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Mervyn King
It's OK for banks to play roulette – but not with our savings
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Lord Turner should have split investment – or 'casino' banking – from deposit-taking, says Jeff Randall

How difficult is the business of commercial banking? Not very, according to George S Moore, a former chairman of Citibank. In his autobiography, The Banker's Life, he wrote: "If you're not actually stupid or dishonest, it's hard not to make money in banking."

Mr Moore's observation, penned more than 20 years ago, leads us to infer that, in recent times, some of the world's most powerful financial institutions have been managed by executives who combine the intellect of a glowworm with the integrity of Captain Jack Sparrow.

To say that money has been "lost" does not reflect accurately what has occurred. "Lost" suggests a possibility, however remote, that it may be found. Not so. The money has been obliterated. Like Monty Python's parrot, it is no more, it has ceased to be, it has joined the bleedin' choir invisible.

There was a time when £25 billion was the stockmarket value of an average British bank. Today, such a sum is more likely to represent its annual deficit.

Between them, the Royal Bank of Scotland and Lloyds Banking Group have dumped £585 billion of "assets" (dodgy loans and devalued collateral) in a box marked "Toxic Waste" – and we, the taxpayers, are insuring them.

For context, that's £10 billion more than Alistair Darling said he would raise from taxes, rates, excise duties and National Insurance in his 2008 Budget. The scale of the banks' misjudgment of risk defies comprehension. So, too, does the amount of rope extended to them by dozy regulators.

Against this backdrop, the Financial Services Authority and the Bank of England are scrambling to reassert their grip on a system that nurtured a conspiracy between reckless lenders and irresponsible borrowers. Between 1997 and 2007, house prices rose on average by 155 per cent, while wages increased by only 18 per cent. Yet right up until Northern Rock began to crumble, aspirational home-buyers were being suckered into the property market with 125 per cent mortgages and loans of six times salary.

When the debt bomb finally exploded, both the FSA and the Bank suffered massive reputational damage. This week, repair work began in earnest. On Tuesday, the Bank's governor, Mervyn King, set out his vision for recovery in a speech to the Worshipful Company of International Bankers (I promise you, I'm not making it up). The next day, Lord Turner, the FSA's chairman, unveiled his response to the banking crisis in a 122-page report.

Despite carefully scripted comments of mutual respect, it's clear that these organs of rectitude are battling for supremacy in the new order. In terms of setting out past failures and acknowledging its role in them, the FSA's mea culpa has been more fulsome than the grudging acceptance of shortcomings by the Bank. Both, however, seem like humble flagellants compared with Downing Street's shameless campaign of self-exculpation.

As a matter of convention, neither the FSA nor the Bank openly criticises the Government. But for anyone paying attention, the pointers are unmissable. Lord Turner, in particular, delivered a damning verdict on the tripartite system of banking regulation, established by the Prime Minister, that fell apart spectacularly in the credit crunch's first tremor.

As No 10 tries to rewrite history, let's not forget that at the 2007 Mansion House dinner, Gordon Brown boasted that London's success was based on "light-touch regulation, a competitive tax environment and flexibility".

He told an audience of Square Mile grandees: "In 2003, just at the time of a previous Mansion House speech, the Worldcom accounting scandal broke. And I will be honest with you. Many who advised me, including not a few newspapers, favoured a regulatory crackdown. I believe we were right not to go down that road… we were right to build upon our light-touch system."

When asked in the press conference if his report consigns Mr Brown's light-touch approach to the dustbin of history, Lord Turner did not flinch: "Yes." Among the black ties of the worshipful company, Mr King was more expansive: "To rely solely on the discretionary judgment of individual bankers and regulators is asking too much of human capabilities." We need regulation that joins the dots between assessing systemic risk and supervising individual banks, the governor said – "The present system has not delivered that."

The FSA's proposed rules, quite rightly, will require banks to hold more capital to support risky activity. This will blunt their capacity for bumper profits in boom times, but should make them more able to resist meltdown when the economy turns sour. It's hard to quibble with that.

In addition, Lord Turner proposes dragging the activities of hedge funds and other non-banking finance houses into the FSA's regulatory net: "If an activity looks like a bank and sounds like a bank, we regulate it like a bank." Another sensible suggestion.

But that's about it. The rest of the report is a conflation of missed opportunities and woolly thinking. For instance, the FSA wants to examine not just bankers' probity, but also their technical competence. How will that be done? Where will be the bar of acceptability? An economics degree? Basic banking qualifications? What about a GCSE in Adding Up?

As for the FSA's support for a European "super-regulator", don't get me started.

Lord Turner's most glaring omission is his decision not to impose a clear regulatory distinction between conventional deposit-taking institutions and the casino division of financial services, also known as investment banking. These are the chaps who, when times are good, enjoy treating other people's money as chips on a roulette table.

Nothing wrong with that, as long as the cash they burn has not been left for safe-keeping by widows and orphans. But when depositors at boring Halifax discover that a testosterone-fuelled derivatives dealer in another part of the group has been punting on the wheel of unfathomable instruments, is it any wonder that faith in the system quickly fades?

The state was forced to bail out banks in part because their casino operations had run amok. Time, then, to cut adrift these bits of the banking business, and fulfil the prediction made by Michael Lewis, the bond trader-turned-author, that by the late 2080s the Wall Street phenomenon of big-shot investment bankers with "interior decorator" wives will give way to big-shot interior decorators with "investment banker" husbands.

If they are as clever as they claim, those still in the game will have no trouble in making vast profits and multi-million pound bonuses. In which case, good luck to them.

If, however, they lose their trousers when the ball pops in the wrong hole – tough. No rescues, no bail-outs. They're on their own. After all, only the stupid and dishonest fail to make money in banking.

by Jeff Randall

Source >  Telegraph | Mar 20

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