BANKING Part 2 of 3: Unaccountability and Deregulation

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by Andrew H. McMorrin (Drew1314) – A retired banker

THEY WIN – WE LOSE!
THEY LOSE – WE LOSE!
THEY WIN AGAIN ……… WE LOSE AGAIN!!!

WHY?

PART TWO – UNACCOUNTABILITY AND DE-REGULATION

As far back as the early to mid 1970’s, the unaccountability and de-regulation started, and, in my opinion, somewhere therein, lies the start of the slippery slope.

By the mid-70’s I was on the ladder, so to speak, of promotion. Not for me “the brown nose” approach. Just hard work. The latter approach did not endear me to some “traditionalists” within the Bank. Yet, strangely, my mentor in my early years was the original bowler-hatted, stripey trousered, Bank Manager. He had been sent to the branch in Ayrshire in the late 1960’s to clear up the excesses and maniacal lending of his predecessor – (one of the aforementioned, Uncle Wull’s nephews). So much carnage was inflicted in a short space of time. I arrived at the branch a couple of months after him and although we were opposites – he the city gent – me the country hick, we struck up a respect for one another which lasted many years, until he died in the early 1990’s. He was determined that the skills he learned throughout the country and in London should be passed on not just to me, to others who wanted to learn. He became my mentor.

The first couple of years saw many bankruptcies and liquidations – very unpleasant, yet he always positioned himself on the side of the customer, until all avenues had been explored. This was a very sobering time for all at the branch and even more so for those customers affected by the bankruptcies. Strangely enough that was following a period of a Westminster Labour government led by Harold Wilson.

The Tories brought in and ditched several important Acts in the 1970’s. Examples – “The Banking and Financial Dealings Act 1971” . The “1947 Exchange Control Act” gradually disappeared over the decade. Amongst the former’s many so-called attributes was allowing the de-mutualisation of Building Societies. It was enhanced over the years and allowed a “free market place” for Banks to start lending mortgages and for Building Societies to allow customers to have cheque books. No bad thing one might think, alas there were pros and cons, although many did not kick in for a few years:-

Pros:

  • The large Joint Stock Banks suddenly had competition in the market place. No longer could they, as a matter of course, just charge people for having a cheque account, interest had to be offered.
  • The Building Societies had competition for mortgages and longer term bonds.
  • The ordinary man had choice and should no longer be afraid of challenging his Bank manager and intimating that he – the Banker – could go forth and multiply. No bad thing.

Cons:

  • The Banks became “inventive” at how to charge, where to charge and when to charge. Paying money into a business account for example became chargeable, as did getting coin change in bulk for business customers.
  • The Banks could give mortgages and be “inventive and more worryingly, creative” in which area they loaned money.
  • The Building Societies too became “inventive and creative” and personal customers of the Banks, no longer could see the point of visiting two separate establishments, a Bank then their Building Society.

Remember this was approaching the height of the “Thatcher era” when social housing stock (council houses) were being sold off at an alarming rate. An admirable ideal, when the house prices were low and affordable. In my opinion, there should have been reinvestment in the replacement of social housing. As it was, it only helped fuel the house price bubble.

Now all the above means little in the scheme of things and there are many other pros and cons I could have highlighted. However, two things, above all made this social project dubious:-

1) THE LACK OF EXPERIENCE IN BANKS ON BUILDING SOCIETY PRACTICES.

2) THE LACK OF EXPERIENCE IN BUILDING SOCIETIES ON BANKING PRACTICES.

It took years for the chickens to come home to roost. During the early 1980s and 90s again the Tories started to rebuild the economy on foundations of sand. The cyclical “boom and bust” was in the boom cycle, in the mid 1990’s. Labour again took over an economy on the rise “Cool Britannia” was the in thing. De-regulate farther and faster was the new chancellor’s mantra. The New Labour project was really nothing to do with the working man, or the middle classes. It was an ego trip for “pet projects” – the Millennium Dome, Bank of England Independence, European Union. To fund all these came the stealth taxes from Chancellor Brown and in November 2002 he made arguably the most bizarre decision of his tenure – he sold the gold.

Alas this, coupled to other events, took attention away from successive years of squandering even more revenue in the shape of “The Black Gold” by both Westminster parties – Scotland’s Gold ……….. OIL!!

Unfortunately, and perhaps more importantly for the future, the “Tri-partite” (The Treasury, The Bank of England and The Financial Services Authority) took their eyes off the Banks who were becoming even more inventive and creative on how to coin in the cash. Futures, buying and selling commodities like copper or coffee, were old hat. Anyway only the likes of a freak weather event in Columbia could lead to a worthwhile profit for the Investment Bankers in coffee futures. So instead they started to bundle up piles of mortgages – say 500 at an average of say £50,000 plus interest say worth £100 million. Trouble is there were tens of thousands of these “packages”, some fine, however most of them with “dodgy” mortgages contained therein and there was no way of finding out what was where. This WAS “loads o’ money” time. It was Investment Banker time – essentially gambling with, not their money, but never-never dosh. Even worse, it was the hard working and middle classes’ cash they were playing with.

