The mess we’re in

The banking scandals of recent years have been so big and so complex that it is difficult for most people to grasp the extent of the problem. In the London Review of Books, John Lanchester surveys numerous major scandals, in ascending order of seriousness:

• Two traditional trading floor disasters – The huge losses caused by Kweku Adoboli, the UBS wunderkind who lost £1.4 billion in 2011, and Bruno Iksil, the ‘London Whale’ at JPMorgan Chase, who in 2012 lost an amount described by his boss Jamie Dimon as ‘a tempest in a teacup’, until it turned out to be $6.2 billion.
• The downfall of HBOS – The FSA said: “Whatever may explain the problems of other banks, the downfall of HBOS was not the result of cultural contamination by investment banking. This was a traditional bank failure pure and simple. It was a case of a bank pursuing traditional banking activities and pursuing them badly.” Lanchester adds: “In other words, the single biggest factor in the collapse of HBOS was simple incompetence.”
• The manipulation of Libor – Lanchester observes: “It seems bizarre that something so central to the global markets – $360 trillion of deals are pinned to Libor – should have such a strong element of invention or guesswork. The potential for abuse is immediately apparent.” And abuse is precisely what happened.
• Criminal acts – Sanctions-busting by Standard Chartered; sanctions-busting and also money-laundering for drugs cartels by HSBC.
• RBS’s back-end implosion – The bank introduced a software update into its payment system that caused it to stop working. It was impossible to make either payments into or withdrawals from the bank’s accounts.
• The payment protection insurance (PPI) scandal – Lanchester says this is the biggest scandal of them all – “an industry-wide, systematic cheating of the banks’ own customers”. The cost will be enormous; the latest estimates of the final cost to the banks vary between £16 billion and £25 billion.

Lanchester concludes that the PPI scandal is the worst, not just because of its size but also because it has destroyed banking’s most important asset:

Trust is the banks’ most important intangible asset: if it were lacking, none of us would ever use them for anything, ever. In a sense, trust is what banks do...

PPI was about banks breaking trust by exploiting their customers, not accidentally, but as a matter of deliberate and sustained policy. They sold policies which they knew did not serve the ends they were supposed to serve and in doing so treated their customers purely as an extractive resource. That is why, uncharismatic as it sounds and dreary in many of its specifics as it is, PPI is the worst scandal in the history of British banking: the one that shows just how badly wrong the industry had gone, and just how fundamentally it violated what should have been its basic values. No wonder that there’s been what the Parliamentary Commission on Banking Standards, in the very first sentence of its 571-page report, calls ‘a profound loss of trust born of profound lapses in banking standards’. PPI is the final proof that our banks became rotten.

Even PPI, though, is not the most serious issue. There is a problem so large that Lanchester leaves it out of his account:

Just to keep things simple, I’m going to leave out the biggest of them all, the grotesque toxic-asset and derivative spree which took the global financial system to the edge of the abyss. That was the precursor and proximate cause of the difficulties which are affecting the entire Western world at the moment, but the causal mechanisms connecting the initial crisis and our current predicament are a separate subject. The crisis and its consequences are too big to count as a scandal: they’re more like a climate.

Amongst other things, the “grotesque toxic-asset and derivative spree” dwarfs any sin committed by the last Labour government. That government shares some of the blame for the financial crisis and subsequent recession, but to reduce our present economic problems to “the mess left by Labour” is facile. Anyone who thinks that slogan is a satisfactory analysis is an idiot.

Bankwatch with Bill Oddie

In a spoof documentary, Bankwatch with Bill Oddie, the naturalist protests against HSBC’s illegal logging by entering the den of a creature closely related to humans: the banker.

HSBC has made nearly £100m bankrolling some of the world’s most destructive logging companies in Sarawak Malaysia, and is at risk of violating international money laundering rules.

You can find out more from the producers of the film, the NGO Global Witness.

Have they no shame?

“HBOS: Regulator’s findings shame three executives who brought down a bank” says the headline in today’s Guardian.

I thought the point was that these bank executives had no shame to begin with.

Bankers’ bonuses: Liberals 1 Tories 0

The EU proposal to cap bankers’ bonuses has received predictable opposition from David Cameron and Boris Johnson.

