BBC BLOGS - Peston's Picks
« Previous | Main | Next »

Cause 39 of the banking crisis

Robert Peston | 09:14 UK time, Wednesday, 29 September 2010

Howard Davies, director of the London School of Economics and founding chairman of the Financial Services Authority, has just published a characteristically witty and pellucid analysis of the competing theories for who and what caused the worst global banking crisis since the 1930s, The Financial Crisis - Who is to Blame?.

Howard Davies

 

He identifies 38 causes, from the efficient market hypothesis and lax regulation through to avarice and traders' testosterone. It's an old-fashioned primer, not a polemic. And - some would say - none the worse for that, given that there are a good few myths still doing the rounds about who or what was at fault.

Why did he write it? Perhaps it was therapy, a need to reassure himself that the debacle wasn't his fault. And he can take comfort that the explosion of banks' balance sheets - the period of the fastest growth of their dangerous lending relative to their capital resources - took place after he had handed back his watchdog's teeth and climbed his ivory tower.

As luck would have it, Tim Bush, a former Hermes fund manager and member of the Accounting Standards Board's Urgent Issues Task Force, would this morning argue that Davies's 38 causes should be 39.

He's tabling a paper for the taskforce to minute, as a prelude to a proposal for reform of the way that British banks account for old-fashioned, plain vanilla loans.

His is not the modish complaint that putting a market price on tradeable loans and investments - the mark-to-market requirement of fair value accounting - meant that banks over-valued their assets in the boom era, and under-valued them in the bust years.

There is a genuine debate to be had about the merits for banks of allocating their capital on the basis of asset prices determined by the irrational herdlike behaviour of investors (including the herdlike behaviour of banks themselves).

But Bush makes a different point. And although he has become something of a one-man, single issue, slightly obsessive campaigner, what he says is certainly worth considering.

In simple terms, what went wrong - Bush says - is that in the UK and Ireland from 2005 onwards banks stopped making any general provisions against the risk that their loans could go bad. In that sense, they stopped the long and tested practice of factoring into the cost of a loan the probability that it might not be repaid.

British and Irish banks stopped making these provisions for possible non-repayment of loans at both the level of published accounts and at the lower level of the operating units.

This was not their choice, Bush says. They were forced to do it by the way that the Accounting Standards Board implemented the international accounting standard IAS 39 as Financial Reporting Standard 26, or FRS 26.

Bush argues that the implementation of FRS26 magically made lending seem less risky and cheaper for British banks - so (guess what?) they did much more of it.

If you look at the terrifying speed at which Northern Rock increased the supply of 100% mortgages, or the extraordinary acceleration of lending to property companies by HBOS, there would seem to be some connection between the worst excesses of the UK's credit bubble and the cessation of any requirement to factor in the probability that some loans would go bad.

And there is a similar correlation between the accounting change and the timing of the explosion in property lending by Anglo Irish Bank and Allied Irish Banks.

That said, it doesn't seem wholly plausible that an accounting change could turn on a credit tap quite so fast - in that an accounting reform surely couldn't have persuaded long-serving bankers to simply forget their years of experience about the riskiness of lending.

On the other hand, it is striking that there was not quite such a lending binge in continental Europe, where the new international accounting standard was not implemented at the level of operating units, where lending decisions are actually made.

Given that the reckless increase in lending by HBOS and Northern Rock generated massive losses for both of them, which ultimately undermined their solvency, you might ask why the Accounting Standards Board thought it a good idea to abolish the requirement to make general provisions against possible non-repayment of loans.

Well, the ASB for some years has strived to reduce the element of subjective judgement in the production of published accounts. The ideal would be that accounts show the world as it is, not the world as managers would like to see it. So it seemed a good idea that banks should only report losses on loans as and when the borrower stops repaying - and not when the bank manager fears that they may stop repaying.

However, it turns out that accounting rules which deny the importance of managers' judgement may have the unfortunate effect of transforming them into credit-spewing automata.

Here's what gets Mr Bush really excited.

He thinks that FRS 26 may actually contravene the requirement of company law that banks operate in a prudent manner consistent with the protection of their depositors and creditors.

Which carries the intriguing and resonant implication that shareholders might be able to claim that they were gulled by FRS26 into believing that Britain's banks were made of bricks when they were in fact made of sand.

Comments

Page 1 of 3

  • Comment number 1.

    > avarice and traders' testosterone.

    At least he got some things right, eh?





  • Comment number 2.

    Robert, could you post a link to the roport & paper to which you refer ? Many thanks.

  • Comment number 3.

    > an accounting reform surely couldn't have persuaded long-serving
    > bankers to simply forget their years of experience about the
    > riskiness of lending.

    Could that bunch of losers be far, far less gifted that you give
    them credit for?

  • Comment number 4.

    But the underlying problem is still a constitutional one ... the role of the state in having full democratic and transparent strategic guidance, control and influence over the financial sector in terms of directing the strategic direction of e.g UK business/infrastructural and other investment and use of stakeholders funds.

    The first step in this may be reform of accountancy practice to enable Parliament to hold the financial sector to account and appraise all aspects of financial business as particularly that involving stakeholders' deposits and ruisks affecting the security of stakeholders (as including the 39 problem areas).

    The constitutional and strategic management questions and issues get to the heart of the matter ... 'FRS 26' does not.

    Britian needs a new deal with its financial sector i.e. they're serving 'us' ... and we do not exist to serve the interests of the banking/financial system.

    A distinction needs to be made between private syndicated money and interests and stakeholders' money and interests as including review of the Pension Fund Institutions.

    No part or whole of the Financial sector should be able to substantially threaten, influence or damage the stability and security of the overall financial sector or materially disadvantage any stakeholder through mismanagement, hubris, bad practice etc.

    This is the role of government to prevent this ... a new deal is needed with UK financial sector and all of the UK stakeholders need to come out as 'winners' ... and not just the 'establishment'.

  • Comment number 5.

    Could somebody please direct me to information on the history of UK bank capital asset ratios, I have just been trying to google it and can find no clear graph or any other sort of information. I cannot understand why this information has not been cited in trying to find who is to blame for the recent banking disaster. If we could easily see if the ratios were eased, and I think they were, then we could portion blame more to the governments who may have allowed banking too free a hand.

  • Comment number 6.

    Fundamentally, price rations credit.

    The collapse in price should have alerted the regulators to the cataclysm ahead and the should have reacted prudently. They didn't.

    Although the changes in FRS26 did change the way things had to be reported, BUT there is still a general requirement that business is run on a sound and prudent basis. The regulator owed a duty to react and to react by increasing the price of credit as that is the ONLY known practical and workable mechanism to restrict credit.

    Howard Davies is using his report to shift blame from the regulator - sorry but he has failed and the regulators (including all those 'in change' for the last decade and a half) are still right bang in the sights of the blame game thermonuclear weapon.

  • Comment number 7.

    If I were a banker, and my financial controller told me that new accounting rules make it less costly to lend money, then I would have thought it was Christmas. If bricks become cheaper then builders build more, if lending becomes cheaper then bankers lend more.

    It is impossible to place a value on the loans made by a bank, unless you can see the future and know who will default when and what the market interest rate will be at those times. The best you can do is an educated guess based on historical default rates and what interest rates today are. Throw in accountants and you end up with a FRS 26 number which is totally, totally different to a fudged estimate!

  • Comment number 8.

    Ok, so lets say the banks were 'allowed' to lend far more because they weren't required to hold more security against possible default...it doesn't exonerate them!

