Tag Archives: money

All Change!!

It was Gordon Gekko who said that “Greed is good” and currently it is that greed which is popularly believed to be the root cause of the current economic downturn. But who was it that said that “Change is Good”? What if the real root cause of the crisis is poor governance , jump-started and caused by the new Change mantra?

Nowadays, the word “Change” appears on a very high percentage of job descriptions. There are “Change Gurus”, “Change Agents”, “Change Trainers”, “Change Management” and a hundred other delicious flavours of Change.

“Change” has become synonymous with progress but very often the consequence of constant change is a company which never quite achieves stability or Steady State. It has been believed for nearly thirty years that a company which does not change, risks being “left behind”. However, there may be certain industries which should embrace the Steady State Theory and not the constant-change environment. Change not-only appears to feed progress but during transitional periods, it also provides opportunities for corporate mistakes to be buried. Because a constantly-changing company never achieves Steady State, management errors and holes in accounts are always regarded as just temporary.

A mere thirty years  ago, there were four columns supporting the Financial Services Industry: Banking, Insurance and the Building Societies were the highly visible threesome and their City cousin was the Stockbroker. He was the mysterious one who spoke in a strange tongue and dealt in financial mysteries and abstracts. The sort of stuff that Bankers did not understand.

A few predicted that these four venerable institutions would, one day become indistinguishable from each other. And so it has come to pass.

Thirty years ago, Banks lent short-term unsecured money, issued chequebooks and most branches had a manager who was accessible both to the private individual as well as the local businessman. It was a “people business”. Eventually, Change decreed that Bank Managers were not skilled enough to recognise the subtle shades of risk hidden in propositions which landed on their desks. “Systems” were created.  Decision-making was taken from the branches and handed to the system. Credit Scoring was the way forward.

Did credit-scoring work? Yes, but only when it was applied.

Building Societies were still true to their 19th Century roots. They lent money which enabled private individuals to buy a home after they had accumulated a deposit. There were only two types of mortgage. Gross of Tax and Net of Tax. There were savings accounts which were called Paid-up share accounts  and there were only two types of these – the only difference being that you could either add interest annually of half-yearly. There were also deposit accounts which paid slightly less interest but allowed the depositor first crack at the funds in the unlikely event of a run on the Society’s funds. The products were simple.

The in the late 80s when MIRAS ( Mortgage Interest Relief At Source) was removed and  the green light was given to all sorts of strange hybrid mortgages and accounts. New systems meant that even the most complicated and incomprehensible products could be administered.

Originally, Insurance companies sold peace of mind and would pay either a lump sum or an income to a family in the event of the breadwinner’s death. The first inkling of change was in the mid-seventies when the Royal Insurance Group introduced the first low-cost endowment plan – the G-plan. It sold like hotcakes. In the long term, these contracts produced hundreds of thousands of unhappy mortgagors and many red-faced Actuaries.

Stockbrokers lived in large (sometimes condemned) buildings in the City and they practiced their dark arts without too much interference from anyone.

In the good old days, the lending of money  to an individual had never been a profession – it was more of a “trade” because it was simple. Consequently, the money-lending business (nowadays it is called “banking”) was run by ordinary honest folk who could gradually work their way to the top of their organisation. Not a Degree or MBA in sight. The same applied to the Building Societies and Insurance companies.

The Directors would make sure that they kept the bank or building society on an even keel  and well within the liquidity rules plus  they would vary interest rates when instructed  by the Bank of England and they NEVER went bust because it was nigh on impossible to go bust. There was one occasion many years ago when the Chelsea Building Society was forced to revalue its assets  in order to comply with liquidity rules but otherwise – no problems.

There were no executive bonuses because the word “profit” was not in their dictionary – but they would strive to make a small surplus. Likewise, there were no golf days, conventions or any other executive freebies.

But dark clouds were already gathering. Even 25 years ago, the Banks wanted to become Building Societies, the Building Societies thought that it would be a good idea to become  Banks and the big Insurance Companies wished that they too could become all things to all people.

