It’s all over: The banks have won

September 21, 2009

Laurence Copeland- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

There is so much talk of a new regulatory framework for the financial sector, anyone would think it was an important issue.

Unfortunately, it is almost irrelevant, for the simple reason that, however sophisticated the new regime, experience shows it will be bypassed and/or captured by banks of one kind or another, possibly by novel types of institution invented specially for the purpose.

This is true even in the unlikely event that the whole world – with the possible exception of North Korea – embraces the new regulations and enforces them with vigour.

The only type of intervention which has a hope in hell of success is one based on size. As Mervyn King has said, when a bank is TBTF (Too Big To Fail), it is just too big.

What is needed is breakup along functional (and, where necessary, geographic) lines, separating the boring but essential utility business of deposit-taking and payment-transfer from the exciting risk-taking of investment banking. A once-and-for-all breakup would have to be followed by continual monitoring, to ensure that takeovers and mergers did not breach the size limit and take us back to the TBTF dilemma.

The aim should be straightforward. If banks were cut down to manageable size, the taxpayer’s liability could be limited to deposit insurance alone. Banks could be allowed to fail in the same way as firms in other industries and would no longer be able to hold Governments or central banks to ransom, as they have repeatedly done in the last twenty or thirty years.

Moreover, break-ups would bring other benefits. Without an implicit taxpayer guarantee, there would be more incentive for institutional shareholders to insist on responsible management behaviour and to impose remuneration packages consistent with it. This mechanism of shareholder vigilance, which failed totally in the run-up to the current crisis, in my view offers the best hope for the long term. By their shameful passivity, institutional shareholders must carry a major share of the responsibility for the existing mess, and everything should be done to shame them into activism in future.

Will breaking up the banks eliminate systemic risk altogether? Of course not. But it will mean that the world economy will no longer be hostage to the irresponsible behaviour of a handful of bankers consciously pushing the banking system to the limit, or, as has recently been confirmed in accounts of the demise of Lehman Brothers, indulging in brinkmanship with the authorities.

The difficulty is how to get from here to there. As I said in an earlier blog, we need governments too big to be captured, and it is now plain that they exist neither in Washington nor in London. Predictably, the UK Government has shown no stomach whatever for the fight, even though it effectively owns two of the country‘s largest banks. It is a catastrophic error – one is reminded of the first Gulf War, when, with Saddam Hussein at their mercy, the Allies fell back on technicalities to justify leaving him in power.

It would be ridiculous to compare the evil of tyranny with the excesses of bankers, but in pure monetary terms the current crisis has already cost several times as much as the two Gulf Wars added together. Yet not only are Western Governments running away from confronting the banks, they appear determined to take on almost anyone else involved in finance. In particular, the EU’s hostility to so-called Alternative Investments (hedge funds and private equity) is, if anything, likely to make institutional investors as a whole even more reluctant to intervene than they were before.

As ever, it seems there is no situation so bad that our endlessly creative politicians cannot make it worse.

Comments

Yes – shut down the monopolies! If we could shut down or break up Standard Oil and the telephone companies, it is long overdue to breakup the banks so that competition can be created again.

Posted by Chad | Report as abusive
 

I would like to provide proper names/labels to problems.

I have heard the phrase “The Sub-Prime Meltdown” used in conjuction with the banking/liquidity problem we face today.

I believe we should call the problem by it’s real name “The Banking – Fraudulent Home Loan” house of cards problem. I have listened to several investigative news agencies Dateline etc. showing how loan brokers/agents changed the applications to show greater income afte the applications had been signed by the borrower. Therefore, the borrower would “qualify” for a larger loan than they could possibly service. Then the loans were sold to Fannie Mae or insured through AIG to cover the risk… given consequence.

 

I think that there are bigger forces – ideals, if you will – at the table here rather than banks bullying government. I’m of the impression that banks in the UK and America are the only thing left that those two respective nations have left on the world scene, except for military presence. Manufacturing and other industries in those nations have disappeared, shipped off to Timbuktu and beyond so that they can make an extra penny per unit on sales. The only industry left is banking, and the banks know it. So they use the power that comes with that position to do as they please. And the governments are only too happy to acceed to any demands because they believe it ‘saves face’ in the international community by still having homegrown industry leaders. I may be way off base, but I look at Canada and see some of my thoughts on display. In Canada, mining and oil production as well as production and technology sectors are on equal footing with banks and insurance dealers. No one gets preferrential treatment, and therefore are more responsible both to employees and shareholders, which by extension is being responsible to the public at large. (As an aside, while I agree that the oil sands are bordering on creating a blight across an area bigger than Texas, I can honestly say that if any other country were running the show up there it would be MUCH MUCH worse.) If not for bullying from America and illegal threats from the US automakers, they wouldn’t have gotten any Canadian money; if there was a majority government in Canada at the time, I think that government would’ve honestly told GM to take a hike.

