In terms of economic history 2010 year is likely to go down as the year that the global banking system bounced back from economic crisis.
There are still some problems in the financial system, like the Irish banking bailout, and doubtless some institutions will have to write down a little more toxic debt. But by and large the financial industry is up and running just as it was before the autumn, with banks posting healthy trading profit and investment banks back to making mega bucks.
Unfortunately the same cannot be said of the real economy. Growth in the Western world, outside of Germany, is going ahead at a snail's pace and all major Western economies are posting record levels of unemployment.
Unfortunately the same cannot be said of the real economy. Growth in the Western world, outside of Germany, is going ahead at a snail's pace and all major Western economies are posting record levels of unemployment.
We are in this situation even before the worst of the austerity measures being rolled out across the globe are really starting to hit the real economy. At present next year looks like its going to be a good one for the financial industry and a bit of a disaster for the rest of us. And by the rest of us I largely mean the taxpayers who bailed out the financial institutions in the first place. While governments and central banks are calling for more regulation and better risk management the financial industry seems to be saying fine but don't get carried away because we need to stay competitive.
In order to stay competitive the industry has to attract the best brains and to do that they need to be able to claim massive annual bonuses. Does anyone really take this seriously? Let's have a quick look at the best brains the financial industry has managed to attract. Shall We? In spite of the fact that he started out as a clerk at a bank when he left school in London, Nick Leeson was a very clever man in the industry. Indeed when he joined Barings and moved to Singapore as the bank's main dealer he was hailed as a genius of the financial system. The problem here is that he was an arbitrager and a derivatives trader whose expertise in the market was such that none of his superiors had a clue what he was doing. His bosses, at what was then the UK's most blue-chip bank, just thought that because he was generating so many trades and so much fee income he was the bee's knees and paid him massive annual bonuses..
This, in turn, allowed them to pay themselves even bigger bonuses. Basically what Leeson had done was gambled on a favourite and lost. To make up the loss he got better odds on the third favourite and lost again and by the beginning of 1995 he had put the bank so much in the red that he was backing three-legged horses because he needed a 1000-1 miracle to get him out of the mess. But three-legged horses do not win races so he left a note on his desk saying 'Sorry' and fled the country leaving Barings with losses of $1.4 billion they could not cover.
Bernard Madoff is equally a very clever man. He managed to peddle a Ponzi scheme in New York for more than a quarter of a century. Now a Ponzi scheme is a sort of financial equivalent of pyramid selling and anyone with an O-level in arithmetic should have been able to work out that the bottom would eventually fall out of his market. But it took rather a long time for anyone to notice that some $65bn of clients' funds were not there. The important point here is that the people who invested with Mr Madoff were not simple people but by and large fund managers and investment specialists who made extremely large bonuses on the amount of other people's money they invested with Mr Madoff. But like the men from Barings these highly-paid experts had their snouts so deep in the bonus trough that they never bothered to take the trouble to work out what Mr Madoff was doing. He was the toast of the New York Stock Exchange and all the highly-paid financial professionals looked up to this crook. The same can be said of the stock manipulation of companies like Enron and WorldCom at the beginning of this decade. Some of the highly-paid and highly-qualified accountants at Arthur Andersen should have spotted what was going on.
But it was not really important to them because when ordinary people lost their jobs the lads from AA just got employment in other top accountancy practices. What all of these events have in common is that in each case a few people go to jail, a lot of ordinary people lose their savings and pensions, and the financial experts who should have known better just get a job elsewhere and carry on regardless. Anyone who had taken an even cursory glance and the subprime structured investment vehicles that caused the global financial crash would have seen that they were nothing short of a fraud. But then if you are making a lot of money and fat bonuses on trading worthless stock which you can pass off as valuable why stop.
The traders probably knew the bubble would burst and the bankers probably did not understand what they were trading in, but like the boys at Barings, they just looked at the fees that were flooding in and kept on trading until someone took fright and the whole system came tumbling down. I am one of the people who take the view that bailing out the banks was not only the right thing to do but the only thing to do. The alternative would have been a financial collapse which would have hit the real economy a lot harder and would have resulted in an economic downturn that could have lasted for a decade. But now that the banks are sort of working again I think governments and central banks have got to come to terms with the fact that the old system does not work and there can be no business-as-usual attitude.
Anyone, other than bankers, who seriously believe that a bit more regulation and a bit more risk management will prevent another collapse has got to also believe in Santa Claus and the tooth fairy. Given that a large section of the global financial industry is now owned by taxpayers then now is surely the time to completely restructure our financial industries. For a start we should ban bonuses being paid out from taxpayers' rescue packages and explain to the industry that in future they will just have to work for a salary like everyone else. We should take more control of policy in the financial industry and link lending rates to central bank base rates rather than what bankers like to see as market prices. We should, at least for a year, have a moratorium on home repossessions, which only serve to damage the housing market and the economy as a whole.
