Sunday, Aug 23, 2009
According to Lord Mandelson bankers are fraudsters?
Greg Pytel: author of an analysis on the financial crisis published by the House of Commons Treasury Committee: Lord Mandelson concluded that bankers were fraudsters
A brief but thought provoking article. It clearly makes a case that, according to Lord Mandelson, bankers are fraudsters. (Although it is not surprising that Lord Mandelson would not use this word.) I think the public should wake up and look deeper into the causes of this crisis. Leaving it all, to still legal, "bankers' greed" or "irresponsible decisions" etc. seems to be short of addressing the real causes and mechanisms of this crisis. There seems to be more than that below the typical rhetoric of mainstream media. And above all, where is the money that that "evaporated" causing liquidity crisis?
Posted by andrew @ 12:04 PM (1264 views) Add Comment
29 Comments
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1. paul said...
This is why I can never subscribe to the Naseem Taleb 'Black Swan' theory of the crisis, which is ever-so-loved by bankers chielfy because it largely absolves them of any responsibility for their actions.
2. drewster said...
Fraud is too broad a term. Pytel says risk is good but excessive risk is bad. However it's near impossible to draw a firm line - at what point does risk become excessive? Driving a car at 70mph is risky but legal; driving a car at 71mph is only slightly more risky, but it's illegal. It's even harder to draw a line with banks. All loans are risky, fundamentally.
3. will said...
I wonder which Board of Directors Mandleson will find himself appointed to when he leaves politics. Like Tony Blair now receiving £500K each year from JP Morgan - for services rendered to the Banks. Corruption at the top. And politicians wonder why we have given up voting.
4. Andrew T said...
It is Lord Mandelson himself, not Pytel, who concluded that banks were taking "excessive risk" (rather than reasonable commercial risk). Pytel does not state that risk is good, but that: "An enterprise has no choice: it must take a risk in the course of the business operations. This is in a nature of the economy. However it must always be a calculated commercial risk." i.e. that taking risk is an inevitable part of life. It is bad, but we have to live with it (we have to cross the street but we do not have to play chicken).
drewster argument with increasing speed by 1mph is a rhetoric trick. This way you can keep on increasing speed by 1mph and no speed was dangerous. Pretty simple stuff. And if drewster took care of reading more Pytel's blog, s/he would have realised that whilst lending by banks with loan to deposit ratio below 100% is risk taking but it is open to debate (of a similar type as "1mph speed increase"), with loan to deposit ratio is always an "excessive risk" as it guarantees liquidity crisis. Therefore drewster must have realised, that indeed, there is a very firm risk line beyond risk is always excessive: lending with loan to deposit ratio above 100%.
5. drewster said...
Will,
Mandy could have left years ago - in fact he probably could have earned more while Blair was still in power, because Blair listened to him. Mandelson is clearly more interested in power than money.
This article is rather disingenuous. Why twist every single word that politicians say? You're forcing them to use legal-speak rather than plain English.
6. icarus said...
drewster - but if you're driving at 200 mph knowing you can eject just before any crash and fall into the arms of a guardian angel, knowing that others will have to clear the wreckage?
7. drewster said...
icarus - Very good example.
But what if I'm driving along at 75mph (HBOS, AIG) and you have a 200mph crash (Northern Rock, Lehman Bros) right in front of me, causing me to crash too?
What if everyone's driving at about 150mph and there's an almighty pile-up. Can I blithely tell the police officer that I thought it was ok because everyone else was speeding too, and anyway the police hadn't stopped anyone for years so they must have been ok with it?
8. Andrew T said...
drewster: you clearly do not know what you are writing about. Read the first article of Pytel's blog: "The largest heist in history" (http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html) You will then realise that in banking there is a very clear line above which taking risk is always excessive (as it guarantees liquidity crisis) and indeed constitutes fraud know for centuries called "a pyramid scheme": it is lending with loan to deposit ratio above 100% that the western banks (apart from few exceptions) were doing.
9. will said...
drewster @ 4
If Mandleson remains in politics for as long as he can, his rewards will be even greater.
10. quiet guy said...
drewster,
In case you haven't seen it, I'd like to highlight that Greg Pytel has posted a (rather harsh) response to your criticism of his article on his blog.
11. alan_540 said...
drewster... Fail!
12. icarus said...
There was a lot of pressure on individuals to drive at the same speed as everybody else. Putting the driving analogy to one side, if you're making a 5% return while everybody else is making 10% you're fired.
13. uncle chris said...
Is this the same Mandleson that resigned due to mortgage fraud?
14. mander said...
"Lord Mandelson concluded that bankers were scammers"
Is Lord Mandelson calling wealth creation scam?
15. Andrewt said...
mander @12. Greg Pytel wrote a response on his blog to mander comments:
"mander does not understand the difference between "wealth creation" and a "pyramid scheme", which is a fraud (i.e. crime) and is at the root of the current crisis.
The author of this blog (i.e. Greg Pytel) invites mander to read "The largest heist in history" - http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html"
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17. stillthinking said...
sheesh ! mander@12's comment got a reply on pytel's site as well... its like blog ping pong !
18. martin said...
So Greg Pytel is not a "fun" of Mandy or mander, but is a clearly a fan of this site. So who are you Greg, go on give us a clue!
Oh, and can I have a mention on your site too?????
19. drewster said...
Ok let's keep this polite. Telling other bloggers to jump off a tall building is rather mean. Here, have some ketchup to go with that chip on your shoulder.
Lord Mandelson is quoted by the BBC as saying: "The rewards (for bankers) need to be linked to risks. The problem is when excessive rewards start driving excessive risk taking."
That's the entire quote, just twenty-one words.
