Brown and the Banks

[Monkeytrousers]

www.thisismoney.co.uk/news/article.html?in_article_id=453203&in_page_id=2

I know there wil be a chorus of cynical voices echoing Tory grumbles (I have been told by an insider that the Tories are despeeratley praying for disaster in the economy - our economy - their economy - just so they can play the 'I told you so' card) of unfair use of taxpayer money, which completley ignores the payoff at the end if this works. This move will radicalise the banking system, and for the better.

I think this plan is a stroke of genius. I am in awe of GB's balls. I really hope it works and am almost sorry it's taken a global recession to do this, as it needed doing anyway.

Have you read what I wrote on this thread? People who designed these products did not "fuck up". Products worked as intended.

The problem was that (1) the system in US was flawed and vulnerable (because of deregulation) and (2) some underlying securities were very risky (sub-prime mortgages)

These very risky sub-prime mortgages were given out because the company who wrote the mortgage didn't care if borrower couldn't pay. He would package all these mortgages and sell them on to another financial institution anyway. Who would then package them further and sell them on to another institution who would then market a variety of instruments based on these packages of mortgages. It is lack of regulation that allowed all this to happen, not evil bankers.

It annoys me slightly when I hear of all "complex financial instruments" being the work of Devil. (Devil, in this case, being all bankers, of course.) Credit derivatives based on US sub-prime mortgages are and were a very small part of "complex financial instruments". Most have nothing to do with mortgages. A lot are futures and options on foreign exchange pairs and commodities, for example.

DaddyJ, can you clarify what financial products you are referring to? I assume you do not mean any products which are sold to the retail customer aka man-in-the-street.

Instead, I assume you refer to the origination and packaging of risky subprime (some call 'toxic') loans into financial products such as notes and instruments which are sold to by-and-large sophisticated investors like other banks, pension funds, insurance companies - big boys who should theoretically be able to assess risk. It is these toxic assets which sit undisclosed on banks' and other financial institutions' books and balance sheets which are causing stasis in the financial world because banks don't want to lend to the next Lehman Brothers. Hence the government (GB, if you will) stepping in to guarantee these toxic loans and shore up confidence in the interbank financial sector.

Those financial products backed by dodgy loans are risky. Risk is not bad per se. It is one thing to sell dodgy loans as good loans. But that is not the case at all. The financial products were clear - each class of notes related to borrowers of a specific risk profile - hence class A (goldplated borrowers like cest and me), class B (daddyJ and OHB), class C (man on sofa in loan consolidation ads) - tongue-in-cheek of course.

Banks knew what they were selling. Investors knew what they were buying. Broadly speaking.

The punt that investors were taking is that the man-in-the-street would not default on the loans. That was largely true when credit was easy and the economy was high-rolling. And if there was default, the risk of a small percentage of borrowers defaulting was already factored into the risk profiles and price of the riskier notes.

The elephant in the room which everyone did not (want to) notice was the spectre of a sharp recession, coupled with unprecedented gridlock in global lending. Where you did not get the occasional default but widespread default because no one could get loans (meaning good businesses fail for cashflow), individuals could not rollover their overdrafts, property values start falling and borrowers go into negative equity, banks getting nervous and pulling loans.

The recent popularity of credit derivatives and mark-to-market basis of valuation of bank's assets for regulatory purposes magnified the effects of credit defaults in a way we have not seen the likes of. And the fact that there are So Many subprime loans about because of easy lending policies.

All of this is theoretically foreseeable. But each player built up the individual parts of the picture in relatively benign circumstances without realising they were contributing to a bubble economy. Regulators also sat on the sidelines and did not put it all together until the horse had bolted.

So I find it hard to fix blame on any one player or group of players.

I can't take anything GB does regarding the economy seriously. I don't think he's got a clue. He's addicted to debt, and will leave a dreadful legacy for future generations. And if we the taxpayer are now the majority owners of these banks, they should just be told what to do, there is no need for negotiation.

blueshoes, the fundamental problem I have with all your points

• partially valid as they may be - is that you are far too keen

to spread responsibility to the point where no one is responsible.

And when no one is responsible, everyone becomes responsible,
i.e. society through government is forced to pick up the pieces.

Which is a farce. A profoundly unjust farce.

