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Bank spanked - who weeps?

Robert Peston | 16:45 UK time, Monday, 15 September 2008

For those who believe in free markets, it's a good thing that Lehman has gone bust.

Leyman office in New YorkWhy?

Well a corollary of having the freedom to make hay or fat returns when the sun shines is that banks should suffer for their mistakes.

But ever since the credit crunch set in last year, the US Treasury and the UK government have bailed out banks that ran into trouble

They feared that if Fannie Mae, Freddie Mac, Bear Stearns and Northern Rock had been allowed to collapse, the havoc wreaked on global markets and economies would have seen excessive pain inflicted on too many innocent people.

The problem with these bail outs is that they provided comfort to banks that they could make stupid mistakes and get away with it (well, to an extent).

Not any more.

The US Treasury has well and truly re-established moral hazard - the idea that banks should pay for their sins - by refusing to use taxpayers' money to support Lehman.

And make no mistake, this is a huge insolvency filing, the biggest in US corporate history, with $613bn or £340bn owed to creditors - equivalent to around a quarter of UK economic output.

Big banks can no longer be under any illusion that they can make big, stupid financial bets and expect taxpayers to pick up the bill when the bets go wrong.

Which most taxpayers may feel was a lesson worth teaching - unless they're all impoverished ultimately by collateral damage to other banks and a potentially negative impact on global growth.

Let's hope, for all our sakes, that Hank Paulson's decision to punish this big bank doesn't end up hurting us (and him) disproportionately.

Comments

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  • Comment number 1.

    The other way of looking at this is to question whether the Fed could actually have afforded to bail out Lehman's, having already put themselves on the line to the tune of £3tr on the Fannie and Freddie rescue. If even a fraction of the borrowers default, that's an awful lot of cash the US taxpayer has to find. An I suspect that the US people would be a little less forgiving than the UK people when spending on their armed forces is cut dramatically to bail out a financial institution.

  • Comment number 2.

    Yep teach them a lesson....

    Not much use to me as my ability to trade and therefore earn fees goes down the toilet.

    Next on the BBC: The 5 Year Recession - The Great Depression: They never had it so good.

  • Comment number 3.

    Interesting times certainly.

    I'm a bit confused though why some banks are 'too big to fail' but not others. I certainly believe in free markets with state support where necessary but either we've been spun a lie about how much damage letting a bank fail will cause or (and I suspect this may be more likely) we're about to see the proverbial hit the fan as the shockwaves from Lehman reverberate.

    On a positive note though hopefully this will finally help sort out who is and isn't going to make it (as the weakest banks will start to crumble now one has fallen) and speed up the final reckoning so things can get back to something vaguely resembling normal.

  • Comment number 4.

    I see the argument about Fmae and Fmac causing financial turmoil if allowed to fail----but I still think Northern Rock wasn't a financial decision as a political one...and it hasn't really been saved, so much has had the inevitable postponed at great cost.

    But the moral hazard rebalancing will only have been acheived when over powerful executives have been forced to accept the same terms as the shareholders....ie they don't get to lose their jobs with the aggregated proceeds of the years spent creating the disaster safely banked.

    The best idea I have heard so far (which is so simple that it must be flawed) is to retain all (or some portions) of executive bonuses and options until the true effects of decisions are seen.... say 5 or even 10 years for total payouts to be completed.

    Then if they are delivering "real shareholder value" and want some reward now.... they can even buy some in the market and share in the dividends.

    Finally re the "We have to pay what the market rate is for top talent." justificatory argument----surely that now means, as top talent from Merrill Lynch, Lehman, NR, Bear Sterns...maybe AIG etc are getting zero (or soon will be) the Remuneration committees of the big banks will be shaping the current pay and bonus awards accordingly...?

  • Comment number 5.

    At last I no longer feel alone in beleiving the Banks should be held to account for the years of greed and throwing money at people who can illafford to pay it back.

    Well said RichardCK

  • Comment number 6.

    And will all the fat cats executives and directors be ordered to repay the excessive bonuses and share option profits that they have been paid out of the non-existent "profits" of the past couple of years?

    Will there be zero payouts for loss of office for these directors and executives?

    Don't hold your breath. There is still no penalty for failure.

  • Comment number 7.

    Spot-on article from Robert Peston.
    Bankers everywhere should be made to quake for what they have done.
    How come an idiot like me could see the folly of hyper-house-inflation three years ago, yet the bankers plodded on into oblivion.
    Alan Greenspan also warned all British banks and the government of over-priced property causing a crash.
    None of them listened.
    I hear that New-Labours old slogan of "education, education, education" has been changed to "devastation, devastation, devastation".

  • Comment number 8.

    Is it really that the respective governments are no longer prepared to bail out the banks or is it just that in this particular instance there are no retail customers so there is seen to be less direct impact on voters and hence no headlines showing the queues waiting to try and withdraw their life savings?

    Sadly I tend to believe that if one of the major retail banks went critical the govenment certainly in the UK would step in still and waste more of my money.

    As for learing their lessons yes some banks may but it will take years to work throught the system and those that are in trouble have no real escape route in the short term, so I think this is probably a long way from finished - hold on to your hats!

  • Comment number 9.

    As you noted in your previous blog: There's no lack of cash, it's just in the wrong places.

    The cash, friends and neighbors, is in places like Dubai, Malaysia, Venezuela, Lybia...

    Why? Because we, the good ole' US of A, refused to build one new refinery, or explore for oil (anywhere) domestically, or build a nuclear plant, or develop natural gas or coal resources, etc. for over the past THIRTY years!!

    In the meantime, we decided to move every bit of our manufacturing to places like China, Vietnam, Taiwan, Saipan. We then started moving services offshore--to book a ticket on Delta Airlines, we talk to someone in India.

    If the US ships all of its cash, and manufacturing expertise, and service industries to other parts of the world, guess what happens? We go broke, since all there is left to us is real-estate speculation, and the creation of ever-more arcane financial paper to sell to one another.

    If it goes sour, the bankers just send the bill to the US Treasury.

    'Congress won't let us fail!! We've bought those suckers off!!'

    It is time to end this country's thirty-year binge, not the least because we are harming the rest of the world.

    It is time to draw the line--no more privatization of profits and socialization of risk. It is time to rebuild a real economy.

  • Comment number 10.

    Some of these comments are very ignorant, as well as the schadenfraude / downright glee at others' misfortune being very unattractive:

    (1) A large part of Lehman's shares were held by its staff - some 30-40%. So they are big losers. People saying punish the staff are ignoring the fact that collectively they have lost billions in the last year.

    (2) The comment that a part of bankers pay should be retained for 5 years or more likewise misses the point that this is exactly what Lehman did. A large part of the salaries "paid" (well over a quarter) were paid in shares which could not be sold for 5 years. So these guys have just lost at least one or two years pay each.

    I am also not sure about the "moral hazard" point robert makes. I think moral hazard applies less to management and staff and more to other counterparties. The fed would not have been "bailing out" or "rescuing" Lehman shareholders or management (and there is a big overlap), who would still have suffered huge losses and their jobs respectively. If a firm gets bailed out the people who benefit are those who have lent to it; the fact it needs bailing out is curtains for the shareholders and staff anyway. I don't think many bank boards in future are likely to think "ooh, don't let's do that deal because we might end up like Lehman not like Bear": both are pretty horrific outcomes for those involved. But counterparties might sound the alarm sooner.

  • Comment number 11.

    Who pays when a bank fails?
    Not the bank since the bank money was not enough anyway.
    Not the bank fat cats, they just walk away.
    Certainly the bank minions.
    But who pays the vast majority?
    You know already.
    Yep. You and me.

  • Comment number 12.

