[Closed] Bankers: was it really their fault?

Obviously it wasn't ALL their fault. I can't remember anyone being forced to take credit that they couldn't pay back at gunpoint. A significant proportion of the blame has to be attributed to people who wanted to live beyond their means and to hell with the consequences.

However, the actions of the banks were negligent at best, malicious at worst. There was a genuine disregard for any kind of normal prudence when lending irresponsibly. They were negligent because they managed to convince themselves that they had segmented databases of credit profiles that allowed them to lend to more risky people because they probably spent a bit of money on them. Not many people asked the question "err, but what happens if a significant number of lendees start to default?"

But negligence was only part of it. A lot was hit and run tactics by opportunist crooks. They knew full well it wouldn't last, but kept pushing the limit in order to keep raking in the bonuses. This wasn't banking in the 'stern local bank manager who won't give you a loan without seeing you in person' mould. It wasn't acting in the interests of the people who actually deposited money with the banks, the people who should be looked after.

People who had reined themselves in whilst a lot of their peers were remortgaging their house to buy flash cars or go on holiday, now have been screwed over as their savings earn no interest. But they do have some peace of mind. A good job if you consider the risk of becoming unemployed on the resulting shit storm.

But none of this mattered if you were trousering six figure bonuses each year. You might conceivably end up doing a bit of time if the worst really came to it, but you'd still have all your lovely dosh.

The whole thing was a sort of perfect storm of material greed and those (also motivated by greed) who had the means to service this avarice with no consideration of what would happen in the long term.

I often think the best course of action would be to have taken one of the top five earning 'salesman' bankers out into the street outside Bank tube station, shot them in the back of the neck and left them there for a fortnight pour decourager les autres.

Make no mistake, this WILL happen again. People will say lessons have been learned. Then someone will break ranks and start lending irresponsibly again. The others will follow suit as they will say they cannot afford not to. The actual mechanics of it will be slightly different, but it will happen again in one form or another.

Never a borrower or lender be

Make no mistake, this WILL happen again. People will say lessons have been learned. Then someone will break ranks and start lending irresponsibly again.

Don't agree with most of your comment, but we could run to a hundred pages on that.

Your last line though is clearly wrong! Someone has already broken ranks. Due to massive demand from the 'faultless' general public, the Government has stepped in to lend to anyone who wants to borrow up to £600k without a track record or a deposit.

Edit - and the public are all loving it, but will be sure to blame the Government rather than themselves when it all goes wrong.

All sorts of people to blame. The credit agencies get surprisingly little flak, considering the key role they played. I don't really understand how this has come to be- their job was to appraise institutions and particularily CDOs, which they massively failed to do, why are there not law suits flying? At the very best they were incompetent but it seems more likely they were complicit.

Also agree that weak regulation was part of the problem- but while you can blame the police for not stopping crime, the criminal can't blame the police for not stopping them. The fact that regulators failed doesn't absolve the banks at all, it's 2 failures not a split of one.

That's not actually true, apart from anything else it is illegal under EU rules for governments to financially prop up companies unless they have special EU dispensation.

Farmers do sometimes get assistance for loss of livestock outside their control, but the whole business isn't propped up, which is what happened with the banks - they were failed businesses, not simply businesses in difficulty.

And I don't know what haulage companies and construction companies have been saved from bankruptcy by the government - care to elaborate ?

The banks received very special treatment, there's no doubt about that.

No idea in the UK, but the Spanish haulage companies certainly managed to get some concessions from the government when petrol prices went up a few years ago. Car dealers have got state aid, dressed up in part as an ecological measure, with incentives to private buyers trading in older models. Not sure about construction, though.

And it's not against EU law - exemptions are allowed, and AFAIK the law only covers international trade. Unsurprisingly (and as you point out) [url= http://ec.europa.eu/competition/state_aid/legislation/temporary.html ]the banks receive special treatment[/url].

I'm sure companies like Wonga etc are all totally responsible & nothing like 2008 will ever happen again, if only. The difference being they make enough profit to sustain the loss making side of the business.

no.

bankers get banks in trouble.

politicians get countries in trouble.