    If there was a relaxation of the law meaning I could shoot whomever I wished and not face punishment - does this mean I would suddenly consider it ok? Does it mean that just because the authorities deem it alright, I shouldn't consider the law change immoral or wrong? Of course not. Why do experienced 'professionals' get rewarded the way they do when in charge of such influential bodies (banks, govt etc) if they are unable to use that wealth of experience and knowledge to raise a hand and suggest that in a worst case scenario, the rule changes are wrong and can lead to catastrophy and in an average case scenario, question what would need to happen for the uncollateralised lending to stop without severe consequence?

    Yes, its easy to say this after the event but I'm not privvy to these rule changes or question them using my prudent banking knowledge and foresight.

    Those in positions of power should be there by merit and part of that merit should be based on their ability to see beyond the short term for the benefit of everyone else rather than themselves. Disgraceful.

  • Comment number 9.

    Robert, Is this the same highly padi gentleman who presided over the FSA sleeping at the wheel whilst Equitable Life declared all being well ?

  • Comment number 10.

    No doubt that professionals within the industry, and hopefully within the 'government' need to address these technical aspects of accounting and regulation.

    But lets look past the mudied waters.

    As one example, I clearly remember listening to ordinary people in ordinary jobs shaking their heads and saying that if banks let people take out mortgages at five times their (unverified) income, then there was going to be trouble.

    To be honest, I really don't believe that professionals with years of experience could not have predicted this just because of an accountancy anomaly.

    Perhaps if a few more had been lead away in handcuffs - rather than still picking up million pound bonuses - after they trashed the whole economy, they would now be taking the issue more seriously.

  • Comment number 11.

    38 causes - blimey, that seems rather a lot. No wonder everyone was running around like headless chickens whilst the UK economy tanked.

    No. I believe there were only two causes - hubris and arrogance!

  • Comment number 12.

    @ 4. At 09:59am on 29 Sep 2010, nautonier wrote:

    > Britian needs a new deal with its financial sector i.e. they're
    > serving 'us' ... and we do not exist to serve the interests
    > of the banking/financial system.

    They're either with us, or they're against us. And there's no sign of humility yet. So let's fire a warning shot across their bows, by breaking up one or two of the big ones and see what effect that has on the others. They still have a little time to change their ways, but the public's patience will run out soon.

  • Comment number 13.

    sorry to post this again but it makes a good point that there is still an underlying problem in the system never mind making provision for non payment of loans

    If, therefore, currency is multiplied, it is a delusion to suppose that capital is multiplied.....If banks not only lend capital but also lend "coined credit" some time or other a liquidation must come, there must be an effort to touch the capital which the notes pretend to convey. Then it is found they represent nothing; then "credit breaks down," and there must be a settlement, a liquidation, a dividend, and a new start....The real amount of capital we posses is divided up, and we have to make up our minds that we posses only 50 to 75 per cent of what we thought we possessed. we put smaller figures for everything, and reconcile ourselves to smaller hopes, but the experience is soon forgotten, and the old process of inflation and delusion begin again.
    William Graham Sumner 1870

  • Comment number 14.

    Isn't it fascinating how these experts can come up with 38 wrong reasons for the credit crunch.

    To be so wholly inaccurate takes some expertise the rest of us can only admire.

    The cause is simple - the banks face the same diminishing margins as all businesses - first recognised by Adam Smith in 1776

    http://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit_to_fall

    This combined with the pressure of shareholders to receive returns (for absolutely no work) results in a greater and greater risk taking.

    I'm no expert on accounting rules - but I bet the FRS26 wasn't aroung the last time banks decided to lend excessively

    You seriously have to be a moron to believe this tosh - everytime a new reason is cited as the cause of Capitalism's latest crisis - and yet no fix ever works - don't you think that's a little strange? I mean if we're truly identifying the 'cause' then a fix applied should work (I mean especially if it's not the cause next time)

    ...and yet banks still lent excessively and we still ended up in crisis.

    What a shame so many people are so willing to trust the charlatans of Capitalism and yet they are wrong so much of the time.

    It's time people started thinking for themselves rather than listening to the fools who got us into this mess.

    I get the same feeling when I see people getting ripped off by dodgy builders - I want to advise them on the con they're about to fall for - but my instincts are to allow people to make their own mistakes so they can learn from them.

    However in the case of Capitalism I've been watching the same mistake being made over and over again for the last 30 odd years!

    Where is your recovery? Where is the solution? Things are getting worse, not better - the recovery is merely a fraud perpetuated by journalists too lazy to do any proper research.

    http://www.reuters.com/article/idUSLDE68S0RC20100929

    ...there's that phrase again.....

    "British mortgage approvals fell to a seven-month low in August and consumers unexpectedly paid back some of their debts, official data showed on Wednesday, in a further sign that the economic recovery may lose momentum."

    What's unexpected? - only to those living in an optimism cloud with no real structure - I've been saying it for over a year now - and still the press are surprised at every turn downwards - have none of them read JK Galbraiths book?

    See this story?
    http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8031081/Game-hit-by-21.5m-loss-on-lack-of-hardware-releases.html

    Get used to this - last year Game were being touted around the halls of media as 'bucking the trend' in the recession. The steady decline since then is a pattern you're going to see all around the business world for the next 10 years or so.

    There is no recovery - you people had better start preparing for the worst.

  • Comment number 15.

    "The ideal would be that accounts show the world as it is"..."So it seemed a good idea that banks should only report losses on loans as and when the borrower stops repaying - and not when the bank manager fears that they may stop repaying."

    Whoever thought a 1 day time horizon was a good idea for valuing a liability/asset when the loan extends for 25 years was a moron.

    'I'm driving down the motorway at 180mph and I've not been stopped by police yet or had a crash - must be ok to carry on at this speed on that basis'. Notice anything ridiculous about this scenario?!

  • Comment number 16.

    3. At 09:49am on 29 Sep 2010, Jacques Cartier wrote:

    "Could that bunch of losers be far, far less gifted that you give
    them credit for?"

    Well it's interesting to note that the contestants for the apprentice this year are well stocked with investment bankers. I think the world will see why it all went wrong when they watch the 'gifted bankers' try to complete some rudimentary tasks set by a Lord who's salary we are subsidising.

  • Comment number 17.

    The regulators to some degree had their powers limited by Gordon Brown in particular. the "light touch" regulation many still in the investment & banking industry would still prefer clearly failed and with everything from mortgages to takeovers regulation is failing to keep a balance. Its also high time the interests of ALL affected are considered not just banks, hedge funds, shareholders, sovereign funds, pension funds etc but also employees, suppliers & the public at large. one word sums up what went wrong "greed". Excessive greed of the few either in the money sector or within boardrooms has crippled an entire economy and left Britain vunerable yet still se are selling off the family silver as fast as possible so the same few can continue to gain so much.

  • Comment number 18.

    ...and now for the revolution....


    http://www.independent.ie/national-news/dail-gates-damaged-by-truck-2357289.html

    Whoooo hooooo - the Irish people lead the way!

  • Comment number 19.

    PM's being taken to court? - this sounds like a people's revolution.

    http://www.bbc.co.uk/news/world-europe-11432362

    Oh dear, the people of Hendon must be quaking in their fantasy investments.

  • Comment number 20.

    It’s all very interesting, but is it true?

    As any mortgage salesman will tell you, the more mortgages they sell the more they earn. They are driven by targets and paid by commission.

    And if you move higher up the food chain at the bank, it’s no different, the more loans you create, the more money you earn.

    No commission has to be re-paid for loans that go bad.
    In short there is precious little accountability for mistakes.

    Targets and bonus come first, commonsense simply doesn’t enter into it.