A farce that continues to undermine everything
that is being done to mitigate the crisis.

These people were paid huge sums to understand the risks.
They were paid collosal amounts for their supposedly sophisticated financial engineering.
Their bosses took home obscene levels of pay.

And now that their system has collapsed, now that their bets have turned sour
(long after they have walked off with considerable personal fortunes)
we are told that no one was in charge, it was nobody's fault,
just an unfortunate string of unforseeable events.

A whole bloody lake of black swans, eh?!

In fact, as OHB already pointed out, there were quite a few people who DID foresee it.
You had the STR crowd and the goldbugs.
Then there was Robert Peston, of course.
And was it not Warren Buffet who famously called some of these teeny products
'financial weapons of mass destruction'?

It was blatantly obvious that these products were utterly unsustainable and hair-raisingly risky
but the people in charge were far, far too busy lining their pockets to care.

They failed on a monumental scale. They failed us on a monumental scale,
though they did rather well for themselves.

That injustice needs to be addressed.
It is such an obvious injustice that even the best efforts
of intelligent and eloquent posters like yourself, cest and cote cannot change the raw facts.

Cote, you are arguing that it was all about regulatory failure, correct?
There is some truth in that. The regulators were simply not able to contain the bankers
who admittedly did not break any laws.

The trouble with your theory is that it removes any sense of agency from the bankers.
'It was the flawed regulatory environment wot did it.'

No, it was the bankers who did it.
They had a choice. They chose to recklessly exploit every single short-term
profit-making opportunity as long as the law was not directly broken.

They chose to give up any kind of moral compass,
they chose not to see the dangers which were obvious to quite a few people as pointed out earlier.
They (surprisingly enough) chose to take the opportunity to become very very rich
with scant regard for the health of their own companies let alone the system as a whole.

These people are sitting on mountains of money
which they earned by turning our financial system into a casino.

A casino where the short-term rewards for taking reckless risks were so attractive
that any thought about the eventual, possible fall-out became irrelevant.

They have brought harm to our societies.

They have brought so much harm to our societies
that whether laws at the time were broken or not is as good as irrelevant.

One thing that bugs me the most is that it is still pretty hazy
what lessons to learn from all this and how to prevent a repeat.

Tighter regulation is unlikely to work - financial history has taught us that.

One possible solution is to retrospectively punish the main individuals involved.
Public naming and shaming, suspended prison sentences
and very painful fines for the top 250 earners.

This would send a powerful message to future generations of bankers,
more powerful and more effective than any law.

I'm not "arguing". I'm telling you as it is.

None of what I said is subjective. It is not opinion.

You are clearly not very familiar with the world of finance, and from where you sit, it looks like (1) "the system" has all collapsed (2) what bankers did (their jobs) was wrong, (3) top earners should be punished, etc

None of those statements are correct.

I know you are angry and there are many like you who know little about what is going on and yet have already oiled the pitchforks and lit the torches, but that doesn't mean you are right. It just means you don't understand. And that you are human and want someone to "pay".

daddyj, when you talk about 'their system', 'their debts', 'these people' and 'they failed us', it sounds so clear cut to you.

How can my points be 'partially valid as they may be' - for all you know they are wholly invalid. But I cannot even begin a decent conversation with you if you cannot even say whether I am wholly or partially valid with any conviction.

I think I can just about find a 'them' if I scrunch up my eyes together, fix on a blurred mass of people, take a deep breath, aim and shoot.

Things have to change. And that is the way in which bankers are remunerated. Their bonuses should be less tied to the number of deals they do. That has been identified as a risk long before things went belly up.

This will free them to act in a way which is more long term and in accord with prudence (by turning down more risky deals), as doing that would not hurt their pocket directly.

Regulators had previously pointed this out but adopted a softly-softly approach. I would expect they will become more hardline now.

Daddyj, sadly, apart from that, an altruistic banker is an oxymoron.

I disagree that it is the (deal-making) bankers' job to understand the risks where we are talking on a macro scale. They need to understand the risk of the individual products they are selling and describe them to the investor. So long as their product is what it says on the tin and they don't sell risky stuff to widows and orphans, they are home free.