Governments want there to be as much money as possible loaned out as this maximises the amount of money moving around. Its not is the interest of government to have most people saving and working towards financial independence. There was no motivation to regulate the banks. Its similar to the failure of governments to raise the retirement ages slowly and consistently. Instead the cost of a retiring population has ramped up so much retirement ages are being jumped by big chunks and people find it a shock. Similarly banks become overstretched and when they failed they were too big to fail as they should have done.

was the hedge fund managers that caused the actual crash

because theyd bought and sold the american dodgy mortgage debts, chopping them up and repackaging them essentially just to try and multiply their value each time and multiply their own bonuses

when the mortgages looked like they were going bad the banks and investors asked the hedge fund brokers what the funds were actually worth

they had no idea because theyd created a system of smoke and mirrors

all of a sudden the banks got paranoid and wouldnt trust anyone else so lending stopped

plenty of people at fault; estate agents trying to bump up prices, self certifying mortgage borrowers and lenders, poor oversight & regulation from government, banks that lobbied for less and less regulation, banks that were addicted to risk and enourmous profits, banks and investors that didnt ask enough questions of the hedge fund managers and the hedge fund managers themselves, selling something they didnt understand

Government has stepped in to lend to anyone who wants to borrow up to £600k without a track record or a deposit.

This is stupid. I can't work out if this is being done just to gain votes or if the majority of the government actually believe this makes sense.

plenty of people at fault; estate agents trying to bump up prices, self certifying mortgage borrowers and lenders, poor oversight & regulation from government, banks that lobbied for less and less regulation, banks that were addicted to risk and enourmous profits, banks and investors that didnt ask enough questions of the hedge fund managers and the hedge fund managers themselves, selling something they didnt understand

Probably best comment so far on this thread.
You only missed joe public thinking all was OK because their house was "worth" double what it was five years ago, and there was nothing untoward with that, or anything troubling about their kids never being able to afford a home of their own without borrowing 10 their salary.

bankers get banks in trouble.

politicians get countries in trouble.

Not really the bankers fault [ though it was this time] as it is what capitalism does boom and bust ;it had to happen - you can pick a villain each time it happens but it will always keep happening

So the bankers were the dumb animals and the people were the clever owners in charge of the situation?

In a roundabout way, what I'm saying is this:

In the current system, bankers can't really be expected to behave any differently. As humans, we can be moral creatures of course, but the commercial environment creates the job and its requirements, and the best person to fulfil those will end up in it.

It'd be lovely if all the top bankers got together and said 'you know what, this isn't really cricket is it?' and started being much more sensible and less profitable, but I can't see it happening.

Kimbers: you're also forgetting about the large number of civil servants that signed up local government authorities etc to financial instruments they didn't understand and failed to get proper guidance on.

Government has stepped in to lend to anyone who wants to borrow up to £600k without a track record or a deposit.

Are you talking about the 'Help To Buy Scheme'? I've only had a cursory glance at it but don't you need a 5% deposit and to secure a mortgage on 75% (I think) of the value? And to secure a mortgage (especially now) will require credit checks etc.

So on the contrary, that's a 'track record' and a deposit.

Have I missed something?

5% is not much of a deposit and if you can secure a mortgage on 600k you should not get government help.

Disclosure at significant risk of massive abuse / flaming - I've been in "the city" for 30 years, seen a few cycles this was the biggest peak to trough crash so far.

My 2 pence

There was (and still is) far too much debt, there was a huge explosion in borrowing by governments, corporations (including banks) and individuals. A bit like musical chairs when the music stopped there was a problem but it was much bigger than anticipated by most (a select few did predict a big crises and made a lot of money from that).

The seeds for the crises where laid by the deregulation of banking, including in particular in the US where investment banks and retail banks where allowed to merge (having been broken apart after the 1929 crises)

Low interest rates post Twin Towers / 9-11 made it cheap to borrow

Lending and borrowing in the US went nuts, you could get a big loan with very few checks, people want to buy stuff today including that dream home rather than save so they want to borrow.

The UK didn't want to miss out so we did the same in particular the old Halifax (HBOS) went nuts with lending, Northern Rock etc too - basically the old building societies

Not to be left out Governments decided the borrow now, spend now, pay back never was a good way to win votes, this was particularly true of the weaker Euro group members.

When the music stopped, people couldn't pay, when people couldn't pay banks couldn't pay and when banks couldn't pay governments couldn't pay.

@kimbers - hedge funds where certainly involved but the crises would have occurred without them.