Greg infers that Mandelson is referring to the present situation rather than to an abstract situation, which is a perfectly reasonable inference. However to infer that when Mandelson says "excessive risk taking", he means fraud or scam, is incorrect. Therefore Greg's title "Lord Mandelson concluded that bankers were scammers" is disingenuous.
Greg goes on to write "He was very clear that "taking excessive risk" was a euphemism for committing fraud." Umm, no, I don't see that in those twenty-one words. That's your interpretation, Greg. Disingenuous.
20. drewster said...
(quiet guy - thanks for the tip-off)
21. uncle tom said...
Mr Pytel should realise that the web is not immune to litigation.
However, I suspect Mr Mandelson has better things to do than seek redress for libel from a little known blogger.
22. Andrew T said...
Pytel published extensive response to all queries addressed to him below his article on his blog:
http://gregpytel.blogspot.com/2009/08/lord-mandelson-pointed-out-that-bankers.html
23. drewster said...
greg wrote: "If Lord Mandelson believed that excessive rewards drove excessive risk taking (and such fact happened, which is now widely acknowledged) then he implied, albeit very diplomatically, that bankers committed fraud (i.e. “excessive risk taking” was a euphemism for committing fraud)."
No he doesn't imply that at all. Excessive risk taking (by bankers) doesn't equal fraud, except in your personal definitions of "excessive" and "risk", definitions which are specific to the issues you raise in your blog. Greg, your blog in general makes some fine points. However sometimes when you have a hammer, everything looks like a nail. Your hammer is the greater-than-100% loan-to-deposit ratio. Mandelson's quote looks like a nail to you, but it isn't.
Many of the bankers who took "excessive" risks (and received "excessive" bonuses) did so in areas unconnected to the loan-to-deposit ratios. When local bank loan officers were meeting their monthly mortgage sales targets by advising unqualified applicants to try a self-cert mortgage, they had no view on the big picture (the LTD ratio). However by meeting their sales targets they collected their commission. At the other end of the scale, when investment bankers were slicing and dicing subprime mortgage debt and repackaging it, most of them had no view on the big picture. They just sold the repackaged debt and collected the commission.
It could be argues that all these individuals took excessive risks, but is it fraud? If they genuinely believed their (flawed) models then is it fraud?
"Excessive risk taking" has a much wider definition than yours.
greg wrote: "I believe that at present my article is a fair comment upon Lord Mandelson’s views."
I don't believe it's a fair comment.
24. devo said...
22. drewster said... when investment bankers were slicing and dicing subprime mortgage debt and repackaging it, most of them had no view on the big picture. They just sold the repackaged debt and collected the commission.
Is that what you think, drewster?
25. mander said...
Greg Pytel said...
It appears that mander does not understand the difference between "wealth creation" and a "pyramid scheme", which is a fraud (i.e. crime) and is at the root of the current crisis.
Politicians have praised the wealth creation of the bankers (house price speculation) before the crises. I am not going to go in detail and define wealth creation but just to remind every one of the creation of unquantifiable of 600 $ trillions of credit default swaps that have supported irrealistic wealth creation.
26. drewster said...
devo,
If an individual investment banker thinks up a brilliant plan to repackage subprime debt into tranches and sell it to different categories of client with different risk profiles, then he doesn't see the loan-to-deposit ratio. Relatively few people would have seen those figures, and even fewer would have realised the implications. Stupidity and greed alone don't constitute fraud.
My points are that:
1) Excessive risk taking comes in many forms, not just exceeding the 100% loan-to-deposit ratio.
2) Other than the specific case of exceeding the ratio, there is no clear definition of when a banker's risk is "excessive". When Nick Leeson brought down Barings bank in 1995, everyone was quick to denounce his excessive risk taking. However in 2009 when Goldman Sachs announced record profits from their trading team, they got a round of applause. It seems the only definition of "excessive" is when the bets go wrong.
27. drewster said...
greg,
I think we're coming closer to agreement on some points. Nevertheless....
"These things are trivial to even any half intelligent person of very little, if any, formal education."
Clearly they are not trivial, otherwise we wouldn't be in this mess! Also if it was so obvious there would be no need for your blog :)
Most bankers are pretty intelligent people. However many of them took out huge mortgages to buy expensive London houses, so they clearly expected the casino to remain open for a long time. If they were so clever then they would have sold up and gotten out long ago. (Maybe the truly clever ones did, leaving just the unintelligent ones behind.)
"The effects of lending with loan to deposit ratio above 100% propagate through all aspects of finance."
I agree entirely. That's precisely why it was hard for most bankers to see it. Only a handful made the decision to break that ceiling, but it affected all the rest in different ways.
Perhaps the best analogy is with Bernie Madoff. His clients didn't ask questions about the 15% annual returns; they all just thought they had backed a good horse. Similarly a lot of bankers didn't ask questions about where their money was coming from; they just thought that they were on the winning team. Was this fraud? For a handful yes, but not for most.
28. drewster said...
Greg,
Final points. I understand the logic of necessary & sufficient conditions, yes. I agree that breaking the 100% ceiling alone is enough to cause runaway damage, of course. However I do not agree that it is trivial or obvious, or that it was widely known amongst bankers before Northern Rock collapsed. It certainly wasn't ever acknowledged in the media, except for rare lone voices.
Even those who knew the mathematics and the risks preferred to turn a blind eye. Politicians, bankers, investors, homeowners - they all ignored the risks as long as things were going well for them. It's hard for people to accept a theoretical future model, even if it is a mathematical certainty, when it flies in the face of what they are experiencing in the present and want they want to hear.
(Incidentally, for another example of this willful ignorance of mathematics, see peak oil.)
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