Opinion

The Great Debate

Two cheers for the walking wounded

May 6, 2009

ws2– Mark Hannam is a guest columnist, the views expressed are his own. He formerly worked at the Bank of England and Barclays. He is currently chairman of Fair Finance, a microfinance company –

Some banks have come out of the financial crisis in better shape than others. We should encourage them rather than lump them together with the failures.

Public anger at the recent failings of many of our leading banks, while justified, is not a sound basis for future policy. The temptation facing policy makers — that of failing to distinguish between better capitalized, better managed banks and under-capitalized, poorly managed banks — should be avoided.

The period leading up to the financial crisis was characterized by an insufficient differentiation of risk in the financial markets. Across many asset classes risk premia were compressed to such an extent that the difference in price between low-risk and high-risk assets was insufficiently wide.

Prices are signals and in the past few years they have signaled incorrectly.

Public policy that treats all banks as if they were the same perpetuates the problem of erroneous signaling: JP Morgan does not have the same problems as Citibank; Barclays’ prospects are not identical to those of RBS.

The stress tests in the U.S. — however crude and dubious in methodology — are likely to demonstrate this. We can and should distinguish between those banks that benefit from general government support for the financial system and those that require specific government intervention to remain solvent.

Last autumn, when Lehman Brothers collapsed, there were legitimate concerns that the entire financial system might disintegrate, causing sustained and substantial damage to the global economy. At that moment blanket government guarantees covering all market participants were welcome because they were necessary. That moment has now passed.

Today’s problem is not contagion, but the shortage of beds available for restorative surgery. The public purse isn’t bottomless. We cannot be sure there will be no further fatalities but we do know which banks are on the critical list and which are not.

It makes sense to clear the walking wounded out of the hospital, even though they are not yet fully recovered.

We should welcome Goldman Sachs’ and JP Morgan’s desire to pay back money to the TARP scheme, and Barclays’ willingness to sell assets to improve its capital position without taking additional government funding.

These banks have some way to go before they make a complete recovery, but at least they are making progress.

Those banks that have survived the past two years with less damage than their peer group are those that are cleverer or luckier than the average. They should be allowed to take advantage of the opportunities that the economic situation offers. They are our best hope for a return to normal activity in the financial markets, which in turn will initiate the slow process of economic recovery.

The news that some banks were able to make substantial profits in the first quarter has provoked some predictable venting of spleens: Goldman Sachs dares to be successful again!

Last year’s schadenfreude has metamorphosed into this year’s ressentiment. Whether bankers are losing vast sums of money or making vast sums of money, there will always be people who love to hate them. To indulge such hatred, at the cost of a longer and deeper economic recession, is pure adolescent posturing.

The events of the past two years have demonstrated beyond doubt that all banks depend upon governments (and therefore taxpayers) as their ultimate guarantors. No bank can avoid the consequences of systemic risk so all banks should pay for protection against them.

In the future these premia are likely to be higher than in the past and should be calculated according to the level of risk posed to the public purse.

Increased revenue from bank licensing should be invested in the reform financial regulatory system, which has demonstrated itself to be inadequate for its task. There are plenty of failed banks still to sort out and the process of bank supervision requires substantial redesign.

We need better quality regulators; but we will probably end up just with a bigger quantity of them. One lesson from the financial crisis that governments appear unwilling to learn is that size gives no indication of ability.

The stronger banks want to avoid the full embrace of the state. They appear confident that they can survive better without it. Some of them will be profitable this year. This is one of the few pieces of good news to come out of the financial markets of late.

As the Romans used to say, pecunia non olet: money does not smell. So then, two cheers for the walking wounded!

Comments
9 comments so far | RSS Comments RSS

I think that the challenge will be to keep the banking industry from going back to its old ways of not checking out investments, and relying on past history(Good old boy mentality) in order to maximize profits. In order to get stability into the banking system the government must demand that the banks have a long term business plan, reachable goals, and also remove pressure from Wall Street on maximizing short term profits. Banks would also be required to improve due dilligence on investments before purchase, slow down loan approvals, and spread the customer base for investments. We can ill afford another wild ride down the slippery slope of maximizing short term profits.

Posted by f belz | Report as abusive
 

I thought the “walking wounded” had shot themselves in the foot. So why should we cheer their recovery? The damage to American families is clearly far worse and wider reaching than any reports on the economic health of the nation are indicating. Yet we bail out banks but not families. I could puke! Where is the recovery?