That nasty word "bonus" - the crises would have occurred with or without bonuses, politicians wanted power they don't get paid a bonus.

So I'd say in summary banks and the broader financial sector was certainly at the centre of the problem but they where ably supported by greedy individuals and naive governments

Junkyard - lazarus

so when the banks were in trouble we could have just let them fail and nothing at all would have happened to the economy

er, exactly, sort of.

IF the country's finances had been more or less ok, we could have taken the hit of letting a bank or 2 fail / bailing them out, with a bit less pain.

but instead, politicians had geared our nations finances so that we *needed* 3% growth every year, to cover the repayments for the money borrowed the previous year.

if i did this at home, by running up £4000 of credit card debt, necessitating a 3% pay-rise next year to cover the minimum payments (£50/month), my wife would be very upset,

if i did it again the next year, and the next, and the next, and etc. my wonderful wife would kill me to death. It's clearly an incredibly stupid way to run things, but this is what our politicians have done. Despite all the talk of 'recession' this / 'downturn' that, all we're really talking about is a lack of growth. permanently relying on growth/pay rises to pay off debt is bad financing.

back to my original point; it's popular to blame 'the bankers' for all our financial problems.

naughty bankers.

but there's a bigger picture, and we're all part of it - through our own behaviour, and the politicians we elect.

all of course imho, i'm only a lowly engineer, not an important economist.

Specifically to support @scotroutes comment above. Halifax (HBOS) head of mortgage lending thought it was all getting too risky in 2006 so he tightned the lending criteria. As HBOS lost market share he was fired. A new man was put in place who redoubled the daft lending efforts, HBOS where well known in the broker community for NEVER spot checking self certified loan applications. When the music stopped HBOS failed, its large dodgy mortgage book being the primary factor

Though, to add a little background, HBOS was in the process of frantically trying to make itself look big, to avoid getting bought over and bummed by some larger bank with equally dodgy business practices. Playing safe risk-wise wasn't necessarily safe business wise. Not helpful. But that's capitalism eh.

Three events in the 1990s; the dotcom boom, the Asian financial crisis and the rise of al Qaeda (aka the response to 911) were the causes of the credit bubble.

[quote=jambalaya ]Specifically to support @scotroutes comment above. Halifax (HBOS) head of mortgage lending thought it was all getting too risky in 2006 so he tightned the lending criteria. As HBOS lost market share he was fired. A new man was put in place who redoubled the daft lending efforts, HBOS where well known in the broker community for NEVER spot checking self certified loan applications. When the music stopped HBOS failed, its large dodgy mortgage book being the primary factor
One would almost think I was there.....

http://www.housepricecrash.co.uk/forum/index.php?showtopic=194151. Here is link to an interview with Alan Greenspan by Evan Davies BBC

Could go some way to answering your question

@scotroutes 8)

R
B
S

That is all.

It really is missing the point. No single human being should have the facility to take that amount of money from everyone. The 1% who hold all the profits have as much money as everyone else in the county. There's only a certain amount of money available and the richer they get individually the poorer the ENTIRE nation gets,they already have billions, for every extra pound they are still earning your lifestyles will have a lower standard. Don't cap banker earnings cap everyone's. No man should have a billion pounds especially if it means 1million more people should live in povery to do so.

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Also if you don't know I'll explain how bankers rip you off, remember also you are not getting anything from them, not oil, nothing. It's just numbers.
I'll dumb down the figures so it's easier to understand. A bank can lend 7 times what it actually has so take 1million, they can actually lend out 7 million that doesn't exist and make interest off that so they are already sucking all that money from the economy that they didn't even have to start with. They make huge profits which they then pocket. But say 3million couldn't afford to pay that back, the government then bail the bank out.....again out of OUR money and give it to them even though they never had that 3 million. So now they have 3 million plus the interest of 4million whilst starting with no more than 1 million! Is this not fraud? Even if the banks are regulated better and everyone were able to pay back their loans. They would still be making profit on money they didnt have to start with. The end result can only be economic failure as it is impossible to pay back all the debt because not enough money exists in the economy and it didn't exist to start with.
now stop voting.

Icke in 3...2...1...

In
Before
The
Icke
??

