The “help yourself” bank

The Royal Bank of Scotland is one of the United Kingdom’s largest banks. A few years ago it became insolvent and by any normal rule of business, if the shareholders were unable or unwilling to support it, the bank should have gone into insolvent liquidation. However, irony of ironies, the government deemed the bank too large to fail and supported it with so much cash that the government (or taxpayers more accurately) now owns 81% of the bank.

The Lending Policy of National Westminster Bank and Royal Bank of Scotland

I came across a case which illustrates perfectly the problems that the banking industry is continuing to cause in our economy. It is better neither a borrower nor a lender be, not just because borrowing can ruin friendships and distort them, but because borrowers in effect put themselves in the hands of the lenders and while those hands may be safe for a time eventually the lender’s greed ruins the borrower. What follows is a true story.

Another Fine Mess the Banks have got us into

By foolish speculation with the money of their customers banks have caused many problems for most people in most economies. It seems that the bankers cannot resist a free gamble with other people’s money. Also, whilst insisting and monitoring prudence in their customers who borrow, the banks manage to borrow recklessly, leveraging their deposits into realms of what should be fantasy but is unfortunately reality. As though this damage was not enough we find that banks are not paying sufficient attention to their core business, of getting and looking after the money of the poor mugs who have to use banks. For the past week NatWest, the Royal Bank of Scotland and other banks in that group have managed to mess up what should be a simple business of recording money going in and going out of the accounts of their customers.

Seven Great Unsolved Mysteries of Modern History

For nearly three weeks protestors inNew York Cityhave campaigned against the banks and corporate control of American politics. The key issue about the bankers and corporate investors for those that protest (and for the millions of us that do not protest) is a simple question. If the bankers brought an end to our prosperity by recklessness why were they rewarded instead of being punished?

Who Controls Our Money?

About two hundred and ten years ago, Mayer Amschel Bauer-Rothschild, the father of the Rothschild banking dynasty said “give me control of a nation’s money and I care not who makes her laws”. His words explained the relationship between bankers and the state. That held true of the power vested in banks in 1800 and still holds true today in most nations.

But today in the United Kingdom governments are going to make laws about banks and banking. Will the banks be able to resist the laws or has their power waned? Banks are powerful creatures and their wealth and control of credit makes it hard for any government to act contrary to what the banks deem in their best interest. Banks place their own interests ahead of the national interest, like true multinational companies.

But in the United Kingdom virtually everyone, outside the banks, knows that the banks are in need of reform.

After a long and hard look at British banking, the Independent Banking Commission has reported on the measures it recommends that will help avoid the kind of debacle that banking has undergone in the past three years. No reform can be a substitute for honest, wise and prudent leadership, but the Commission’s recommendations, while not being able into insert integrity and caution into banks and their leadership will, when implemented, make things much less likely for banks to need taxpayers’ money to avoid going bankrupt.

Had normal laws and procedures been followed several years ago, at least three, and possibly four of the major U K banks would have going into bankruptcy, because they could not pay their debts as those debts fell due. Those banks would have suffered the fate of thousands of businesses and had the ignominy of being would up, their assets (such as they were) seized, and their directors disqualified from holding directorships for fifteen years.

Had Slippery Syd the Master Con Man conceived of such a delicate effective fraud as personal protection insurance he would have had is collar felt rather sharpish, but banks are immune from normal laws, and they will pay back some of the PPI money they conned but no one will stand in jeopardy of losing his or her liberty.
It is all part of the condition of British banking; insolvent crooked and treating depositors as a trough at which the banking executives directors and speculators may gorge.

Of course the banks were to blame for the state they were in, with a good helping of contributory negligence from the government of the day and previous governments which allowed the banks a free hand with our savings and assets. Fortunately for the banks, they were deemed by the government as being too big to fail, and so they were rescued with billions of support from taxpayers which they obtained at bargain basement rates while saddling the taxpayers of the future with debts and liabilities that will take many years of growth or inflation to erode. Some banks were taken into virtual public ownership.

That means we have the likes of the Royal Bank of Scotland, HBOS  and Lloyds TSB examining the affairs of their customers to ascertain whether the customer is credit worthy and whether the facilities should be continued.

For some reason the executives who did the most to contribute to these failures – the directors and traders of the big bonus culture – were let off the hook and allowed to retain their ill gotten gains and pensions, notwithstanding the damage they caused. We can speculate about the reasons but I see no sign of the likes of Fred Goodwin hanging his head in shame.