There are no masters of the universe. Those who considered themselves as such should hang their head in shame. Unregulated free markets do not work and probably never have. That is because wealthy capitalists are free to bribe politicians in order to establish and protect their monopolies and accompanying privileges.

Posted by Anubis | Report as abusive
 

Anubis,
How can you possibly feel that a couple of years of financial turmoil justify the sweeping statement “unregulated free markets do not work”. You appear to be literate but you seem to ignore the incredible progress made at a global level over at least the last 50 years. Wealth creation and development are always at the front end of finding new ways to expand the economy. This inevitably leads to some unregulated products and markets but this is a natural progression. In the event that this dimension of the economic expansion is proved to be nonviable it is then normal to introduce regulation. However to believe that regulation should precede free market expansion is nonsensical. Would you vote to regulate mobile phone, computer, aeronautical or health developments. It is normal to push the boundaries and then take a step back and consider whether or not it is truly beneficial. I understand that some people have become extremely wealthy over the latest economic bull market and that the current climate has hurt families, employees and companies. However to question the process on which the economy grows shows a lack of intelligence. We would not enjoy the privileges and leisurely lifestyles we enjoy today were it not for economic entrepreneurship and risk taking. We rise together and fall together and if you are working hard and taking risks you rise higher and fall harder across all spectrum’s of the economy. Take control of your own circumstances and stop complaining about generic grievances of the wider world.

Posted by Ian | Report as abusive
 

Ian,

Anubis is right. In an unregulated free market, the rich get richer and the poor get poorer. Power and money in the hands of a greedy few always has, always does, and always will lead to corruption. Maybe you consider such a market to be “working”, but I don’t.

Posted by Bill | Report as abusive
 

Ian you are correct. The grievances are however not generic. If 50 years of progress is 30,000 children dying daily from a lack of potable water in India and Africa, or nations that can no longer fish off their coasts because of fishery collapse due to climate change and poaching by western powers then please forgive my concern for the wider world.

The issue of intelligence is moot. The issues of accurate and complete information is not. Glacial ice is in retreat causing massive spring flooding and low summer water tables. Lakes Victoria, Superior, Huron, Michigan, Erie and Ontario are all dropping. Lake Chad once the 6th Largest fresh water lake in the world has dried up. Lake Lanier and Meade are no longer able to provide the water for which they were constructed for. The cities and farms that depended upon these man made lakes are no longer viable.

Illiteracy is a formidable adversary. It is clear that you have not read the works of Joseph Stiglitz or Paul Krugman. I suggest you do. Even the President has humbled himself and invited these men to the White House for dinner. I presume to in order to seek their counsel. Clearly Summers and Geitner have no clue as what to do next. Perhaps this is because they simply spent their careers enriching themselves on the payrolls of Wall Street.

Clearly regulated economies are far more stable than legislated monopolies under the guise of free market capitalism. The U.S. government is as as responsible as any corporate criminals. Congress repealed common sense regulations put in place subsequent to and in response to the Great Depression. President Nixon canceled Bretton Woods. These actions lead to the greatest transfer of wealth from the working and middle class to the upper 10% of Americans in the history of this nation. Similarly the “third world” nations saw the gains they had made since WWII wither away.

I am glad you have a life of leisure Ian. Perhaps your income bracket is the upper 10%.

Posted by Anubis | Report as abusive
 

By the way Ian, I sincerely hope you are right. I hope there is only a couple of years of economic turmoil. Until the world economy improves it is doubtful that nations will find the political will to move forward on sustainable resource use, energy consumption and hot house gas emissions. Clearly the free market has shown no capacity to move forward on any of these issues with real impact.

Posted by Anubis | Report as abusive
 

Walking wounded or walking zombies is the question. Take the bank with the best result in the recentjoke of a stress test. Apply standardaccoutng principals which applied before the crises, then file for chapter 11.

Posted by gd | Report as abusive
 

Tell it gd.

Posted by Anubis | Report as abusive
 

Ian, one should never consider technological advancement to be the same as progress. Progress has to do with human development. Technology, not so much. In human terms there has been little progress at all. We still kill each other. We cause each other suffering. And will still take advantage of each other when we know we hold an edge. This is low animal behavior conducted from office buildings while wearing suits. A national resource like money, should reside in national hands. The hands of the people. Not groups, not organizations,foundations, corporations, or markets. Our money should be in our hands. Until each citizen truly owns a piece of the American GDP, we will never get any closer to being free.

 

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