We should split investment banking from retail banking and let the investment bank's clients be in no doubt that there will never be a government bailout if they invest unwisely, while assuring normal borrowers and savers that their money and assets are safe. And we must make sure that the financial system on which we all rely is never going back to being a casino for a bunch of crooks and comic singers who think banking's prime role is to make money for bankers. This hypocrisy pervades society on all levels. We demand honesty, preach the benefits of transparency then ignore the truth, refuse to engage with it and continue in a pseudo-blissful ignorance. Face the facts. We live in the era of the hypocrite, and I am one of many, yet so are you. So break the trend, step out and try to be the one that acts rather than reacts. Hoc est verum et nihili nisi verum.
In order to stay competitive the industry has to attract the best brains and to do that they need to be able to claim massive annual bonuses. Does anyone really take this seriously? Let's have a quick look at the best brains the financial industry has managed to attract. Shall We? In spite of the fact that he started out as a clerk at a bank when he left school in London, Nick Leeson was a very clever man in the industry. Indeed when he joined Barings and moved to Singapore as the bank's main dealer he was hailed as a genius of the financial system. The problem here is that he was an arbitrager and a derivatives trader whose expertise in the market was such that none of his superiors had a clue what he was doing. His bosses, at what was then the UK's most blue-chip bank, just thought that because he was generating so many trades and so much fee income he was the bee's knees and paid him massive annual bonuses..
This, in turn, allowed them to pay themselves even bigger bonuses. Basically what Leeson had done was gambled on a favourite and lost. To make up the loss he got better odds on the third favourite and lost again and by the beginning of 1995 he had put the bank so much in the red that he was backing three-legged horses because he needed a 1000-1 miracle to get him out of the mess. But three-legged horses do not win races so he left a note on his desk saying 'Sorry' and fled the country leaving Barings with losses of $1.4 billion they could not cover.
Bernard Madoff is equally a very clever man. He managed to peddle a Ponzi scheme in New York for more than a quarter of a century. Now a Ponzi scheme is a sort of financial equivalent of pyramid selling and anyone with an O-level in arithmetic should have been able to work out that the bottom would eventually fall out of his market. But it took rather a long time for anyone to notice that some $65bn of clients' funds were not there. The important point here is that the people who invested with Mr Madoff were not simple people but by and large fund managers and investment specialists who made extremely large bonuses on the amount of other people's money they invested with Mr Madoff. But like the men from Barings these highly-paid experts had their snouts so deep in the bonus trough that they never bothered to take the trouble to work out what Mr Madoff was doing. He was the toast of the New York Stock Exchange and all the highly-paid financial professionals looked up to this crook. The same can be said of the stock manipulation of companies like Enron and WorldCom at the beginning of this decade. Some of the highly-paid and highly-qualified accountants at Arthur Andersen should have spotted what was going on.
But it was not really important to them because when ordinary people lost their jobs the lads from AA just got employment in other top accountancy practices. What all of these events have in common is that in each case a few people go to jail, a lot of ordinary people lose their savings and pensions, and the financial experts who should have known better just get a job elsewhere and carry on regardless. Anyone who had taken an even cursory glance and the subprime structured investment vehicles that caused the global financial crash would have seen that they were nothing short of a fraud. But then if you are making a lot of money and fat bonuses on trading worthless stock which you can pass off as valuable why stop.
The traders probably knew the bubble would burst and the bankers probably did not understand what they were trading in, but like the boys at Barings, they just looked at the fees that were flooding in and kept on trading until someone took fright and the whole system came tumbling down. I am one of the people who take the view that bailing out the banks was not only the right thing to do but the only thing to do. The alternative would have been a financial collapse which would have hit the real economy a lot harder and would have resulted in an economic downturn that could have lasted for a decade. But now that the banks are sort of working again I think governments and central banks have got to come to terms with the fact that the old system does not work and there can be no business-as-usual attitude.
Anyone, other than bankers, who seriously believe that a bit more regulation and a bit more risk management will prevent another collapse has got to also believe in Santa Claus and the tooth fairy. Given that a large section of the global financial industry is now owned by taxpayers then now is surely the time to completely restructure our financial industries. For a start we should ban bonuses being paid out from taxpayers' rescue packages and explain to the industry that in future they will just have to work for a salary like everyone else. We should take more control of policy in the financial industry and link lending rates to central bank base rates rather than what bankers like to see as market prices. We should, at least for a year, have a moratorium on home repossessions, which only serve to damage the housing market and the economy as a whole.
We should split investment banking from retail banking and let the investment bank's clients be in no doubt that there will never be a government bailout if they invest unwisely, while assuring normal borrowers and savers that their money and assets are safe. And we must make sure that the financial system on which we all rely is never going back to being a casino for a bunch of crooks and comic singers who think banking's prime role is to make money for bankers. This hypocrisy pervades society on all levels. We demand honesty, preach the benefits of transparency then ignore the truth, refuse to engage with it and continue in a pseudo-blissful ignorance. Face the facts. We live in the era of the hypocrite, and I am one of many, yet so are you. So break the trend, step out and try to be the one that acts rather than reacts. Hoc est verum et nihili nisi verum.
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