  • Comment number 21.

    Did the report mention the infiltration of government by bankers? The old boys network? Did it mention secret groups of world leaders and industrial might who don't publish minutes? Did it mention lobbying? Did it mention anything about the long term plan?

    Doubt it. Just more icing on a very bitter tasting cake.

  • Comment number 22.

    It would be fascinating if those commentating on Robert Peston's blogs (not this one in particular) declared their interests in the matter under discussion. Although it is often easy enough to make a shrewd guess.

    ..and #7 your comparison with Christmas is excellent. A period long associated with excess consumption and hangovers.

  • Comment number 23.

    "British and Irish banks stopped making these provisions for possible non-repayment of loans at both the level of published accounts and at the lower level of the operating units."

    Could anyone with some accounting/audit background please reconcile the above with stories (linked to some banking profits) stating that these profits were just releases of reserves for bad debts, and hence not 'real'? IE implying that there are still big reserves/provisions sloshing around.

    There must be a bad debt reserve still, right? Or are we talking about the difference between something that might go bad, and has gone bad?

    Many thanks to any who can elucidate for a non beancounter.

  • Comment number 24.

    ..oh and #5 I tried to find this (history of UK bank capital asset ratios) some months ago and was also surprised at its absence.

    In the 70's I studied economics for a while and seem to remember a figure of 8% being a legal requirement but in respect of what tier, I don't know. In those days we probably didn't know it would end in tiers. (sorry)

  • Comment number 25.

    Jacques post 3. I will repeat a point I have made many times before and it is still relevant.

    You ask why did bankers forget their years of experience about the business of lending.

    As most of the decision makers weren't bankers they had no experience of lending.

    Virtually all of the heads i.e. Chief Exec's and chairmen of the banks that needed bailing out i.e. northern Rock, RBS, HBOS and don't even get me onto Allied Irish Bank (check out their wikipedia entry but only if you have a very strong constitution) had no banking experience.

    The lunatics had taken over the asylum.

  • Comment number 26.

    There is something odd about this. My understanding of the Northern Rock business model was that all mortgages were securitised and sold to a 'Special Vehicle' which presumably sold the securities on to provide the cash buy some more from Northern Rock. No provisions for bad debt is required. Incidentally the 110% mortgages were not that at all, but up to 100% mortgages and a personal loan on top. This is just extending 'structured lending' to private individuals.

    If banks can securitise debt and sell it I cannot see that provisions are required.

    Incidentally the ONS coulnts all the employees of the three nationalised banks as public sector workers, adding 800,000 to the total. Of course not all of them are employed in the UK and quite a few are earning more than the Prime Minister!

  • Comment number 27.

    Still the same old duffers are still in charge. Not to many of them fell upon their sword.
    No morals, greed and avarice.That is their standards.
    To be honest would they get a real job in the real world. I think not.

    Can someone explain to me what the chairman and CEO really do for a living.

    They have come through the system, and will continue to arrogant and selfish.

    I know of cases were the banks that we are the majority owners of, have loaned substantial monies to overseas companies to take work out from the UK. Rather than invest in our business.

    To many of these guys appear at sporting events, wrapped in the Union Jack, professing their Britishness. Could not be further from the truth.

    They want to go, please let them, If that's how patriotic these chumps are. Go with all are blessing.

  • Comment number 28.

    Oh for heaven's sake. Somebody doooo something! Waffle waffle waffle.

    Break up the banks for a start.

    Bring in austerity for the greedy incompetent fools that got us in the mess - banksters, board room tarts, regulators, council fat cats, the list is endless - not just the innocent poor.

  • Comment number 29.

    11. At 10:35am on 29 Sep 2010, Tony wrote:

    > 38 causes - blimey, that seems rather a lot. .. No. I believe there
    > were only two causes - hubris and arrogance!

    The military call it chaff - a cloud of small pieces of debris which swamps the radar screens.

    Like Lord Turner, he's basically trying to turn the heat down on the greedy pigs who we are roasting for this debacle. Trouble is, Merv King told us who's to blame.

  • Comment number 30.

    12. At 10:36am on 29 Sep 2010, Jacques Cartier wrote:
    "They're either with us, or they're against us. And there's no sign of humility yet. So let's fire a warning shot across their bows, by breaking up one or two of the big ones and see what effect that has on the others. They still have a little time to change their ways, but the public's patience will run out soon."

    I'd like to see a referundum on potential actions. Could then demonstrate strength of public opinion in a non-partisan way. I honestly beleive this is too important to be left to politicians alone. They always have ulterior motives.

    Sadly I don't think the government will be giving us the option. Maybe we should encourage them...

  • Comment number 31.

    `Given that the reckless increase in lending by HBOS and Northern Rock generated massive losses for both of them, which ultimately undermined their solvency, you might ask why the Accounting Standards Board thought it a good idea to abolish the requirement to make general provisions against possible non-repayment of loans.'

    Perhaps it was because it made the price of their houses go up.

    I have come to the sad conclusion that all these `chaps' were just that `chaps'. Not one scintilla of a brain cell between them. They had no idea as to what they were doing.

    But then as we know boom and bust had been ended. Capitalism had won. History belonged in the Middle East. What did we have to worry about? Hubris, perhaps.

    Anyway there is no surprise that our academic friends are coming out with reports to prove what knew already. Between the pair of them, the government and the banks blew up the economy and screwed the British people. My concern now is that they are coming back for some more of the same. Do we let them?

    Restructure the banks now!

  • Comment number 32.

    17. At 10:50am on 29 Sep 2010, jeffa4444 wrote:

    "The regulators to some degree had their powers limited by Gordon Brown in particular. the "light touch" regulation many still in the investment & banking industry would still prefer clearly failed and with everything from mortgages to takeovers regulation is failing to keep a balance."

    that's interesting, for Allister Heath (arch Capitalist) was writing in the city AM this morning that there was plenty of regulation around under Gordon Brown - apparently it was in the wrong places.
    As a result he does not feel that new regulation is required - because it will hurt business.

    With a disconnected attitude such as that - is it any wonder we will end up making the same mistake again and again and again?

    I mean normally (to use the analogy above) when someone has their car crash - they tend to slow down a bit afterwards, perhaps permanently (if it was a serious one) - but the Capitalist actually think driving faster is the solution to his regular pranging!

  • Comment number 33.

    WOTW:

    "these experts" simply have a different view from yours. People have been arguing economic theory for ages, right? I don't suppose they'll stop arguing irrespective of what happens in the next 5, 10, or 50 years. You'd probably find more people agreeing with you if you toned down the hubris. (nobody likes being referred to as "you people")

  • Comment number 34.

    very good article imo, I remember 25 years ago when i was a studying accountant that the adherence to regulation over judgement was leading to accounts becoming less reflective of the underlying position. I actually feel that over the last few years the balance is slightly being redressed, as i understand it the companies act of 2006 no longer makes it a requirement for the accounts to follow a rigid format. The reality is that products and transactions become so complex that no set regulation of reporting format is going to be comprehensive for all. A similar problem happened with payments into pension funds. Do you trust auditors to use judgement on the basis that they would only use this impartially or would they use this freedom to enhance they repo 105 stuff of creative ways to mislead the reader of accounts (imo regulators!). Maybe the accademic world reviewing reported accounts and having a voice may be a way to have impartial odjectivity.

  • Comment number 35.

    This takes me back to accounting fundamentals.

    Any lender be it by means of money, goods or services must have a balance sheet "Provision for Bad Debts." This is as fundamental as time itself and amendments making this unnecessary in bank accounts are corrupt and in my view criminal.

