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?

Why some promises are more equal than others

It seems that all the United States Banks that received US Government tax dollars have repaid the money or will shortly repay the money in full. These banks needed what proved to be a relatively short term loan to help them get back on their feet an help the American economy on its way to recovery. The United Kingdom lent tax pounds to several banks but these banks have no chance of repaying the UK government in the short or even medium term. Continue reading