth it".

    However, considering their "performance", then politicians and journalists are worth even less.

    The only thing a politician sells is his mouth - can we trust him to keep his word and behave honestly. Recent incidents have shown us that very few politicians are worth, to use a very apt US phrase, "a wooden nickel".

    The only thing a journalist sells is reporting facts - does he provide the public with reliable information for them to make decisions. The same recent incidents have shown, beyond doubt, that journalists were, for decades, complicit in a conspiracy of silence with the politicians, not only remiss in their duty of providing the public with the facts, but also (and far worse) spreading lies from individuals like McPoison.

    So, bankers were not worth their remuneration. But then, neither were politicians or journalists.

  • Comment number 36.

    Comment 13 : jolo13

    There's a place for you in Brown's cabinet. I should make some enquiries.

  • Comment number 37.

    Mr Peston,

    Overall a good article, but one serious mistake.

    Moral hazard arises when an individual or institution does not take the full consequences and responsibilities of its doings, and therefore has a tendency to act less carefully than it alternately would, leaving another party to hold (at least) some responsibility for the consequences of those actions.

    Therefore you probably mean that moral hazard needs to be taken out of the system, rather than re-introduced?

    Please try to understand things in full before posting.

  • Comment number 38.

    What is it about these bankers that need both large salaries and even larger bonuses? Most people work conscientiously for a salary. Some small and some large.

    If a banker is paid £1m or £2m to do a job why can they not do it properly without the incentive to earn even more? Are they not prepared to do a job fully and diligently for such a salary? Are they only really interested in obscene sums of money for themselves?

  • Comment number 39.

    We all know about leverage........and because the marginal productivity of debt was negative, the economy crashed.

    In other words, the total debt outweighs the total productivity increases which arose from borrowing the money.

    It's not rocket science; just basic common sense.

    Just a shame so many consumers and businesses and governments forgot to engage their brains and their will power...........

    Consumer junk culture and a junk economy.



  • Comment number 40.

    Splitting investments into "safe" returns on equity and "casino" returns on leverage doesn't work as an analogy - the investments that banks make carry the same risk wherever the money has come from. The problem isn't that returns built on leverage are all risky, but that leverage makes any losses on your investments more damaging, as you say, so too much leverages leaves you badly exposed to a downturn. Using an appropriate amount of leverage is fine and pretty well every successful business borrows money, and rightly so - the problem comes when you are 50x leveraged, rather than, say, 20x leverage (which is fine for a bank).

    This is also not to be confused with the dodgy mortgage-backed derivatives which banks created - you can invest equity capital in dodgy derivatives just the same as you can invest debt capital into them.

    I also totally agree with #21 about measuring wealth by overall GDP, and factoring in house prices - totally meaningless!

  • Comment number 41.

    Good report. However, those fancy profits were also supposed to be backed by assets (security on property) If a company wants a loan against stock and debtors the BANKS will probably reduce the value by 30% to 50% (In cse all is not what it seems) Its a crime that they didnt use the same measures when valuing their of debtor books ?

    #16 Better system of regulation by shareholders ! The institutions are run by the same breed, nod, wink have another brandy after the expensive lunch together ?
    #20 Parasites. Good description, not only the banks though. The couldnt care less attitude to customers and investors is rife in every institution and large company in Britain, bad customer service, no real people to answer and sort out problems. Many simply having NO address on their websites or mail, they only want you to sit in a 2hour wait at £1 per minute. That goes for the government run "Agencies" too. Anyone who saw the debacle TV regarding the DVLA cannot have failed to see that these people are a law to themselves and the service users are simple revenue sources and other than that, just a B*****y pest.

    Lets get back to local managers , contactable, concerned and who CARE enough to get things right

    Britain is broken alright and its fast becoming beyond repair.

  • Comment number 42.


    From each according to their ability. To each according to their needs. Or something like that. Am I getting close to the movement for something called less-pay ?

    Out of all this is that the whole raft of regulatory enforcement measures have not been deployed. Who has been banned from financial services using the extensive powers granted by the Financial Services and Markets Act? Which directors have been banned under the Company Directors Disqualification Act? Who has been penalised under the Companies Act? What about penalties under the Insolvency Act? Which Directors are being asked to make good the losses? Who committed wrongful - if not fraudulent - trading?

    Greed encouraged this crisis, encouraged by an enforcement regime that was half blind and legless, aided by a Government that was equally so disadvantaged, that needed the growth it provided to shore up the public finances.

    Capping pay is a typical half-blind champagne socialist view of control. Getting an effective enforcement regime is key. The FSA and other enforcement agencies have messed up.

    Where's the court cases? Where's the prohibitions? That's what I want to know.

  • Comment number 43.

    I've said all of this before, but I'll say it again.

    The alleged 'skill' of the bank CEO often comes down to the exact same skill as is displayed by the reasonably competent punter on the horses or the dogs.