  • Comment number 36.

    20. At 11:00am on 29 Sep 2010, Dempster

    Exactly - we're constantly reassured that commision based sales gives maximum efficiency - but this is usualy from the same people who also believe that "everyone is corrupt to some extent" - and then there is surprise when mortgages are sold to those who cannot afford them, car loans are arranged at ridiculous rates and old ladies are 'switched' energy suppliers on their doorstep.

    The connection is never made - mainly because those who profit from this situation are very powerful and wish to obscure the truth about commission sales.

    Competition is for sports - not for economics. We can accept (to some degree) the inevitable cheating which goes on in sport as the result doesn't matter that much....however to apply the same logic to the Economy is blatantly stupid - as the result really does matter.

  • Comment number 37.

    21. At 11:02am on 29 Sep 2010, szjon wrote:

    "Doubt it. Just more icing on a very bitter tasting cake."


    ...that's because you're thinking of 'the reasons for the crisis' - and not 'the reasons they are giving for the crisis' - they are two very different concepts I'm afraid.

    ...still, it will keep some of those who live in Economic fantasy going a little longer as they believe that these reasons were the cause and that by resolving them - we will prevent this happening again (forgetting the last 20 or so occassions in living memory when it hasn't worked).

  • Comment number 38.

    @18 wotw

    This truck is sure getting around.

    http://www.galwaynews.ie/12114-protest-truck-removed-anglo-irish-bank-and-impounded

    Can't believe they gave it back, keep your eyes out for more of this. :-)

  • Comment number 39.

    possible Howard Davies link could be as follows - which shows his book and chapter headings.
    http://www.polity.co.uk/book.asp?ref=9780745651637

  • Comment number 40.

    An interesting article. I have made the point before on this site that changes in accounting rules changed banks behavior. I have also made the point that allowing banks to allocate capital based on their own caital at risk (CAR) models.

    What I did not appreciate, but is an obvious extension of my previous arguments, is that in good times the CAR models would over-value the loans and therefore make credit cheaper for banks. This naturally leads to over lending.

    All this confirms to me that as part of any solution (but not the whole solution)

    1. Mark to market account for loans must be limited to those loans which are intended to be traded not a bank's entire loan book

    2. CAR models cannot be based on banks own models but on independent models and should not vary based on herd mentality of market

  • Comment number 41.

    I am an ex banker (how is that for denial) but my baking education - in those days you got one - stressed three things that mattered - capital, leverage and liquidity. All need to be managed.
    Capital was a regulatory issue - and 8% was the old capital ratio in Basel 1 - completely ignored in those days by Euro banks.
    Leverage is critical - too much and bad debts force erosion of capital and insolvency.
    Liquidity. No money and you are bust.
    I am somewhat staggered to find the basics have been ignored. It is not as if this is magic. All companies, not just banks, need to manage these things.
    By the way, a favourite lending test was to place a file down with a company that needed to borrow - and that would invariably be declined due to low capital and high leverage - and lo and behold people would be shocked to be told it was their own employer bank!
    Nothing new in this world!

  • Comment number 42.

    18. At 10:51am on 29 Sep 2010, writingsonthewall wrote:
    "...and now for the revolution...."


    Every month I receive a bulletin from a national secuity company (yep I know, they don't realise who they're sending it to) giving details of known activist demonstrations and/or protests. For the coming month there are TWENTY events listed, sounds like a fair bit of public unrest to me, none in Hendon though!

    I keep saying it, there's a lot of "stuff" going on in the background, you'll be surprised when it takes off but don't say I didn't tell you.

  • Comment number 43.

    It is all Gordon Brown's fault, first as Chancellor and then as PM. His need to finance ever increasing public spending together with his promise that would be no more boom and bust meant that he was in-hoc to the financial community from Day 1. In payback, he allowed a relaxation of regulation and an explosion of credit which created the illusion of growth and a corresponding increase in tax take which in turn allowed more public spending etc etc. Sadly, it was all a giant ponzi scheme and now the taxpayer is picking up the tab. Mind you, he wasn't the only one of course, starting with George Bush et al, all peddling the same short term political expediency nonsense. What a bunch of suckers we all are, to be so easily bought off.

  • Comment number 44.

    # 26. At 11:18am on 29 Sep 2010, cping500 wrote:
    "My understanding of the Northern Rock business model was that all mortgages were securitised and sold to a 'Special Vehicle' which....."

    Loansharkmobile??

  • Comment number 45.


    The banking crisis was caused by the price mechanism failing to provide a rational basis for the distribution of housing resources fairly amongst the people of this country (and others).
    Buy to letters limited the housing supply because they believed they could make money by using other people's money to buy housing and that they should sit on their behinds whilst other people went to work to pay for that housing.
    The media unquestioningly perpetuated the idea.
    House prices should drop continuously in the same way that the price of a car drops as soon as you buy it. Buy to letters should be taxed to the hilt so that the market is flooded with old houses. There should be a cap on house prices (similar to, but simpler than the bands used for council tax).
    Banks should be obliged to provide money at a reasonable rate to people who want to buy homes. This does not mean charging 2 1/2 times the value of the property over a period of 25 years. It means making a profit of less than 10% on their original loans. Bleeding peoples incomes over a period of 25 years is like slavery and only provides more money for banks to loan to buy to letters.
    The banking function which does this should be isolated from other aspects of banking.

    Until something like that happens and we all see reality then this problem will continue in one form or another.
    Cue endless debate about how it couldn't possibly work.


  • Comment number 46.

    bankingballs wrote:
    banking capital history - try BIS for Basel II capital directives and also FSA BIPRU book

  • Comment number 47.

    nautonier: "But the underlying problem is still a constitutional one ... the role of the state in having full democratic and transparent strategic guidance, control and influence over the financial sector"

    The state has no realistic role other than to adapt to changing economic fact. Economies rule states not the other way around.

    Politicians like to think they are in charge and their astonishment when they realise they are not is often humorous. They get angry at their impotence and launch new rules all over the place whilst blaming bankers. History is littered with such events from at least John Law forward.

    Even die-hard communists found that their economy undermined all their silly political attempts to make water flow uphill and in a perpetually beneficial motion.

  • Comment number 48.

    Robert - it strikes me that the overvaluation of loans in the balance sheets of financial institutions implies that either the accounting standards are defective or auditing has been defective or both. Yet, surprisingly, I have not noticed thusfar the attention of regulators and commentators being focused on these aspects.
    And I say this as a qualified accountant who has been in practice for many years.
    Oh, and by the way, a very powerful reason companies are keen not to have general provisions against loans in their accounts, is that general provisions are not allowable against corporation tax whereas specific provisions are.

  • Comment number 49.

    22. At 11:07am on 29 Sep 2010, inacasino wrote:

    "It would be fascinating if those commentating on Robert Peston's blogs (not this one in particular) declared their interests in the matter under discussion. Although it is often easy enough to make a shrewd guess."

    Good idea - I'd like to declare my interest in this is merely to point out (again) the illogical reasoning behind the 'cause of Capitalisms crisis' (on this occassion) being 38 reasons cited by Howard Davies.

    ....and Mr Davies seems to have some declarations of his own to make...

    "In 2004 he was elected to an Honorary Fellowship of Merton College, Oxford and became a non-executive Director of Morgan Stanley. He was appointed to the Board of Paternoster Limited in 2006 as a non-executive Director. Davies is also a member of the advisory boards of the China Banking Regulatory Commission (since 2003) and the China Securities Regulatory Commission (since 2004). In 2009 he was appointed as an advisor to the Investment Committee of the Government Investment Corporation of Singapore."

    http://en.wikipedia.org/wiki/Howard_Davies_%28economist%29

  • Comment number 50.