    Robert, today I'm sorry for th tens of thousands of Lehman staff around the world who lost their jobs and the thousands of families thrown to the wolves, with the stroke of a pen. For more than a century Lehman was a highly respected firm, carefully and safely run, only to be driven into the ground in the last few years 'thanks' to Lehman's ex-board along with the managers, brokers, underwriters, regulators, credit rating agencies, appraisers, issuers, underwriters, accounting firms and others who got us all into this mess. Sorry but I told you so.

  • Comment number 13.

    Robert's article is spot on, as usual. Banks need to fail now.

    This exposes previous US policy which many on the left here have been saying was so much better than ours.

    There are big implication though for our own banking sector.

  • Comment number 14.

    Warren Buffet on Derivatives in 2002

    " The derivatives genie is now well out of the bottle, and these instruments will almost certainly
    multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous
    they are has already permeated the electricity and gas businesses, in which the eruption of major troubles
    caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business
    continues to expand unchecked. Central banks and governments have so far found no effective way to
    control, or even monitor, the risks posed by these contracts.
    Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our
    owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and
    that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives
    contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view,
    however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are
    potentially lethal."
    Not known as "The Sage of Omaha" for nothing, our Warren....

    Wise and prescient, and I'll bet he makes money out of the present crash.

    An humble acolyte
    ed

  • Comment number 15.

    Peston's take

    Sell! Sell! Sell!

  • Comment number 16.

    Could you please articulate who are the losers when a bank crashes.I have not seen one CEO or Board member(including Non-Execs)suffer through his pocket?Have you?

  • Comment number 17.

    Is it really a re-establishment of moral hazard or is it just a one-off that the US Government let this one die before the very eyes of billions watching? The (non)move was probably more to impress the outside world rather than the American bankers. They want to prove that the US is a free market, because they will try anything at their disposal to lure international investors into pumping money into the country.

  • Comment number 18.

    It looks like Lehman was allowed to fail because the US Treasury judged that the US and World economy would be able to handle the fall out. We'll have to see if they're right.

    The other point to make is that markets are not perfect, hence the fact that there is no absolute free market - the US Treasury make the rules and regulations that have allowed large numbers of their banks to get themselves in trouble - its not as if this is a one off. If these latest failures hurt the US (and world) economy, the blame will lie with the US Treasury, not Lehman Brothers...

  • Comment number 19.

    There are some interesting points here.

    I don't think a government can or should allow a retail bank to go as it ruins Joe Voter who is largely an innocent party in the arrangement.

    However an investment bank should know how to behave better. So hard luck on Lehman and their staff who seem to have drawn the short straw.

    So moral hazard is back. Maybe they should also bring back the institutional separation between retail banking and investment banking. This should make the situation clear to all the boys and girls.

    I am surprised how little the markets were affected overall by this situation. I expect it had already been factored in last week.

  • Comment number 20.

    On the other side of the argument, it's not all doom and gloom.

    Us insolvency practitioners will be keeping the Maserati market afloat single-handedly.

    Plus there will be a lot of affordable property available in the home counties.

    Every cloud has a silver lining they say!

    What-ho!

  • Comment number 21.

    We exported the manufacturing base, sold the expensive houses to foreigners, brought labor force from other countries, we brought generations on dole, taxed the hard working as much as we can, etc. Also we were dancing to the tune of greens.

    Now the country is in ruins. Is there any thing else government own that can be sold off?

    After every thing, looks like even John Majors government was far better.

  • Comment number 22.

    Mentioned on another site is the fact that another bank has already put a charge on Lehmans' assets to the tune of $138billion. Wow!

    Another thing to ponder which maybe linked to the above, is what is/was the total value of CDS's (credit default swaps) issued and held by Lehmans. (A CDS is essentially an insurance policy issued by a party with intrest charged, to a second party against the possibility that a third party will default on a loan issued by the second party. Used mainly in the morgage securitisation markets (think sub-prime!) the question has to be if Lehmans goes the CDS market will start to unravel...expolde to such a degree that is beyond quantifying.

  • Comment number 23.

    Given most industries and businesses don't come with taxpayer-funded safety nets, it's about time banks were reminded they don't occupy a gilded pedestal. I have sympathy for the staff - been made redundant myself more than once - but they cannot expect to be untouchable from the failures of their company.

    Maybe the surviving banks will now be compelled to manage risks in a sane manner, thus protecting both jobs and the economy.

  • Comment number 24.

    In the UK we have seen a massive rise in the buying of 2nd homes - people have undertaken a significant increase in debt - on the misguided basis that they will earn lots of money from either renting out the home via tenants or holiday homes. Banks have actively encouraged this buy offering such individuals mortgages .
    This is such a short sighted view by both banks and individuals. It is interesting that such activity is not viewed as setting up a business and therefore individuals are not expected to have undertaken proper research into the market they are hoping to exploit.
    Banks have taken huge risks in allowing people to underetake such individual risks.
    Sorry, but I blame both the individuals and banks for having financial beer goggles.
    I know people who earn 30 grand a year who boast about owning 2 homes yet don't see what risk they have exposed themselves to.
    So it is ok to blame the banks - but don't forget the individuals who have undertaken debt for the so called prestige of owning 2 properties. By the way - I am from Yorkshire and detest the current view of many that none of this is my fault, its always them that's got it wrong.

  • Comment number 25.

    "£340bn owed to creditors" .. who has lost this money when Lehman is wound up?

  • Comment number 26.

    Lehman collapsed not only because of its debts but because of the practice of 'shorting' by hedge funds etc. Surely this should be made illegal now. It seems so immoral that some people have profited from others' misfortune.

    Perhaps nobody is weeping for Lehman's but what about the thousands of employees now without jobs, many of whom have also lost shares that were to provide them with pensions? Does Robert Peston think is fair or 'a good thing'?

  • Comment number 27.

    It looks like Hank Paulson was right (so far), and I was wrong (so far). The introduction of moral hazard is timely in case there are any harebrained notions about re-starting credit markets to what they once were.

    Let's face it: credit is not getting back to where it was for years which ultimatelty means that the mortgage market is dead and will stay dead for years. Again, this makes recession inevitable and we're going to turn the corner and find millions unemployed - hundreds of millions globally.

    There are some things to consider:

    1) We are seeing a massive transfer of economic power into fewer and fewer hands. Necessary perhaps, but where is it leading us?

    2) The venerated Alan Greenspan said that a stable US housing market is the key to this whole crisis. Now this could just be me, but why was he the Fed Chair? As far as I can see we just took a massive step away from a settled housing market, and if it does settle it will settle in a place where I would imagine that only very few people have any equity in their homes and chances of house prices rising substantially are gone. (In Japan, eighteen years after the house price bubble burst, house prices are still falling. Not even 0% interest loans stimulated the market!)

    Can someone help me out with this final one? Adam Smith notes that a pound goes far i.e. that it buys bread for the butcher then the same pound buys shoes for the baker, then the same pound buys candles for the cobbler and so on. Is there are similar theory that is mathematically constructed for debt? What will a 3 billion black hole work out across the economy? How will it be magnified?

    Thanks.

  • Comment number 28.

    If one accepts Greenspan's argument that the
    US banking system cannot be stabilized until
    the price of real estate stabilizes, then we could
    be a way off from a systemic fix.

    I only hope that the politicians here in the states
    don't try to prop up the property market, as it
    will only prolong matters.

    My own personal "coal mine canary," the
    National Association of Realtors just ran an
    ad on the radio about how the commercial
    real estate market is "sound." I was wondering
    when that shoe would drop, and I suppose
    that now is the time.

  • Comment number 29.

    There is no reason now why bankers are paid the same as other professionals, lawyers, accountants etc.