    Like these, the bank CEO's sometimes believe that as they pull off the more risky punts (i.e. get away with them), the more this underscores their immagined skills and abilities and the more immune they are to things eventually going belly up.

    For real managers and directors, the issues are risk management and due dilligence. For the cowboy or maverick ones, it's the buzz of the gamble. Investors and dealers can get truly hooked on the adrenalin and their exagerated assessment of their own skills and abilities.

    Even right back when Emile Zola wrote L'Argent (the English translation 'Money' is a good read) - 'twas ever the case.

    Secondly, the moral hazard could be rectified by shareholders, especially institutional ones, demanding a different arrangement for recruitment and selection of directors, CEOs, CFOs and the like.

    That would be, quite simply, that Directors put up front a bond or security of a substantial amount to insure the company against harm done by their incompetence in office.

    YES - instead of just bragging about how wonderful they are, they put THEIR money where their mouths are. If they are as good as they claim, then they get the handsome rewards and get their security back (perhaps in a phased way, say 20 per cent per year) once their performance proves their claimed abilities.

    This would also encourage a more mid-term and long-term approach to managing and directing a company, e.g. sustainable business models, longer term skills investment, etc., and would discourage quick-buck asset stripping.

  • Comment number 44.

    Leverage itself is not a bad thing - who amongst us (apart from the top bankers, obviously!) can afford to buy a house without borrowing debt against our equity (that is, our deposit). The problem arises when a company or person over-leverages and borrows more than they can afford in the case of a downturn. Banks were meant to have fancy statistical systems that prevented this, but the opaqueness of the market and the instruments being traded meant that they had no real understanding of their true exposure - that is, how much money they stood to lose.

    Yes, let's tie bankers bonuses to long term performance weighted against the risks they are taking - but before we can do that we need a better model to measure exactly what these risks are. After all, given the length of economic cycles, can we ever be sure that the returns a bank makes are sustainable after 1 year? 5 years? 20 years? The key should be the risk the banker exposes his employer to - that, after all, is what they are being paid to manage.

  • Comment number 45.

    This is totally inept! In the whole article I did not see once the word risk!

    Robert "no clue" Preston wrote:

    "Now if you want to know whether bankers are particularly skilful, you have to look at the return on gross assets. If one bank earns consistently bigger margins on the loans and investments it makes, that tells you it is probably doing something cleverer than its rivals."

    Any idiot can achieve this, invest in high risk assets, simple as that! The only issue is , and we saw it recently, it is not a very sustainable strategy if you do not understand your risk properly.

    Why not looking at banks who had risk at the core of their business and the ones which did not? Then maybe compare their performance? This should not be too difficult even for Robert and will give us more information than most of these pointless blogs!

  • Comment number 46.

    Excellent article Robert.

    Now what you need to do is expose those running our pension funds. They effectively gave the green light to the banks and their bonuses. Why?

    Either they couldn't comprehend the sleight of hand that was taking place, or they did understand what was going on, but kept quiet and pocketed their own bonuses.

    Until this is investigated and exposed, there is little chance of the pension funds stopping the banks in repeating the mistakes of the past.

  • Comment number 47.

    It's Modigliani and Miller we have to blame - and all those finance theorists that have followed them in various business schools and universities. They came up with the idea that (subject to taxation effects) gearing of institutions does not matter since the potential shareholder can vary his own gearing levels to synthesise his desired "risk" level by blending his gearing with the corporation's. (i.e. he can borrow to buy shares in a corporation that he perceives to be "under-risked" and use un-leveraged funds to buy one that is "over-risked"). So the investing community does not have to worry if the managers of their investment vehicles go nuts on the borrowing front. They just de-gear themselves when they buy the shares. Of course there is a problem if a large majority of the available investments and the investors themselves become dangerously overgeared as we have just experienced.

    This is just one example of how the axioms of modern finance theory that have emerged since Harry Marlowitz's work of the 1950's are deeply flawed in terms of how they model the real world. The finance community was given a clear warning of these flaws with the collapse of LTCM when two of the fathers of finance theory - Scholes and Merton - took a beating in a market that did not conform to their theoretical constructs. But the fundamental problem has never really been addressed to the extent that their theories and - in particular - the Black and Scholes model of option valuation are still enshrined in the methods used to value assets and liabilities in Generally Accepted Accounting Practice around the world.

    The finance theorists who taught the bankers (or at least their back-room maths wizards) have got off relatively lightly in carrying their share of the blame for this crisis. It's a point that Soros keeps alluding to, but nobody seems to be picking it up.




  • Comment number 48.

    Very interesting research.

    I guess it's always been surprising how banks were able to generate such high profits in such a competitive market (retail banking in the UK excepted). The other method was to create spectacularly complicated derivatives and structured products, and use the information disparities to capture other people's profits (normally non financials I guess).

    With the clearing up of securitisation and the standardisation of products previously traded over the counter this latter route should be closed off. But the leverage will remain, albeit constrained by regulation.

