The situation regarding the banks is one that has dominated the credit crunch era as we started with some spectacular failures combined with spectacular bailouts. Yet even a decade or so later we are still in a spider’s web that if we look at say Deutsche Bank or many of the Italian banks still looks like a trap. Economic life has been twisted to suit the banks such that these days a new Coolio would be likely to replace gangsta with bankster.
Keep spending most our lives, living in the gangsta’s paradise
Keep spending most our lives, living in the gangsta’s paradisePower and the money, money and the power
Minute after minute, hour after hour
Although upon reflection with all the financial crime that the banks have intermediated perhaps he was right all along with Gangsta. This morning has brought more news on this front as we note this from Sky News about HSBC.
HSBC has agreed to pay $765m (£588m) to the US Department of Justice (DoJ) to settle a probe into the sale of mortgage-backed securities in the run-up to the financial crisis.
It is the latest bank to settle claims of mis-selling toxic debt before the financial crisis.
HSBC has paid a lot less than the Royal Bank of Scotland, which agreed to pay $4.9bn in May and Barclays’ $2bn settlement with the DoJ in March.
This is just one example of the many criminal episodes emanating from the banks and if we stay with HSBC there was also this reported by The New Yorker.
In 2012, a U.S. Senate investigation concluded that H.S.B.C. had worked with rogue regimes, terrorist financiers, and narco-traffickers. The bank eventually acknowledged having laundered more than eight hundred million dollars in drug proceeds for Mexican and Colombian cartels. Carl Levin, of Michigan, who chaired the Senate investigation, said that H.S.B.C. had a “pervasively polluted” culture that placed profit ahead of due diligence. In December, 2012, H.S.B.C. avoided criminal charges by agreeing to pay a $1.9-billion penalty.
The tale of what happened next is also familiar.
The company’s C.E.O., Stuart Gulliver, said that he was “profoundly sorry” for the bank’s transgressions. No executives faced penalties.
Yet in spite of all the evidence of tax evasion and money laundering in the banking sector the establishment bring forwards people like Kenneth Rogoff to try to deflect the blame elsewhere. First blame cash.
Of course, as I note in my recent book on past, present, and future currencies, governments that issue large-denomination bills also risk aiding tax evasion and crime. ( The Guardian )
Then should anything look like being some sort of competition raise fears about it too.
But it is an entirely different matter for governments to allow large-scale anonymous payments, which would make it extremely difficult to collect taxes or counter criminal activity.
Does he mean like the banks do?
Competition seems to get blocked
This morning has seen this reported by the Financial Times.
Britain’s peer-to-peer lending industry fears being stripped of one of its key advantages after the UK regulator proposed to block the access of many retail investors, alarming some senior executives in the nascent sector. “This is a moment,” said Rhydian Lewis, chief executive of RateSetter, one of the UK’s biggest peer-to-peer lending platforms. “They are looking to restrict this new industry and it is wrong. This is how things get stymied.”
Still in some ways it is a relief to see the Financial Conduct Authority or FCA actually have some powers as after all it was only last week they were telling us they were short of them.
Given the serious concerns that were identified in the independent review it was only right that we launched a comprehensive and forensic investigation to see if there was any action that could be taken against senior management or RBS. It is important to recognise that the business of GRG was largely unregulated and the FCA’s powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited.
It is important to recall that this was a very serious business involving miss selling and then quite a cover up which the ordinary person would regard as at the upper end of serious crime. Businesses were heavily affected and some were forced into bankruptcy. Yet apparently there were no powers to do anything about what is one of the largest financial scandals of this era in the UK. It is hard not to mull on the fact that a few years ago the FCA was able to ban someone for life from working in the City of London because of evading rail fares.
However if you are a competitor to the banking sector you find that inquiries and regulation do apply to you. However what was the selling of derivative style products to small businesses somehow escapes the net.
It is not the banks fault
A very familiar theme has been played out since the Bank of England announced a rise in UK interest-rates at midday on Thursday. The reality is that many mortgage rate rises were announced immediately but as social media was quick to point out there was something of a shortage of increases in savings rates. Here is one way this was reported by the BBC over the weekend.
Millions of people could get a better return on savings by switching deals rather than waiting for banks to increase rates, experts say.
A huge number of savers leave money languishing in old accounts with poor rates of interest, often with the same provider as their current account.
The City regulator says they are missing out on up to £480m in interest.
So it’s our own fault and we need to sharpen up! As us amateurs limber up the professionals seem to be playing a sort of get out of jail free card that in spite of being well-thumbed still works.
Following the previous Bank rate rise in March, interest paid on half of all savings accounts failed to rise at all. Of those that did, the average rise did not match the Bank of England’s increase.Since Thursday’s rise there has been very little movement in rates,………..
Oh and March seems to be the new November at least at the BBC.
We also got a hint as to why the environment might be getting tougher for peer-to-peer lenders.