    Yes talent needs to be rewarded, but only in accordance with the rules of supply and demand.

    Now there are less banks and people being laid off, surely this means a reapplication of the rules of demand and supply.

    Surely now the banks are obliged to pay lower salaries and bonuses as given current maeket conditions, there is no were for these bankers to go. they should be thankful for the jobs they have like the rest of the population.

    The greed of the bankers is well documented and my sympathy is limited, however my heart goes out to the post room boys, cooks, cleaners, secretaries etc who where just doing thier jobs and suffer from the greed of thier peers.

    It is both a sad and positive day for business. sad for the suffering and financial chaos resulting from this credit crunch and job losses but positive in the fact that as long as these current crop of bankers work, the likes of this credit crunch will never happen again (until it is forgotten to memory in economic text books only to resurface in say sevently years)





    They have just proved that the only demand for their services were from other banks who are either making losses or have

  • Comment number 30.

    fingerbob69 #22

    You wrote about the possibility of the Credit Default Swop (CDS) market collapsing and considered this might cause terrible consequences for the financial system.

    As you said, the CDS market is essentially an insurance policy which is issued to insure against the possibility of a borrower defaulting on a loan. As I understand from what I've read about the CDS market, the CDS market is already collapsing as the numbers of those willing to issue insurance policies have declined sharply and the rates charged by those remaining in the market have increased very sharply, so making insurance an unattractive and expensive option and increasingly unobtainable option.

    In conclusion, the collapse of the CDS market will only mean the end of the ability to obtain insurance. So why should this be the problem you make it out to be? The same amount of bad debt is in the system whether or not the CDS market existed or not.

    The good news is that banks will have to face up to their own bad debts instead of trying to pass the risk onto some other institution in return for paying them a fee.

  • Comment number 31.

    Thank you #22 - fingerbob69. I think I finally grasped the concept of CDs.

    Only a few days ago in this column, I tentatively suggested it was time for a major financial institution to be allowed to go under if only to send a message to the rest that a state bail out was not a foregone conclusion. I was roundly lambasted at the time. Now suddenly everyone is agreeing with me.

    Which is it please?

  • Comment number 32.

    I am hearing very strong rumours from senior people within Lehman at CW that a deal with Barclays was agreed but the FSA vettoed it. From other experience of the FSA behaviuor in recent weeks, with regard to banks taking on any new form of potential risk, the FSA are simply saying no as they do not want to have to to try and deal with another form of 'Northern Rock'

    One way of avoiding risk is not to allow anyone to take any. This may 'protect' the British tax payer, but 25,000 people are now out of a job when this could potentially have been avoided




  • Comment number 33.

    #27 - GrouchoMarxist1
    #28 - gunsandreligion

    Please define 'stabilized' for me.

    If it means that prices return to their recent levels, that I fear is a long way off. If, however, you mean that property both in the States and the UK has been seriously overpriced due to the ready availability of cheap borrowed money and property prices are going to 'stabilize' at a more realistic level, that process seems to be already well under way.

  • Comment number 34.

    Like others have pointed out, Lehmans have liabilities of some 618 billion Dollars - That is a staggering amount of money.

    Who does Lehman owe money to?
    Are any British Banks involved? I wouldn't be surprised if there are and this this was managed on purpose!

    This credit crunch could last a decade!

  • Comment number 35.

    the problem with the moral hazard argument is that it treats the company like a person. it is not a person, it is an organisation comprising many people, and it is those many people that individually every day make decisions about risks taken on by the bank. logically, if bankers are to be encouraged to manage risk sensibly, they must be the ones to lose most if they make a mistake.

    i worked at an investment bank for the last 5 years. it was one of the more conservatively run banks that has sailed through the recent crisis fairly unscathed.

    surprisingly, based on my experience, i do not blame the evidently poor risk management at bear stearns, lehman and merrill on their senior managers, who in my opinion do lose a lot when the whole bank goes down. people who rise to that level of management strongly identify their own personal prestige with the success of their company, and are very averse to taking on any risks that threaten the entire bank. i believe that for the executives at lehman the current situation is truly a personal catastrophe and something they would have done everything to avoid throughout their tenure at the top.

    the problem in my opinion lies in the attitudes of that mass of hideously overpaid employees, the traders, who are at the core of the investment bank's day-to-day business. in my experience, a very typical attitude of a trader when putting a risky transaction was "we don't need to worry about xyz risk scenario, because if it ever happens we will be out of our jobs anyway" or "this transaction could be very problematic when it matures in 10 years, but none of us will be here when that happens".

    another big problem is the hit-and-run tactic - it is so easy for a banker to switch his employer (and negotiate a guaranteed signing-on bonus in the process) that traders are incentivised to put on hidden toxic positions that generate a healthy looking short-term profit in time for this year's bonus round, leaving him free to jump shop before the hidden problems in his book are discovered by management. this problem is particularly prevalent in fixed income (i.e. traded debt, such as mortgage-backed securities).

    when bankers are so grotesquely well paid (believe me, they earn in one year what most uk workers receive in a decade or even a lifetime), their worst case downside (provided they don't do anything criminal) is to be forced into early retirement. unlike most hard workers (and do not doubt that they ARE very hard workers) they don't need to worry about financial insecurity for the rest of their lives.

    so i think that if we are to avoid repeating history, there has to be a sensitive regulation of executive pay in the city. it needs to be done by international cooperation with the us, eu, etc, or it will just push financial services to relocate to a friendlier jurisdiction. and it needs to be done sensitively, as in normal times the bonus system is very effective at promoting meritocracy within the bank and this aspect should not be undermined.

    my recommendation would be to require that the bulk of each annual bonus be paid out over a 5 year period after the date of reward. if an employee does leave his employer, he will forfeit his remaining unpaid bonus. this is a measure that many investment banks do try to introduce already (bank management DO care about the long term success of their bank and try to get employees to care about it too). the problem is that the jobs market in banking is so competitive that if any bank tries to impose such a scheme unilaterally (as merrill lynch threatened to in recent months) they start bleeding all their best employees to rival banks that are more willing to pay cash upfront.

    i suspect the fsa, sec et al would find the management at most investment banks surprisingly willing to discuss some form of regulation along these lines, provided that the regulators are willing to show the necessary sensitivity.

  • Comment number 36.

    robert,

    the financial industry has got itself into the present mess but appears unwilling to look for the "new" approach required.

    is it now time for the bank of england to stop pouring tax payers money into the financial system only for the banks to hoard the cash.
    is it now time for central banks to provide funds direct to building societies who must make them available for first time buyers to purchase a house.
    rates charged should be base plus 15% (a fair and ethical margin) set for the full term of the mortgage.



  • Comment number 37.

    Maybe you should get some research done into the facts of the matter, ie how much profits were accumulated by Lehman over say the past 10 years and how much bonuses have been paid; compared to how much losses have now been posted in the past 12 months.

  • Comment number 38.

    robert,

    is it correct that Lehman staff held close to 40% of the equity.

    if true maybe we should look at financial companies where the majority of the shares are held by staff and small private investors for the next casualty.

    if a bank were to fail in those circumstances the majority of the losses would not be felt by the city.

    given the recent crazy trading in HBOS shares, what percentage of the banks shares are owned by its staff and private individuals.

    and who or whom would stand to gain the most by a collapse. did the FSA look into this issue during their recent investigation?


  • Comment number 39.

    #27 'Paulson was right'!!!???

    That SOB has been behind the curve since the curve was a striaght line in nappies!

    Everything the Fed has done, aided and abetted by the other central banks has either been wrong... slash and burning intrest rates to 2% in 6 months or misguided... why Bear Sterns not Lehmans?