    The thing about reserve ratios is that they determine - by applying the multiple in force at any given time - how much a bank can lend. Bankers make it their normal practice (global debt meltdowns aside) to stay "fully loaned-up" - because any permitted lending they fail to do means making a smaller profit/bonus than they could have made.

    Prior to the accounting rule-change, before they could know how much they were allowed to lend they had to make a required ("best guess") provision for bad loans. Then they loaned everything that was left.

    After the rule-change OF COURSE they would have gone on loaning (as before) everything that was left, but if that subtraction had ceased to be made - by any or all banks - that sum would be greater by the amount no longer being subtracted - right?

    Or am I missing something?

  • Comment number 51.

    25. At 11:12am on 29 Sep 2010, Ian_the_chopper wrote:

    "Virtually all of the heads i.e. Chief Exec's and chairmen of the banks that needed bailing out i.e. northern Rock, RBS, HBOS and don't even get me onto Allied Irish Bank (check out their wikipedia entry but only if you have a very strong constitution) had no banking experience."

    ...but Ian - they were so well paid surely they must have been brilliant

    Is this an example of meritocracy? - or actually the reverse.

    Now where are those Capitalists who presume that the market ensures only those who have talent and skill are highly paid?

  • Comment number 52.

    30. At 11:30am on 29 Sep 2010, Dale_Lemma wrote:

    "Sadly I don't think the government will be giving us the option. Maybe we should encourage them..."

    Every man woman and child on the streets on October 23rd will be all the encouragement they need. (but no revolution talk, it's been banned)

    I mean after the showing by the French last week - even the Belgiums are at it - and like us they didn't vote for a Government either! (although we got one by collusion whereas they haven't had one for 100 days or so)

    ...European nations without a working Government...it must be a rev....sshhhhhhh

  • Comment number 53.

    33. At 11:44am on 29 Sep 2010, Dale_Lemma wrote:

    WOTW:

    ""these experts" simply have a different view from yours. People have been arguing economic theory for ages, right?"

    Arguing - yes, solving no, but then the 'experts' only have 1 explanation and 1 solution (devalue) - outside of that they're are totally useless. Any other scenario and another way would have already been attempted - or at least abandoning the one solution which clearly doesn't work!

    "I don't suppose they'll stop arguing irrespective of what happens in the next 5, 10, or 50 years."

    No they won't - you're right - but what will happen is the people will get tired and angered at hearing the same false arguments - that's when they will look for other ways of rectifying the problem.

    "You'd probably find more people agreeing with you if you toned down the hubris. (nobody likes being referred to as "you people")"

    What should I refer to the anonymous people as? - "my people"? - it's a bit to deity for me.
    I'm just trying to get the public used to being treated like a 2 tiered society - because that's what is around the corner. We need to drop this pretence of "we can all be kings" and accept you're either slave or slave master - until there is a rebellion of the slaves - this will remain the case.

  • Comment number 54.

    From Point 26:

    If banks can securitise debt and sell it I cannot see that provisions are required.

    ********************************************************************

    How interesting, I hadn't really thought of that. If the debt is off the books then there may not need to be a provision made.

    I suppose things fell apart for different reasons for different institutions.


    Among other reasons, Northern Rock could no longer secure the short-term finance to fund long term loans. I presume the reluctance of other institutions to provide this finding was due to their sudden increase in perception of risk and their need to shore up their own balance sheets.

    Other institutions got caught in a game of Pass the Parcel and got stuck with AAA rated securities which were anything but. They could have taken a provision for the loss in value of these securities, but could they have known it would be so close to 100% ?

  • Comment number 55.

    Hugh_Joctopus in Post 15 has got it spot on. Lending has always been based upon the bank's judgement of how many people would default on their loans, and interest rates have been set accordingly. Even in the bad old days before the credit crunch, non-status mortgages were charged a much higher interest rate than full status ones.

    The only way that we can get an accurate picture of how many people will default in a book of mortgages is to close off the book and wait until all the mortgages have run their full term. Obviously, we can't do that with the banks (although they appear to be trying to do the first part at the moment!), so we have to rely on the bankers' judgement as to how many mortgages will default. To try to get away from that would be ridiculous. If your analysis of FRS26 is accurate then whoever implemented it to start with should be shot. Regardless of whether or not it caused the problems of the last couple of years, it is a totally stupid method of accounting, akin to the anti Climate-Change argument of 'Well, we haven't destroyed the planet yet, so we'll just carry on'....

    Oh, hang on....

  • Comment number 56.

    32. At 11:43am on 29 Sep 2010, writingsonthewall wrote:

    Correct - absolutely.

    Or to use another analogy giving people who suffer with say diabetes (useless) placebos and wonder why they are still ill. Then saying I know let's give them no prescribed drugs at all - that'll make them better.

    I'm with your sentiments - the leaders of the City Financeers lied as did the CEOs/CFOs in the Corporations, the politicial class were the blinded being lead by the blind.

    They will do this again and again and again and working people and small businesses will bear the brunt.

    Time for these wealth decimators to be brought to book.

    I'd make a start with Blair and co for the illegal war in Iraq which cost this country's reputation as well as billions of wasted pounds.

  • Comment number 57.

    Those looking for signs of revolution need look no further than Auntie Beeb.
    I stumbled across this the other day.

    http://www.bbc.co.uk/news/business-11281750

    Now for a mainstream media outfit to give a 1/4 decent explanation of Fractional Reserve Banking, in all but name, is truly revolutionary.
    Whatever next?

  • Comment number 58.

    @ 35. At 11:48am on 29 Sep 2010, NorthSeaHalibut

    Exactly. Surely what they've done is to come out and suggest professional negligence? Surely that can be punished to some extent? Whether it be loss of charter status, loss of job or loss of liberty.

  • Comment number 59.

    38. At 11:56am on 29 Sep 2010, szjon wrote:

    > This truck is sure getting around.

    The greed of bankers is utterly beyond belief. The bunch of cretins (sorry, FORMER EXECUTIVES) at "Anglo Irish Bank" spent nearly E 500K on golf balls and brollies!

    > IRISH TIMES: An examination by Anglo’s new management team of past spending
    > at the bank found that €208,000 was spent on golf balls and
    > €218,000 on golf umbrellas over a three-year period.

    They have to be stripped of their worldly goods - all of them. We can allow no mercy to be shown.

  • Comment number 60.

    post 26 Cping500. Let me welcome you to banking lesson number 1.

    A bank makes profits by lending money or providing financial services at a cost that is higher than their initial cost. The bank "should" know from their past experience how many of the people they lend to will not be able to repay their loan and will default. the word should becomes very important later.

    The bank has this money from deposits left with it by investors, in the forms of shares in the bank and also cash deposited with it by savers.

    In a simple world the bank had deposits and assets of GBP 1,000,000.

    Of this GBP 950,000 is deposits. The bank pays the depositors an interest rate of 1%.

    The bank is required by law to keep a certain amount back to allow some depositors to reclaim their money. Again in an ideal world the bank will know how much this should be and again this figure is regulated by the govenment. Let us assume that, for the sake of example it is 5%.

    So after year one assuming that the bank makes no loans it has assets of GBP 1,000,000 and needs to pay its depositors 1% of GBP 950,000. Also the investors want some profit.

    As such the bank has assets of GBP 1,000,000 but a liability of GBP 1,009,500 (add 1% of GBP 950,000).

    On this basis it would appear to have made a loss of GBP 9,500.

