The banking witch trials resume today, and we are offered three new men to burn at the stake: Lord Stevenson, Sir James Crosby and Andy Hornby. The Parliamentary Commission on Banking Standards released its report at midnight (pdf), and it is as personally damning as any I’ve seen. It basically calls for them to be deemed not ‘fit and proper’ people. They are architects of a recipe for bank failure, taking on far more risk than they admitted, telling the regulator that their policies were cautious when they’d borrowed twice as much as RBS and then, even now, refusing to admit their guilt. It’s not so much a post-mortem examination as an 88-page J’accuse. I look at this in my Telegraph column today*.
Now, let’s say — for the sake of argument — that this trio is as vain, incompetent and reckless as Commission says. To me, this is not the main issue. There are vain, incompetent and reckless people in every profession — even politics. You can’t legislate to change human nature.
The whole thing amounts to a deeply regrettable diversion from the question we ought to be asking: what the hell happened, and how do we stop it happening again? I have loathed the hang-a-banker mentality in Westminster, which still persists. Five years since the crash and we’re still running financial war crimes trials — as if that will solve anything. But strip out the name-calling, look at the actual evidence presented to the Commission and we get closer to the truth. We’re also helped closer to this truth by a growing number of studies which I used for my column, and would like to acknowledge here. If CoffeeHousers are interested, here are my main points.
1. The Evil Banker hypothesis is the regnant theory. That there were, say, two dozen really evil people whose greed, vanity and incompetence begat the crisis. If only the hadn’t been so evil, we’d all be okay today. Every time a banker is put in the stocks, and politicians invite the public to throw rotten fruit, the Evil Banker hypothesis is strengthened.
Now, I’m not defending Fred the Shred or the HBOS trio. But when Goodwin was stripped of his knighthood, the first non-convict in history to be so treated, it looked like the government was actively encouraging a lynch mob mentality. Is Lord Stevenson to be kicked out of the Lords? Will Sir James lose his knighthood too? If the Commission is to be believed, these men behaved just as deplorably as Fred Goodwin.
The Evil Banker hypothesis stems from an old medieval idea, of there being evil people infiltrating the world who need to be hunted down and punished. (Note how the HBOS three are being trashed with all the more venom because they refused to repent when doused in front of the committee.)
The more we focus on the bankers’ moral character (or lack of it) the further we get away from what the real issue. Why were there no bust banks in Canada, Sweden or Australia? Was it because their bankers are more virtuous? Or was it because their governments actually regulated the banks properly?
2. Labour’s bankocracy. The relationship between Labour and the bankers has swung from infatuation to loathing, and neither is rational. The Tories govern in coalition with the Liberal Democrats. But New Labour governed in coalition with the banks. Tony Blair was personally bamboozled by wealthy men, Gordon Brown just loved the profits these bankers made. Every bonus was split 60/40 with Brown’s Treasury. Brown engaged in crony capitalism. This was a British version of what Johnson and Kwak, in their book 13 Bankers, refer to as the ‘capture’ or regulation by the new masters of the universe, teeing us up for the boom and bust cycles of the late 1990s and onward.
3. Sir Mervyn King is trying to tell us what went on. In his final weeks as Bank of England governor, he’s being more candid. Here’s what he had to say:
‘I was surprised at the degree of access of bank executives to people at the very top. Certainly they have easier access to the people at the very top than the regulators have. I remember before 2007 that the only time there was a speech about regulation from the Prime Minister was when there was an attack on the FSA for over- bureaucratic regulation. That was the climate in which the regulators operated then. It was extraordinarily difficult. They knew that if they were tough on a bank, the chief executive would go straight to No. 10 or No. 11 and say this was an attack on the UK’s most successful industry—even when it was a perfectly reasonable application of the regulations. The climate has clearly changed since then, but the access probably has not.’