    Rumour has it the Fed will again cut intrest rates, either in an emergency anouncement on Tuesday or on Wednesday after their scheduled meeting. Why? With inflation already over 6% intrest rates are already negative. Do that and you're living the Japanesse dream... decade long stagflation.

    And don't forget, everytime the Fed or any other central bank increases 'liquidity' or injects $Xbillions to stabilise an institution that's 'too big to fail' that central bank is increasing the money supply. It's what they used to call M3. The Fed wont even produce this basic statistic because if it did the World would have a collective heart attack! Needless to say the Fed is printing dollar denominated notes as fast as they can push that little red button that electronically credits Wall St USA with billion dollar liquidity. And where does this get us? With inflation of 10%... 15%... 20%+ á la 1978/1979 with a credit freeze mixer! Think a loaf of bread expensive now at £1.25? How about £1.50...£1.80?

    The Dow has closed down 504pts or 4.42% Asia, after being closed all day now, gets to join the party. This will not be slash and burn. This will be scorched earth!

  • Comment number 40.

    re the posts on who loses. The plot is so thick it will take PWC the accountants a long time to figure out.

    However, it may be many emerging market economies who take the hit, the markets will tell us in the coming days. Hedge funds too perhaps.

    in the end though, a large amount of liquidity is gone from the market, expect real mortgage rates to stay high for sometime, even if the BOW cuts interest rates.

  • Comment number 41.

    The faster a few more banks and hedgefunds go under........ the quicker commodities will get cheaper!!!

  • Comment number 42.

    The fall of Lehman is not a 'good thing' Robert but an 'inevitable thing' for those that believe in free markets. Free markets are not about good or bad any more than the force of gravity is good or bad.

    Don't underestimate the banks ability to make stupid mistakes with or without comfort levels of government bail outs. Has there any been a period when the banks didn't?

  • Comment number 43.

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

  • Comment number 44.

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

  • Comment number 45.

    # 33 by 'stabilized', and it was Alan Greenspan who used the term, I would think it means a price that stays for a time before starting to move upward - a bottom to the market if you like.

    The problem is getting to a stable point. If mortgages move back to 3x yearly salary then it means a huge correction, but you'd have to assume that hundreds of thousands of people would have lost their house (not forgetting buy-to-letters) by that point driving the price even lower and making it likely that houses would be even cheaper, so it's difficult to see a stabilisation point in the near future as no doubt it will overshoot on the way down (and let's face it: the value of a house is what a person is prepared to pay, what competition there is and what lending they can get. There is no intrinsic house price; and not much in the way of a barrier that cannot be breached in terms of how low prices can go.)

    We're probably going to see a very unwelcome and running grievance: people, families homeless with empty properties all over the place. All in the name of maintaining market value.

  • Comment number 46.

    "Big banks can no longer be under any illusion that they can make big, stupid financial bets"

    ... that is all very well but the problem is to keep the global ship afloat!

    Quite obviously liquidity grew far too much and has to be and will be reduced. Collateral damage limitation is the skill needed now.

    1. All private depositors (savers) need a pledge of absolute protection.

    2. No commercial depositor can be protected.

    3. No bank or financial institution can be protected from the consequence of their own stupidity.

    Three simple rules.

  • Comment number 47.

    Quote of the night...

    Jeremy Paxman [BBC Newsnight]

    "You can't call youself a 'master of the universe' when you're carrying the contents of your desk out in a cardboard box"

  • Comment number 48.

    We are all equaly guilty, but bankers are more equaly guilty than others, when their ferraris are incuded

    Investment bubbles are not created by giving suckers an even break

  • Comment number 49.

    #32 - insider21 wrote:

    ". . . a strong rumour that a deal with Barclays was agreed but the FSA vetoed it".

    If this is the case, it seems that at a time when people are calling for more regulation, this is an example of precisely how not to regulate.

  • Comment number 50.

    The UK shouldn't be in this mess. We've been badly governed for years; under Tories and Labour. Take a look at the link below:

    http://news.bbc.co.uk/1/hi/business/7430641.stm

    Its a BBC article which shows Norway has a $400bn sovereign wealth fund; half the amount of Abu Dhadi but still second in the table!

    The Norwegian saved their N. Sea oil proceeds. Now they have a $400bn wealth fund to pay for their pensions. The monies are all ethically invested!

    What happened to our N. Sea oil? why aren't we in the same position?

    We've been badly let down by successive governments.

    We still pay for their salaries and their generous pensions; through our taxes. And the government still expect us to save for our own pension as well.

    I don't mind paying for my own pension but how many other peoples pensions am I paying for? enough is enough!

  • Comment number 51.

    #33, threnodio, by "stabilized" I meant your second
    meaning. However, it seems to be taking a bit
    of time in the States, probably both because the
    US is a large, diverse market, and because
    property owners generally don't sell until they
    have to.

    The property market here is cascading down
    a flight of steps, each step representing a little
    bit of stability, and we are probably about a third
    of the way down the stairs.

  • Comment number 52.

    In my opinion, free markets are great, but you also need a government who's willing to regulate properly to stop the banks from following policies which are plainly against the public interest and which are destined to cause a future collapse in the entire market.

    A situation similar to this arose around 15 years ago in the uk insurance industry, but at that time the uk government knew what they were doing and they forced the insurers to put their house in order before it had a chance to get completely out of hand.

    The insurers lost a lot of money due to their previous bad practices, but it never got truly out of hand; an ideal situation for a free market as the insurers effectively got punished for doing a bad job, but the general public was pretty much uneffected.

    This time it's the banking industry rather than just insurers, and sadly, the uk government in the last few years, despite knowing all about the risks and potential damage, decided to do absolutely nothing about anything, allowing the banks to continue with practices which the government knew full well would end in disaster, and that's why it's reached the stage it has (same applies to the american government too).

    The banks are to blame for the bad practices, and they should be punished for it financially, but equally the government are to blame for not keeping up with how the financial system was working.

  • Comment number 53.

    I think it was gunsandreligion that said a bank without bankruptcy is like religion without hell!

    btw... I could not agree more with post #9 OldSouth ....except exactly the same could be said for the UK. Do you think the banks have been running our governments for the last 90 years?

  • Comment number 54.

    "Not much use to me as my ability to trade and therefore earn fees goes down the toilet."

    Sorry, apeman, but if you were trading derivatives or even engaging in the 'trade' of shares, which became a casino with deregulation, then while I have some sympathy for you as an individual I don't have much for your profession.

    Actually, I don't have any.

    Deregulation was inevitably leading to this sort of collapse - the irresponsibility of financial manipulators chasing every last penny has been the bane of economies for hundreds of years. Just ask Adam Smith; in the Wealth of Nations he lambasted the irresponsibility of uncontrolled and unsupervised managers over 200 years ago.

    Lack of regulation means that irresponsibility is rewarded in the short term, with hell to pay later. If traders were as clever as they thought they were, they would have seen this coming and got the hell out a couple of years ago, when mortgage multiples left sanity behind and burst into cloud-cuckoo land.

    The banks seem to fail to learn the lesson of every 10-15 year property collapse - that prices go down as well as up. They also repeatedly fail to recognise and heed the warning signs, such as the invention of indices to prove why the patently ridiculous is sensible ('index of affordability' is only the latest). In the words of the song, they’re not as smart as they like to think they are.

    Sustaining a bubble market through creation of ever-more arcane and complex financial 'instruments' only leads to a more violent reaction when unravelling time comes - which it has now. A good adage is: if it can't be explained simply and easily, it's probably too dangerous to buy.

