Archive for the Banking Reform Category

Greed laid bare for all to see!

Posted in Banking Reform with tags , , , , on April 15, 2011 by Tom Leatherbarrow

I spent last night reading (selectively, its 650 pages long) the US Senate Panel’s report on the financial crisis (yeah party on!).

It stands as a stark contrast to the interim Vickers report on the structure of the UK banking industry which was released in this country earlier this week.

Where Vickers was polite and diplomatic, Senator Carl Levin and his committee reach for the baseball bat. Levin describes the market in Mezzanine Credit Default Obligations (CDOs), which were made up of thousands of individual mortgages that were traded around Wall Street and further afield, as “a financial snake pit rife with greed, conflicts of interest and wrongdoing”.

Levin also believes Goldman Sachs executives weren’t truthful about the company’s transactions in testimony before the subcommittee at an April 2010 hearing. “In my judgment, Goldman clearly misled their clients and they misled the Congress.”

There has long been a suspicion that Goldman Sachs artificially pumped the market in CDOs, making a killing before exiting the market, knowing full well it was about to crash. In Michael Lewis’ words, author of The Big Short, it was the equivalent of starting a fire in a theatre, sprinting for the exit and bolting the door behind you!

The Senate report, called Anatomy of a Financial Crisis, confirms all this to be true and lays bare the conflicts of interest at the heart of the scandal, which ultimately led to the collapse of Lehmans and the global financial heart attack. In fact, for me, the best bits are not until page 648 of the report when Levin details a timeline of Goldman Sachs’ activities, helpfully labelled the Hudson 1 Chronology.

8/9/2006: “ABX (the CDO market) continues to perform well but firm thinks it has run its course and will reduce exposures”

9/9/2006: “Continuing to reduce volatile ABX position. Trading desk is working to reduce position by reducing ABX longs with shorts” (in other words, Goldman’s knowing the market was shaky bets against it by taking short positions)

19/9/2006: Planning of Hudson begins (Hudson is a massive book of CDOs – in other words, not only does Goldman’s now have short positions in the CDO market which it believes will crash, it now starts marketing the CDOs to its clients)

3/12/2006: Goldman issues (Hudson) offering circular to investors … does not inform them that Goldman’s has $2 billion short position

4/3/2007: Value of Hudson falls significantly. “I think their (investors) likelihood of getting the principal (money) back is almost zero”

15/7/07: A number of Hudson’s assets ie. mortgages are downgraded and trigger liquidation requirements

22/7/08: Hudson goes into default

This staggering conflict of interest, knowing that a market is about to crash, taking a short position in it and then encouraging your clients to get into it, lies at the heart of the financial crisis.

I have long contended that if the general public really knew what the banks (including many of those based in the UK) had really been up to, no banker would dare call for an end to banker bashing.

It’s thanks to people like Levin for casting some much needed light on their practices.

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So the banks want to be loved – it’ll take more than a few press releases!

Posted in Banking Reform, business, PR with tags , , , on February 14, 2011 by Tom Leatherbarrow

Fascinating story in this week’s PR Week, namely that the entire banking sector is going to employ a PR agency to rehabilitate its reputation.

Apparently, there is great concern that bankers are no longer viewed as supportive by SMEs. That’s probably because bankers aren’t supportive of SMEs.

As a case in point, I recently visited a small precision engineering company in the North East which has won a major aerospace contract for the new Airbus. In order to fulfill the order more efficiently, the company decided to spend approximately £70-80,000 on new capital equipment, namely machine tools.

The MD made a big presentation to his bank (who shall remain nameless) and then nothing more was heard. Phone calls were not returned, emails were not answered. Finally, two months later the answer came back. “No, we think you are going to go bust.”

There was of course no evidence of this, the bank manager concerned just assumed that every company in the manufacturing sector must be teetering on the brink. How massively supportive?

In the end the MD turned to his own savings, credit cards and Finance For Industry to help him invest in the equipment needed and fulfill the promises made to his customer.

My point is that it is going to take a lot more than a barrage of press releases to rehabilitate the banks amongst SMEs. What is required is for the banks to regain the trust of the business community and the public in general by making credit, namely the principle of buy now pay later upon which modern society is founded, actually available, in the form of loans for capital equipment and mortgages for you and me.

Much was promised by Project Merlin last week, but even a cursory read of the fine print demonstrates that the banks have inserted plenty of caveats, which the more cynical amongst us believe will be used to renege on the promise to deliver £190 billion this year in credit for business.

Time will tell.

The Return of Glass Steagall (maybe)

Posted in Banking Reform, business with tags , , , , on January 25, 2011 by Tom Leatherbarrow

Sir Jon Vickers’ speech at the weekend had the desired effect on bank shares yesterday – they dropped like a stone!

Sir Jon, who is currently chairing the Independent Commission on Banking, used the two most fearsome words in his armoury guaranteed to send shivers up any self-respecting pinstripe – Glass Steagall.

For those who want to see the banks brought to heel this is heady stuff. For the uninitiated, the Glass Steagall Act was brought in by the United States in the wake of the mother of all banking crises, namely the Great Depression, forcing through the splitting of investment banking (we like to call them casino banks nowadays, usually made up of derivative trading, currency arbitrage etc) and retail banks (those that you and I have our salaries paid into, the same ones that won’t lend to business).

Sir Jon’s Commission was set up to make recommendations on various banking issues in the wake of our most recent crash, not least a reduction in systemic risk; mitigating moral hazards in banking (that’s code for anything which makes bankers think “we know we shouldn’t be doing this, but it makes us piles of money”) promoting competition and structural reform, which includes splitting.

Will it happen? Who knows, but the suspicion remains that this is sabre-rattling designed to get the banks to come to heel over bonuses, particularly in light of Nick Clegg’s support for the proposal on Andrew Marr’s programme on Sunday (I sense a Clegg u-turn coming on).

Sir Jon, who will instantly catapult to the head of my list of contenders for Man of the Year if he actually does recommend it (what more incentive could he possibly need), is due to report in the Autumn.

My suspicion is that we will have a compromise in the end with the investment arms of banks like Barclays and HSBC becoming subsidiaries with separate balance sheets and all sorts of other rules to stop any future ‘contagion’ infecting our retail banks should another crash occur.

One to watch.