4. Did you read the last bit? ‘The access probably has not’. In other words, the cosiness between banks and politicians continues still. As does the risk. And we have an example of it. Osborne wants to keep power to set the leverage ratio (equity/assets) and wants it at 3 per cent (i.e. assets can be up to 33 times equity) as set out in the Basel III agreement. The Vickers Report said it wants the ratio to be 4 per cent (i.e. limiting assets to up to 25 times equity), and the Parliamentary Commission on Banking Standards agrees. But the Treasury rejected it, saying it will hold on to this power until 2018 at the earliest. This is a problem because…
5. Political interference turns banking drama into systemic crisis. This was one of the conclusions from Chicago Uni professor Raghuram Rajan in his 2010 book Fault Lines: the politcial pressure to expand home ownership was an issue. (Mind you, Dennis Sewell argued that even earlier in The Spectator). The same pressure exists now, as Osborne tried to subsidise mortgages in move expected to push house prices up by 8 per cent. And making it all less stable still. Ed Miliband is supposedly a fan of that book, but I don’t hear him arguing (as Rajan does) that government should get out of the mortgage market.
6. The bank ‘bonus culture’ had nothing to do with the crash. The Evil Banker hypothesis goes on to argue that greed for bonsus led to bankers taking short-term bets. The academic evidence suggests otherwise. Two years ago Kevin J Murphy of the University of Southern California made a massive study (pdf) of major banks before, during, and after crisis. The formula of low salaries and potentially huge bonuses (in cash, stock, and options) actually reduced risk-taking incentives. He argues: ‘Further government intervention will likely be counterproductive to both shareholders’ and taxpayers’ interest.’ The EU’s bonus cap is a case in point. It’s political posturing, which will sew greater instability into the system.
7. Asset-to-equity ratios of 35:1 were not crazy, by the standards of the time. It seems daft now, but the below graph (from Andrew Lo at MIT) shows that, historically, it was not exceptional. The banks were just as leveraged in 1998 — less, in the case of Goldman Sachs. But then, the gamble paid off. And given that 2007 was (wrongly) diagnosed by IMF and others as a normal year with no overheat, the recknlessness which the HBOS trio are being accused of would have seemed — as they said — no more than what their rivals were up to.
8. Everyone missed the bubble. Apart from Jeff Randall, Allister Heath and Jeremy Warner. If HBOS was so obviously bad and wrong, why did no one say so at the time? What now looks like crazy risks seemed normal, by the standards of the time. And that’s the problem. The analysts got it wrong, and almost every commentator did too (with the exceptions listed above). Dozens of analysts went through the HBOS strategy, torn apart in such detail by the Commission. Everyone thought it was fine. The HBOS trio were not sent from hell to trash a bank. They were a product of the conventional wisdom of the time. And feted as upstanding examples of how to do banking properly.
9. Andrew Tyrie chaired this commission — so there is much good stuff inside it. Tyrie is no anti-capitalist, but he’s chairing a committee with many Labour politicians still keen to pin all the blame on the bankers. The report doesn’t have much on how Lord Stevenson and Sir James came by their fancy titles. Its passage on regulatory failure comes closest to the big problem:
‘The FSA took too much comfort from reports prepared by third parties whose interests were not aligned with those of the FSA. From 2004 until the latter part of 2007 the FSA was not so much the dog that did not bark as a dog barking up the wrong tree.’
10. The crash was caused by simple mania, not the blackness of bankers’ hearts. The more time we waste with the Evil Banker hypothesis, the longer it will take people to identify — and root out — the wrong assumptions. And this includes our ongoing addiction to cheap debt. Let’s remember that the £120bn deficit with which Osborne is wrestling so unsuccessfully does not contain a penny of bank bailout money. The crisis is one of government spending, and this crisis was concealed in the boom years. It now stands exposed. Deporting every banker in London will not change that simple fact. As the AA’s 12-step programme puts it, the first step to overcoming a problem is to recognise the problem. Five years after the crash, and parliament is not even at that stage.
Yes, everyone loves to hate bankers. I suspect I’ll be the only person not joining the crowds today. But we should be suspicious about a report by politicians trashing bankers: it took two of them to create this mess. They were too close then, and they’re too close now. Until they are properly separated, none of us can breath too easily.
* You can’t really clog up newspaper column with graphs and names of books etc, but I put the hyperlinks here in case CoffeeHousers are interested.
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