Can you Bank on it?

The other night I appeared on BBC News 24 Television. I was asked my views on the current banking crisis. Before this year, some of us may have been forgiven for thinking ‘the crunch’ was a type of chocolate bar. Now we are sadly all too familiar with the phrase credit crunch.

Until recently Wall Street and the City of London were regarded as Masters of the Universe. We simply accepted that the system worked and that these high level financiers knew what they were doing. Over the last decade the banks made obscene profits. Now they are making equally obscene loses. The trail of disaster is clear… Bear Stearns, Fannie Mae, Freddie Mac, Merrill Lynch, Lehman Brothers. Those disasters dwarfed our Northern Rock, but more recent problems are even greater. AIG were the largest insurance organisation in the world and their tentacles spread all over the globe. They even sponsor the mighty Manchester United Football Club. The US and UK governments had a choice as to which financial companies to save from drowning. The choices were Buyout, Bailout, or Burnout (Bankruptcy). Fannie Mae, Freddie Mac, AIG and Northern Rock had to be saved because of their close proximity to the ordinary consumer and the housing market. Lehman Brothers were investment bankers and more disposable. Now HBOS is about to be taken over by LloydsTSB. This is in breach of the competition rules, but the government has waived the rules because HBOS, as the country’s largest mortgage lender, could not be allowed to go down.

I believe we are not yet out of the stormy weather. The heart of the problem is financial system itself. Banks and other financial institutions need a tighter regulatory system, stating what they can and cannot do. AIG was an insurance company that tried to be a bank, speculating outside its core expertise. The whole finance system needs to be simplified and made more transparent.

Exotic City practises like ‘blind trading’ and ‘backwardisation’ are examples of gobbledegook that the system hid behind. Over the last decade there has been a ‘casino’ culture where finance companies over-borrowed and then used borrowed money to invest in extremely dodgy products. They failed to employ the simple philosophy of Wilkins Micawber, in Dickens’ David Copperfield, “Don’t spend more than your income.”

This is a wake up call for National Governments and financial institutions. It is easier to avoid a storm than get out of it. It is not the fat cat directors of Lehman Brothers and Northern Rock who end up on skid row, but the ordinary folk who entrust hard earned money with them.

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