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.