    Until I read this article I had never really understood how the great Glass-Steagalling was meant to take place. The whole "casino element" seemed ill defined and if anything misleading; after all Northern Rock were the first to go under, and they were pure retail, not a hint of investment activity (which aside from propietary trading, is actually relatively stable in revenue terms [note the relatively]).

    But defining "casino" in terms of leverage (and to make it more nuanced, I'm sure you can drag in various specifications of funding requirements) seems to do the trick, if not perfectly then at least getting towards adequately. Banks can be divided as retail, which have to conform to certain leverage requirements, and investment which do not. If done properly this could allow retail banks acccess to the cleaned-up securitisation markets to spread their risks, and even a bit of trading if their bent ran that way. Of course this would make banks less profitable, but I'm not sure that's any bad thing.

    Unless of course we get nationalistic, and realise that a lot of bank profits come from extracting rents from overseas. So Britain may in fact be poorer for this move, unless we can create a healthy framework for investment banks to operate and continue to cream money off our less financially sophisticated friends.

  • Comment number 49.

    Looking at the average growth from 1900 to 2009 isn't exactly a good comparison to the rest of the stock market. You aught to look at the average growth from 1986 to 2009, when they changed their tactics.

  • Comment number 50.

    #13

    10/50 = 0.2 The decimal 0.2 as a proportion of 1 is the same ratio as 20 out of 100, i.e. 20%

    Ditto for 0.5

  • Comment number 51.

    There are 50 million people out here in "ordinaryland" who just don't understand why the banking industry pays itself in millions, while everyone else works on 10k to 50k.
    What on earth is so special about bank workers?
    They've been working for sensible money for centuries, but in the last 10 years have decided that they are worthy of lavish riches, all coinciding with the biggest bank-bust in history.
    And now they want to do it all again.
    Massive pay equals massive ego equals massive recklessness.
    Wake up HMG.
    Wake up BOE.
    Wake up Britain.
    Bankers enriched themselves on one of those waves of "asset price inflation" that we occasionally get in the UK.
    But "asset price inflation" always has the same outcome....bust.
    It becomes unstoppable and has nowhere else to go but down the drain.
    There was no "boom"...many of us could see that.
    Listen HMG....you cannot run an economy on these "lame-duck" booms.
    Stability is vital.
    And if you don't control the greed and ego of bankers....we will all go into poverty (except the bankers, who thanks to their riches, couldn't care less.)
    If you pay someone a lifetimes' earnings in one year, why should he care about future stability?
    Robert Peston is absolutely right....all big rewards should be available only on a long-term basis.(And even then should NOT be lottery jackpots.)
    THE PUBLIC ARE NOW REGARDING THE CITYS' EXCESSES AS FRAUDULENT, PARTICULARILY AS THE TAXPAYER IS PROPPING THEM ALL UP.
    Signed...stevewo... just another member of Britains' defrauded public.

  • Comment number 52.

    The banking crisis isn't over yet. All the rubbish in off-balance-sheet vehicles is still there. The bankers are hoping people have forgotten about it and that by alchemy (QE, inflation etc) it can be transformed into gold. As an astronomical metaphor, this 'dark matter' continues to gravitate money and resources.

    The characters responsible for setting-up systems that created this mess are still around: Bernanke, Greenspan, Geithner, Paulson, Brown and the rest of the Harvard/Goldman snake-oil salesman. 'Originate & Distribute creates global stability and growth' - hehe. Do they really believe that anymore?

  • Comment number 53.

    Nationwide are having their AGM soon. They sent around the usual reports including Director's remuneration reports outlining how much they get stuffed with (benefit of savers money). They have 'medium performance pay' which basicaly is a average of the previous 3 or 4 years performance, and of course they will always be guaranteed this aprt of their pay despite this years figures being 'down'. It appears they have carried out the 'MPs coup' by accepting pay set by a committee formed by themselves (oh yes it is properly audited (and what does that say?)) and leveraged to ensured they never 'suffer' despite savers getting 0% on their savings, in other words receiving negative growth related to either an average inflation in real terms. Once again, savers who provide the wherewithal for these 'custodians' lose out, and the DIector's will probably get their annual increase at the coming AGM by default because everybody thought they were working for the benefit of the savers. Robert, please do a programme to encourage those who have votes to use them to rein in the power of Directors.

  • Comment number 54.

    Can't diagree with this, clearly there should be some limits on gambling with other peoples money! Not rockets science, but still.

    Given Robert broke the Northern Wreck story I am surprised he has not followed up [Unsuitable/Broken URL removed by Moderator]

  • Comment number 55.

    Excellent article.

  • Comment number 56.

    Call the bankers bluff. We're always told that they need to be paid big salaries otherwise they'll all swan off and work overseas - well why not try it? It would certainly be a case of 'addition by subtraction' in temrs of what they actually bring to UK society. (And don't mention us missing out on the tax they pay, because most of them have 'tax advisers' who ensure that they'll pay very little)

  • Comment number 57.