    Try to describe and explain securitised subprime mortgages on one side of A4. Leave plenty of room to explain why they were a good buy. And a bit of room to explain why they became so toxic. That last shouldn't take long: "inevitable: they were a bad idea in the first place, a convoluted way of seeking to conceal reckless, ridiculous lending that had gone beyond prudent or justifiable and left sanity in their turbulent wake". That should cover it.

    The emperor had no clothes, not a stitch on, and traders in derivatives and, latterly, in shares are very much to blame. You – and everyone like you – should have had the courage to say so. Masters of the Universe? I think not - more like self-deluding fools, who ended up believing their own propaganda as well as the ridiculous praise heaped on them by senior management – who also deluded themselves that they knew what they were doing. Did you ever feel the slightest embarrassment at being rewarded, far more handsomely than those working to create the value you tossed so carelessly around, for doing something so fundamentally worthless - shifting numbers around on a screen? Following the herd, in whichever direction it went?

    A regulated market may have restricted your ability to trade with total freedom but it would also have restricted the ability of investment houses of all kinds to cause the type of damage we are only just beginning to see. This one is going to run for a while yet. In the UK, the average house price over the long term has cost 4.5 times average income. It's currently nearly 7 times, even after the most recent wave of price falls. Add in the effects of major collapses and restrictions in the financial sector and we're looking at the possibility of a further 50% off prices, as the pendulum swings back too far before finding the balance point.

    And then it will all begin again. We'll be assured that things are different, yet again. There will be calls for regulation to be eased, yet again, for the entrepreneurial spirit to be liberated, yet again. Only problem - it always ends in tears, every time, every ten years or so. The longer it's delayed, the worse it is - and it's been too long since the early 90s.

    One looks back at the days of maximum 2.5 times earnings for a mortgage with nostalgia. It would have kept prices reasonable and reduced the likelihood of huge collapse from inevitability to merely possible.

    A lot of people are going to suffer, a great deal. So forgive me if I weep very little for traders who have been caught out; this crisis was of their industry's making. Cry first for, the manufacturing workers, the ceramic workers, textile workers, even the miners, all the other industries who were pressured to achieve one-off savings by moving to 'low-cost areas' (now subject to massive wage inflation) rather than encouraged to address and solve systemic problems, through means like Lean manufacturing, Six Sigma, TPM and so on.

    Shed a tear, too, for the people in rural communities who found themselves unable to compete with the spending power of financial services workers intent on buying second homes and turning once-flourishing towns and villages into weekend dormitories.

    Possibly one good thing will come out of this: the realisation that real value exists only where it is created, in factories and on farms around the world - and maybe in the retail sector. It does not exist and is not created on screens, on trading floors or in hubris-inviting skyscrapers. Trading paper doesn't add value; creating something from the dirt, in factories and farms and in some creative industries (to be fair), that's what adds value. Real value, not a twitch on the ticker at the end of the dealing day.

    You have lost the means to earn fees; others have lost and are going to lose homes, jobs, families, after striving to learn and develop skills in industries that banks and stock traders decided were 'old hat', 'old economy', or whatever. They had no power over their future; that was reserved to banks and trading floors, driven purely by where they believed they could make most money in the shortest time, with no thought to genuine, long-term value.

    Time for you to get some real, tradable and valuable skills, which people will want to pay for. Good luck with it - I hope you put something aside from the good times.

  • Comment number 55.

    Incredible, after years of shoveling money into the deregulating, neo-conservative, victory at all cost Republican party, what happens to the big investment banks?
    The Bush Administration actually did what they said they would do. Nothing.
    What is the point of deregulating if you can't manage yourself correctly? Why should we now step in now that you made a mess of things?
    Now, historically, every time we did deregulate the financial sector, we had disasters, like Wall St. Crashes, Saving and Loan bailouts and now the current debacle. Who is to blame? The Republicans for not learning from history or the banks for not being due diligent?

  • Comment number 56.

    DEAR ROBERT,
    There is something very wrong here "What did Alstair Darling Know when he stated four weeks that we are in the worse finacial crisis for a decade or more"?
    "What did he Know">
    Seems to me Labour knew more than they wanted the rest of us to know.

  • Comment number 57.

    The main problem is one of integrity as I see it. The lawmakers are obvioulsy on the take. In any other country this would be sufficient for the US to suggest a regeime change but when all those concerned have their fingers in the till the legislation is always going to be slanted one way.

    Why is it that this kind of behaviour is supported by the general population?

    Can not some sort of democracy be brought into play when such large amounts of public funds are used without even so much as a briefing from the Head of State? I say put it to a vote everytime and if its no then let the institution go bust that is always the best solution to bad and reckless management.

  • Comment number 58.

    It would be better if the question was asked - "Why were the banks allowed to believe in the first place that the taxpayer would bail them out".

  • Comment number 59.

    I am so happy that we don't have to care about what happens around us. Economy is complicated, and we don't have to care about rules and regulations that keep it working. We can be irresponsible and still "hope, for all our sakes," that we don't have to pay. Aren't we sweet?

  • Comment number 60.

    Unfortunately, the main losers from falls in the stockmarket will be Pensioners whose funds will lose value.

    Of course anyone who owns Shares will lose out, which includes Insurance and Life assurance companies too, and their policy holders.

    One way to give the UK economy a shot in the arm would be to give the Public sector a fair pay rise say four and a half percent.

    That would boost business through consumer spending.

    Apparently the average pay rise in the private sector is four and a half percent , with some getting much more and some much less.

    It would be useful if Stock lending was reduced, this is where an agent (fund manager) lends its Clients stock without their knowledge at a profit to the Manager.

    Stock lending enables massive shortselling to take place.

    Don't need to be a genius to see the problems that causes!

  • Comment number 61.

    Absolute nonsense i think there should be a pay freeze for all for 18 months - our costs are now so high that our businesses are moving into Europe to manufacture because it is much cheaper and no planning hassles with arguments about protecting the countryside instead of jobs.

    I am one; all we do here now is sell because it is too expensive, too much red tape, lack of skilled or interested workforce etc and there are many others who have been left with the same problem very high labour costs because they all have high mortgages and debts. We cannot compete in manufacturing because of this financial legacy.

    Look reality check for every 5 containers brought into UK only 1 goes out again loaded!!! Hello what is going on...apply the same principle to your bank account and ........pam bust!! We are nearly.

    The best way is total financial meltdown on the property side to allow us to get back to basic low costs. I hope it happens soon.

    Sorry if this is bad news but it is the truth.

  • Comment number 62.

    September 15, 2008 12:29 PM EDT

    Thanks for your reports Robert. The really scary matter now is the (non-)management of AIG's demise. It provides a vital undergirding for the whole crazy investment bank model. Insiders must have known that AIG would be tested...but they appear to have been asleep at the wheel. This really is the big test for the US authorities, the major banks and US attitudes towards the international financial system. I can just hear George Bush saying 'heckuva a job Paulson' as things continue to go from bad to worse.

    I believe that there is hardly a major bank that doesn't interact with AIG in ways that are critical banking system life support. AIG is now trading down at $5.94 a dramatic 51% fall - more than Lehman in the hours before its crash. The authorities will have to be extraordinarily creative to cope/avoid accelerating failure.

    The hubris of Friedman and his fellow travelers has been well and truly exposed. However, the extraordinary genius of his brilliant rival, JK Galbraith, will still not be acknowledged. JKB remains, after Keynes, the commanding economic intellect of the 20th century and a truly exceptional communicator.

    I confess that I did not expect to see the conventional wisdom turned on its head in such a short space of time? Crash 2008 will be a fascinating study in the years to come...but right now it is a truly depressing and increasingly frightening spectacle.

  • Comment number 63.

    I would just like to make a few comments about the problems in the financial markets and about Lehmans.

