You’d be hard pressed to miss the shellacking being meted out in the media over the banking crisis. Everyone from politicians to regulators, oversight boards, auditors and on to the bankers themselves continue to see the finger pointed at them. As well they should. But has anyone yet come up with a credible way to go forward? Not as far as I can tell.
I’m wondering how much further we need to go in the blame game before someone, somewhere comes up with a way that people – that’s you and me – can feel confident again.
I don’t have any problem with the prodding of those who participated in the charade of the last 15 years. Goodness knows I do enough of that myself when taking shots at the Big 4. But if truth be known, I’m getting tired of it. It’s done. I want answers that help us see how the future will be reshaped. I want action that makes sense, that assuages the fear of what might happen next that many I know experience on a daily basis.
There seems little doubt that the ‘light touch’ to ‘unregulated’ climate of the recent past has been shown up for what it is – a recipe for unbridled greed that wrecks lives on a grand scale. No-one can say its perpetuation is desirable and expect the majority to agree. But then state ownership is hardly a recipe for success.
The problem is that thinking which draws from past economic theory doesn’t seem palatable either. I see for instance that Bob Warfield is hoping that market oscillations will end and that might act as the trigger for a return to normality:
…we need to first dampen the oscillation by lessening the effects of mark to market. Then we need to see about reducing allowable leverage in some manageable way that doesn’t create panic. It’s going to be a long painful process, but we can see from the market of the last few days that even a little hope from major banks cheers everyone on.
Bob’s continuing a conversation that’s been going on among my colleagues in the Irregulars that started with Jeff Nolan hoping for a backing off or at least significant modification of the mark to market rules as appears to be signalled in this WSJ piece:
Mark-to-market rules, which require companies to mark their assets to current value, have forced many of the banks to write down billions of dollars on their books and have made it hard for some of them to meet capital regulatory requirements. While the SEC and FASB have said they don’t support suspending the rule, both have agreed guidance on the rules are warranted and FASB is currently in the process of drafting it.
I disagree with Jeff. My position remains as it has for a long time. It goes back to the ’70’s. Those were the days when we made attempts to go from HCC to CCA in the light of high levels of inflation. Attempts at mark to market are attempts at arriving at a fair reflection of reality. If a market has declined then tough on those who invested. I didn’t hear the banks complaining when markets were in an apparent ever upwards spiral.
But – if there is a significant modification then what about the past say five years? Will there be restatements? If so what will that mean for the bonuses paid out to management?
Regardless of what happens, I get the sense that regulators are trying to recast something that hasn’t worked without fixing the problems. For example, Richard Murphy has finally been vindicated in his assertion that the UK banks (at the very least) have been actively engaged in high stakes tax avoidance:
You can argue ’til the cows come home that tax avoidance is a legitimate business strategy but if you are going to reshape industry then this egregious behaviour must surely be ended. That’s why I am delighted to see that Transparency International has joined the Task Force on Financial Integrity and Economic Development. I know a little about what TI does having met some of its senior people a while back. It is fighting some of the most corrupt practices on the planet, often seeing its people operate in regimes that puts people in genuine danger of their lives. It can be no concindence that tax avoidance and corruption are finally being linked in this alliance.
On the audit front, Francine McKenna delivers a stinging indictment to the Big Four in their complicity to continuing with ‘clean sheets’ for some of the worst corporate offenders, many financial institutions included, warning that:
Go ahead, trade the rumor. But in this environment these companies, like GM and others, will fail when you least expect it, in an “unpredictable” way, and regardless of the ongoing propping up. Why? Because when companies, their management, and the watchdogs refuse to accept reality over and over again, they are daring fate to intervene and hand them a situation, an event, a level of volume of problems that they can no longer manipulate. Unless major, fundamental changes occur in many of these companies, the end is inevitable. Unfortunately it will defy all “logic” except the actual facts.
Francine’s words are a perfect reflection of the delusion that by somehow easing counter party risk in assets the construction, makeup and value of which few seem capable of fathoming that governments and regulators, aided by taxpayer hand outs will somehow magic the problem away. Surely logic dictates that for every winner there has to be a loser? Why should the losers be the taxpayer in a jam tomorrow promise of prosperity? So what about action?
It is rare for me to agree with someone as extreme in his political thinking as John Redwood but in this piece I believe he is talking sense when he says of RBS:
The correct strategy with an unwieldy conglomerate like RBS is to break it up into its constituent parts and find answers for each of them. Some could be sold immediately. Some will need managing to health and some like the Investment bank can be closed down after the bits of value have been sold. You should also keep RBS short of capital and cash to force it to raise more of its own, and to prevent it from paying the absurdly high salaries and bonuses it is still paying when it is no longer making profits and raising private money to do so.
Political points aside, Redwood makes a strong case that would see the man in the street more confident in the shattered system. It is after all people like you and I that keep the economy going. Right now no-one is spending. Everyone I know fears for their employed or self-employed future, many are hoarding cash. I don’t care how much you think the banking system as it existed is worth saving, solving their problems at our expense won’t make people any happier, more content or confident.
Instead, I believe we will need to draw on the past and present. Some banks have acted with propriety, sticking to what they know and not falling for the illusion of the quick buck to be made from exotic derivative instruments. They’re in good shape. Last Friday I spoke with the CFO of a mutual society that has taken a cautious view of its investments, spread into a large pool of liquidity yet is continuing to invest. The crucial sentence in our conversation: “We’ve always been in it for the long haul.” They’re in solid shape but are maintaining a vigilant view of the markets in which they operate.
Mutual societies, like the old friendly societies grew up as community banks, there to serve local need. They fulfilled and continue to fulfill a vital purpose of providing credit to communities the fund managers know and understand. I recall my first mortgage. The manager knew the turf, knew the kind of properties that would be right for us and what we could reasonably afford. He knew about my employer, my circumstances, my prospects. He’d been at the branch for many years. There was no question of our getting overstretched. Everyone was a real winner and to this day I am grateful for the advice and help he gave in getting us on the property owning ladder. That lender still exists as a solid if buffeted mutual society. I was never lulled into the illusion that property owning is an investment but a place to build a home. The two are very different propositions. Today? Do these people even exist among the big lenders?
In some senses I am moving towards a position that reflects some of what Stowe Boyd says here:
The past fifty years of growth-oriented, unsustainable business practices have created such complex and interconnected economic systems — and largely unregulated ones — that we simply don’t know how they work. Even the folks dreaming them up — like the people who structured the sub-prime mortgage mess — really didn’t understand the implications of connecting things together, to this degree and extent across the entire globe….
…The econolypse is hastening the die off of those businesses and industries that were already weakened, but also the restructuring of our social contract. That will take a lot longer to play out than a few quarters, and we won’t see it in the barrage of ticker symbols going by. It will have to be built up one neighborhood at a time, one job at a time, one new urban farm plot at a time.
Stowe portends a gloomy future and with some justification. Even so, I see the potential of local over global as at least one viable pathway out of the current morass. Saving the big banks ain’t on that agenda. Neither is a perpetuation or a re-incarnation of past mega-trends in banking, regulatory or auditing practice. However, I do see the voices that have argued local as taking on a significantly more important place in the building of the near future. Unlike Stowe, I don’t necessarily see that manifested in protectionism. The Internet has changed that. Like anyone else with a connection to the outside world, I can reach a global market. If I can, then anyone can.
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