    What I continue to find galling is the claim of the bankers that they have to continue to pay huge salaries otherwise if they do not they will lose their talent. What talent? The same talent that has made the banks bankrupt no doubt. There are an awful lot of very smart unemployed non bankers around who would love a job with a salary probably half what the banks pay. Such new blood would almost certainly change the culture that is now so necessary to change.

  • Comment number 58.

    #13

    "the return on equity is 10 divided by 50, or 20% ".... err 0.2% surely?
    "the return on equity is 10 divided by 20, or 50%."....err 0.5%

    NO

    10/50 = 0.2 which is equivalent to 20% (of 1)
    10/20 = 0.5 or 50% (of 1)

    OR

    10/50 = 0.2 x 100 = 20%

  • Comment number 59.

    Excellent article..if its so simple why are they paid so muchand why does OUR government let them get away with it.

    Problem could be based on The old school tie meets Corporate America.

    Its seems strange that most have Europe have escaped most of the financial bad debts and bad investments.

  • Comment number 60.

    Good post, Robert - in the interests of ALL of the people in the UK, we absolutely must not let things go back to where they were and have another one of these disasters.

  • Comment number 61.

    Robert

    If the owners of a business want to take a bigger risk to achieve higher returns then why not? If they want to incentivise the CEO to do what they want it is up to them.

    However, if the regulator/government want to reduce the risk of a bank collapse (because of the chaos caused) then it is for the regulator to set more appropriate capital ratios and liquidity rules. It is nothing to do with the CEO's salary and bonus.

  • Comment number 62.

    How depressing to learn that returns on gross assets have not been used by boards in determining the largesse distributed to bank employees. Its as if the banking sector have decided to invent commercial success models which suit their employees but not the owners. But, as you say, more fool the institutional investors ( and UKFI appear not to have been tasked to change this) for being sucked in. How many times have we heard these pension funds say to us that share ownership is for the long term, not for a quick buck!

    What we have learned from you and others is that bank funding models, liquidity risk and leverage is the real threat of our economic national interest. For UK plc to maintain its credibility its government has been forced to stand guarantor for huge balance sheets, lest a UK banking default to its international creditors causes a run on UK plc. Leverage must be curtailed or alternatively big banks should answer to a supra national lender of last resort.

  • Comment number 63.

    Spot on ! This piece should be given much wider exposure. A very good script for a 10.00 o'clock news piece perhaps.

  • Comment number 64.

    I think Germany's Finance Minister Peer Steinbrueck knows the real reason why our useless Government won't implement any effective regulations...

    "He told a meeting of the Confederation of German Trade Unions that the British government was 'on the side of the City of London and its interests and holding back from implementing regulations'."

    Germans accuse Brown of dragging his feet over the economy
    http://www.dailymail.co.uk/news/article-1196913/Germans-accuse-Brown-dragging-feet-economy.html

  • Comment number 65.

    10 and 41 - 2 posters only who understand.

    According to Robert's analysis there was no difference between Northern Rocks 125% mortgages and those issued by other banks with 50% equity backing.

  • Comment number 66.

    @SH8960 post #59: Rest of Europe has escaped? Tell that to the Germans that are having to bail out both their regional state banks and their international investment banks. Or Spain, that have had to set up a fund to support their regional banks due to the collapse of their property markets. Or Iceland (remember them?) or the French (who weren't exactly in a great place employment wise to begin with).

    This is not just a UK problem!

  • Comment number 67.

    will hutton last night touched on a similar issue - the banks are now part of the public sector and expect to be bailed out by the government if insolvency is a reality. He also stated that this is such a scandal he does not understand why the public ( and their representatives ) are not asking for some form of retribution from executives or board memebers - Sweden was cited as an example where civil action was taken

  • Comment number 68.

    Who is it precisely who is saying that 'bonuses are back'?
    http://moralorder.mediumisthemess.com/blog/

  • Comment number 69.

    Best article for a while Robert, but I would have liked you to clearly differentiate retail from investment banks. I firmly agree that retail banks are 'utilities' and should be tightly regulated to protect 'joe public' and the taxpayer. One thing I would like to see are measures to prevent 'toxic instruments' finding there way onto retail bank balance sheets e.g a list of regulator 'approved' financial instuments.

    Investment banks are a different kettle of fish. They are set up with the express remit to participate in new and/or riskier investment opportunities and indeed to 'invent' the financial instruments that have lead to the current crisis. This is why they should be firmly segregated from retail banking - I have said from the word go that this is was very unwise. Andrew Haldane's analysis shows that retail banking's increased profitability is a short-term mirage.

    I would also like to make the point that credit rating companies performace has been appalling. I wonder if there is a way of independent regulators taking over this sort of function?

  • Comment number 70.

    Bankers!give them enough rope and ....they'll hang the taxpayers who have yet to be born using a viscous proxy governmrent as tax collectors till Sparatacus arrives. The present generation is financed from vast borrowings from various sources ,the commissions from which prevent the vast vampire banking/political system from disintegrating in the light of day .