    Tragedy

    Though many of us working in other areas of the economy might say that it's about time these city slickers got their comeuppance, it none the less is a tragedy for them and their families as well as for the people working in peripheral businneses and depend upon the presence of these banks for a living. In the final analysis we will all suffer because to a certain extent we have all been living the same lie.

    Remuneration levels

    Now that these self professed masters of the universe have been exposed as mere mortals, living in some form of strospheric bubble, it is to hoped that their future remuneration packages will be moderated to reflect this and to bring them more into line with other sectors of the economy. Where the jobs are just as demanding and it is sometimes more difficult to manage and make an adequate return. If that happens then it will go someway towards moderating people's expectations in other sector's of the economy, particularly in the southeast area of the country.

    Better regulation and administration

    We should now expect to see the financial markets and banking sector to emerge from this bruising encounter better regulated, better administered, better disciplined and with greater degree of integrity than before. We should also expect the regualtors and auditors to be more dilligent when carrying out the duties they are being paid to do. They should be vigilant and highlight any dodgy or suspect practices they come accross with particular attention to the way traders are allowed to operate and become a law unto themselves.

  • Comment number 64.

    Dear Robert

    There will be a major loss in the UK very soon, as Companies ajust to this, Bankers really are the "PITS," they are modern day pirates out to rip off the poor, and the pensioners, because they are a drain on society, Pension funds were wrecked by Gordon Brown, and HE IS THE CAUSE OF THE STEALTH TAX, which will now be the major hurt for everyone, I have no doubt what so ever that The Government knew more than they werre telling, and they sat back and let it Happen.

  • Comment number 65.

    This is a cause for enormous celebration. The whole capitalist system is crashing to the ground. I have no sympathy whatsoever for any of the employees, shareholders, or anyone else affected by the demise of Lehman Brothers. You sell your greedy soul to the capitalist system, you take the consequences.

    Perhaps the 21st century is finally the time for Marxism to become the prevailing world system. Fingers crossed.

  • Comment number 66.

    I am surprised by how many people insist that Lehmans and any other bank should be bailed out because it will restore confidence in the system.

    No it won't. Sinking taxpayer money into a badly run company will simply keep it running and taking business from better-run competitors. Letting it fail will help those remaining have a less crowded field to compete with.

    These businesses were pocketing trouser-busting bonuses as recently as 2006. The CEO was on something like 45 million bucks a year. You have to ask the question. Is he really worth that much? Maybe the shareholders who are whining would car to ponder why they did not take a closer interest in the risks their company was taking? I suspect the answer is simple - until the credit crunch, they were creaming it in.

    Pity they put nothing away for a rainy day but instead gave it all away in bonuses and dividends. But I see no reason why the government should plug that gap.

  • Comment number 67.

    These banks live in a false economy anyway. They are paid high wages and are given big bonuses. When it falls flat the taxpayer bails them out. They are a scum like tapeworm living off others and give nothing but illness in the host in return.

    When we eventually ride the storm and things go back to normal (if they do) how long will it take for the banks to put us back in this mess.

    An argument for a 'mixed' economy in the banking sector sounds compelling to me.

  • Comment number 68.

    Most of the economic growth of the last 15 years was an illusion produced by magic and debt.

    The hard reality we see now is that Investment Bankers created a lot of money from smoke and dreams, giving some people an illusion of wealth.

    I always remember a wise man said once that "it is when the tide goes out that we can see who has been swimming naked".

  • Comment number 69.

    In one of the newspapers this morning, I read that Lehman employees were expected to plough back into the company some or all of their bonuses. Yet, as the BBC web site reported yesterday, a PwC spokesman said that when they went into Lehman the company had no money at all (only liabilities), and that is why the employees were laid off immediately.

    I find it especially reprehensible that Lehman had not ring-fenced enough money (UKP 42 million, I gather) to pay its employees for even one month. Loyalty must be a two-way street, if there is to be trust. I am sure that all the employment contracts - for secretaries and receptionists and catering staff, as well as for higher-paid traders - stated that the employment could be terminated by at least a month's notice ON EITHER SIDE, not just from the employee.

  • Comment number 70.

    Re the short sellers/villains point raised, this just seems to me to be a classic example of where the financial markets have gone so far wrong.

    Equity markets exist for firms that do stuff to raise capital cheaply so that they can invest that capital and generate a return from doing more stuff.

    When my pension fund buy shares in a company, I am theoretically aiding the process.

    When some shark comes along, borrows my shares from the pension funds' investment bank, hawks them as if they are dumping toxic waste, then returns them to my pension fund in a much more worthless condition, all they have done is extract value from the markets, and lined their own pockets.

    In much the same way has the financial system created an interbank market in more and more complex products structured to generate fees and "lock in" a few basis points, whilst losing sight of the services they should be providing (simple - finance, liquidity, investment and risk management).

    Those who stared agog at the bonuses being handed out in investment banks were told that we were victims of envy and should be grateful for the benefits the financial services industry brought us all.

    Now we know the truth - that the value being distributed was not value created, but value extracted.

    In 2006 and 2007, the 5 big investment banks paid a combined $75 billion in bonuses alone. Just the 5 of them. $75 billion.

    Go figure.

  • Comment number 71.

    Are you really sure that "teaching a bank a lesson" is a good think?

    Also don't you think a lot of US Citizens will have to go back to work because their retirement savings have been wiped out?

    And what are the mistakes in investment that they have made?

  • Comment number 72.

    What I'd like to know is who was the idiot who convinced the worlds banks that debt was an asset?

    Perhaps the worlds bankers need to get back to school and relearn the basics.

    What really hurts is that so called "top executives" picked up millions in bonuses and themselves laugh all the way to the bank with no recourse.

    Such is their incompetence that they should be personally bankrupted for the mess they've created. It's one thing to oversee the demise of your own business but to walk away with millions is an absolute disgrace.

    As usual the middle classes well end up paying whilst newly "retired" bankers will thumb their way through the latest yachting gazette wondering which to try next.

  • Comment number 73.

    Funny how all the media are now screaming doom and gloom. Of course, they are right in that sense, as we're only reaching the middle of this crisis.

    But where was the media just a few years ago? Over the last 10 years there have been many prominent and respected people warning about the coming 'first world debt crisis'... but the media chose to ignore them. Presumably the editors wanted to max their income by selling advertising space - and didn't want to alienate their clients or readers. (In the case of the BBC they probably didn't want to get accused by the Government of spoiling their party. After all, Gordon wanted to be known as a 'prudent' chancellor).

    While I am delighted that at last these big banks have to pay the price for their greed, it is in the end us who will pay the price.

    Instead of bailouts with our tax money, we will be paying with higher interest rates and the loss of our pension pot. Considering that there is a growing population of older people about to retire... Who will pick up the bill for their failed policies?

    More regulation and honesty will be needed to get the system back on track. But we're not there yet. So hold on for the ride!

  • Comment number 74.

    I think Robert needs to check the definition of moral hazard. It is "the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk". This is clearly the situation the banks were in before, when a government bail-out was expected. Now that the banks know they run the risk of collapse, it has reduced the moral hazard, not "re-established" it.

  • Comment number 75.

    Investment Banks should stick to their description and not behave like gamblers in some universal Casino.

    That means investing in Companies/Projects and taking a share of the profit/risk. It means taking a long term view. Sadly this is something that the 23 year old "Investment Bankers" have yet to learn, maybe they will now.

    It was obvious even from the days of Interest Rate Swaps that Derivatives and securitisation was essentially a gamble and not investment.

    Personally I've got physical gold sold to me by the ex Chancellor at a bargain rate.

  • Comment number 76.

    It strikes me as nothing more than a game of financial poker... or perhaps feeding a slot machine. They don't think the game or the machine won't pay, they just expect it to.