Bank of England governor Mark Carney suggests new entrants are increasing competition, creating better deals.
Comment
There is quite a bit to consider here as we look around UK banking. Looking at RBS there is the problem that the UK is invested at much higher levels. The 251 pence of this morning is around half the level that the UK government paid back in the day. Perhaps that explains at least some of the lack of enthusiasm for prosecuting it for past misdemeanours. Especially as the sale of 7.7% of its shares back in June illustrated a wish to get it off the books of the UK public-sector which still holds around 62%.
I note over the weekend the social media output of HSBC finds itself under fire reminding us of an ongoing issue..
Planning your next trip? Get cash before you go, to make the most of your holiday time.
The response is from Paul Lewis who presents Radio 4’s MoneyBox.
Dreadful advice. (a) HSBC rates not great (b) using a HSBC card abroad is subject to a hefty surcharge but using a Halifax Clarity card is not. This is why never go to a bank for advice it’ll only give you sales.
The old sales/advice issue rears its ugly head again as we note that the advice will of course be rather good for the profits of HSBC.
Moving onto the FCA and the Bank of England it is hard to see a clearer case of regulatory capture or as Juvenal put it so aptly back in the day.
Quis custodiet ipsos custodes?
Or who regulates the regulators?
Notayesmanseconomics's Blog 
‘The issue that has swept down the centuries and will have to be fought at some point is the people versus the banks’
Lord Acton
sorry but it appears we ‘ve lost ……
Forbin
Hi Jason and welcome to my corner of the web,
Thanks Shaun
I’ve been following you for a while but had to comment on today’s blog (a subject close to my heart having worked in banking pretty much my whole working career)
It seems to me that what the vast majority of the Public, perhaps as opposed to Business, needs is a “bank” where they can deposit money and withdraw it at need. The bank itself could either charge for this service or lend it out at interest in the traditional way. The vast majority of the losses incurred by banks relate to activities unrelated what the retail depositor wants. If legislation were in place for such entities to be created the market could decide whether it was appealing. The necessary infrastructure for this to be done without bricks and mortar already exists.
This goes back to the old Merchant Bank days (if the bankers invested badly they and their investors lost their shirts, ordinary depositors never got touched in this scenario).
The banks however, could just not resist playing the casino with the vast sums retail deposits could bring, and the icing on the cake if it went wrong (as it did in 2008) the Government would be so frightened of the public reaction to losing deposits they would get bailed out.
I try and keep the minimum necessary now in my bank to cover bills, I am not even sure the deposit protection scheme would work in the event of systemic failure
I was saying years ago, that if one really big bank goes. then, because of their financial interconnectedness, and depositor fear, they’ll all go. In such circumstances, where would the govt. get the money to pay the deposit guarantee.
It’s absolutely worthless.
Seems to me the FSCS is not a guarantee. It’s simply there to stop a Northern Rock style run…
Excellent checkpoint Sean.
‘Will we always be second fiddle to the banks?’
Funny, I thought that the ‘0.1%’ had all the fiddles, and the rest of us had better learn to whistle?
2nd ?
that far up ?
Forbin
Hi Shaun
I’m afraid you don’t draw the obvious conclusion from this. This has to be that this state of affairs only exists with state collusion.
As you rightly say, the banks have been engaged in multiple instances of criminal behavior and this can only exist with state connivance. I’m afraid there is a nexus between the banks and the offshore banks that is effectively a money laundering and tax evasion enterprise and this is what we are. ?The banks are devoid of morality but so is the government to allow it.
Of course it doesn’t do to admit loudly that a fair amount of what is laughingly known as GDP is based on outright criminality but that’s where we appear to be. Consequently it’s all kept quiet, as is the British way, until it all blows up, which, at some point it surely must.
yup
Governance of the people by the Banks for the Banks
now how do we throw their shackles
Forbin
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…. I believe that banking institutions are more dangerous to our liberties than standing armies…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
Thomas Jefferson.
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It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
Henry Ford.
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One thing is for sure, governments no longer run countries, they are merely a puppet show to fool the people into thinking voting actually matters.
Hi Kevin
As your quotes so aptly show it is as not the case that the problems of the last decade have arrived like a bolt from the blue. Of course though we are regularly told that they have!
It is a moot point about what control governments actually have. In a way Yes Prime Minster was a saga about it being limited in scope and in fact very limited. So this theme has been around since the 80s.
Like so many other things, the blame lies fairly and squarely on US investment banks, with Goldman Sachs standing out in particular.
When I was first in the City at Kleinwort Benson, it was illegal for a bank (ie a business with a banking licence) to own:
1. A stockbroker; or
2. A stock jobber (now called a market maker).
We therefore:
1. Lent money to businesses based on business merit;
2. Advised companies, but did not trade their shares;
3. Underwrote issues using our balance sheet, ie our shareholder funds. The clearing banks did hardly any of this. This was then subunderwritten by institutions (the pension funds etc). For a 30-day period of underwriting, we received 0.5%, the subunderwriters received 1.25% and the stockbrokers received 0.25%, making a grand total of 2%.