The reforms that have been recommended by the Commission are structural; banks that take deposits should have their assets and liabilities under separate corporate and management control, well away from any speculative “investment” they may wish to undertake in order to swell the bonuses of their speculators. The bank will not be able to use the widows and orphans funds as part of their leveraged speculation operations in future, probably around 2019.

The other major change is that banks must have a buffer of 10% of their domestic retail assets, rather than the present wafer thin requirements that exist or the 7% recommended by the International Committee on Banking Supervision. The biggest banks would have to keep back more than 10% in reserve.

There are other proposals which will create more competition and make it easier for customers.

Of course, the banks will object to these changes, and we will have to find out who rulesBritain; the banks or the government. I would add to Mr Bauer-Rothschild’s words of wisdom; the control of a nation’s money is only vested in a bank if the bank has lent money to that nation. In the United Kingdom the taxpayers have lent money to the banks and so the banks will have to care very about who makes the laws that the United Kingdom.

Why are British Banks so bad at banking

Why are British banks so spectacularly unsuccessful? It strikes me that in the United Kingdom our bankers have been so much worse at their business than bankers in other developed countries. I shall explain.

The banking collapse affected all large banks in all developed countries. Most large banks had to be “bailed out” directly or indirectly by government support schemes, which were underwritten by the taxpayer. That in itself is bad enough as mostly the taxpayer lent its assets to supporting businesses on the basis that these businesses were too important to local economies to be allowed to fail. Unfortunately the taxpayer has not been paid an underwriting fee for its services. Apparently saving these terribly important businesses was reward enough.

The underwriting now, with the wisdom of hindsight, was made necessary by a lack of confidence in banks. Banks borrow from depositors and lend to borrowers. If the depositors fear that the borrowers will not be able to repay the money borrowed, then some depositors will seek to withdraw their money from the bank quickly, so that some other group of depositors are left without money.

This is essentially what looked like happening across the developed world, with a herd mentality making it necessary to protect a run on every bank. The underwriting did this, essentially protecting your own deposits with your own underwriting promises! It worked and confidence was restored.

However, again with the wisdom of hindsight, we have seen that in addition to some banks needing a short term underwriting to maintain confidence and prevent a run on the bank, other banks were not only affected by a crisis of confidence, but they had been run in such a way that they had no assets left to support the deposits that they had taken in the long term.

This arose because banks trade with each other. They buy and sell assets to each other, ostensibly to minimise risk. In the course of this trade some banks managed to sell assets for far more than they were worth. Some banks managed to buy assets for far more than they were worth. Some banks managed to do both at the same time.

So now that the dust has settled what do we see? Two massively large banks in the United Kingdom – Royal Bank of Scotland and Lloyds TSB – have bought much more in worthless assets from other banks than other banks have bought from them. So while, for example, banks in the United States are tarred with the disgrace of having had to be bailed out in the short term, they have recovered their solvency and have limited exposure to worthless assets.

These two banks in the United Kingdom are years away from recovering their balance sheets and are only now able to survive not just with government underwriting but with huge amounts of taxpayers’ capital. To get into this position they have clearly bought “toxic” assets from other banks – mainly American banks – which are now found to be worthless although RBS also has the distinction of having bought a bank – ABN Amro for many more times than it was worth.

All this draws us to three conclusions:-

1. The banking crisis was a world crisis but
2. British banks fared worse in the crisis by being fundamentally flawed in the way they did business compared with other banks because
3. The United Kingdom banks were a repository for “investments” that were fools gold.

So we British are hopeless at banking? Are those that carried out the due diligence on these investments before they were bought fools? Was any due diligence actually carried out on some of these investments being traded for hundreds of millions?

All this points to a lack of competency in banking and associated services. This is odd, because successive governments have built the UK economy around banking, rather than around manufacturing because the British were supposed to be good at banking.

Of course, there could be another explanation – which is that the British Government ought to have monitored and controlled the activities of banking far more closely to ensure that excessive risks were not being taken. If a nation has a key industry upon which that nation depends it would be the duty of the government to ensure that key industry did not take excessive risks, would not it? Hindsight is a very useful tool. It cannot do much about the mistakes that have been made, but it can prevent people from making the same mistakes again. That, of course will only happen if those that made mistakes admit to them, won’t it, Mr Brown?

Gordon Brown, markets and the need to cage the beast

Gordon Brown thinks that markets (and this this context he really means the financial markets) must reflect society’s values which include fairness, stewardship and co-operation. He is wrong on both counts, Markets actually never reflect society’s values, but operate on a value system of their own. All markets have to be competitive, uncooperative and only interested in stewardship in so far as it may affect the perceived interests of those operating in the markets.