    If banks/investors want to take risks, do they actually think as far as "what if no one bails us out," or do they just think "to hell with it, just think of the potential gain."

    Press (a) if you think they're concerned about being bailed out or

    (b) if you think they're concerned about the grade of the risks.

    I think (b) it's a risk game, they are just concerned about making as much as possible.

    The trouble is, you/we can't control their decision-making processes. They'll do precisely what they think is most profitable, until they run into difficulties. If they then need bailing out, they come cap in hand.

    I doubt that they even think about that in advance. They just see the carrots dangling. But unfortunately, the carrots only dangle in cycles and those cycles end every ten years or so, sometimes sooner.

    Unfortunately, the rest of us, the taxpayers and the world economy are in their hands. And those hands are just grubby, feverish mitts on a slot machine, no better or worse than a gambler in a Working Man's Club.

  • Comment number 77.

    Just wanted to lighten the tone for a moment.

    I've just applied for a job via Lehman's recruiting website.

    Not holding out much hope though!!!

  • Comment number 78.

    $6 Billion bonuses last year. Bust this year!!!

    It doesn't take a genius to work out that there are a lot of people in the financial world taking millions of ordinary people for a ride. Who will end up suffering though? The ordinary people of course.

  • Comment number 79.

    totaly agree, but what a shame the world follows them down.
    i was shocked when i heard some big banks had lost billions (and some had gained billions - goldman!) by betting on if the market goes up or down.
    This is not the horses on a weekend, this is customers and shareholders money i presume and now taxpayers suffer and it impacts the world globally.
    Some people should be going to prison for a long time if they are found placing any such bets that are proven absolutely not to be net profit or there own personal funds.
    get the feeling the hedgeys have forced them to do it to compete with them, kind of understandable for a hedgey as their clients maybe understand the risks, but even they need to be controlled.

  • Comment number 80.


    Bail outs are OK and are meant to take place as our central bank is intended to be the "lender of last resort"

  • Comment number 81.

    Robert, you have mis-used the term 'moral hazard' in your article to give exactly the wrong meaning. Punishing the banks is an attempt to PREVENT moral hazard, not 're-establish' it as you wrongly say. Any first year economics student will tell you that moral hazard is a form of 'market failure', not
    something to be 'established'.

  • Comment number 82.

    'Moral hazard' is NOT paying for your sins. The US Treasury has done well in taking steps to eliminate, not reinstate, moral hazard.

  • Comment number 83.

    Don't forget a large proportion of those bonuses was in Lehman's own shares!


    I agree with lots of the comments about gambling but what's the alternative. Ok more regulation but where on the continuum from free rein at one end to communist manifesto at the other do you want to be.

  • Comment number 84.

    Robert. Why do you make excuses for the Bankers who caused the credit crunch and have left our economy vandalised by implying that they the big financial bets they made were stupid. No Robert the unscrupulous bankers knew exactly what they were doing.
    The FBI in the USA is in the process of bringing criminal proceedings against the greedy bankers who caused the credit crunch - but nothing has been done to prosecute the bankers in Britain who knew what was going on. The one fundamental ingredient that is missing to prevent such unscrupulous and unfettered behaviour most foul is a DETERRENT. When banks’ are entrusted with other peoples’ money and assets, surely, transparency, accountability, preventative legislation properly regulated and a forensic authority with power to prosecute, to claw back ill-gotten gains, seize personal assets, jail sentence’s and enforcement of heavy finds big enough to be a Deterrent, is the operational recipe needed to be proper and acceptable.

  • Comment number 85.

    Seeing as suggestions of similarities with the great depression have already begun....


    'As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. [Emphasis in original.] Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped. That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929. The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment. Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population. This then, was my reading of what brought on the depression'.

    Eccles, Marriner S. (1951). Beckoning Frontiers: Public and Personal Recollections


    Since the idea of Full 'employment' became wildly unfashionable long ago substitute it for growth and substitute 'outside of the banking system' for deregulated.

    Capitalist development as it was then and it is now is unsustainable. That is the bottom line.



  • Comment number 86.

    Here's a couple of questions Robert:

    - Would Paulson have made an example of Goldman in this way

    - Would the Fed have been more receptive to a white knight which was based in the US?

    I think to accuse the entire financial market of making 'big stupid bets' is a bit unhelpful. Poor risk management and terrible regulation was the issue.

  • Comment number 87.

    The banks provided the bullets, the consumer fired the gun.

    Having read a couple of these blogs I have noted that one of the largest contributing factors in all of this woe appears to have had little mention. The fact that the personal financial attitude of millions of individuals around the world to have "more" than they could afford seems to have had little mention.

    In my own little wordly bubble, I actually wonder how many people living within a mile radius of me have re-mortgaged their home to fund the shiny new car (that lost thousands in re-sale value within its first metre of travel), or that lovely two weeks in the maldives. Perhaps more than I think?

    Yes, the banks relaxed too much but they didn't spend the money, they just spread it around.

    And now the relative haven of a fixed rate mortgage has bitten the behind of more than a few, the financial merry-go-round has brought some of the problem back to the door of the taxpayer. What goes around......

    The best way to solve problems is not to look outward.

  • Comment number 88.

    Robert

    Yes there is a whiff of

    - "I TOLD YOU SO"; and
    - "THEY DESERVE IT"

    but the real crux to me is the serious issue of business ethics - i.e. that business (especially large corporates, huge multinationals and financial conglomerates) like Lehmans have none.

    But it is also fellow business investors and corporate pensions schemes that demand these monstrous profits from huge corporations so it some ways we the investing consumer are to blame as well.

    I am sure there will be an outcry about "WHO AUDITED THEM" - as an accountant myself how in the heck can any auditing firm seriously state that they are convinced of the "TRUE AND FAIR" representation that the audit partner signs after 4 weeks work.

    Plenty of food for thought over the next few weeks and months ...

  • Comment number 89.

    The whole world suffers because of the greed of some and the incompetence of others.If there is a valuable lesson to be learn't its that even in a capitalist world(bar a few)we cannot allow banks to have free reign.There has to be common sense. It cannot be right for a handful of mavericks to be allowed to drive every economy into the dark ages.The quality of the people chosen to protect the interests of countries,companies and peoples investments falls well short of what is acceptable in the 21st century.In a global economy the world is a very small place.Its time to change the rules or the consequences will be more than just financial and then the world will become a much more dangerous place.

  • Comment number 90.

    Rober. You are a great analyst. Great blog. But the following is nonsense:

    "Big banks can no longer be under any illusion that they can make big, stupid financial bets and expect taxpayers to pick up the bill when the bets go wrong."

    The UK and US governments have too much at stake to allow a total collapse. It may have hung Lehman out to dry but don't expect many more. In the UK there is surely going to be a major casualty - but just the one.

  • Comment number 91.

    If my business suffers from an unforseen bad debt allied to difficult trading conditions that makes it suddenly illiquid I am duty bound to shut the doors. What makes any Bank or Building Society aka Northern Rock any different to it's competitors aka Lehamn Brothers or my business.
    Government bail out's of these businesses are inherently immoral. Looking after it's customers is not.

  • Comment number 92.

    Hank Paulson said yesterday that financial uncertainty would remain until the US housing market bottomed out - or words to that effect.

    Most commentators are also blaming the crisis on the underlying state of the US housing market. One could be forgiven for assuming that prices were crashing all over the place in the US housing market.

    However, I checked on the Office of Federal Housing Enterprise Oversight SEASONALLY-ADJUSTED HOUSE PRICE INDEX FOR USA and the picture doesn't seem to me that gloomy.

    For the USA as a whole, house prices have only actually fallen on an annualised basis for the past three quarters at 4.8% (2nd quarter 2008), 3.03% (1st quarter 2008) and 0.53% (4th quarter 2007).