    Robert Peston PLEASE be brave ,and use the magical words FRACTIONAL RESERVE BANKING and YOU TUBE

    Even the tier one capital that Banks must hold ,is no more than promices promices it being based on calculations of future profits now no longer possible ,unless of course THOSE people saving in pension funds are only allowed to retire "after" they die,which would enable the stocking fillers THAT BANKS sold the ponzi pension funds to carry on alluring the next generation of punters into believing that they were saving for a rainy day whilst the recipients of their largesse carried on floating arround the med indulging in wine woe men and song.

    To understand what is going on one does not need a degree in anything that passed for the thought of the enlightenment, since it ammounted to no more than a posturing subterfuge to hide the real meaning behind the following childrens tales.

    THE EMPERORS CLOTHES

    BRER RABIT AND THE TAR BABY

    THE GOLDEN GOOSE

    THE FOX AND THE THREE PIGGYS

    JACK AND THE BEAN STALK

    ETC etc etc and etc

    Childrens stories make one think ,the thinking of the enlightenment[converted to the thinking of the entitlement by bankers] persuaded its captive secular audience of dung eating fools that they were thinking.


    Paper "wealth" created by banks ammounts to no more than the beads given to the indians reputedly in exchange for manhatten island [Although the indians did not realise it at the time ,they having no concept of ownership].

    Banks should not be in charge of capital origination as Soddy pointed out many decades ago,yet any attempt to remove their power of creating capital from thin air based only on the promice of a recipient to repay backed by dutch tulip bulbs , will lead to them merging with trotskyist and other such organisations to call those proposing change fascists and kick them about the streets while the pseudo police stand aside and watch.

    The Grimm reppo has arrived!

  • Comment number 71.

    Maybe we need a little social activism in order to make throughly clear the extent of the contempt in which bankers are held by the public at large.

    Boycotting bankers' business might be a start. If you own or are influential in a business, stop doing business with bankers. If you know your customer is a banker, show them the door.

    I'm not suggesting stopping doing business with the banks themselves - as has been pointed out, the country needs the institutions to work. Rather stop doing business with the individuals until the industry gets the message.

    Once they start being treated by the public as the pariahs they truly are, they might get it.

  • Comment number 72.

    Interesting to see historical analysis is begining to creep into the equation.

    1986, eh? No wonder they called it the Big Bang. The trouble is the house didn't finally fall down unitl some 21 years were passed.

    In the light of what you describe one can only ask what were the regulators doing whilst all this was going on? It was not as if there weren't enough of them under the new Tripartite system introduced in 1997 by you-know-who. Was there a sub-text at that time nobody noticed as looking at current circumstances I doubt very much if you-know-who had the ability to think it through on his own?

    So we have bankers cutting and shutting debt instrument thanks to deregulation, massive development in computing power, mathematical modelling and a perception of a new paradigm. Talk about The Bubble as it was once known.

    More significantly we also have governments using this explosion in presumed wealth to expand the base of the state into all parts of the economy and society on an assumption that the government cares. Inevitably government will not regulate the bankers too hard as they too became dependent upon the money. So we now had a Double-Bubble.

    Both of these events at the time pushed the remainder of society into a cul-de-sac where we were left to live of the remains of the feast. It became very difficult to create commercial value in real terms because the rate of return on investment was vastly inferior to what could be got from The Bubble. So we lost a million manufacturing jobs.

    Now that the Bubble has burst we remain still at only the start of the new times. The state is a bloated shell that needs to shrink in size. The banks want life to continue as before: well they would wouldn't they? And the political will to move on is just not there.

    The real economy once discarded as too cheap and too poor is now underpinning the lot. The balance of power in the economy has changed; but nobody has noticed yet.

    At least the bankers got their new paradigm: it is not the one they expected but then they never are. Time to change and change big because (old cliche coming round the bend) those who refuse to learn the lessons of history are doomed to relive it.

    The public are in a hanging mood because they understand times have changed but those who say they are our betters have not and probably cannot. Time to encourage the others, methinks.

  • Comment number 73.

    Post 66 specialist_fielder - The volumes that have been made avaialable to the German state and land banks is a fraction of the amount pumped into our banks. The German investment bamks took a big hit....but not as much as our banks... and the German economy is much larger and stronger than ours. Spain... a fund to support.... a little different to taking over some of our institutions. Iceland....isn't really in Europe is it (Isreal in the Eruovision song contest??) French...similar position to the German land banks but without the massive international investment issues. Our banking is in a mess...I doubt it will ever recover unless there is a major overhaul very soon. I know my money won't be there much longer because I don't trust them.....

  • Comment number 74.

    As a start, perhaps salary and bonus levels for banking executives should be tied to the leverage, the bigger the leverage, the smaller the salary. Make it exponential, so a small rise in leverage is a big decrease in salary.

  • Comment number 75.

    I've never heard of anyone on minimium page causing damages greater than their renumerations.