Banks don't lend money they haven't got - they borrow it themselves from other banks or investors at a lower interest rate than what they sell - usually the LIBOR rate (so there is another banking scandal) and is backed up by security - i.e. your house or business or whatever it is you're borrowing against. Banks collapse when the people they lend to start defaulting on their debt to them which means in turn they can't service the loans they've got and the security deposits against their loans is worth less than the debt they have (so like negative equity for the banks).

The problem was the banks were over extending their lending to the public, most of it bad debt, somehow selling that bad debt onto other banks (as if bad debt has value) and all that bad debt started circulating and building up in the worldwide banking system until ultimately it couldn't take any more, property prices collapsed and in turn banks started to collapse.

The government then had to step in to bale out collapsed banks and prevent other banks from collapsing before the banks started to raid our savings, pensions and our homes to repay their debt to their debtors.

The rest is history, and, from what I can tell, our future at some point cause I can't see what has actually fundamentally changed to prevent the same thing happening again.

This is a gross oversimplification, but you get the gist. So are bankers to blame? Yes and for the larger part, but not totally - they were just fulfilling demand from the general public. Governments are as well and to a certain extent alot of us as we're the bottom of the food chain feeding and creating this cycle of debt.

The biggest effect to the UK was the fact that under Gordon Brown, he had got our nation saddled in so much debt and the structural deficit was so poor that we were not able to weather the storm which has lead the the current austerity measures that are ultimately hurting us, and are probably necessary to continue for some time to come.

I'll dumb down the figures so it's easier to understand.

You're too nice.

Banks don't lend money they haven't got

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[i]Banks don't lend money they haven't got[/i]

I'm pretty sure that's precisely what they do. They lend money from investors to lend to other people who need money. The banks make sure they take risk with other people's money. Never their own.

As for the overall crash, I thought the LIBOR rate fixing was the main cause of it all? And that absolutely was 100% the fault of the bankers both by fixing it and failing to stop it happening.

If you want to look that close to the event you could argue that RBS (and others) went down because of a run on the bank. No bank holds enough cash for that. Libor freeze and the run on the banks was just the last act. The root causes went back to the 1990s.

bankers, politicians and the public

everybody wanted easy money and quick profits, the issue was bankers gambled with what wasn't theirs - down to lack of integrity and regulation(see politicians) and a total lack of accountability, politicians have the problem of not really wanting to tell people bad news as it can cause election issues, and again they're gambling with what isn't really theirs, and aren't properly accountable (*MPs in safe seats don't get voted out), the public - well the fundamental problem they had was it was theirs and they were accountable

I blame politicians the most, ultimately what controls behavior is the law (where they failed totally in terms of financial regulation/accountabilty) and they've been overspending for years - something that you or I would not be allowed to do.

For me banks are more a mirror of what is going on around them than the sole driver of events, especially as they are relatively low profitably businesses that rely on massive leverage to generate their returns. This magnifies the good and the bad. Currently the bad!

When I started my professional life, the overall level of debt in the UK economy was 220% of GDP. Twenty odd years later it was closing on 600%. This gorging on debt happened across all sectors of the economy - governments, corporates, banks and households. Everyone was feasting and boy what a great time to be a banker!

By borrowing, we all allowed ourselves to bring forward our consumption and delay paying for it. And didnt we all enjoy it!?! Economists were given Noble prizes for arguing why this doesn't matter. And Central Bankers went from being faceless beauracrats to global superstars earning millions on the lecture circuit. But at some point this gorging has to stop. The cycle has to be reversed. Payments have to be bought forward and consumption has to slow/be delayed. The future we and our children now face.

But towards the end of the gorge fest, we had a succession of crises where policy flaws became horribly exposed. What happened? More of the same. And so we come to the start of the current crisis. To correct previous errors central bankers flooded the world with liquidity at a time of artificially low interest rates. A double whammy and catastrophic error. Markets became grossly distorted and risk was mispriced globally. Then regulators introduce a system that made behaviour even worse.

So if you flood the economy and the banking system with money and you keep interest rates artificially low to correct for your past mistakes, and then tell bankers that it is half as risky to lend to some bloke with no money to buy a house rather than a big company with a strong balance sheet or lending to Greece is the same risk as lending to Germany, why are you surprised when banks do silly things deliberately or otherwise?

It happened in the past, it is happening now (mis pricing risk massively yet again) and will probably happen again in the future.