The willingness of the Tories to continue to defend the selfish interests of the bankers who caused the global financial crisis seems to know no bounds.

So it is good to hear Sharon Bowles, Liberal Democrat MEP and chair of the European Parliament’s most powerful committee, the Economic and Monetary Affairs Committee, strike the right note:

“Overall, this is a major achievement for [the European] Parliament, in curbing the culture of quick profit and irresponsible lending that has played such a pernicious role in fuelling Europe's banking crisis.”

Meanwhile, if the Tories are right, and a few irresponsible and overpaid arseholes flee to Singapore or Zurich, good riddance.

Just when you thought bankers couldn’t get any worse...

Never mind the banks that are “too big to fail”; what about the bankers who are “too big to jail”?

Rolling Stone reports that British-based bank HSBC has just been prosecuted in the USA for the largest drug-and-terrorism money-laundering case ever. But none of the bankers responsible were jailed. Instead, the bank was fined $1.9 billion, equivalent to about five weeks’ profit:

For at least half a decade, the storied British colonial banking power helped to wash hundreds of millions of dollars for drug mobs, including Mexico’s Sinaloa drug cartel, suspected in tens of thousands of murders just in the past 10 years – people so totally evil, jokes former New York Attorney General Eliot Spitzer, that “they make the guys on Wall Street look good.” The bank also moved money for organizations linked to Al Qaeda and Hezbollah, and for Russian gangsters; helped countries like Iran, the Sudan and North Korea evade sanctions; and, in between helping murderers and terrorists and rogue states, aided countless common tax cheats in hiding their cash.

So why no jail sentences?

That nobody from the bank went to jail or paid a dollar in individual fines is nothing new in this era of financial crisis. What is different about this settlement is that the Justice Department, for the first time, admitted why it decided to go soft on this particular kind of criminal. It was worried that anything more than a wrist slap for HSBC might undermine the world economy. “Had the U.S. authorities decided to press criminal charges,” said Assistant Attorney General Lanny Breuer at a press conference to announce the settlement, “HSBC would almost certainly have lost its banking license in the U.S., the future of the institution would have been under threat and the entire banking system would have been destabilized.”

Is Lanny Breuer’s dismal assessment correct?

Breuer is saying the banks have us by the balls, that the social cost of putting their executives in jail might end up being larger than the cost of letting them get away with, well, anything.

This is bullshit, and exactly the opposite of the truth, but it’s what our current government believes. From JonBenet to O.J. to Robert Blake, Americans have long understood that the rich get good lawyers and get off, while the poor suck eggs and do time. But this is something different. This is the government admitting to being afraid to prosecute the very powerful – something it never did even in the heydays of Al Capone or Pablo Escobar, something it didn’t do even with Richard Nixon. And when you admit that some people are too important to prosecute, it’s just a few short steps to the obvious corollary – that everybody else is unimportant enough to jail.

If further proof were needed that the present financial system is beyond minor repair, this is it. Politicians who continue to argue timidly for regulatory tinkering as a remedy for the banking crisis either have no clue or no balls.

Why the big banks need breaking up, not ‘ring-fences’

Is George Osborne’s promise of ‘ring-fencing’ within the big banks an adequate response to the corruption and shoddy practices that caused the financial crash? Probably not, if Wall Street is anything to go by.

Greg Smith, a former employee of Goldman Sachs, has just written a book titled Why I Left Goldman Sachs: A Wall Street Story. Unfortunately, it doesn’t properly explain what went wrong, according to another Wall Street refugee Michael Lewis in his review of Smith’s book

In 1989, Lewis wrote Liar’s Poker, a pioneering exposé of Salomon Brothers. And he finds Smith’s book a statement of the bleedin’ obvious, which would have been more useful had it been published before the financial crash.