    "banking became a casino run for the benefit of bank executives: the sucker punters were the shareholders and - little did we know it - taxpayers."

    Try telling that to the generations which are and will be born into debt. And to tell them that some of those responsible are enjoying themselve in tax havens, away from the wreckage of plunders.

    What will happen if the world has no more genuine trust, respect and honour?

  • Comment number 76.

    Robert,

    On a separate topic, ie, the pay down of mortgage debt (http://news.bbc.co.uk/1/hi/business/8132081.stm), one thing missing from the analysis is the effect of the drop in interest rates.

    My mortgage interest element has dropped like a stone but the money payment has stayed the same. Thus it is being paid down much faster than before. This could over-egg the amount people are deliberately reducing debt.

    I don't know if this is also happening with other variable rate debts eg loans and credit cards but it would be worth checking. It may help determine if people are consciously or unconsciously paying debt down, ie, has there been a real change in consumer behaviour?

  • Comment number 77.

    As many posters have said in many ways...

    We have to move away from a banking systems that is based upon asset inflation. But how, without total collapse?

    My guess is that what we need to do is to re-price money so that asset inflation is suppressed - I see no other mechanism. This, like other inflations, can only be achieved by making money cost a sensible price - That is by putting interest rates up to the 4-6 percent range. (and stop printing money [quantitative easing]!)

    Unless and until the cowardly central bankers (yes, Mervyn King cowardly - this means you!) take this on board we will just get deeper into the hole that the last 20 year have dug! [As we have already nationalised most of the banking system,we can rescue the depositors fairly easily.] But we MUST start NOW!

  • Comment number 78.

    If you look who on the board of UK Financial Investments,
    the arm of the Treasury.
    who agreed Royal Bank of Scotland's chief executive pay deal 9.6 with the bank

    http://www.ukfi.gov.uk/about-us/

    As long as we have regulators that have a vested interest in the industry that they are regulating then the regulator is all ways going to fall on the side of the industry

    As the regulator would not want to do anything to upset the industry as members of the regulator broads would want to go back in to the industry at a later date

    This is why the banks are just laughing at us as tax payers and costumers



  • Comment number 79.

    Mr Curzon applied for a banking licence, any update on that? Was he successful?

  • Comment number 80.

    I read that UK has 280,000 accountants, more than the rest of Europe put together. Why?

  • Comment number 81.

    What is obvious is that whilst the bankers thought they were clever, they forgot the golden rule of getting out whilst the going's good. My own feelings are that once the genie was out of the bottle they weren't smart enough to stuff it back or even retire on their ill gotten gains before the bubble burst. It is also obvious that due to the paper trail of such accountancy practices been complex in who agreed or said what that litigation would never touch them. It is important for the future that some notable scalps are taken now and Sir Fred losing £200K a year off his inflated pension does not deliver that scalp!

  • Comment number 82.

    #67 xaviergalore

    Will Hutton also started the piece by saying that he was absolutely amazed that there have been no mass riots in the streets over this scandal.

  • Comment number 83.

    Banks have their tier one capital wiped out if the assets on which their loans are based become insolvent and the debtor walks away

    It is irrelevant how much leverage a bank uses if the underlying assets become insolvent

    The only differance between highly leveraged and lowly leveraged banks is in the quantity of counterfeit fiat money that they loaned out and can no longer recover, since their tier one capital covers little and probably nothing if it derived from future profits using accountancy fictions.


    The perfect synthesis between bankers and politicians has produced the greatest counterfieting scaaam on a world level in history.

  • Comment number 84.

    Very interesting artcile, pointing out the obvious that given more money to lend banks will lend it - ie far eastern short term cash loaned as long term debt.

    Surely something a government should regulate as being highly dangerous ?
    Surely something the "market" should highlight as dangerous and therefore reduce the share price of such companies.

    Of course the opposite has happened, as it has ALWAYS happened in every boom and bust.

    The market doesnt work - as can be seen by the oil price and commodity prices, the market is actually ruining businesses on a daily basis. Scrap all financial markets now. Replace them with only markets where pensions companies and invest for the long term with regulated balance sheets with no financial wizardry.

    The Obvious question is what is going to happen to house prices ? The loans that have been made over the last 10 years are clearly outside of what the public can afford, partly due to a fall in food prices. This short term trend will reverse as other countries like China get richer.

    I see a fall of between 30-50%, it's just a matter of time before the UK's hand is forced on this issue as either our currency falls or other countries buy what we cannot afford.

  • Comment number 85.

    Robert,

    Firstly, a great article..thanks, its like a weight being lifted from many of our shoulders on here I suspect.

    Many normal folk with an interest in finance have been saying the same thing since the collapse of Northern rock without the benefit of being big wigs in finacial circles, merely being 'people who can see the bleedin obvious'.

    There is an important concept you miss though.

    That is the concept of justice.

    They were greedy and nothing special and trashed the world economy and we should be more careful in future is the conclusion from your article.