This process was:
1. Very cheap;
2. Put the risk with investing institutions, who got the highest reward;
3. Did not lead to the bank using its own money to trade shares.
Somehow, the US banks persuaded the government that this was anti-competitive and that we should adopt the US system, which:
1. Allowed anyone to own anything (so-called Big Bang)
2. Put the fees up to 6-7%, all of which went to the bank, as it now owned the broker and, as the underwriting period for a US bank is about three nanoseconds (they do not underwrite until the whole deal is sold), involved no risk. We had gone from a risk-sharing model to a rip-off.
Since then ,the whole investment banking industry has turned on its head :
1. Companies such as, say, Tesco, are no longer the clients;
2. The real clients are the traders and their clients, the buyers and sellers of shares/bonds etc;
3. The Tesco-type (ie real) companies are now just product to feed the machine.
The next disaster happened when the clearing banks became involved and, again, this was a master stroke of the US investment banks. They made so much money that the clearing banks looked like fuddy-duddy dinosaurs. What could be better than for the clearing banks to set up/buy investment banks to jazz up their earnings? What could possibly go wrong?
So, we see Kleinwort bought by Dresdner, Morgan Grenfell by Deutsche, etc etc etc and, in every case, it has been a disaster, as the clearing element of the bank has:
1. believed all the investment banking claptrap;
2. Used the vast balance sheets to trade/speculate in things that they do not even pretend to understand;
3. Gone bust (sorry, I mean needed some government assistance).
In one generation, the investment banking world has moved from being relatively small, pursuing long-term advice to real companies, to a bunch of gangsters holding the world to ransom.
Sorry about the length of this, but I feel quite strongly about it!!
Off to lie down now.
Agree 100% I’ve seen the whole system turn on its head on the space of 32 years working in it (the merchant bankers still wore bowler hats and striped trousers in the city and we queued to get on the Waterloo and City line too when I started out as a clerk)
we need someone with the gonads to bring back Glass -Steagal act
separate the commercial from the gambling house part of the banks
in these days we have no one like a Churchill ….
Forbin
2nd fiddle?
We’ll only matter at all when, like big business and the banks, we can afford nauseatingly huge, corrupt sinecures for post-career politicians.
Hi therrawbuzzin
You may well be right that I was over optimistic here. My knowledge of orchestras does not stretch to knowing if there is a 3rd, 4th of 5th fiddle or not?
We are to quote Genesis “In Too Deep” https://www.youtube.com/watch?v=_G5UwCyr_g8
In good times, the banks produce lots of taxes and jobs, but every economic cycle brings a downturn, at which point they go cap in hand to the govt and the govt has to bvail them out. Once, it was the odd bank like BCCI, then in 07, it was RBS, HBoS and next time, it will probably be the whole lot, brought down by bad mortgages, cards, etc.
The current round of cheap money has created a feeling that there is no need to worry about productivity or risk – I ave sat through two “huddles” at banks (Lloyds and Barclays) where the female team leader (in position on the diversity agenda) has moaned about the lack of productivity, but done nothing about the underlying causes. Now, if you challenge what they are doing (as they invite you to do) or remind them of previous mishaps, you are either silenced/ignored or in the case of the CISI Review, they just publish your comment. I have just had two rejected by the CISI – on an article about the recent housing price falls for suggesting the Russian money being laundered in London was drying up and on an item about Angela Knight for pointing out her role in the LIBOR fiasco when she was head of the BBA. It is that arrogance and rejection of criticism that is leading them to the next bubble disaster – and when it does, their chums in politics (looking for that cushy directorship after politics) will bail them out with our money.
Hi David
The irony of course is that these meetings are clear drain on productivity as they take up time for a purpose that they do not believe in. What I mean by that is the meeting is for feedback but there is no intention of following it up or god forbid actually applying any of it.
The BBA was such a shambles no wonder it ended up changing its name a la Windscale. I have yet to come across anyone who speaks favourably of it.
The BBA were only ever good for managing banking exams. I remember a quip from the 2008 debacle, there was a list of senior bankers and included in the list was Terry Wogan. The question and guess which one of these actually has banking qualifications (and yes it was good old Terry)
Shaun
Completely off topic, but have you ever looked at Target 2? I am bombarded with doom-laden emails about how the imbalances here will:
1. Break the euro
2. Cause a mega crash as Germany realises that (despite all rhetoric to the contrary) it has lent hundreds of billions to Southern Europe which will never be repaid.
The emails essentially say that all this will come to a head when:
1. Italy publishes its budget in September/October; or
2. As a dialogue in the May European elections.
I know that you don’t do politics (thank goodness), but these Target 2 imbalances do seem perhaps to be where economics will trump politics or have I misunderstood the whole thing?