@samuri - banks are public companies owned by shareholders, banks have shareholders money and money they've borrowed (this includes money people deposit with them). When banks loose money its the shareholders money they loose first. Banks have lost a huge amount of money. It's misleading to say banks don't loose "their money" they aren't private companies so like all public companies their money comes from a variety of sources. Most senior level bank employees have many millions tied up in bank shares so some of the money they are loosing is their own.

@pitchpro others have commented on your argument so I won't add more to the "banks create money debate", however with regard to bailouts. Governments around the world allowed many institutions to fail and investors in banks (be they private or institutional like pension funds) lost a huge amount of money. The "bail outs" given by governments prevented a real catastrophy, most of this bail out money was loans which either have been or will be paid back or guarantees which where never used (and on which the uk government, ie taxpayers made a profit in the many billions).

The uk government encouraged Lloyds to bailout (buy) HBOS which was a terrible error for them that has cost Lloyds and it's shareholders many billions.

Bankers are just like you but they work in Finance, whatever they did is whatever most would do given the chance. Its the same reason Oil execs are happy to cause climate change and Food execs are happy to cause an obesity pandemic.

Shareholder return is all that matters, provide that, get well paid for a couple of years and get out.

banks have shareholders money and money they've borrowed (this includes money people deposit with them)

Secondly the money they lend out from depositors is still actually the depositor who could ask for it back at any time and they have generally not given the bank permission to lend it out - what is the MLR 10 % ish ie only 10 % of depositors could actually withdraw their money from the banks

Given this it seems reasonable to say its not the banks money they are lending out.

Most senior level bank employees

I tend to agree with THM we all banked on the fact boom and bust had ended and loans were always safe and the future certain. We assumed payments would always be met and growth would be unabated.
The problem is the money is not actually there currently and its just down to how confident you are that you will get the money back be it my mortgage payments or an other debt.
that is you are gambling on the future to have a happier now.
Sometimes, with say a mortgage it makes sense sometimes it does not

Bankers are just like you but they work in Finance, whatever they did is whatever most would do given the chance.

The shareholder capital thing may be slightly misleading (although that's not jambalaya's point) but it is still relevant. True, banks donot lend out their capital but every loan and indeed every asset that carries risk has to backed by a set proportion of capital (capital adequacy).

The funny thing about the whole issue of "banks making money", is that (because banks are still essentially broken) the multiplier effect has gone into reverse globally. Hence the money being pumped into the system is not flowing through into the economy. Nor is it feeding (yet) into inflation. So much for the Quantity Theory of Money! One reason why GO cannot claim too much credit for the current recovery. It's nowt to do with monetary policy. If he was honest about what his real policy was then may be we could give him some credit, but honesty would be embarrassing for him.

but every loan and indeed every asset that carries risk has to backed by a set proportion of capital (capital adequacy).

Genuine question though I am loathe to ask you to explain 😉
Said in a friendly way not an STW way for clarity!
It is , to some degree, just down to faith or confidence. Right now they remember getting burnt in 5 years time they wont they will remember last years bonus till it all happens again.

It's nowt to do with monetary policy.

Banks are not allowed to borrow out investors money, they legally 'must pay the bearer on demand' the sum. Banks are not allowed to use antibodies money. The money is created when you sign an agreement saying you agree to the payments, this is a legal cheque and can be written on toilet paper. At that point banks lend you the money. If investors have a million pounds banked the bank has to be able by law to pay back that entire sum. The loaned money is 'created' when you sign an agreement and this is legal.
Banks get the money from the trust and its printed on these agreements. Investors do not print money, they can't it does not exist.
My feeling is the solution is to say that an no time should private investors (individuals) own more money than exists in the economy. Also no institution should be allowed to borrow money it does not have.

Reluctantly, I will respond. What is the MLR that you are asking about?

Plus remember in the event of failure shareholders come last in the peckin order of who gets their money back.

I have just spent all last week analysisng what is going on in Europe regarding essentially how one £1 injected into an economy becomes more that £1. Unfortunately for all of us, that is not happening at the moment. Working out why, is the fun bit!! This all puts Osborne and others in a bit of a pickle.

Don't mind Vince. He's my new mate, I knew nothing about UK nuclear policy until 48 hours ago! Then I read his/his departments strategy reviews. Fascinating stuff.