    If anybody else in society had been so socially and economically wreckless it would have severe implications on their lives in the time honoured tradition of not rewarding practises that go against broader society for the enrichment of a few and as an example to discourage others from so doing.

    The people who perpetrated this white collar crime against humanity get to slink off to their country clubs and wonder how they are going to spend the millions they have accumulated now in safe offshore tax havens in the next 40 years.. a few of them may even say sorry before doing that (through gritted teeth). That is hardly going to put off the next generation of spiv bankers is it?

    There appears to be no will within the media or politics to properly tackle the injustice issues which the people clearly want addresed, they sew fear into our minds by suggesting 'we need these people to steady the ship and get us out of the mess so we cant attack them''...Do we need them to steady the ship?

    Your article establishes clearly that what they did is not exactly remarkable....actually I think I could do the job just as well with a bit of re-training and I would be happy to do that for the 55k a year I get now in the knowledge I would be doing a service to society.

    So Robert you have sucessfully, finaly reported on what happened, can you now deal with the justice issue please...but for our sakes try not to be 2 years late and after the fact this time.

    I am not sure that we have that long to sort it out.


    Jericoa...offers of employment on the lines as above welcome...

  • Comment number 86.

    Modern banking is based on "the big bung"collective barrel theory, which allows the bankers to suck on eachothers little redundant corks as they drain off the real vintage in the form of bonuses into their private offshored cellars.

  • Comment number 87.

    Interesting stuff but a couple of points for consideration:

    directors salary set by the individual banks remunerations committee which ususally consist of non exec directors who are usually directors of other big firms who get massive salaries set by their remuneration committee. ie. jobs and money for the boys as long as you are in the gang.

    Regulators - are supposed to carry out stress testing of banks balance sheets etc. - obviously didn't see this one coming so what was the point.

    Auditors - auditors of a company are supposed to report to the shareholders. don't see any auditing companies being kicked out for failing miserably to notice (a) the excess bonus culture and (b) the casino gaming by the board - why because if they did they would lose nice juicy contracts in other words they would appear to be working for their own interests not the share holders.

    Risk - banks have massive risk divisions surely they are responsible for highlighting the gaming issues.. oops forgot those that did got sacked.

    FSA - all banks directors need to be approved by the FSA perhaps they should look to see whether their expertise is banking rather than gaming???

  • Comment number 88.

    72, Stanillic,


    The real economy once discarded as too cheap and too poor is now underpinning the lot. The balance of power in the economy has changed; but nobody has noticed yet.

    Interesting comment, would you care to expand on that please?

    Thanks

  • Comment number 89.

    Instead of creating a system to regulate pirates why not make them walk the plank instead.

    Its a perkuliar thing that Peter Pan [Alias tony blair ]seems to have done a deal with the captains of[f] the Hook types whereby politicians who walk the plank end up working for hooky types ,thus forming backscratchars anonymous.

    And what are we left with but a prime minister who would not look amiss in a jolly rodger hat ,a wooden leg, an aye patch and a parrot that repeats"hello my darling how about a quick bonus"when a banker arrives.

  • Comment number 90.

    87 - quick comment re: auditors. That isn't the role of the auditors, their remit is effectively to state whether the accounts are basically true and fair and put together in accordance with applicable accounting standards. The excess bonus culture is not in their remit - if bonus' were contractually due and stated correctly in the accounts then that is where their responsibility ends (and the exec's remuneration is reported in the financial statements).

    With regards to the pricing of the assets - again, the auditors are supposed to challenge the assumptions behind asset pricing and valuation but, again, as long as they are priced in accordance within accepted accounting standards and correctly disclosed then they are ok (the complete collapse of the credit system and the subsequent destruction in asset pricing wasn't apparent until it happened and then the pricing was changed (for example RBS huge write down)). As long as all the activities were adequately disclosed (you will see pages and pages on risk in the financial statements) then effectively the auditors have fulfilled what their responsibilities were. You may question that these responsibilities should be different but at present that is what they are.

  • Comment number 91.

    How many people commenting on here previously held bank shares at several pounds each and have lost huge amounts of money?

    The benefit of the banking crash is that it has allowed people who could never have afforded to invest in large UK institutions to do so if they so wish. I did and made a fair few quid out of Barclays I still hold Lloyds and dabble a bit with RBS. As far as I can see this is fantastic redistribution of wealth from the people previously wealthy enough to invest in shares worth several pounds each to people like me who could never have held several thousand shares in major UK companies.

    Go Nuts Gordon, I'm getting quite into this Socialism lark!

  • Comment number 92.

    Ok - I think we all appreciate things need changing and we can't get into the situation of the last few years over again. We need to change the view on risk and the reward structure to reflect a more long term basis (not just economically but environmentally and socially as well). I think we should leave the witch hunt and mob mentality and focus on the key issue of where do we go from here. I don't believe anything illegal was done by anyone so lets leave off all the calls of prosecution and fraud and all other "burn them" cries and get onto the more constructive discourse of fixing things. Hanging/imprisoning/burning/lynching all bankers isn't going to get us anywhere now is it!

