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eric pebble

Fabulous Essay On What Has Gone Wrong - And Why.

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Fabulous essay on what has gone wrong - and why.

In the comments section of Jeff Randall's fabulous piece in Telegraph yesterday: Author: Ken Harvey.

http://www.telegraph.co.uk/finance/comment...real-world.html

[scroll down to 12.41pm today - it's there.]

It's brilliant.

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"As this ancient banker has written on blogs elsewhere - this is not a recession in any accepted sense. This is a world banking system which has irrevocably crashed. Zillions in value has been lost and it will take a decade or two, to repair the damage.

What has happened? Until this is understood, no appropriate decisions can be taken in an attempt to put matters right.

1. Mixing very different businesses. The very sensible Glass Steagall Act of 1933 was effectively whittled away from the mid 'eighties (big bang and all that) and finally ditched in 1999. The rest of the world followed the New York/London lead. This enabled the mixing of commercial bank and investment bank operations, giving the investment banking business access to the one thing that they had always lacked - money: this in the form of customers' deposits - granny's savings account. (Previously they had little to lend but their name). This is how the "investment banking" business was financed.

2. Profit pressure. Shareholders, largely my and your pension funds, demanded ever increasing profits. One has to go back to the days of the Wilson government to understand why British bank shares became a target for those wanting high profits, instead of the bluest of blue chips held only for the safety of widows and orphans. The practice of declaring profits after transferring undisclosed amounts to "Hidden Reserves" was banned. It sounded sensible, but as many bankers of my era pointed out, it would bring bank chairmen under pressure for profits with the loss of the traditional dictum that a banker's first responsibility is not to his shareholders, but to his depositors. To meet the ever increasing shareholder demands, both as to profits and share price, banks had increasingly to resort primarily to their gambling arm, the "investment" division.

3. Mixing of very different businesses. From the mid 'eighties, banks were allowed to own building societies, and the latter were allowed to become banks. Bankers of my era were horrified. Dress it up how you like, a domestic mortgage takes twenty years or more to repay, and it cannot conceivably be financed by bank demand deposits. It cannot safely be done. Bankers of my era were guilty of rather looking down on the building societies, but we recognized that they were properly financially structured for what they did, and very well they did it.

4. The opening up of the banking system globally. This proceeded over twentyfive years or so. Foreign banks were allowed to take deposits from the public away from their home base. We had Icelandic banks all but unregulated, taking money from granny. We allowed A.I.G. Financial Products Limited to register itself as a bank in London and as a result go unregulated as an insurer, in either London or New York.

5. Bonuses. The bonus culture crept in from the investment banks. A good trader, whatever the market, can make his employers a lot of money. Traditionally the good ones have been very well paid, and so they should be. But there is a big difference between high salary, and reward for results. A high salary breeds a high regard for safety and thus salary continuation. A bonus reward, be it for trader or chairman of the board, introduces moral hazard. That hazard affects every man jack in an organisation. The dictum of, 'we don't lend our own money but that of our depositors', disappears and is replaced by, 'don't do anything that could affect the Chairman's bonus'.

6. Deliberate bad lending. The chairmen had to produce ever increasing high jumps in profits and there was only one way that they could do that - they had to write bad loans! How was a so called bank such as Northern Rock to keep increasing profits?

It had little capital, little customer deposits, and massive debt to the "interbank market". (Anybody who thinks that the "interbank market" is a fixture in the monetary scheme of things, rather than a temporary aberration, should not be in the employment of any bank). It could not increase profits by making good loans but had to make bad ones. There was no other way to 'earn' the profits required. From the mid 'eighties derivatives were developed. They were devised and sold by young maths graduates who had an astonishing understanding of equations. They had zero experience or understanding of cross party risk. The risk asset managers became regarded as old fuddyduddies who were too innumerate to understand numerical risk elimination. They were a threat to bonuses. The internal auditors, the other people who since time immemorial have kept banks on the straight and narrow path were similarly downgraded by replacement with younger men who "understood the new dynamics". The bonuses ruled the day from the chairman to the

doorman.

7. The regulatory framework became a joke. The central bank, whose raison detet is the regulation of the banking system, had its essential responsibility taken away from it,to be replaced by a job that a couple of office boys could do once a month in their lunch hour. In charge of this institution we have had a man who I believe is fully intelectually up to the real job, with the one failing that he is not of a disposition which would have enabled him to stand up to the government when the need became apparent some long time ago. Government enjoyed the tax revenue. The regulators were consequently living in a don't rock the boat atmosphere.

Result. An untold some of money, trillions, has been lost FOR EVER. Where has it gone? It has gone on dividends and bonuses and the champagne life style. Like Madoff's billions, it has not been pugged away in Switzerland, it has been spent never to return. When you read that a bank has made bad debt provision of x billion this last quarter, that is not x billion that has been lost these past three months. At best it is a figure for money lost some long time ago and, at worst, simply the largest figure that the chairman is prepared to declare in this set of results. Much of it was lost on the day it was written on to the books, a la Northern Rock.

Whether there is a way out, is beyond the intellect of this old gentleman, but of absolute certainty we shall never recover while moral hazard is allowed to remain. Seeing that the House of Commons seems unable to eliminate the moral hazard in its own seat, I am left fearful for the welfare of my grandchildren.

--------------------------------------------

Edited by eric pebble

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I am trying to run a small engineering development company with a good export order book. The political spin says I should be helped and given facilities.

The reality is that the banks control EFGS and find every reason under the sun as to why you are not eligible. They get applications binned verbally at the branch level so they do not appear on the refusal list. That is how they are pushing the "low takeup" along.

Then they come back with "Give us your house, wife, kids, cats and car then we might be able to do something at twice the price"

So quite apart from propping up the banks with my tax money they want all my profits as well.

Whether or not you get facilities is purely down to whether or not they can use you as a publicity stunt in their charm offensive.

There again this bunch of gamblers have never grasped the concept of actually working to earn money.

Soon it won't be necessary to turn off the UK lights before leaving, they will have gone out anyway.

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Excellent article!

(Anybody who thinks that the "interbank market" is a fixture in the monetary scheme of things, rather than a temporary aberration, should not be in the employment of any bank)

This surely applies to a Mr. Adam Applegarth late of Northern Rock does it not?

It for one should ahve stuck to being a building society - a good one in it's day!

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Excellent article!

(Anybody who thinks that the "interbank market" is a fixture in the monetary scheme of things, rather than a temporary aberration, should not be in the employment of any bank)

This surely applies to a Mr. Adam Applegarth late of Northern Rock does it not?

It for one should ahve stuck to being a building society - a good one in it's day!

Applegarth really is a fooking tool. Someone should have cracked him with a large club after that 'gay' government interrogation got nowhere.

Just want to also say that the latest FTSE Bull rally has been built on thin air. I escaped, only just in proft, this morning.

Sham 69!!

Edited by Wait & See

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Good stuff but am I the only person who thinks that this particular sentence is hogwash?

(Anybody who thinks that the "interbank market" is a fixture in the monetary scheme of things, rather than a temporary aberration, should not be in the employment of any bank)

Been around since banks began, as far as I am aware.

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Applegarth really is a fooking tool. Someone should have cracked him with a large club after that 'gay' government interrogation got nowhere.

Applegit should have been thrown into jail years ago. :angry:

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