So, to sum up, I agree that any kind of ‘regulation’ of bank pay is ludicrous and doomed to fail or be dodged. And TBTF is here until the next meltdown. Obviously these banks need to be splintered a la Standard Oil. Then other industry needs to step forward and flex some muscle – hopefully not just oil and military corps – to show that banks aren’t the only game in town. Quite the chicken and egg stuation, because will the Citigroups and BofAs be hacked up without another sector stepping up to the plate first to fill the void?

Posted by the Shah | Report as abusive
 

Laurence Copeland is absolutely right!! Furthermore lobbying should be outlawed to prevent big business / big banking from having the ear of our government. One citizen one vote,,,plain and simple. If American tax money can be found to prop up gambling bankers then it can also be found to fund election campaigns. After this debacle I don’t think many working men and women will mind too much.

Posted by RH Pyle | Report as abusive
 

Excellent idea. A well written piece with points that will be too painful for some to hear.

Posted by LS | Report as abusive
 

“one is reminded of the first Gulf War, when, with Saddam Hussein at their mercy, the Allies fell back on technicalities to justify leaving him in power…”

Funny, that. One is obliged to conclude that the “Allies” – or the people who call the shots – wanted another round of taxpayer-leeching war crimes and high-cost cultural destruction to look forward to, a little multi-Trillion dollar something for later. And they got it.

These bailouts are no different in character – or lack thereof. Just easier to see coming. And once again, Congress spurns the Will of The People. How long they think they can keep on getting away with this unmitigated serial contempt, is the question.

Posted by The Bell | Report as abusive
 

The problem is not so much the sub prime loan industry. It is the ideal that financial companies make money on two things, interest and fees. Never mind that the real estate market was an obvious bubble waiting to pop ( I mean come on with every house frau flipping a 120K shack to a 300K sell you could see that collapse waiting to happen). Never mind the collusion in end to end finance of a home (from home valuation of “it looks like a 400K home” to less than legitimate inspections…) the down fall lies in the the way the lender makes money. Fixed rate 30 year loans are like t bills, slow but steady. Sure you can package them and sell them but the amount of profit you make is not a number likely to change. Enter the Adjustable Rate. The “I will gladly pay you tuesday for a hamburger today loan” except that hamburger was going to be a heck of a lot more than you thought. Sure the sneaky stuff is what got the buyer in trouble, over valuation of property, lying about income but the banks all knew that was going on. They just packaged up those ARMs and sold them as commodities!! And who would not want a prospect that would jump in returns in 3-5 years??? except..they didn’t count on Joe Homebuyer saying “eff that” and walking away…then those banks who looked the other way when the home was valued at 500K suddenly found they had far less equity than they thought.

So the problem does not lie in the lying, the shenanigans and the bad people who don’t pay their mortgages when they explode in cost.. the problem lies with whoever said “sure you can package mortgages up as commodities to sell!!”

Posted by Glen | Report as abusive
 

It does seem that banks should not be allowed to get so large that they are “too big to fail”. As you mention, if banks have to operate without a government safety net, perhaps they’ll be a bit more careful how they operate.

 

The author seems to forget that we live in a global economy. If we intentionally break up our banks, then foreign banks will take over and funnel profits back to their home countries. Our own institutional investors have a fiduciary responsibility to seek the highest returns and would seek out those big foreign banks instead of small regional banks. Why? Because those foreign banks are too big to fail while ours may suddenly fail without warning, thus investments are safer in banks which are too big to fail.