Signs were there: How could The Royal Bank of Scotland sponsor everything from Formula 1 through Wimbledon, to the American Open (plus many other events and individuals). How could they keep buying up Banks, everywhere and anywhere. The straw that broke the back of R.B.S. was in my opinion, the purchase of A.B.N. Amro – the Dutch Bank. How that got past the regulators, beggars belief. Other exposures to the sub-prime market exacerbated the problem

Elsewhere, The Bank of Scotland had thrived for three hundred years, with just a few small hiccups, never anything that would threaten it’s existence, then along came the men in grey suits and so the merging of the Halifax Building Society created H.B.O.S.Ltd. A hybrid monster. It was never a merging – it was a takeover by the Halifax. This as I have stated earlier, meant suddenly there were staff who new little about good Banking practice and staff who knew little about good Building Society practice who were interchangeable in the Branches – an extremely dangerous scenario.

So it proved as inappropriate lending across the board became the norm – no thought of the borrowers when the chickens came home to roost, and the devastation caused to families. Then just to add to the total race to lend, they started giving staff commission for mortgage lending. Now, as far as I was concerned, it was just a matter of time before the ba’ burst.

I had been retired since 1973 – (dicky-ticker) – however I kept friendly with a lot of staff, some of whom had trained under me, most of them becoming slowly disillusioned – some leaving. The Bank of Scotland also got tied up in the sub-prime market and although the sub-prime market was mainly in America there were many other countries tied to that particular market.

Now we come to the first hint of “things no being richt in the at the top o’ the brae”.

Northern Rock, a true basket case, which had been a fairly successful North West English Mutual Building Society and the Bradford & Bingley, a once highly respected player in the Building Society circuit – both crashed (1).

All the time the so-called “tri-partite” were supposed to be monitoring all of the above and more. Where was the Head of the Financial Services Authority, Hector Sants, when the former went “belly-up” – he was asleep at the helm. The Governor of the Bank of England, Mervyn King was marginalised and the third player in the tripartite, The Treasury under the control of Chancellor Gordon Brown, was more interested in another job.

Not since the early 1860’s had there been a run on the Banks on such a scale (Overend, Gurney & Co – actually a discounting house) why? The Banks had reduced liquidity ratios – ring a bell? The great buzz words at the time of the start of the modern financial crisis were “stress testing”. The Guardian newspaper even referred to such tests as “War Games” on the 30th May, 2009. Trouble was, no-one was minding the books, as in the aforesaid [inspectors (auditors)] mentioned in part one of this lengthy lecture. Yet again it was a Labour government which presided over the shambles.

Oh there was more, much, much, more. I had the rather dubious privilege of watching, first hand, the Money Markets (futures, derivatives, currency etc. etc.) in full flow and that was many, many moons ago. There were checks and balances back then – an essential to a sound fiscal system. I watched for example as soybean futures prices went through the roof (2). It was legalised gambling with customers cash, although I did not see it back then. We cannot live without the Money Markets – oil and green power for example. We need to re-establish a manufacturing base. However all this requires proper oversight. Not by quangos made up of MPs or MSPs , pals and family, whose only qualification is that they know how to fill in an expenses form.

Properly qualified (Traditional University and ‘University of Life’).

All too often I see our young countrymen/women vilified or ridiculed whereas I see potential. When I coached Rugby at under 18/19 level, it never ceased to intrigue me the abilities, inventiveness and creativity that many possessed. Most of them were picked, not through birthright or Private School, but through ability. Although I bow my hat to some of Scotland’s private learning institutions who have provided us with much talent, both in academia, medicine, finance and Rugby, many came from less privileged backgrounds. That talent lies untapped in many of our young Scots, who by dint of their birthright, do not have the opportunity to develop to their full potential.

With the powers that economic independence would offer us, jobs would be created, we can reduce the financial risks which comes from the whims of Westminster, City of London, Brussels and World Markets. It must though be with proper regulation, not stifling, as was the case in the draconian regimes of the 1960’s and before. We could decide to use a shared currency however just look at the Eurozone crisis of the “P.I.G.S.” ( An acronym for – Portugal, Ireland, Greece and Spain).

It is my belief that there are more Lehman Brothers, more Bernie Madoffs, more H.B.O.S Ltd type crashes to come and who will finish the main player – China – not cold wars, not poppy wars (1858 recognise the era – yep, as above ). No correlation – you decide. Now and in for the foreseeable future it will be currency wars. China already holds a huge amount of the U.S.A.’s national debt paper (and many other nations I.O.U.’s).

All doom and gloom. No, Scotland, has always had the propensity to bounce back. Inventiveness, diversity, discovery etc. are ingrained in our D.N.A. as it is in those who chose to live and embrace our country. So who failed in all this, yes the bankers, first and foremost, however the Tories threw the ball up in the air in the mid 1990’s then labour took control of the ball and positively run with it, as fast as they could go. No, I repeat. No referee’s whistle could divert our prudent Chancellor, even slow him down. “No more boom and bust” yeah right. The learned Adam Smith, a great Scottish economist, recognised the economic cycle, yet proposed it could be ironed out. Not such large booms and not such large busts.

Part 3 tomorrow: So Where Next?

1. From demutualisation to meltdown: a tale of two wannabe banks

http://www.emeraldinsight.com/journals.htm?articleid=1786505&show=abstract

2. Commodity fluctuations.

http://www.ers.usda.gov/AmberWaves/March09/Features/AgCommodityPrices.htm

I composed this long essay before the Irish bail-out.