  • Comment number 93.

    Lots of good points being made here, by RP and fellow bloggers. So, it seems to me the summary is the fractional reserve banking brought the house down. And note, the assets upon which money were lent were assigned inflated values too, so double the trouble when the poop hit the fan. Our government, and that of the US, lacked the will or wit to properly control the domestic activities of banks. I am sure they didn't dare contemplate that the lending in the West was uncontrolled recycling of Far Eastern trade surplus (being our own trade deficit).

    As far as the UK is concerned, Crash Gordon rode a wave of apparent prosperity off the back off all this, happy to take the credit to the extent it got him the PM job when Blair went. But now Mandy is pulling his strings, and one result is that the EU has been given an oversight over our FSA, beloved of Crash. No wonder Crash and Darling want the FSA to remain as is - all the while it is useless, the EU has no chance of exerting any restrictive influence which may hinder the re-emergence of the old system. After all, for all the hand-wringing the chance of real change in the US is limited given who Obama's backers are, and our financial sector is obliged for it's own sake to follow their path to compete and to generate anything like the returns (legit or casino) needed to pay for the collapse. Crash and Darling can't afford Euro style restrictions. Sub-plot - divergence of interest between them and the ambitions of TB/Mandy.


  • Comment number 94.

    bmviking in post 20.

    Think you should learn the workings of the Mortgage Market before accusing anyone of theft.

    If you're being quoted a rate of 5 to 6% apr, this would be based on the term of the mortgage( You don't mention if this is fixed or floating).
    The money to supply your mortgage is provided from the money markets through the issuance of commercial paper, for a term aligned to your type of mortgage - e.g. 2 yr CP to cover a 2 yr fixed mortgage.
    The Money Market Rates have little to do with current BoE Base Rate and more an expectation of Libor rates for the term concerned.
    So in summary the money markets are expecting Base Rates to soon be up to 5%, that's why the mortgage is priced as it is.
    Theft is a strong word, and no bank is obliged to lend to you, regardless of what rate they wish to charge you.
    It is exactly your hypocritical attitude that makes this blog a complete waste of time.
    You blame bankers for the mess we're in for lending recklessly, then you accuse them of theft for charging a market rate for a product you are not obliged to by from them.
    If banks are so terrible why don't you repay your mortgage, and not have to deal with banks for this product anymore. Probably because you don't have the money to repy your mortgage, and yet these EVIL Banks are providing you with a product that allows you to live in your home.

    Get Real and Grow Up.

  • Comment number 95.

    Message 88 JavaMan1984

    What I mean is that without the willing compliance of the little people who pay their taxes, save their money, know who they are and love what they know the whole superstructure will collapse.

    There is a simple choice before the financial industry and its client state:

    Either, become like us; moderate in our needs and sensible in our lives.

    Or carry on as you are but watch out for heads stuck on pikes.

    I would much prefer that the sinner comes to true repentance but if he does not then he will be brought to judgement. As I said the public are in a hanging mood so minds need to concentrate.

  • Comment number 96.

    If banking and politics were analorgiesed as a sexual romp what would they be up to with their inflated digits and who would be the suckers and who would be the succoured

  • Comment number 97.

    22 Ian The Chopper - You are spot on there.
    To add to your comment, doesn't it make you wonder if the pictures used in the blog are so inaccuarate or irrelevant to the content, just how accurate the content of the blog really is...................

  • Comment number 98.

    #58 and other mathematicians......
    thank you for highlighting my lack of mathematical expertise but i was only asking for an explanation which you have given and robert did not.......If you dont ask you dont learn.....

    Back on topic i note that Goldman are continuing the gravy train with $20 billion in bonuses...and I also note the AD whilst complaining about the banks has done little to curb the excesses of the banks he owns in our name...

  • Comment number 99.

    I was interested in Robert's analogy with the gambling industry.As someone who worked in a Casino (in his younger days)I know something about gambling.
    There is one mantra everyone knows before placing a bet:
    'Never gamble more than you are prepared to lose'
    In a Casino there is only one winner.....the Casino. The odds are stacked in favour of the house. I saw many punters come into the Casino, have a lucky night, and walk away from floor with a stash of cash. Often they would leave with a big grin on their faces. Easy money! Suckers!
    The following night they would be back. The same self-satisfied grin on their faces.
    But this time the roulette ball didn't fall where they expected; the cards didn't come out of the shoe in the right order. Gradually their money slipped away.
    Then there was nothing left. Gone!
    The moral of this tale for the City of London is this: if you are going to gamble with other people's money, be prepared to lose!

  • Comment number 100.

    I seem to recall that merchant banks (remember them) used to be partnerships. That ensures that the executives are betting their own money. Another structure which may be more relevant today is that used by Michelin, in which the most senior executive has unlimited liability but other executives do not.

 

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