    However the bank has lent out the GBP 950,000 at an interest rate of 10% for personal loans. As such assuming that all of the lenders repay their money over the year they now have GBP 1,095,000.

    This means that without adminstration and handling costs and ignoring the risk of loan default the bank has made a profit of GBP 84,500 (GBP 1,095,000 less GBP 1,095,000).

    Obviously staff wages need paying and some loans will go unpaid.

    If we multiply thee figures upwards to a more logical mational level and replace millions with billions the bank has made a profit of GBP 84,500,000.

    Let us assume that staff costs, including bonuses came in at GBP 14,500,000.

    This reduces the profit to GBP 70,000,000. If we assume that 2.5% of the lenders default then the loss on lending is GBP 23,750,000.

    In this scenario the banks gross profit before tax is GBP 70,000,000 less GBP 23,750,000 i.e. GBP 46,250,000.

    if the bank costs go up or loan defaults go up then profits will fall.

    Northern Rock and most of the other banks that failed borrowed money out expecting a very low default rate, after all in the previous ten years defaults had been very low.

    The fact that defaults were very low because of a property boom seemed to have slipped their minds.

    As such banks to win more business and make more profits, and pay bankers more bonuses, lets not forget, cut margins to increase business. This is why the difference between bank base rate and mortgage SVR was very low up to 2008 and why some people still have tracker mortgage rates at bank base or very close to it.

    Default arets were low because of two reasons.

    1) The price of the asset that the loan was made against, generally domestic or private property, was rising so that even if you couldn't repay the loan you could sell the asset to more than repay the debt.

    2)With a booming property market and rising property prices many new developments sold out off plan because people feared that if you didn't get on the property ladder then you never would be able to afford to. This genertally meant that the income to repay the loan was made very quickly. Obviously if you have a quick turnaround on a development to sale the more new developments you could do and hence the bigger profits for everyone.

    You have to remember banks were charging fees and commissions for pretty much all of these transactions but people did not care as they were making money quicker than they eer could before.

    You get a credit crunch and a drop in supply of credit and reduction in demand for property or a rise in defaults and the house of cards falls down.

  • Comment number 61.

    @ 40. At 11:58am on 29 Sep 2010, Justin150

    Problem you get with point 2 is who is considered independant enough? Ratings agencies? That didn't work out too well for the CDS/O market when 'Hick-Town Tyre Co' etc had a AAA rating 'cos the bank was paying the rater's bill.

  • Comment number 62.

    @ 41. At 12:02pm on 29 Sep 2010, GVS

    "my baking education"....did you study economics or home economics?

    ;-)

  • Comment number 63.

    # 45. At 12:09pm on 29 Sep 2010, i wrote:

    "Cue endless debate about how it couldn't possibly work."

    Only one bit strikes me as unworkable in theory -
    "House prices should drop continuously in the same way that the price of a car drops as soon as you buy it."
    There is a resale relative to condition element to housing stock which if maintained (unlike cars) doesn't eventually end up as scrap. Even old cars acquire "classic" status and/or rarity value and appreciate.

    Your solution other than that is fairly sound but alas unpopular with the people that matter - the corporations. I would go a stage further to be honest, large state owned housing stock and get away from the british disease of home ownership - rent from the state. The income to the state would be considerable and the leverage of interest rates would be confined to the value of sterling and other consumer credit. Hell that's a bit communist isn't it - yep.

  • Comment number 64.

    WOTW:

    "I mean after the showing by the French last week - even the Belgiums are at it - and like us they didn't vote for a Government either!"

    It depends on how you interpret non-votes. My Gran didn't vote, and she swears (after heated debate) that the reason is because she doesn't mind who is in charge. In other words her abstention is a de facto endorsement of any and all of the MPs in her constituency.

    It's not that crazy an argument really. I mean, I wanted a certain party to NOT be in power. So I voted for one of the others. If I honestly didn't mind, then maybe I would have saved myself the walk.

    But I digress. People on the streets is always a great idea and the only real option of course (those e-petitions are pants). Fingers crossed on a reaction from the government, but I would give long odds.

  • Comment number 65.

    I'm confused again. I thought bankers got massive bonuses because of their unique skills and talents at wealth creation and risk management and yet now we're led to believe that they needed a regulator to hold their hand and tell them the basics. Doesn't sound very uniquely skilled and talented to me.

  • Comment number 66.

    Check this out....

    The Irish Government is still having to guarantee savings - because the banks can't do it. When does this promise become an empty one?

    Read carefully folks as this story is a glimpse into our own futures....

    http://www.bloomberg.com/news/2010-09-29/irish-banks-hooked-on-ecb-cure-as-lenihan-s-financing-fails-euro-credit.html

    That's the problem with banks - once they pop - they just can't stop!

  • Comment number 67.

    56. At 12:41pm on 29 Sep 2010, M_T_Wallet wrote:

    "I'd make a start with Blair and co for the illegal war in Iraq which cost this country's reputation as well as billions of wasted pounds."

    ..that's as good a starting place as any - where is he these days? - gone into hiding because his book signing became 'too popular'?

    Is he now conducting his book signing in secret?

  • Comment number 68.

    Check out 'Money As Debt' on google video. The preset money system allows a minority to exploits those willing to put themselves into debt and now also punishes the people saving in the currency issued by central banks. We have gradually moved from sond money (precious metals) to a system that needs new debt to sustain itself. It seems to be a ponzi scheme

  • Comment number 69.

    54. At 12:35pm on 29 Sep 2010, The_Brizzle_Don wrote:
    From Point 26:

    I suppose things fell apart for different reasons for different institutions.
    =====================
    Absolutely: probably various combinations of the 38/39 reasons. Has anyone seen the list? The number does seem a shade high, but I find it hard to believe that anything in the real world has a single cause.

  • Comment number 70.

    Now we're blaming accountants? Well, it's about time.

    So FRS26 opened the lending floodgates? Well probably not on it's own.

    FRS26, A regulator that wasn't regulating, the "sales culture" in all banks, the multi-million pound salary for big risk-taking, A bit of greed driven by the idea of share price performance, requiring market share holding/grab and profits growth.

    That's what drove bank's off over the cliff.

    And has anything changed, yet? Nope all we hear is "they're still thinking about it." (Because tax receipts may fall and MP's won't be able to spend as much.)

    It's enough to make you weep!

  • Comment number 71.

    23. At 11:10am on 29 Sep 2010, Dale_Lemma wrote:

    Actually, it's the other way. Many of the losses taken were investment write downs and not realised losses. In fact less loans have gone bad than anticipated hence release of provisions.

    (ACA, formerly with the Big 4 - not bad for a 14 year old)

  • Comment number 72.

    57. At 12:42pm on 29 Sep 2010, prudeboy wrote:
    Those looking for signs of revolution need look no further than Auntie Beeb.
    I stumbled across this the other day.
    http://www.bbc.co.uk/news/business-11281750
    Now for a mainstream media outfit to give a 1/4 decent explanation of Fractional Reserve Banking, in all but name, is truly revolutionary.
    Whatever next?


    A full explanation would be nice.

  • Comment number 73.

    In building and running a nuclear reactor, while you admire the inexpensive electricity it generates and what this can do, you are also aware of the immense danger that sits at the heart of the beast. Everything is designed to protect humanity from worse case first, then extract the benefits second, even if protection means that you can't operate at maximum efficiency.

    So why do we let large banks, whose failure can level a western country to 3rd world levels, operate without effective control?

    We've seen what a minor upset can do, and how 60 million people will have to suffer for about 10 years to correct, imagine what would happen if (when) they truely failed.

