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Never Trust The Banks When They Say: 'don't Worry, We'll Be Careful'

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http://www.telegraph.co.uk/money/main.jhtm.../cctracy105.xml

A year into the credit crunch, we are all older, and many of us are poorer. Let's hope that some of us may be a little wiser.

Last August, financial markets wobbled, as losses in the US subprime market caused investor confidence to slide. Banks stopped lending to each other. Central banks tried to help, but some banks - including, in this country, Northern Rock - did not respond to first aid.

A year on, banks are still struggling to right themselves, after heavy losses eroded their safety margin of capital. Despite raising fresh money, they remain strapped for cash and reluctant to lend, just as companies and consumers struggle with economic slowdown. There is no end in sight: rising mortgage defaults are likely to cause a further downward spiral.

I have since come to the jolting realisation that, however sceptical I was about the workings of the financial system before the credit crunch, I was not sceptical enough.

The shock, to me, was that banks were running such huge risks in the first place - big enough to wipe out large portions of their capital, when things went wrong. It seems fund managers and regulators were also unaware of the risks being taken and I don't believe that the banks themselves were fully up to speed either. It certainly wasn't possible to tell from the numbers they reported. What on earth did they think they were doing? The answer is simple: making money. In good times, taking more risk means higher profits - and bigger bonuses. Remuneration is structured to reward risk-takers excessively, when they get it right - which isn't terribly difficult to do in a rising market.

One City executive told me recently he is finding it really hard to motivate his team at the moment, because they know they won't get big bonuses this year. Is there any other industry that would survive if its staff lost interest in doing their jobs when times get tough?

Meanwhile, what of the regulators, who are supposed to police the banks? It transpires that they, the rating agencies and to some degree the accountants, were persuaded by the bankers that risk was being eliminated through ingenious financial engineering.

The regulators forgot the cardinal rule that, like teenage boys, bankers are not to be believed when they swear: "Don't worry. I promise I'll be careful."

And so central bankers joined the party, deciding it was fine to keep interest rates low, which only encouraged more lending by banks to both companies and consumers, and riskier strategies by investors keen to enhance their returns.

The trouble was, the bankers actually believed their own narrative of risk-reduction and convinced regulators that by re-parcelling risk and selling it on to investors, they were actually making the global financial system safer.

They devised a catalogue of ever more ingenious financial structures: the CDO-squared, for instance, a bet on a bet on a pool of assets, such as mortgages. Increasingly complex, they made it even more difficult for the rest of us to get a clear picture of what was going on. The CDO-squared market imploded, inevitably, when the subprime market collapsed, resulting in massive losses and a devastating knock-on effect as banks sold assets to cover these losses.

It must surely all serve as a reminder that superior intelligence is no guarantee against stupidity. The mathematicians who structured these instruments were, without doubt, very smart people. So were the Nobel prize-winners behind Long-Term Capital Management, the hedge fund that had to be rescued 10 years ago. Both cases demonstrate that highly sophisticated computer models can prove entirely unreliable when it comes to real life. It is baffling why regulators continue to place their faith in risk-management systems that fail with such alarming frequency.

It is no surprise, though, that bank bosses and board members failed to raise doubts about a highly profitable area of business. And besides, like the regulators and investors, they probably weren't keen to admit that it all gave them a bit of a headache. They lacked both the wisdom and humility of investor Warren Buffett, who has rarely owned a technology stock, on the grounds that he doesn't understand the business.

Bankers commonly moan that regulators are not sophisticated enough to understand the complexities of their business. I think we all now know that their own grasp is not so firm.

People who had never heard of a CDO are paying the price for this mess. The financial meltdown has spilt over into the real economy, and the gap between banks and taxpayers is far smaller than we had realised. While, in theory, weak banks should be allowed to fail so that other banks are encouraged to be more prudent, in practice, the danger of a collapse in confidence in the whole system is too great to allow that to happen. If, then, the taxpayer is ultimately expected to stand behind every British bank - as the case of Northern Rock suggests - the system needs to be adjusted accordingly.

So the bankers are finding it hard at work because they won't get big bonuses, frankly the state should seize their assets to help cover the losses the banks have created.

Risk taking has undermined the entire banking system and monetary policy.

No one cared when the profits rolled in, now the party is over we need to help the poor bankers......

I don't remember sharing in the banks profit, even though it was MY money they where risking to line their own pockets with.

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http://www.telegraph.co.uk/money/main.jhtm.../cctracy105.xml

So the bankers are finding it hard at work because they won't get big bonuses, frankly the state should seize their assets to help cover the losses the banks have created.

Risk taking has undermined the entire banking system and monetary policy.

No one cared when the profits rolled in, now the party is over we need to help the poor bankers......

I don't remember sharing in the banks profit, even though it was MY money they where risking to line their own pockets with.

The point in the article about regulation is well made. Markets and regulation are not incompatible, i.e. we don't allow pie manufacturers to poison people or Boeing to cut costs on safety in the name of profit yet the food and aerospace markets get along fine. The banks will have to come into line or there will be blood.

Edited by sossij

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In effect, the bankers were in the casino and saw some big winners coming away from the blackjack table. Thinking they had figured out how to beat the dealer, they just kept on gambling. :(

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So the bankers are finding it hard at work because they won't get big bonuses

Well, to be fair, they do need to be incentived to do their jobs. Working for ethical reasons is something we only seem to expect from people who find they are better off claiming benefits, but are told to work anyway because it's the 'moral' thing to do.

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http://www.telegraph.co.uk/money/main.jhtm...6/cnstan106.xml

Mervyn Davies, chairman of Standard Chartered and head of the Prime Minister's Business Council for Britain, has raised concerns about excessive risk-taking and greed among bankers and the role that played in contributing to the credit crisis.

Speaking as the emerging markets bank reported a 31pc rise in pre-tax profits to $2.59bn (£1.3bn), Mr Davies said: "We need to question whether the market has worked in [the] important area: compensation. The industry should not reward excessive risk-taking or reward failure.

"Boards and remuneration committees will have to reflect in future on whether the risks and rewards are appropriate."

Referring to what he called "the greatest upheaval in my career as a banker", he said: "It is clear that there has been a mispricing of risk. The market did not understand the value and importance of liquidity and some banks did not fully understand some of the instruments they were dealing in."

Mr Davies' comments position him alongside HSBC chairman Stephen Green, who recently described the existing banking model as "bankrupt" and forecast a return to "good old fashioned" principles.

Are the banks going to become the scapegoats for this mess???

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  • 399 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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