Enough is Enough. It's Time to Stop the Banker Bashing

Further to last week’s rant- and in the full knowledge that bonus season this year means banker bashing season in the media- let’s have a brief reminder of the real causes of the recent financial crisis.

Firstly, in defence of bankers, the whole community is being pilloried because a few individuals were greedy and reckless. Even then, those individuals were merely exploiting a system that was set up to enable them to do so. Most of the high earners were hard working individuals who had put everything into their careers, were often workaholics and were reaping the rewards that came with the huge profits the whole sector was making. Mo0st of them were not rewarded for failure, but for making their employers a massive amount of money. Within that system, if they were offered double or triple their package to move elsewhere, well...who would refuse such an offer from reputable companies?... chance would be a fine thing! Many bankers were totally uninvolved with CDO’s or similar structures, probably didn’t even know how they worked and many would have thought ABS was the braking system on thei car.

So what about the faults in the system itself- and let’s concentrate on the USA for the moment, since most of the major financial structures (and therefore, in this context, problems) originated there and were copied around the world when they were initially hugely successful.

The first problem came when Glass Stiegel was repealed and banks were allowed to enter a free for all in each other’s markets. For that you can’t even blame GW Bush, which is most people’s snap reaction, because that great idea was down to the Clinton administration. Unfortunately, they failed to realise that scrapping those controls meant other strong controls over market excess should have been put in place. Instead that became the first signal to put your foot down hard and accelerate into markets and risk new to you and that you did not fully understand.

Secondly it was decided that everybody in the USA had the right to own their own house, apparently whether or not they could afford it. That was the root of the Fannie Mae and Freddie Mac fiasco and also has its roots in the Clinton administration.

Then there was the stunning idea to reform the Basle accords governing bank capital in 2001. That is a little bit of political reform conveniently forgotten by every politician yelling foul at the banking sector. The US replaced it with their “recourse rule.” This meant that US Banks were required to keep only $2 in capital for every $100 invested in AAA or AA rated CDO’s or other secured assets issued by...wait for it... Fannie Mae or Freddie Mac- only a fifth of the capital required against corporate loans.

What does that tell you about the administration’s view of the risk attached to such instruments? And where would you, as a banker, start to invest much of your resource. The rating agencies and the regulators as good as told the banks that these were the safest investments outside government securities, that they wanted them to promote them and... By the way... the banks could make a lot of money putting the deals together as well.

At the time of the crash, no less than 93% of the US banks holdings of mortgage backed securities were issued by Fannie Mae or Freddie Mac or, if issued elsewhere, were AAA rated bonds. So the banks did what the capital structure and ratings told them was the safest, cheapest thing to do- and now it’s gone wrong they are carrying the can for the systemic failure of the ratings agencies and especially the regulators and politicians to realise the massive heap of potentially toxic waste they were encouraging the system to develop and invest in.

So this winter, stop wondering how the bankers get bonuses and start wondering how the ratings agencies have been allowed to survive in their current form, how many regulators kept their jobs and how some politicians managed to get re-elected

There is far more that could be said and the banks and bankers are not totally blameless, but enough is enough. Have a good one