Lewis gets to the heart of the matter:

Stop and think once more about what has just happened on Wall Street: its most admired firm conspired to flood the financial system with worthless securities, then set itself up to profit from betting against those very same securities, and in the bargain helped to precipitate a world historic financial crisis that cost millions of people their jobs and convulsed our political system. In other places, or at other times, the firm would be put out of business, and its leaders shamed and jailed and strung from lampposts. (I am not advocating the latter.) Instead Goldman Sachs, like the other too-big-to-fail firms, has been handed tens of billions in government subsidies, on the theory that we cannot live without them. They were then permitted to pay politicians to prevent laws being passed to change their business, and bribe public officials (with the implicit promise of future employment) to neuter the laws that were passed—so that they might continue to behave in more or less the same way that brought ruin on us all. And after all this has been done, a Goldman Sachs employee steps forward to say that the people at the top of his former firm need to see the error of their ways, and become more decent, socially responsible human beings. Right. How exactly is that going to happen?

Lewis advocates breaking up the too-big-to-fail banks into smaller units. He concludes:

The ultimate goal should be to create institutions so dull and easy to understand that, when a young man who works for one of them walks into a publisher’s office and offers to write up his experiences, the publisher looks at him blankly and asks, “Why would anyone want to read that?”

This is a somewhat more robust stance than George Osborne’s.

Advice to any MP seeking to embezzle

“Libor Lies Revealed in Rigging of $300 Trillion Benchmark” is the startling headline in Bloomberg News, exposing what it calls:

...the biggest and longest-running scandal in banking history. Even in an era of financial deception -- of firms peddling bad mortgages, hedge-fund managers trading on inside information and banks laundering money for drug cartels and terrorists -- the manipulation of Libor stands out for its breadth and audacity.

In case anyone is in any doubt, financial scandals don’t get any bigger than this:

“We will never know the amounts of money involved, but it has to be the biggest financial fraud of all time,” says Adrian Blundell-Wignall, a special adviser to the secretary-general of the Organization for Economic Cooperation and Development in Paris.

However, it is unlikely any politician will hear this issue raised on the doorstep. If voters express any concern about financial corruption, it will probably be about the parliamentary expenses scandal, even though that is now history, and even though the amounts of money involved are dwarfed by the immense size of the Libor fraud.

Why is this? It’s not as if Libor doesn’t affect most people’s lives. It determines the interest people pay on their mortgages or receive from their savings accounts.

To begin with, most people don’t know what ‘Libor’ means. (Since you ask, it is an acronym for ‘London Interbank Offered Rate’, a daily reference rate based on the interest rates at which banks borrow unsecured funds. Is that clear?). But people do understand the terms ‘banker’ and ‘corruption’, so this doesn’t really explain the apparent lack of popular concern.

The reason is something else; it is that hardly anyone can imagine $300 trillion. Converting that to pounds (£190 trillion) doesn’t make it any easier. In the UK (as in the USA), a ‘trillion’ means a thousand billion. The annual GDP of the UK is only about one and a half trillion pounds, and most people can’t even get their heads round that amount. It’s like when astronomers talk about the distances to other galaxies; the sheer size of the numbers renders them practically meaningless.

If people cannot imagine the sums involved, the abuse of such sums cannot shock them. Fiddle your expenses to spend £800 on a wide-screen TV, however, and most people can imagine that all too easily.

So here’s the lesson for any politician contemplating embezzlement. If you’re going to commit fraud, make it either a very small amount or a very big one. Nick a biro from the office and no one will mind – everyone does that. Or trouser several trillion pounds and no one will understand what you’ve done. It’s the middling amounts that really upset people.

It’s a mad, mad, mad, mad world

Sometimes it seems that our economy is being run from a parallel universe.

For example, you might think that the big banks that have been mired in scandal would make a bad investment. You would be wrong.

Today’s Financial Times reports on how bank shares performed last year:

In several cases 2012 share price performances were seemingly driven by some bizarre inverse correlation with lenders’ misdeeds. Among the best performers were three of the big UK banks – Barclays, which was fined $450m over Libor and lost its chairman and chief executive; HSBC, which was fined $1.9bn over Mexican money laundering and Iranian sanctions breaches; and Lloyds, whose PPI mis-selling has cost it £5.3bn. Barclays and HSBC shares were both up about 50 per cent, while Lloyds’ investors doubled their money.

The sad thing is that this news will be treated within the banking world as a vindication. The necessary reforms will become even less likely – until the inevitable next crisis.

[The FT’s website requires (free) registration; if you are unable to register, search for the headline “Bank shares buoyed on a sea of scandal” on Google News.]