The great banking error

8 September 2009

When Yellowhammer, a trendy advertising agency famous for its “Heroin screws you up” public health campaign, won the Barclays’ account back in the 1980s, the team assigned to the business had a banner across its open plan office bearing a pithy message, “banking makes you blind”.

Obviously applying that message to regulation or politics or even journalism wouldn’t have the same resonance but I’m beginning to wonder if those who are too hands on in those professions are suffering from a similar problem.

The focus that last week’s G20 meeting gave to curtailing fat cat bonuses suggests that the politicians, as well as the regulators, certainly can’t see the wood for the trees, and as for the media, well at 9.00pm on Wednesday BBC 2 is offering The Last Days of Lehman Brothers – a fictionalised account of the fall of the investment bank.

Then, on the following night, also on BBC2, we have The Love of Money.

This is an hour-long documentary also on the last days of Lehman Brothers with words of wisdom from Gordon Brown and Alistair Darling, but not Hank Paulson, the US Treasury secretary who misunderstood the pivotal role that Lehmans was playing in the global market, and let the bank go with such catastrophic consequence to the international banking system and economies around the world.

It will be interesting to see how far the docudrama and documentary can go in exploring what might have been different if Darling had chosen to work with Barclays to turn Lehman Brothers around, instead of throwing it to Paulson and the dogs?

It’ll also be interesting to see which programme, faction or fiction, will get closer to the truth of what actually happened, though benchmarking truth these days is becoming too tough to call.

But like the finance ministers who attended the G20 meeting, the programmes will no doubt be putting a lot of the problems down to greed and fast buck bonuses even though the big cats at both Lehmans and Bear Stearns were mostly rewarded in long-term stock options.

And when we look at the UK big time losers, such as Northern Rock, Bradford & Bingley, and Alliance & Leicester among the former building societies, and then among the mutuals themselves, Cheshire, Derbyshire and Dunfermline, were they tempted into the dark side of the lending universe by the prospect of fast returns and even faster cars?

What happened with Freddie Goodwin at Royal Bank of Scotland, and the fate of HBOS, particularly with its commercial lending, favours the moralist’s argument and many will raise their eyebrows at Northern Rock being included in my list of the inept but innocent.

However, we shouldn’t overlook an undisputable fact of life that under a Basle ll waiver granted by the Financial Services Authority in early 2007 Northern Rock was allowed to radically reduce its capital at a time when it was recklessly increasing it exposure to the mortgage market and what was true for the Rock was true for a lot of financial institutions at that time.

The great banking error is to assume that the global crisis that we’ve just experienced can be put down to human greed rather than regulatory failure in which the Basle II regime played a not insignificant part, along with the political ambition of governments eager to extend home ownership to people, who without the provision of low-cost mortgages delivered by the greedy bankers, would have been forever excluded from the land of milk and honey.