    We can put a man on the moon, & harvest the atom, but we can't stop human greed from destroying us all.

    Are we mad?

  • Comment number 74.

    The telling point is that they abandoned general provision for non-repayment immediately and at every level of their banking practises.

    They may not be required to show this in published accounts but at the operational level they can do what they like and they should have known that the probability of repayment still needs to be the major factor in lending decisions. And there is nothing to stop them using it now.

    The fact of having non-bankers running banks leads yo to such unfortunate ill-informed decision making - the "don't need to know" management crowd taking their nonsense to the extreme and the country pays the price.

    Is there really such a thing as "talent" in the world of banking, or even of any corporation? Or do we just have a need for simple safe stewardship? I believe that it is the latter - we need stewards who understand the business in spades - and any contrary view is generally held by people who profit from their view and use it to justify excessive and unwarranted payments to themselves and to their cronies.

  • Comment number 75.

    3. At 09:49am on 29 Sep 2010, Jacques Cartier wrote:
    > an accounting reform surely couldn't have persuaded long-serving
    > bankers to simply forget their years of experience about the
    > riskiness of lending.

    Could that bunch of losers be far, far less gifted that you give
    them credit for?

    *************
    Hi Jacques,

    While the individual losers, are as you describe, don't you feel that at the top, rather cunning and greedy masters are congratulating themselves at how they managed to milk the planet to the brink, and are laughing at how they've already started to do it again with impunity?

    This is what makes me angry, the thought that they've won, and are still winning.

  • Comment number 76.

    41. At 12:02pm on 29 Sep 2010, GVS wrote:
    I am an ex banker (how is that for denial) but my baking education - in those days you got one - stressed three things that mattered - capital, leverage and liquidity.

    Baking education...quite a Freudian typo that. Is that where you learnt to cook the books ?

  • Comment number 77.

    http://www.bbc.co.uk/news/world-europe-11432849

    Terroist attack likely? - or increased security to quell the people?

    We are all terrorists now.

    Lets hope this time it's not a bunch of binmen having a joke about popping off the pontiff.
    http://www.dailymail.co.uk/news/article-1312918/POPES-UK-VISIT-Six-men-arrested-plot-harm-Benedict-XVI.html

    Classic arrest reasoning here:

    "It is understood the man acted ‘oddly’ following the arrest of his colleagues and he was detained as a precaution."

    So anyone who's thinking of acting oddly - don't for these days it's an arrestable offence under anti-terror legislation.

  • Comment number 78.

    Reason 39 is a howler.

    I don't need a regulation to tell me not to walk around the lab with an open container of α-Amanitin. And if I ever worked anywhere with no restrictive regulations on where I could work with the stuff, I think I would still be restrictive in my own actions. In fact, I would refuse to work with anyone who didn't understand just how toxic the stuff is!

    Masters of the Universe? I don't think so! Huge intellect? Automotons would be more accurate.

  • Comment number 79.

    52. At 12:26pm on 29 Sep 2010, writingsonthewall wrote:

    The Romanians were out complaining about their dose of austerity too.

    'The Romanian government was in an uproar yesterday over austerity protests, with the nation’s interior minister resigning, the opposition demanding the prime minister go as well, and top police officials holding emergency talks with the president.'

    http://www.boston.com/news/world/europe/articles/2010/09/28/romania_protests_roil_government/

  • Comment number 80.

    It's interesting Howard has the second chapter of his book entitled...

    "2 The rich get richer - the poor borrow. "

    Mmmm- but what about all those who blame the borrower? - Surely this can't be contrary to that belief?
    I mean this is Capitalist arguing with Capitalist - it's not a good show of stability lads.

    ....now if Howard could just put the other pieces in place and forget about those 38 reasons and just concentrate on the one....

  • Comment number 81.

    WOTW wrote:
    "I'm just trying to get the public used to being treated like a 2 tiered society - because that's what is around the corner. We need to drop this pretence of "we can all be kings" and accept you're either slave or slave master - until there is a rebellion of the slaves - this will remain the case."

    Let's look at history agaain shall we. Slaves rebel, kill kings, install "peoples" government with a "peoples" president. President then starts not wanting to lose his position and so bends/rewrites rules so that this will not happen. People who are not in President circle are still slaves. Examples - Khmer Rouge, North Korea, Zimbabwe, Sierra Leone, DRCongo, China, France and lots more

    So tell me again how people rising up makes a difference?

  • Comment number 82.

    36. At 11:49am on 29 Sep 2010, writingsonthewall wrote:

    Exactly - we're constantly reassured that commision based sales gives maximum efficiency


    I have this image of undertakers deciding to increase their commission based sales and in so doing, chucking out the fundamental rules.. Thou shalt not k....


  • Comment number 83.

    Who says politics is out of touch with reality?

    "But its latest Budget also relies on economic growth of 2% for 2011, above the 1.3% consensus forecast, to close the gap."

    http://www.bbc.co.uk/news/business-11434531

    If your growth estimate is making your deficit look unpayable - well simply change it!
    This is similar to "if your earnings don't warrant you being approved for a mortgage" - then simply change it too!

    ...now what was someone saying about it being the fault of the borrower? I wonder where they get their idea from....

  • Comment number 84.

    Attention Assembled Plebiscite!

    Lend me your ears!

    To quote the late John Lennon "We all want to change the world".

    Might I ask for you to take a quick look out of the windows of your glass Panelaks?

    This 'capitalist system' you complain about...

    Two tiers. Us slaves at the bottom. The Kings enslaving us at the top (Mainly Bankers, probably distantly related to Britain's autocratic unelected imperialist monarchy).

    Compared to:

    The 'socialist system'. Hmmm...

    The Workers Party at the top, and oh, us slaves at the bottom?

    I don't see the difference?

    I don't see the greener grass.

    This is life. Read your Darwin. Some succeed. Some fail. Some just don't want to get out of bed and face the world.

    History demonstrates that people I'm afraid will always take (great or small) advantage of their positons.

    I suggest a more mature discussion based on positive progression, accepting are limitations and imperfections as a society, and leaving John and Joe back in the 20th Century where they belong.

    Everyone together for themselves.

  • Comment number 85.

    Changes to the accounting rules (IFRS) may well be the origin of the crash.

    Under these new rules, banks were no longer allowed to provide for potential bad loans by way of a general provision, nor are they obliged to make a provision for a doubtful asset (i.e recognise a loss) unless there is an "event" which causes this to become obvious. Bankers came to realise that their own annual accounts were no longer as conservative as they should be and consequently that they could not put faith in other bank's annual accounts either.

    This explains why the pre-cursor to the crash was the gradual drying up of the inter-bank market (where banks lend to each other). They could no longer be sure whether other banks were credit worthy.

    It also explains why the valuations departments of the major estate agents are surprisingly short of bank work. Getting a low valuation on a mortgaged property would be an "event" which would cause the bank to have to make a bad debt provision, i.e recognise the loss. So they don't get valuations - but no one financially sophisitcated now believes that the accounts of the big banks are anything short of make-believe.

    We need to go back to accounting rules which insist on greater prudence.

  • Comment number 86.

    Like myself, I suspect that many of the posters on this blog thoroughly enjoyed the boom. We readily accepted the soothing assurances of the 'experts' and borrowed with abandon!

    Houses became ATM's and consumerism ran riot. After all, what could possibly go wrong? - we were told that 'boom and bust' would never happen again.

    And then...

    What happened was nothing less than a betrayal of trust by politicians, bankers, financial professionals and economists. Why on earth should we now accept anything that they say. Sure, we can vent our spleens, but what will that achieve (other than making us feel a little self-righteous).