The high priests of Change were beginning to take a foothold.

Then, in the 1980s, laws were changed and the “suits” came.

Until then, Directors of lending institutions used to be a crustily venerable lot and  tended to be unqualified businessmen who strangely enough, were more entrepreneurial than the MBAs that are running the show these days. Typically, they were senior partners in Accountancy Companies, Estate Agencies or Solicitors. They were men in their 50s and 60s who were REAL businessmen who had created their own wealth.

That is where the seeds of destruction were planted – in the panelled boardrooms of provincial England. The Old met the New and were dazzled by the following: (perm any two from six) MBA, Oxford, Cambridge, Harvard, Degree, University.

The  pipe-smoking unqualified old duffers were dazzled and seduced by the shiny new boys with MBAs and incomprehensible management jive talk. They all wanted one!

Once laws had been changed and the new boys were let loose, Building Societies issued chequebooks, Insurance Companies bought Estate Agents, banks bought Stockbroking firms, Insurance Companies introduced savings accounts dressed-up as life assurance (remember Unit-lined whole-of life policies?), Stockbrokers morphed into Investment Banks, Banks bought Estate Agents – in fact, everyone bought (and sold) Estate Agents.

Foreign banks arrived in the UK and began buying-up bits and pieces. It was all about Change through acquisition and the ugly phrases “client-bank optimisation” and “cross-selling” were born.

The price that the industry paid for all this change was an imperceptibly gradual loss of management control and increasingly lengthening reporting lines. That in turn,  resulted in two things: A sudden growth in regulation (SIB, LAUTRO, FSA) and  the emergence of dictatorial and “entrepreneurial” management.

It was in 80s  USA that the cult of the “corporate entrepreneur” had been born and transplanted rather uncomfortably into the gut of the UK’s financial industry.

A corporate entrepreneur is a man who takes risks with other peoples’ money and is rewarded for his “entrepreneurship” through the medium of the profit-related bonus.

The Financial Services industry became a testosterone-fuelled orgy of  Change, Acquisition, Growth and an accelerating race towards more and more profit. Several CEOs would not have looked out-of-place in a James Bond villain’s lair.

The charismatic, dictatorial Chief Executive with a Messiah complex had arrived. This type of individual was comfortable in the company of millionaires and billionaires and his word was always final.

Many real entrepreneurs took advantage and high-level CEO-administered Vanity Lending was born.

Thirty years of change have created a  Financial Services Industry which has become a Frankenstein and  our Government is keeping very busy patching it up here and there.

Currently, there is little else that can be done but thirty years of increasingly accelerating change may eventually need radical solutions and perhaps a return to the old ways. Simple products for what is essentially a simple process.

The Change Experiment has not been successful because current economics now owes more to the Chaos rather than the Keynes theory.

Is it time to go Back to the Future?

Money,money, money.

Great fun was had on the various stock exchanges around the world last week. Lots of  yoyo investment activity.  Shares were up and down like a bride’s nightie.

In the US, there was good news from banks such as JP Morgan and Wells Fargo but not so good from Lehman Brothers and Merrill Lynch. Citigroup was keeping its head down.

Fat Fannie Mae and Fulsome Freddie Mac are still sitting there in the corner, quivering and thinking “Feed me”.  Freddie is thinking of raising capital by selling something like 10 billion dollars worth of new shares which will be a good scam if they can pull it off , bearing in mind that in 2008 they managed to lose their investors about three-quarters of their money.

But if they were allowed to go to the wall , property prices would disintegrate and the US housing market would grind to a shuddering halt. Nice.

There is even  more fun and games over in the States  : the US securities regulators are issuing subpoenas for Deutsche bank, Goldman Sachs and Merrill Lynch . They are looking  at suspected manipulation of Lehman Brothers and Bear Stearns shares.

The banking sector has always been institutionally incompetent and now, to add to that wonderful endorsement, they are regarded as irresponsible, cynical and crooked. Gone are the days of the honest banker who had your interests at heart. There has been a  comparatively recent proliferation of sharp-suited self-serving MBAs  and other prats who have overcomplicated a venerable institution  and turned it into a financial all-singing all-dancing circus.