Posted by Greg | Report as abusive
 

This country is facing a BIG financial problem. People everywhere face the same “OLD” problem. Why, Legalized loan sharking, by the banking & mortgage companies.
The more one gets into debt with the “Loan Sharks” the harder they make it for you to get out of dept. It seems the big financial problem the Federal Government is facing is not so much a “Bail Out” as it is “Payback”! If people were able to pay off there debts more easily the faster this financial disaster can be put behind us.
The “REALLY SIMPLE SOLUTION” to all this is making “Every Loan In America” A SIMPLE INTEREST LOAN” at “Reasonable Percentage Rates”. Pass laws Amortized Loans or Creative Accounting. This is the MAIN REASON we are in all this trouble in the first place. Americans just cannot get out of debt! This way Americans CAN get out of debt.
This would put the money back into the banking and financial system and pay it off. Also this would stimulate the economy by allowing more Americans to use the money they were paying in interest…i.e.: retail spending, buying homes, home improvement, IRA’s, savings accounts, buying automobiles and much more. THIS WILL WORK!
With simple interest loan, one can have an expectation of leaving this world debt free! Can you imagine buying a car with an amortized loan, 30 years to pay it off! Why should we buy home that cost less than some luxury cars and spend an entire lifetime paying it off! Americans are paying approx. 2.5 to 3 times the amount of the purchase price just to buy a house to live in, this is an OUTRAGEOUS amount of interest it is Loan Sharking! Credit Cards are also a curse on America…if laws are passed to make them all simple interest loans and Americans could actually pay off a $5000 debt in less than a decade of payments. Moreover, if one calls one of those advertised “debt consolidation” companies and lets them know that that you are having financial problems, they smell blood and move in for the kill. The Loan Sharks own these companies! They are using these companies as a front. They con Americans into thinking they will help you. Instead, they raise your interest rates. Then they complain that too many people are filing bankruptcy. In addition, they want more laws passed to protect their right to Loan Shark! They raise yours your current interest rates sometimes more than triple what you were paying before you consolidated. Now you are really stuck in debt and it will now take you many more years if ever to pay down their debts. This is just WRONG!
Since receiving Billions in Bailout Money, ALL of THESE Institutions are BACK to their OLD TRICKS, New Fees and more to rob Americans and Line their Greedy Pockets even more! This MUST STOP NOW. Write & call everyone YOU know, friends relatives, politicians, local & national news people, any organization you can think of. Lets ALL OF US get behind this initiative and get the LAWS Changed.
Also forgive all student loans. Quit giving Taxpayer money to the weathy!

 

Curb bonuses to 100% of salaries. That will purge adventures seekers and gamblers from banking to hedge funds and private capital management. Make sure that banking is boring once again.
It would make redundant 1000′s of ‘financial professionals’ who used to play with bank money with 0 responsibility. They always were concern only about next bonus.
Investment banking is extremely inefficient few ‘work horses’ doing all the job while the rest playing corporate politics.

Posted by Sergey | Report as abusive
 

As long as we as a society accept that people should be given money for having money, this is what we’ll get. If you don’t physically make, transport, process or sell an actual thing (Financial products are not products by the way, they are pieces of paper that in reality have no value.), you should not make any money. PERIOD! The funny thing is that all the endowments, pension funds, retirement packages, and the like are what drive this money for nothing attitude. I know people will say that they “earned” this money, however if you earned it why didn’t you collect it at the time? Take all this money away from the “system” and you don’t have the problems anymore. If your retirement is in a safe in the corner, some banker can’t profit from it or lose it. As long as america wants money for having money, this problem will never be solved.

Posted by Coray | Report as abusive
 

Your point that despite owning (courtesy of tax-payer/citizens funds) some very large banks Britain’s government has ensured the future repetition of TooBigTooFail problems. What is it going to take for the political classes to re-balance the needs of industries like banks etc, with the needs of its citizens? Britain’s Labour government under Blair and then Brown will go down in history as the most dissolute “leaders” Britain has ever had. They have their banking policy dictated to them on the deck of a luxury yacht tied up in the Med.
I hope their dreams are filled with the misery they have presided over.

Posted by Peter H | Report as abusive
 

My take on the domino effect which the whole World experienced, across all continents and cultures: Inflation was actually higher than published, things were perceived to be cheaper than they were, so credit became the next domino, when the rest of the food chain could not close out and settle their positions, suddenly nothing was worth anything, and prices deflated to real inflation. Banks are like inlaws – when they do well for us, we love them, otherwise they make us uncomfortable. What really baffles me though, is where does all these massive earnings go to ? The race is over, the rat has won.

Posted by Casper | Report as abusive
 

Know that American taxpayers are LENDING to banks (whether ‘healthy’ or distressed) at an interest rate of 0%! (ZERO percent !) Require those banks to structure every new loan and restructure every existing loan at a 2% to 4% interest rate (based upon income). 2% interest rates would save the average mortgagee about $600 every month, to spend as they will. This would ‘free up’ and cause the flow of $50,000,000,000 of ‘extra spending money’ into the American economy every month ! The inherent byproduct of the resulting commerce is employment. This will also recreate housing demand and lead to restoring home values.
High mortgage rates exacerbate our stressed economy, create foreclosures, and cause recession.

Posted by Michael Knight | Report as abusive
 

These problems are all a symptom of a much larger problem. We think only of ourselves and not about each other. We are each inside of a prison called egoism. Egoism is what keeps making people think of things in terms of increasing pleasure for ones self at the expense of others in this place.