    I'm really not interested in Mr Davies' utterances.

    Mr Osborne should take a chunk of 4 by 2 to the banks and bring back Glass Steagall. That would stop this 'casino economics' nonsense.

  • Comment number 87.

    22. At 11:07am on 29 Sep 2010, inacasino wrote:

    So tell us what your interest is then.

  • Comment number 88.

    71. At 1:24pm on 29 Sep 2010, Lindsay_from_Hendon wrote:

    "(ACA, formerly with the Big 4 - not bad for a 14 year old)"

    I don't believe it - a 'big 4' accountant. Suddenly everything you have said before just made sense.

    At least we now know why you're so keen for interest rates to stay low. It's not a good thing if an chartered accountant goes bust as they are barred from practicing - isn't that right Lindsay?

    Well you've made me laugh today - I'll give you that. Sadly your admission does not do you credit.

    I don't know what it is with accountants - they must be frustrated in some way - I remember the same story with AndyC555 who professed the fairness of Capitalism - and the restriction of Government taxation - even though he made a living from it.

    Is that it? All accountants want out but until there is no taxation they're trapped in their depressing, dead end and worthless jobs?

    It really is the bean counters revenge..

  • Comment number 89.

    73. At 1:25pm on 29 Sep 2010, Crookwood wrote:

    "We can put a man on the moon, & harvest the atom, but we can't stop human greed from destroying us all."

    Oh we can....but the greedy don't want us too....

  • Comment number 90.

    #69 AnotherEngineer

    re: the 38 causes

    It is in Howards book, The Financial Crisis:Who is to Blame? there is an outline and chapter headings here

    Is Howard stuck for cash at the moment ? I'd have thought that such an authority on financial issues would be more interested in having his views read and discussed than making a bit extra for his pension. Why didn't he publish under the creative commons licence so that we all could read it, after all we did pay his wages for a chunk of his career


  • Comment number 91.

    76. At 1:34pm on 29 Sep 2010, AudenGrey wrote:

    "Baking education...quite a Freudian typo that. Is that where you learnt to cook the books ?"

    You can't keep this all for yourself you know.....

    Everyone knows the bankers are only in it for the dough, I mean it's a system which didn't run on knead so now there's very little crust to be made - that's all in the pasty.

  • Comment number 92.

    56. At 12:41pm on 29 Sep 2010, M_T_Wallet wrote:

    Or to use another analogy giving people who suffer with say diabetes (useless) placebos and wonder why they are still ill. Then saying I know let's give them no prescribed drugs at all - that'll make them better.


    Interesting that you should say that - our new government is proving itself to be rather, eh, thick!

    http://blog.dave.org.uk/2010/07/government-ignores-science.html

    It's sugar pills for all!

    If they can't figure that out, they'll never sort through the bankers pleas for less regulation (and bigger bonuses) as they throttle what is left of the country!

  • Comment number 93.

    65. At 1:07pm on 29 Sep 2010, davidbrent wrote:

    So your lesson is...
    Don't believe what they tell you, instead research the facts and think for yourself?

  • Comment number 94.

    Complete garbage. A financial product is not priced based on a general provision (which is what was removed by the rule change). A general provision has no impact on cash flow or on ultimate profit of the product (as the provision is reversed when the product is finished). Pricing decisions were almost certainly wrong because of using historical losses as an estimate of future losses, which changed dramatically, not because of this accounting change.

  • Comment number 95.

    73. At 1:25pm on 29 Sep 2010, Crookwood wrote:

    We can put a man on the moon, & harvest the atom, but we can't stop human greed from destroying us all.

    Are we mad?


    No we aren't mad. We've just let the few greedy folk rule the roost! We've been lazy, we haven't bothered to keep an eye on what is going on and we haven't bothered to do anything about the nutters we see telling us nonsense and we haven't bothered ditching the crumming press that feed us celebrity nonsense rather than real news.

    It takes time and effot to stay informed and participate in democracy. This must be a lesson for us all.

  • Comment number 96.

    75. At 1:31pm on 29 Sep 2010, Crookwood wrote:

    > don't you feel that at the top, rather cunning and
    > greedy masters are congratulating themselves at how they
    > managed to milk the planet to the brink, and are laughing
    > at how they've already started to do it again with impunity?

    They'd rob us if we let them, so the idea is to batter them, break them down and enslave them and their industry. We'll pay them a living wages for counting our money, but never again can they live like kings.

    That's the idea, anyway.

  • Comment number 97.

    WOTW:

    "What should I refer to the anonymous people as? - "my people"? - it's a bit to deity for me. "

    More palatable options include 'people' 'we' 'citizens'. As soon as one uses the term "you people" one puts the recipient in a state of being accused. Never good for productive discussion imho.

    Re experts, the point I was trying to make is that you think you're right. And others think capitalism has a chance (people have been arguing for ages). Even if capitalism crumbles tomorrow, people will keep arguing about whatever else there is. There is no absolute truth, so the hubris associated with possessing it, is counterproductive. The anger apparent in your posts may also be bad for your health.

  • Comment number 98.

    Ah the dilemna of Government - they cry "spend, spend, spend" in order to provide us with a consumption based 'recovery' (because consumption is not productive and therefore any economy based on it is doomed - right USA?)

    ...but the sheepole know better - they must remember what happened last time with interest rates (or god forbid, they're actually listening to me)

    http://www.bbc.co.uk/news/business-11434442

    I always said this 'solution' was failed from the start, you basically need to persuade all the 'spenders' to reign it in whilst simultaneously encouraging all the 'savers' to start splashing cash irresponsibly.

    ...last time I checked, Government policy can't do that - and hey presto...it's not (despite what the media has been claiming)

    Real savers would rather save even though the return is pitiful - because to savers, savings mean 'safety' - rates will have to go negative before this particular dam is breached.

  • Comment number 99.

    19. At 10:59am on 29 Sep 2010, writingsonthewall wrote:
    PM's being taken to court? - this sounds like a people's revolution.
    http://www.bbc.co.uk/news/world-europe-11432362
    Oh dear, the people of Hendon must be quaking in their fantasy investments.


    "The 59-year-old faces up to two years in prison if convicted by the Landsdomur, a special chamber which has never convened since it was set up in 1905 to try government ministers accused of crimes."

    Excellent.

    We must have loads of unrepealed laws we can dust off and use against the scum. How about the "ducking stool", used to establish whether the suspect was a witch?

    Basically it involves throwing suspected witches in a lake - if they float they are guilty, and if they sink they are innocent.

    Fake profits, witchcraft - same thing, really, so this is entirely appropriate for bankers and regulators.

    Why not give it a try on Turner and Diamond, say?

    To make things as fair as possible, we could convert their personal gain into gold and put it in their pockets, then carry out the test at the Mariana Trench, so they are free to sink fast and deep, thereby proving their innocence.

    It's win, win! Justice at last!

  • Comment number 100.

    71. At 1:24pm on 29 Sep 2010, Lindsay_from_Hendon wrote:

    "Actually, it's the other way. Many of the losses taken were investment write downs and not realised losses. In fact less loans have gone bad than anticipated hence release of provisions."

    Thanks Lindsay. So clearly there are provisions against assets such as loans. So what does Bobby Pesto mean by the following:

    "British and Irish banks stopped making these provisions for possible non-repayment of loans at both the level of published accounts and at the lower level of the operating units."

    Apologies if I am missing something. But I was once taught that contradictions don't exist (one of the premises is always wrong).

 

Page 1 of 3

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.