Many of these people do not have a clue how to deal with the sort of crisis that they are now emeshed-in because they have only experienced the “ups”. Many will crash and burn. Sorry – Many will negatively optimise.

There appears to be no good reason why Sovereign funds or anyone else should rush to the aid of these discredited institutions unless there is a substantial change in their governance and competence.

The word on the streets is that the recovery period of the banking sector is going to take much longer than was generally believed. In fact, put two bankers in a studio, ask them about “the downturn” and you will get three opinions – all of them different.

In spite of the fact that they deal in numbers, it is remarkable how much guesswork and conjecture they rely on in their day-to-day activities.

The mechanics and decision-making behind last week’s announcement by the Bank of England to maintain the bank base rate at five percent demonstrate that institutions such as the Bank of England are not adding to the creation of an economy- they are merely myopic observers.

They are like the 1993 Grand National starter who was waving his flag at the horses when they  false-started and were a hundred yards down the course.

The bank’s monetary policy committee consists of both bankers and proper economists. It was very interesting to note that one of the economists suggested that the base rate be raised by 25  basis points and the other wanted it lowered by the same amount.

Whether bank rates  are raised  by a quarter percent or lowered by quarter percent would make absolutely no difference to the economy because the Bank of England  is lagging behind the economy.

The equation should be quite simple. Inflation is a consequence of rising energy and food prices which in turn are a  function of too-rapid economic growth. We NEEDED a slow-down in economic growth because it was  and still is unsustainable.

Interest rates cannot control economic growth. One day, central banks will realise this.

Nevertheless, through habit more than logic or science, inflation is still regarded as enemy No 1 – the Bogeyman.

The United Kingdom budget deficit in the quarter ending June 2008  was £24.4 billion. That is the biggest deficit since just after World War II. House prices are falling at the  fastest rate since the Great Depression of the 1930s and United Kingdom share prices have fallen by 20 percent in the last 12 months.

The general feeling is that things will continue to head south to the end 2008 and possibly beyond. I reckon about 10 years beyond – with of course the occasional rally fired by bouts of illogical euphoria.

The whole scenario is not helped by the fact that currently the City wide boys have not only got themselves themselves into a right old state but have also managed to get themselves into a totally negative mindset.

Traditional thinking has it that in order to solve the problem, more money needs to be thrown at it . Imagine a small businessman on the verge of bankruptcy going to his bank and saying , ” OK, I screwed up. Let me have more money and I’ll see if I can sort it all out.”

Yet, that same small businessman is in the hands of an institution which dishes out business advice whilst losing millions. Takes your breath away! Plus that institution wants more money because it did not take its own advice!

The sad fact is that the banking system is run by incompetents who  in turn are regulated by ineffectuals.

We have a financial system that was a Frankenstein. We now have a financial system which is an ailing Frankenstein.

There is only one solution and that is to dismantle the whole system and start again. Sounds extreme but all that it needs is lots of legislation or possibly the repealing of the legislation which turned Banks into  a combination of Bank, Investment House, Building Society, Insurance Company and anything else to do with cash that you can think of.

The modern “name of the game” is called Client-bank Optimisation. That means that once you have a banking client, he is your prey and you can flog him anything! If you haven’t anything to sell him, invent something! That approach is a time-bomb which WILL eventually go off.

Having said all of that, there are still many in the city who are making money. Unfortunately, they are only making money for themselves and adding nothing to the general flow of the economy- apart, of course when they buy the next Aston Martin or penthouse pad.

Over the next few years, the  dying bodies of financial institutions  will finally float to the top.

There are some who at this moment are covering their losses and holes in the balance sheet thanks to either a fine Finance Director or CEO with a strong self-preservation instinct.

Their grey bloated bellies will finally be visible. They will be twitching in their death throes but as we have seen over the past few weeks, they will still be offering their grasping  fat hands and asking for more money to be inserted by the taxpayer.

Time to stop.