The banking sector is just an example of this. There is profit to be made. And those who know how to work the system and thereby gain substantially from it, will do so. Even if it costs other people their jobs, their pensions, their health care coverage, or what ever you please.

The proof is in the headlines and all over the news on this site.
We need each other for our very survival. Nature proves this to us constantly. And yet when we get together we think only of our own needs and nothing more.

If we do join with others for a common cause it’s only because the cause serves our self’s interests. For example we have groups that represent teachers, doctors, homosexuals, minorities, etc…
All of whom seek special consideration because of the plight of their particular group.

And bankers are just another group. It’s not the systems that are the real problem. Systems can be changed and improved. But our own sense of greed and selfishness keep us from really helping each other. And it is not until we begin to realize that the only way to come out of this is to develop a sense of love and care for others that is equal to the love and care we have for ourselves.

“Love your neighbor as yourself” is not a fairy tale. It is the antidote to the problems that surround us today. When human beings finally realize that the true treasure in this world is other human beings, then we will be ready to correct the problems we are experiencing.

Regulate banking, and health care, and what ever industry you care to. But nothing will change until the human heart begins working like it’s supposed to. There is no crisis out in the world. The crisis is in the heart and mind of every human being that lives. Look to solving the problem of egoism. When that problem is solved everything else will solve itself as well.

 

It is rather unlikely foreign banks are looking to invest in the U.S.. We now have four mega banks(Chase, Wells Fargo, Citibank and BOA). They are now all larger than the institutions that failed. Capitalism has failed. Only those with the blessing of Washington can do business.

Bernanke and crew have funneled trillions of printed dollars into the economy through the “Plunge Protection Team” and directly into financial institutions. It is only a matter of time before rampant inflation occurs.

The Federal government has not spent 5% of the 800 billon dollars in stimulus funds appropriated for the people. Yet the banks received all of the 750 billon dollars and more. All of this spending had no popular support with American Citizens. This is not Democracy. This is an Oligarchy. As long as the society and economy are allowed to crumble we will continue to print and borrow money to bail out financial institutions.

In my view we have only two choices. Allow the country to disintegrate or, the people must put their differences aside and take their country and government back from the elite. It is time to establish true democratic rule and force elected officials to uphold the Constitution(which they so clearly have not). Only by achieving this can we all have a “say so” in building a new society that puts people first and not corporate profits.

Posted by Anubis | Report as abusive
 

I have remarked before that since a financial institution makes its money (profit) by lending at high interest the monies which depositors place with it, and usually pays those depositors a low interest rate (if not none), it should be made a rule that the rate the bank charges for the loan should not exceed twice the rate it pays its investors. This would encourage the depositors to pay into the bank, and would relieve a high burden on the borrowers. A governmental cap of say 5% for the rate on the loan (and this applies also to credit card charges) would benefit the bank, as a great many more people would be able to afford a mortgage, while more inflow of money from depositors would enable the bank to grant more mortgages. More business = greater profit.

There is at present an outrageously high disparity between most mortgage rates of interest and the rates paid to investors.

Posted by Dave Butcher | Report as abusive
 

For the most part the rest of the world doesnt really believe the USA will effectively address financial reform, no more than the USA will lead on climate change or nuclear arms reduction. Im sure Obama’s intent is genuine but the reality is that the USA is a two party system that in its function is less democratic than some third world dictatorships. Sure you get a vote but its hardly much of a choice and the money from corporations and lobby groups is all about buying policy from those they support. In short USA is a terribly sick and disfunctional society with a large portion of its population ignorant of the rest of the world. The average american is wearing the costs of corporate greed, when will they wake up ?

Posted by David | Report as abusive
 

Banks will always win when they make an ‘interest turn’ on money they borrow from e.g. federal reserve banks.

Banks will always be at an advantage if internal treasury inflows are ‘over directed’ to treasury deal making/speculation.

I don’t mind paying fees, albeit transactional (retail & card & corporate), merchant or investment banking and insurance.

Posted by Casper Lab | Report as abusive
 

It’s not wrong to compare the evils of banksters with the dictator Saddam Hussein. Hussein was on speaking terms with Don Rumsfeld while banksters put one of their own– Hank Paulson– in the WH cabinet. Tyranny is tyranny no matter whether it has an Arab face or a caucasian face. When will the American people rise up to overthrow their oppressors?

As Thomas Jefferson said, “Resistance to tyranny is obedience to God.”

Posted by Anton Chigur | Report as abusive
 
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