Does buying a carbon offset genuinely offset carbon?

Carbon offsetting is a large industry which sells people things that might or might not be what they expect to purchase and might or might not work. The industry is entirely unregulated although there is a promised “Code of Conduct” for the UK there is no agreed standard about what people are allowed to sell and what they are allowed to claim in their sales pitch. When you have bought a product from this industry you have no idea whether you have actually done something useful or thrown away your money.

Oil prices rise as the economy falls

The price of oil still rising but the economy of the world is slowing down. This at first sight seems like a paradox. If the world’s economy slows down you would expect less energy to be used and therefore the price of oil should fall. Today oil stands at around $120 a barrel – it has never been higher, but businesses face fewer sales, lower profits or greater losses and people’s employment will be threatened as businesses reduce staffing levels.

 

We are told that this is the result of the sub prime lending foolishness which the world’s banks embraced to the extent of buying worthless securities; having done so they became afraid to lend each other money and are still so afraid. The rate at which UK banks lend to each other is known as LIBOR – the London Interbank Offered Rate, and banks in turn fixed loans they made by reference to LIBOR, giving themselves a small margin over it when lending to commerce.

 

It is worth noting that none of the recent three Bank of England interest cuts has had the normal knock on effect of reducing the LIBOR. The margin is now historically very high, reflecting the risks that banks feel they take if they lend to each other.

 

Also it is by no means clear to me that the banks actually have the money to lend. The Royal Bank of Scotland is short £12 billion and will seek to raise this money from a rights issue to their shareholders who must pay up or have the value of their shares diluted. In addition the banks are benefiting from a £50 billion loan being made by all of the taxpaying citizens in the UK.

 

So the economy is not healthy and at the same time oil price rises inexorably. It has always been thus. In his excellent book, “the Last Oil Shock” David Strahan points out that some analysts have found that movements in oil prices since 1954 have been closely mimicked by US unemployment figures after a time lag of around eighteen months. http://www.amazon.co.uk/Last-Oil-Shock-Extinction-Petroleum/dp/0719564239

 

Mr Strahan suggests that while oil consumption as a proportion of gross domestic product is falling, because we are increasing our population and driving more, flying more and living more comfortable lives oil consumption per person is increasing. We find more things to “spend” our energy on.

 

There is a relationship between the availability of energy and economic growth but somehow governments overlook this basic fact. Our present Energy Minister, Mr Malcolm Wicks, is a junior minister and he does not have cabinet rank. He also does not have complete jurisdiction over energy; his boss gets in on the act from time to time as do the people at DEFRA; the Treasury set the policies for energy taxation which further limits Mr Wicks’ brief. No-one it seems to me, is bothering to look at the whole picture and this is worsened by the fact that Energy Ministers in the past ten years have tended to come and go like the newspapers.

 

This means that we get a muddled energy policy; one day photovoltaics are in vogue, the next day wind turbines. Biomass then becomes fashionable and now nuclear is proffered as a solution. The Government is not joining the various energy dots together and even worse is not linking the energy picture to the economic picture.

 

The government’s main energy policy is to cause us to invest in insulation – first for lofts and then for cavity walls. This makes energy use more efficient but efficiency is often outweighed, as I explained in another post, by those with good insulation turning the thermostat up to enjoy a more comfortable home wearing lighter clothes. The efficiency gains end up with more economic growth in the sense that we spend the efficiency gains and more on other energy consuming practices.

 

Now an economic downturn may be caused by a high oil price, as businesses dependent on oil collapse. The oil price would then fall, reviving the economy but in the nature of the beast as the economy grows so the oil price would rise all over again. I am not an economist but it seems to me that a rising and falling and re-rising oil price (and coal prices and gas prices) would lead us through a series of sharp boom and bust cycles, with the bust cycle lasting longer each time until the energy finally runs out.

 

That, I think, is the fundamental problem that Governments have to solve. The solution must be to use whatever resources we can muster to produce benign energy ourselves. The Government needs to require us to invest in microgeneration and pay attention to the details– not throw money at grandiose schemes dependent upon depleting resources.

 

That means higher building standards, solar water and space heating for virtually everyone, more offshore turbines, taxation on fossil fuel energy to reduce demand and make people more careful about the energy they use, penal taxation on large-engined inefficient vehicles, as well as what they are doing now.

                                                                                                                                    

There will come a time when energy will be at the very top of the political agenda; the fuel duty strikes almost brought down the new labour government in 2000. The future position could be far worse than political inconvenience and far harder to solve.