Individually they do not think about how this deal with impact on the economy. If it goes tits up, their first thought is that the investor will lose money. But not what if that deal goes tits up for the investor, along with hundreds and thousands of other similar deals which I think are out there, because my competitor is doing them too, but if I don't my boss will sack me and I need to make a packet before I get sacked or made redundant as my shelf life does not generally extend beyond my 40s.

Well, they don't think macro any more than your average man-on-the-street does when he accepts a mortgage he does not have a clear idea how he is going to repay. Because the market can absorb his one default. But the crux is can the market absorb his default, along with million others which are probably out there the length, breadth and scale of which he does not know. Does anyone really think this?

daddyJ, I am curious by what criteria you are going to identify the top 250 earners (because earning money is a crime, doncha know) to mete out suspended prison sentences and fines to.

The FSA will also be interested to know.

Are their individual states of mind when they did what they did relevant? What if it was not their job to look at the macro picture in the way that analysts and strategists do? What if they acted wholly within the legal and regulatory framework? Are you going to impose retrospective moral laws on rational market behaviour?

If you are imposing criminal-type penalties, you have to show what crime each individual is in fact guilty of. Mass criminal responsibility sounds like a witchhunt.

The point is I personlly don't want anyone "to pay", including me and every other tax payer. Would the world really end f these institutions weren't saved, does anybody really need them ?

Front page of Times today; "RBS, worth £75 billion only 2 years ago, is now valued at $4.5 billion, even though it received £32 billion from taxpayers and shareholders less than 3 months ago".

So let's get this right. GB, supposedly the top economist in this country for the past decade, surrounded by the top civil servants and best financial brains in the country, is busily injecting billions of our money into, err, financial black holes.

And people still think he has an economic policy and knows what he's doing (sorry, it's all "global", I keep forgetting, despite his litany of disasters during our 12 years of growth like not a penny put aside, annhiliating our private pensions industry, selling off all our gold at the bottom of the cycle etc etc).

Of course it will work. Brown saved the world. He told me so himself.

Somehow, I think it will work - if you take a long term view

An individual with this level of debt would be much better off becoming bankrupt and I expect that's where the UK will end up, unless the IMF or an oil rich Arab state will bail us out.

Cote, this thread is about banking not me.
Stick to the topic, contribute to the actual debate.

blueshoes, I do like your posts!

Let me dwell on them a little, you speak a lot of sense
but I am not quite ready to join you in your happy world
where all that is required is a little tweaking of the system
and everything will be fine.

KayHarker, you are talking out of your arse. Brown didn't save the world he did infact abolish boom and bust economics.

bb.b.but he said so, he did...see

Thanks to Cest la vie and Cote for their contributions on this thread

I'm sure that more and better regulation is the way forward ...

America does a u-turn on GB "saving the world" idea

Europe doesn't seem too sure about GB saving the world either Brussels predicts UK to suffer worst recession of any large Europe economy, national debt to rise by £400 billion by 2010 and condemns GB for failing to do more to bolster finances during boom years

DaddyJ - re "contribute to the debate"

I haven't?

Is your definition of "contribution to the debate" ranting about bankers and cooking up irrational plans of how they should be punished? Was an overview of facts that brought us to this point not "contributing"?

Not sure what u-turn you're referring to Elfrida.

Paulson's original plans to underwrite "toxic" securities were a ill thought out and badly conceived shambles, and indeed was rejected by the House of Representatives as you'll recall in addition to being widely pilloried. The recapitalisation of banks as proposed by GB was a far more thoughtful response and was one widely adopted by other countries as it required less capital and lower risk to the tax-payer whilst leaving potential upside for the tax payer in the event that it worked.

Fast forward six months and unfortunately that plan hasn't had the intended results - the wholesale markets gridlock has eased slightly but not sufficiently, partly perhaps because the plan wasn't sufficient but partly also because of the continuing deterioration of the economy and further unravelling of banks' positions. At this point, with the the less risky plan having failed to free up credit then the more risky plan is being undertaken.

What were you wanting? That we should have taken the high risk, most expensive option straight out?

What I would like, cestlavie, is some sense that GB is not continuing the process of saddling this country with unmanageable debt, which he started years ago as Chancellor and is now getting worse and worse to the extent that we are now contemplating a money print. I'm not the only one wondering where it's all going to end http://business.timesonline.co.uk/tol/business/economics/article5555898.ece here.

oops, try again