Tag Archives: Building Society

New Banks for Old!

There is little doubt that a brand new Banking Act is a little overdue. However, instead of spending 5 years on inquiries, commissions, debate and law-writing, why don’t we  just “rewind” and “tap-in” to some of the old banking legislation.

Banks HAVE become too big but only as a result of Retail, Institutional, Investment etc arms coming together to produce a Gordian Knot of “impossible to unpick” financial mystery.

This week’s favourite word is “firewall”. All we need is a buffer (or firewall) between a Retail bank and the Investment Bank. THAT’s an accounting exercise. Separate reporting , separate balance sheet, separate shares and separate management.

Once we see distinct organisations, we’ll know who we’re dealing with.

The Retail Bank’s job SHOULD BE to store and look after our money. The Investment Bank is a completely separate playground and is not proper banking at all. It is Stockbroking with additions such as crazy people who believe that they walk on water.

We need to return to the good old days when banks would finance themselves with equity and not with debt. Mind you, there’s absolutely nothing wrong with properly managed debt. In fact, without debt, there is no Capitalism.

Forget the “too big to fail” nonsense. The rationale should be simpler – a smaller institution is easier to control and inspect,with fewer nooks and crannies in which to hide “naughtiness”. Plus a small bank which “goes down”,  is not going to bring an economy crashing  in the same way as the banking behemoths of today can (and will).

Certainly, the British government should be looking at helping to create scores of small independent banks, rather than be held to ransom by a few huge ones.

Mind you, we once had a ready-made structure in place.  The Building Societies. Unfortunately, most have now been consigned to the Skip of History. Shame.

The Building Societies would have provided a useful model because they were limited as to where they could invest depositors cash. They used to have  a series of “caps” enshrined in legislation.

Today, a cap should be put on the Retail bank’s ability to invest in equities, plus a cap on liabilities as well as a strict limit on leverage.

Currently, Investment “banks” operate in a very highly leveraged way – with very little equity and masses of debt. By no stretch of the imagination is that “banking” as we used to know it. Plus the sheer volume of total bank debt places an unacceptable level of cost and stress on an economy. The current Eurozone crisis is a manifestation and perfect example of that phenomenon.

This is the very simple model we need to rediscover:

The Retail Bank holds deposits which belong to the consumers. The bank is empowered to lend that money to private individuals and small business.

The Investment Bank raises money for commerce through the Stock and Gilt markets.

The end.

Historically, there came a time when the banks weren’t happy with those simple arrangements and gradually, through the medium of legislation, government took the brakes off and so began an orgy of leveraging (borrowing) by the banks. Then they overleveraged (overborrowed) with the straw that broke the camel’s back, being the banks’ decision to leverage (borrow against) their sub-prime mortgage assets. Effectively, borrowing against something whose value collapsed because it was bound to collapse.

The surprising thing is that they’re still doing it. Why? Because, they know that there’s no risk to them because standing behind them are tired and bankrupt governments who have foolishly promised to bail them out.

Banks have now completed their journey from being keepers and stewards of community assets to scary insatiable monsters in constant pursuit of profit. Not for the community but for shareholders and executives.

Unfortunately, they are not very good at it – and yet, they are allowed to continue their rampage by uneducated and naive politicians who in truth, should have closed them all down four years ago.

However, there’s another problem. Western communities do NOT save as they used to. That means that there is never enough to lend to consumers from  meagre bank deposits. (We spend more than we earn). Is there a solution?

Yes there is.

Retail banks could sell all the debt which private individuals needed. Those debts could be securitised through investment banks. (The concept of loans backed by securities is not a bad one, except when it is abused as it was in the United States.)

The down-side? Banks would never again be as profitable as they are today.

The Investment bank would concentrate on finding capital for companies and controlled speculative trading but without any government-guaranteed bailouts if things went wrong.

We need the traditional (Retail) bank because it is the foundation of an economy and where the entrepreneur goes for money so that he can become a capitalist .

The investment bank is where the capitalist goes to party, with money that has already been earned.

Time to turn back the clock?

The new Oktoberfest?

The financial establishment was driving an express train  to hell but now it wants to hand the steering  to the government  –  any government –  and it wants to do it as soon as possible.

We are the prisoner- passengers and there is no possibility  of getting off the train. We’re trapped.

The Crash of 1929 and  the Crash of 1987 both have something in common. They took place in October.

October 2008 starts next Wednesday and it looks as if  our train is about to hit the painful buffers of another Black October. Inevitably there will be what is euphemistically called a single-day  “DOWNWARD ADJUSTMENT”.

Look out for a Black Monday, Tuesday, Wednesday……………….you choose.

By now, George W. Bush and his crew are realising  that a mere  $700 billion will not be enough to save the fantasy world created by the global financial system.  But they need to appear to be doing something.

What is being done to slow mortgage defaults? What will be done to encourage the banks to lend money to each other and to consumers?  How will the housing market stabilise?

It is also painfully evident that the banking establishment has no idea of  how to attack the current problem so the “professionals” are handing the problem over to a collection of elected amateurs led by Goldman and Sachs’ ex-CEO. Priceless.

The credit contagion will soon hit every company that distributes its products on credit. Will the government(s) bail them out as well?

The sad fact is that we cannot provide a solution to a problem that no-one understands . The inaction of our bank chairmen and boards suggests that they are   paralysed by a combination  of fear and what appears to be institutional intransigence.  

There is nothing easier to manage or direct than an organisation which is  in “steady state”.  It is when a company destabilises that senior managers , directors and administrators  should be earning their money.

Instead, there will be retirements, sackings, redundancies and court cases.

After  the blood-letting, there will be a shiny new train that we can all climb aboard. 

Does anyone remember the good old financial steam-trains of thirty years ago?

Building Societies took in savings and deposits and paid a small interest rate. They would then lend that money  to mortgagors at about 4% more than they were paying  their investors. That gave them their operating margin  plus a small surplus.

Then the banks, insurance companies and stockbrokers waded into the mortgage market and made the whole system super-technical and totally unintelligible. The legislators then gave the whole industry a good stir and  the rest,  as they say, is Geography.

Perhaps it had all been too simple.

The only surprise is that it took so long to unravel.