Mr King shouts a warning – we should listen


by David Malone

In an interview with the Telegraph, Mervyn King, the Governor of the Bank of England, said:

“… the institutions bailed out were those at the heart of the crisis. Hedge funds were allowed to fail, 3000 of them have gone, but banks weren’t.”  Could there be a repeat?  “Yes! The problem is still there. The ‘search for yield’ goes on. Imbalances are beginning to grow again.”

Mervyn King never raises his voice.  But in this little quote he is shouting.  And we need to listen because the bankers are not going to.

You see “the search for yield” is a euphemism for seeking out risky bets, using other people’s money to make them and not worrying because you know the creepy government people will force those scabby voter people to bail you out if the ball lands on black, not red.

Yield comes from risk.  More yield means more risk.  Lots more yield, lots more risk.  Killer yield, killer risk.  Only, in the new bail out world of too big to fail, the banker boys don’t worry because they get to keep the yield and we get killed.  

The “search for yield” means shunning sensible, low risk/low return, slow and boring investment in favour of speculation.  It means paying lip service to lending to the real economy and to ‘helping’ people, in favour of  making bets on which nations are going to default and in so doing helping them towards it, and it means speculating on the food people eat so that they can afford less of it.  It means taking the money we have borrowed and printed, and instead of using it for anything remotely socially beneficial, pumping it instead into emerging economies unable to protect themselves so as to create such a tempest of money, moving so fast that it sucks the moisture from the ground as it passes and leaves behind nothing but dust when it’s gone.

I am sure Angela Knight, Chief Executive of the British Bankers Associaton, would have an uncomplimentary thing or two to say about that description, but that’s the recovery I have been watching over the last two years.  And maybe, just maybe, Mr King has begun to see a little of what I have seen.  But as soon as the Head of the Bank of England says “the search for yield” is growing again, that “too big to fail” has not been addressed  and that “imbalances are beginning to grow again”, the ink has hardly dried before the banking lobby has dispatched their mouth piece, Ms Knight, on to the Today programme and to every newspaper, to say she didn’t recognise in Mr King’s comments the banking industry as it is now.  It is, she declares, a “responsible industry” and “it has reformed radically”.

Now I don’t want to say that Ms Knight is stupid, I have never met her.  Perhaps systemically ignorant might be better.  For example, in a Guardian article from 31st December 2009, called “Let bankers do their job” she wrote,

“Siren voices are calling for the break-up of the banks on the grounds that they are too big, too risky, or both.  Yet worldwide, big banks survived the crisis best with many more smaller, simpler banks – including the mutuals – failing.”

Perhaps she failed to notice that the reason the big banks survived was because they were bailed out to the tune of hundreds of billions of dollars, euros and pounds while the little ones weren’t.  Or did the bankers who pay her salary not mention that to her?

In the same article she goes on to describe our banking system as, “a banking model which has served us well.”  So well, in fact, that our marvellous banking system, despite £1.4trillion in public support (the Government’s own figures for what the bail outs have cost us so far) in loans, direct investment, buying their worthless debts and insuring the ones too worthless and toxic to buy, oh – and watching as they paid the bankers who created the mess, huge bonuses despite making more losses – so well, that despite all this the banks have said that it is too early to withdraw the support and to do so would risk their collapse.  But of course not withdrawing the support is why we now have a public borrowing crisis which the self same bankers now advise we solve by cutting all non-essential services to the lesser classes of people who frankly are not really needed any more.

And Ms Knight, having told us, with all the authority invested in her by her clients and paymasters, and on the basis of her total impartiality and obviously far greater knowledge and understanding than the Governor of the Bank of England, that the banking system, “has served us well”, went on to say that the industry has got even better, “We are all more careful now. Products are simpler and more transparent.”

Isn’t that nice! Isn’t that just too creamily reassuring and don’t you feel silly for having worried your little heads.  Gosh, I am glad Ms Knight is on the job to give us this doubleplusgood news.

Simpler and more transparent! Is that what she calls the huge bets the banks are making on interest rates, on currencies and commodities?  But wait, there’s even more, not only are they great already but they are getting even better.

“Next steps also must address the risk culture within the industry.  Those who contributed to the problems have gone, credit controls are changing and assessing risk is now a much more formalised process.”

You see, they just knew straight away who the ‘bad apples’ and rogue traders were.  As soon as they realised a few odd mistakes had been made, they just knew who the silly billies were and out they went.  Yes indeed. Ms Knight might have taken them in hand herself.

I know a couple of risk assessment managers from major banks and they haven’t told me that much has changed at all.  The fact is, the banks are using the same risk assessment methods now as then.  Across the industry the same people are doing the assessments using the same models based on the same assumptions.  Long term funding is still swapped for short term funding.  Interest rate risk is still swapped away for market risk.

The same rating agencies are using the same methods to rate the same assets, bonds, debts, securities, derivatives and CDOs that they got so completely and utterly wrong before.  The same ratings agencies are still getting paid for the same ‘expert’ ratings by the same banks who paid them off, sorry paid them, before.  The same rating agencies are still claiming that their ratings should be trusted and quoted while simultaneously maintaining that their ratings are not guides of worth but are “just their opinion”.  Excuse me?

They take money from the banks, to rate the securities as AAA and then when thousand of those securities they gave AAA ratings to implode into insolvency within a year of getting their AAA rating, the agencies who profited from helping to create the mess, say it was just ‘an opinion’?  My ‘opinion’ is that they are sacks of s***.  Just my opinion, of course.  However, that is the phrase used by some of the banks to describe securities that the ratings agencies did such a wonderful job rating, just before they sold them to customers as AAA rated.  So maybe I’m on to something.

I don’t know what planet Ms Knight gets up in, but its not the same one as me.  In my reality the same people who were paid hundreds of millions during the years when they created this mess are still running them today.  And the exact same people who worked for them and could have stood up and blown the whistle but didn’t are also still there.  Those top people have made sure the banks have paid off and headed off almost all effective change.

There has been no change in the fundamental ideological basis of modern finance, its worship of greed, its acceptance of, or total inability to stop fraud and its assessment of risk.  The same broad faith that ‘the market will provide’ still holds sway and has been re-enforced by the guarantee that whenever the market doesn’t or can’t provide, “don’t-worry-your-bonus-about-it” – the tax payer will be forced at gun point to provide, in the event of any emergency.

So carry on searching for yield and wheel out Angela if anyone, even the Governor of the Bank of England has the audacity to think they have the right to question those doing God’s own work.


David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here: