Pass another cream puff please Vicar

Whilst not doubting the integrity of his interim report, Sir John Vickers ‘Independent Commission on Banking’ (“ICB”) is a complete waste of time and taxpayers’ money.

There are two reasons why:

1 – The Lehman Brothers collapse on 15 September 2008, which precipitated the global crisis, was, for followers of Nassim Taleb, a Black Swan event. It is unlikely to repeat itself for at least another five, perhaps ten, years. Thus what is happening is much huffing and puffing over an anticipate event(s) which won’t happen.

J. K. Galbraith, in ‘The Great Crash of 1929’, wrote that it is only in periods of wealth creation when dishonest behaviour in the markets increases sharply.

2 – Whatever regulations are eventually introduced (the final report comes in September 2011 and then the process will go on and on) the skills of the financial engineers will quickly find ways to circumnavigate those rules.

As importantly the indecision and uncertainty the proposals create are constipating the credit system and delaying the UK’s recovery. It is thought that Britain’s banks may struggle to raise the £500bn of wholesale debt that they will require in 2012 as a result of the Vickers’ proposals.

It is worthwhile examining the decision taken by Hank Poulson, the US Treasury Secretary, (supported by Federal Reserve chairman Ben Bernanke and New York Federal chief Timothy Geithner) to allow Lehman Bros to fail.

It focuses on the issue of ‘moral hazard’. This originated from the insurance industry in the sixteenth century and recognises that when an individual becomes insured he may, perhaps subconsciously, act in a riskier way.

Poulson himself recognised the dilemma when he said that “I don’t take moral hazard lightly.” However his decision not to bail out Lehman Bros caused a panic in the financial markets. This resulted in US taxpayers paying much, much more to rescue their system.

So, in summary, Governments have to appear willing to guarantee their financial systems so that when the inevitable crises appear other lenders do not panic. Gordon Brown had to rescue Northern Rock: there was no other choice.

But for taxpayers and shareholders ‘moral hazard’ is a real problem. The tax payer foots the bill and the shareholders the cost if it creates the potential for the managers of their investments to behave recklessly.

There is an alternative way. What if the banks were to behave in a socially responsible way? How about if they impose better internal controls to prevent above average levels of bad debts? Could they focus on long term growth rather than short term bonuses? Why should not non-executive directors work more effectively on their committees?

Vicar, could you please lead us in prayer. The other Vicker has no idea either.

1 comment for “Pass another cream puff please Vicar

  1. Hugo Tillinghast
    19 April, 2011 at 12:12

    “Gordon Brown had to rescue Northern Rock: there was no other choice.”

    Funnily enough NR was one bank he could have let go without much difficulty. He (and/or the Governor of the Bank of England) could have made the declaration that:

    1. The bank would go into liquidation per the Companies Act
    2. Retail depositors would be guaranteed up to £50,000 each (per the FSCS limits then in being)
    3. Any overnight or short-term inter-bank liabilities/assets (the net figure is probably minuscule) would – as happened in the rest of the system – be mediated through the Bank of England
    4. The bank’s mortgage portfolio would be administered/run down/flogged off by the liquidator but only non-senior employees of NR would be allowed to continue working for the liquidator while the portfolio was run down
    5. Wholesale lenders/depositors and bond holders could register their debts with the liquidator
    6. Shareholders would lose the lot (and rightly for letting the NR management play with their investment)

    In other words, the UK banking system would be secured but NR would go to the wall: an orderly liquidation of NR need not have been the disaster you envisage. Nor, as it happens, would the orderly liquidation of RBS and HBOS. The “missing link” in all this is the complete ignorance by politicians and the civil service (and the regulators) of any idea how business (let alone the banking system) actually works. The problems of solvency and liquidity should not be confused although, during a bank run, they manifestly affect each other. Nevertheless, there is and was no excuse for the continuing existence of NR, RBS or Lloyds (except the maintenance of employment in Labour constituencies). BTW when are Sir Victor Blank and Gordon Brown going to be sued by the shareholders of Lloyds for conspiring that bank’s ruin?

    As an aside, the next time Alex Salmond bleats publicly about the English theft of Scotland’s oil somebody might tell him that the cost to England of rescuing Scotland’s two major banks dwarfs anything gained south of the border from the UK’s oil.

Please leave a comment - we all like them