    And the rate of fall seems to be declining: in 2nd quarter 2008, prices fell 1.36% on the quarter compared to 1.68% in 1st quarter 2008.

    And this is not a picture across the nation. Prices actually increased over the past four quarters in 12 states, although three states-California, Florida, and Nevada-saw prices decline more than 12 percent over the past two quarters.

    This fall comes after 15 years of uninterrupted house price growth.

    All-in-all, this doesn't seem to me quite the savage correction that commentary seems to suggest.

    Aren't the markets over-reacting somewhat to what the statistics suggest is a mild correction, the extent of which is already slowing down?

  • Comment number 93.

    There is the occassionals bankers splutter of we have lost money personally. We held shares etc. So what. If it is obvious that things are unsustainable, and you are working pumping up the volume you know whats going on and can get out long before the ship hits the rocks. If you stay it is because it is cosy and you hope somehow the rocks are missed.

    Evidently Lehmans had a share offer recently they declined as too low, it would have saved them but they thought they would be bailed out. It's called gambling.

    As for so called expertise and skill etc etc there has not been much on display. As at the lower level in banks there has been a marked trend towards restrictions on what actions can be taken, the tunnel vision is higher up the organisation(s) and this is all down to a relatively few people setting policy. Coupled with deregulation.

    It has been suggested Brown knew this was coming hence the bottling of an election late 2007. Northern Rock start of 2008. Knowing more than letting on, Darling too. If so just makes it all the worse as have done nothing, real pair of Crash Dummies - strategy seems to be hope don't hit the rocks.

  • Comment number 94.

    I take no pleasure in seeing Lehman Bros staff clearing their desks, mainly because I know it'll be those of us further down the food chain who will suffer more in the long run. And I will suffer less than people in poorer countries because a collapse of the banking system, even if it's only a partial one, will ultimately affect their chances of greater prosperity, political stability and security.

    Hindsight is a wonderful thing of course, but you have to feel that a lack of old-fashioned morality is at the heart of this. All that lascivious money-making that seemed so wrong probably was wrong. Simple greed is to blame. Greed, and a lack of a long term belief system, is what drives a gambler to risk everything for short term gain. If you're a 22 year old trader with 22 year old mates who all own Ferraris, are you going to think, "Oh no, it's morally wrong to take a huge risk so I can join my mates and drive around in a Ferrari with a fit bird by my side"? No, of course you're not. The government is telling you it's ok, your bosses are telling you it's absolutely essential, and you have no moral compass to follow.

    The traders aren't to blame. We all are. We're all ridden with greed. Anyone who thought they could make a fast buck from property, anyone who bought a second home or third home just because they could, anyone who worships money has to accept the fact that property and money can sometimes be worthless. Sadly, for 90% of people in the Western world money is our only belief system.

    This all makes me sound like a wacko fundamentalist. Not at all. I believe in capitalism, in free markets, in small government, minimal regulation and greater individual and collective responsibility, but I also believe in moderation, self control and human decency. Maybe I'm naive to think that those beliefs can go together. All I know is that in life we need checks and balances. We need to fail in order to succeed and usually (not always) we learn from our mistakes. This is clearly going to be a big learning curve for a lot of people. But if we come out of it with a less money-obsessed, property-obsessed, self-obsessed view of life we'll all feel a lot happier about ourselves. Even those Lehman Brothers employees.

  • Comment number 95.

    I've long expected fallout from the over exposure to debt instruments by banks. They were always "inverse pyramids" where huge amounts of debt were warehoused by tiny amounts of shareholder capital.

    Its a bit like a bookmaker saying - I'll pay you 1000:1 for a £10 bet for something and the bookmaker only having £50 in the kitty to pay a successful punter. It may be a longshot but if the punter should win, the bookie can't pay out.

    The only difference between modern banking and a bookie is that the other £950 of risk was sold to other bookies who didn't really know what the odds were.

    The lucky punter wants to collect now and
    all those clueless bookies have to pay out - there could be dozens of them but no-one knows where they are.

    Bottom line is, if you want to be a bookie, know the odds and be prepared to pay-up if the punter comes calling!

    It never ceases to amaze me how Lloyds of London fell into this same trap and no lessons were learned (re-insurance). LTCM failed to teach the same lesson (50 times leveraged bets on the US bond market). Will this debacle teach the lesson, finally? - The answer is an emphatic NO.

    It is human nature to keep chasing bigger and bigger gains, whether it be Sarah Beeney on the Property Ladder with hapless "developers" chasing wafer thin profits or insurance companies writing business for pennies when the risks are huge, simply to ensure the shareholders get a decent half-year profit report.

    We have to get used to these shocks in the market - they will happen again and again. Its just the way the human works.

    If you are lucky enough to work at a winning hedge fund, it must be like the candy store is full of sweets and everything is half price!

  • Comment number 96.

    "12. At 6:05pm on 15 Sep 2008, peterdough wrote:

    Robert, today I'm sorry for the tens of thousands of Lehman staff around the world who lost their jobs and the thousands of families thrown to the wolves, with the stroke of a pen."

    Well I'm not sorry for them. It was the miners and industrial workers of this country who were really thrown to the wolves. Most without skills or ability to find new work, these are the people who have experienced real hardship, those communities are still suffering today. AND it will no doubt, in the end, be ordinary people, such as these who will suffer most thanks to the mistakes these people at Lehman and others in the banking sector have made.

    I have little sympathy for Lehman staff, except perhaps the cleaners and the like. They've all earned good wages, some have earned astronomical wages. They will all find new jobs, their life styles will change very little.

  • Comment number 97.

    It is sad that the employees of Lehmann and all of the other people who will suffer as a result of the collapse of the had to gothorough all this as a result of the incompetence of the managers - but the Fed had to let it go.

    The propblem is that Bankers had got used to the idea that it didn't matter what they did there were no consequenses.

    If they made a good investment they took a big slice of the profit but if they made a bad one they still toook a percentage of the amount invested. They got paid hansomely win or lose.

    If the bank did well they got paid hansomely in bonuses but if it didn't they were still OK as the government would bail them out.

    Every other professional has to face the consequences of their own poor performance - so should the banks.

    There is obviously an equally powerful countervailing argument which says "principles are ok if you can afford them." There are going to be some failures which simply cannot be contemplated. Freddy Mac and Fannie Mae are probably good examples of this but where governements have to intervene then the bosses should (as with Freddy and Fannie) all lose their job.

    Failure - at least on the scale we have at the moment - must result in a serious sanction.

    What gets me is that these people couldn't see it coming. My (then 14) year old daughter - a student of history - predicted it 18 months ago. It doesn't give you much faith in the people running the system if they were outperformed by a yr 9 history student.

  • Comment number 98.

    To quote Charles Mackay author of 'Extraordinary Popular Delusions and the Madness of Crowds' ...

    "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one!"

  • Comment number 99.

    I cannot agree with you more MightyRover ! These bankers had stacked up so much during the good times that most of them don't really have to care now. It's easy for them to get sacked and just walk away while the rest of the society (good citizen taxpayers) has to suffer.

    I feel sorry for the cleaners and the security staff at Lehmans but I have not one tinge of sympathy for the investment bankers, who, most probably did not think about the potential adverse implication on the society if they lose their bets but rather only focus on squeezing out the best possible bonus they could. Now, should I feel sorry for these people ? I don't think so.

  • Comment number 100.

    This situation affects everyone not just the investment bankers!

    I just hope that there is a light somewhere. I know some of the commentators on this blog are saving serves them right but these people clearly haven't got a clue about the knock on effect this is having on all of our lifes!

 

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