Thursday 26 September 2013

Banking Scandals

‘The public have a sense that advantage has been taken of them, that bankers have received huge rewards, that some of those rewards have not been properly earned, and in some cases have been obtained through dishonesty, and that these huge rewards are excessive, bearing little or no relation to the work done.’

So says John Lanchester, quoting the Parliamentary Commission on Banking Standards in a very readable overview of the mind-boggling banking scandals of recent years.  He categorises them as follows:-

First,  'the biggest of them all, the grotesque toxic-asset and derivative spree which took the global financial system to the edge of the abyss.  ...  The crisis and its consequences are too big to count as a scandal: they’re more like a climate.'

Second, the 'old-fashioned' banking scandals:  'Traders take financial instruments created to control risk and use them to make huge bets; sometimes they do it with their bosses’ approval, sometimes without. That’s just how they roll. Every now and then one of these bets goes wrong on a huge scale. The banks always claim they have procedures in place to control the relevant processes and manage the risks involved, until it turns out that they don’t.'  

There have been two of these recently.  'These losses were caused by Kweku Adoboli, the UBS wunderkind who lost £1.4 billion in 2011, and Bruno Iksil, the ‘London Whale’ at JPMorgan Chase, who in 2012 lost an amount described by his boss Jamie Dimon as ‘a tempest in a teacup’, until it turned out to be $6.2 billion.'

Third, banks wildly over-extending themselves through reckless lending.  The classic case here is HBOS.  'This was a traditional bank failure pure and simple. It was a case of a bank pursuing traditional banking activities and pursuing them badly. ... In other words, the single biggest factor in the collapse of HBOS was simple incompetence. And let’s not forget what happened next: when HBOS was clearly about to go broke, it was taken over by Lloyds, with the encouragement of the government. Unfortunately the extent of the losses was so great they ended up bringing Lloyds down too, and the new combined bank was bailed out by the taxpayer a month after the takeover.'

Fourth, LIBOR manipulation.  ‘This dwarfs by orders of magnitude any financial scam in the history of the markets'.  The full scorecard isn't yet in plain sight as cases wind through courts around the world, but especially in the litigious USA.  Total compensation costs are expected to run into tens of billions.

Fifth, 'sexier forms of overt criminality such as money laundering and drug dealing.'  Standard Chartered and HSBC have both been fined hundreds of millions of dollars in the USA.

Sixth, the RBS back-end payment system implosion of 2012.  The UK taxpayer paid out billions to keep the cash machines open in 2008, then RBS managed to shut them down from sheer incompetence.  ‘Completion of new home purchases were delayed, others were stranded abroad, another was threatened with the discontinuation of their life support machine in a Mexican hospital, and one man was held in prison.’

Seventh, PPI mis-selling.  The costs of this scandal keep going up and the latest estimate is £16 billion.  Lanchester feels this is the worst of all, 'because it involves a more basic breach of what banking is supposed to be about: looking after other people’s money. That’s the first thing that is qualitatively different about PPI; the second is that the misdeeds happened not inside rogue units of these huge global institutions but at the centre of their retail operations. This was an industry-wide, systematic cheating of the banks’ own customers.'

It's well worth reading in full and quoting whenever anybody tries to convince you that a large financial sector is a good thing for an economy or a country.



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