Archive for Banking reform

What Vickers has done with banking we must now do with pensions!

Posted in Banking, business with tags , , , on December 19, 2011 by Tom Leatherbarrow

A very quick take (it’s my day off) on the Government’s announcement over the weekend that it intends to implement ‘in full’ the recommendations of the Vicker’s Commission on Banking.

In effect this means we are having a ‘Glass Steagall-lite’ ringfencing of investment banking from retail banking in the UK.

Two points. Firstly, this is welcome news (well, not for the banks but the rest of us should be happy!) but the worry is that full implementation does not start until 2019. Plenty of time for the influential banking lobby to try and water down the proposals. This Government (or for that matter any future Government) must stand firm.

Secondly, the Observer’s story yesterday concerning a leaked powerpoint presentation for the Government put together by Dr Christopher Sier, which details the secret fees being charged on pensions contributions is, to say the least, alarming. Apparently, “the charges are spreading and are so steep that savers may find they get less back in retirement than they invested in savings accounts and pensions over their lifetimes.”

All this proves that it is not just those involved in trading complex credit derivatives that need to be brought into line.

Debt crisis solved (hopefully), now deal with the demand crisis please!

Posted in business, economics with tags , , , , , , on October 27, 2011 by Tom Leatherbarrow

European leaders are busy slapping themselves on the back today, but they shouldn’t get too carried away – there is an even bigger job still to be done.

As ever the past can give us a clue to the future. When Franklin Delano Roosevelt FDR) became the 32nd President of the United States at the height of a banking panic in 1932 he dealt with the immediate problems with a torrent of legislation designed to stabilise the situation. The Emergency Banking Act gave banks vital breathing space against foreclosure. The Federal Deposit Insurance Corporation effectively guaranteed all deposits which stopped the run in its tracks. The Glass Steagall Act separated commercial and investment banking thereby controlling the rampant speculation which had undermined efforts to bring America out of the Great Depression.

All of this should sound familiar to European policymakers, but crucially Roosevelt did not stop there. In between his election victory in November 1931 and his inauguration in March 1932 he attended a meeting at the White House with outgoing President Herbert Hoover and the British economist John Maynard Keynes. Hoover talked passionately about why it was not the government’s place to stimulate demand. Keynes retorted with his belief that fiscal and monetary measures can mitigate the adverse effects of economic recessions . The story is that FDR did not understand a word that either said, but he instinctively knew that something had to be done, and if that didn’t work he’d “try something else.”

The result was a monumental kick-start to the American economy. He expanded a Hoover agency, the Reconstruction Finance Corporation, making it a major source of financing for railroads and industry. The National Industrial Recovery Act established rules of operation for all firms to stop cut-throat competition, such as predatory pricing, and also increased wages.

Crucially, the recovery was pursued via pump priming with Federal money. $3.3 billion of spending via the Public Works Administration for example created the largest government-owned industrial enterprise in American history, the Tennessee Valley Authority (TVA), which built dams and power stations, controlled floods, modernised agriculture and homes in the Tennessee Valley. In simple terms, FDR put people back to work and gave them money to spend which in turn created demand.

All of this is very much counter-intuitive. Our instincts in times of financial crisis are to retrench and hoard what we have got. In actual fact we need to be spending and Government has to give the lead, in order to rebuild confidence.

The sense I have is that our policymakers know what has to be done even though it goes against many of their instincts. Our current Chancellor of the Exchequer has talked in vague terms about “big capital projects”. This is going to need more than words though.

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.

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.