The bankers' victory dance

They call it Basle III. But two years after the Lehmans crash, we experience it as a sharp kick to the crotch

o John Lanchester
o guardian.co.uk, Monday 13 September 2010 21.00 BST


This week it is two years since the US bank Lehman Brothers filed for bankruptcy, setting off a wave of panic that almost brought down the entire financial sector. It is a truism that the two most important forces in the world of money are greed and fear. For years, during the boom, greed had dominated; now, in the aftermath of the Lehmans implosion, fear kicked in, and the world's banks stopped lending to each other, and to us. The result was the banking crisis, which in turn triggered the recession, which in turn triggered the collapse in the public finances that is going to be the dominant issue in this country for years.

Given what a big deal the collapse of Lehmans turned out to be, you would think that it makes sense for there to be a whole fat book of legislation on the statue books designed to prevent a repetition of the crisis by making banks smaller and safer and more focused on their wider public function. Well, you might have thought that; but if you had, you would have been wrong, because there have been exactly no new laws targeting the causes of the crash. The systemic risks are the same as they were two years ago.

For some time it seemed that the closest thing to genuine reform would come out of the United States. After the Democrats' defeat in Ted Kennedy's old Senate seat, President Obama suddenly and belatedly seemed to get the point about how unpopular the banks were and how widespread was the perceived need to make them reform. He set out proposals to make the banking sector less profitable and less risky – and for a moment it seemed as if real change might be in the air.

By the time his proposals emerged from Congress this June, however, all the meat had been stripped off them. A $19bn levy was thrown away. Rules on trading derivatives were watered down. Talk about splitting up the casino part of the banks from the deposit-taking part was ignored. On the day the new rules were announced, bank shares rose nearly 3%. That tells you everything you need to know: in the view of the markets, the banks had won.

But then, the banks always win. Once the banks got through the immediate post-Lehmans bailout crisis, they launched a fightback that has seen them win every battle since. They are now so confident that they no longer bother pretending to care what politicians or the public think. Last week's announcement that Bob Diamond is to be the new chief executive of Barclays was a symbolic highpoint of this process: the poster boy for casino banking appointed to be the head of one of Britain's biggest banks. Paul Kenny of the GMB union is too mild when he say this decision "sticks two fingers up to taxpayers". It sticks two fingers up, follows it up by a kick to the crotch, does a victory dance, then posts the footage on Facebook.

So the banks won that one. Yesterday's news that this year Britain's banks won't after all have to reveal the exact levels of the bonuses that they are paying out, because the legislation isn't in place yet? Another win for the banks. (Mind you, they had already won there, because the proposal to name specific bankers' bonuses had been ruled out – all that was being made public were the "bands" of payout.)

The day before had come the announcement about new international rules on bank capital requirements, which were supposed to make the banks safer by making them keep larger amounts in reserve against their riskier activities. The new level of super-safe capital reserve – "core tier one capital", as its known – was set at 4.5%, way below the figure for which the British and American governments had been arguing. So yet again the banks won.

That happened on Sunday, and it is a very big deal. The process involved is "Basle III", named after the town in Switzerland where the Bank for International Settlements – in effect the central bank of central banks – has its headquarters. Basle I and II were the first two sets of rules for international banking. The rules keep having to be changed because of the increase in the complexity of new financial instruments, of the sort that caused the credit crunch. Basle III was supposed to set out new regulations for levels of capital reserves, liquidity and leverage ratios.

The model is Canada, where the banks were forced by law to keep higher than average levels of capital in reserve against a rainy day – and where, uncoincidentally, no bank went under during the crunch. These kinds of rules are unpopular with the risk-taking type of banker, because they tend to make banking less profitable. This is not sexy stuff, but in the eyes of insiders it represented the last great hope for a new system of safer banking.

The latest news is a grave disappointment for everyone who hoped that the collapse of Lehmans, and everything that followed, would lead to real change. Every one of these victories for the banks involves a non-recognition of the dangers involved in their activities. But the banks keep on winning and in doing so, creeping back to the edge of the precipice. That would be fine – if they weren't dragging us along behind them.

The bankers' victory dance | John Lanchester | Comment is free | The Guardian

Basically, what that article says. I could point out a couple of little slips (CDOs did NOT provoke this crisis, for Heaven's sake) but the gist is 100% on target.

Regulators, politicians and central bankers are just pathetically inadequate to the job. I don't know why but they just are. With all that public support, with even the US willing to play ball for once, they couldn't do better?

This is incompetence to the point of being criminal.

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Olive: Half measures on protecting banks

By David Olive

Olive: Half measures on protecting banks - thestar.com

Business Columnist Now that the world’s banks have agreed to deprive themselves of some of the ammunition with which they’ve been shooting themselves in the foot, the urgent question is whether this alone is sufficient to prevent another catastrophic meltdown in global finance.

And the honest answer is no. Which is why critics of the so-called Basel III negotiations that culminated on the weekend already anticipate a “Basel IV.”

They have ample reason to worry, for reasons I’ll get to.

For the moment, the negotiators who reached their unquestionably historic compromise in the charming Swiss city on the Rhine deserve credit (pardon the pun) in forging a substantive agreement on greater banking safety among scores of banking colossi, regulators and politicians.

Overcoming national parochialism and the varying agendas of individual banks and regulators, the Basel III architects managed to impose on the banking system a more than doubling in the amount of capital banks must maintain in reserve.

That’s precious capital to cope with sudden distress without need of the government bailouts required over the past two years in every major banking jurisdiction apart from Canada.

It’s very good indeed that the amount of common equity – the most readily available capital for absorbing losses – must leap from the current two per cent of banks’ loans and investments to seven per cent.

It’s even better news that the largest banks, the mega-lenders whose failure could topple the entire global system, must hold an even higher percentage of capital in reserve against potential losses.

And best of all that global regulators will be able to restrict dividend and executive bonus payouts at banks failing to maintain these new, much larger capital cushions against disaster.

Canadian banks have the least need to shore up their reserves. Earlier this month, the World Economic Forum said Canada’s banking system tops the world in soundness for the third straight year. The U.S. system ranked – wait for it – 111th, trailing the likes of Chile, Lebanon and South Africa.

As expected, there’s been much celebrating this week over the Basel III architects’ handiwork, A joint statement by the U.S. Federal Reserve Board and other major U.S. banking regulators hails the agreement as ensuring a system “less prone to excessive risk-taking.”

Ah, if only it were so.

The view CNN gave us of the crisis, at its height in 2008-09, was of banking titans reduced to wards of the state. Yet by 2007, an estimated 60 per cent of U.S. financial activity was conducted not by conventional banks but by securities firms and hedge funds.

It was the failure of those “shadow banking” actors – investment banker Lehman Brothers Holdings Inc. in particular – that pushed the entire world system to the edge of the abyss.

Those institutions largely weren’t, and still aren’t, subject to regulation, under Basel III or any other framework.

In their recent book, Crisis Economics: A Crash Course in the Future of Finance, economists Nouriel Roubini and Stephen Mihm make the obvious point – at least in hindsight – that “it’s little wonder that the shadow banking system was at the heart of what would become the mother of all bank runs.”

Conventional banks gorged on junk mortgages, to be sure. But securities houses and hedgies were there at the trough along with them, feasting on effortless lucrative returns with what they deluded themselves into believing was minimal risk.

It should be scary as all get out that, in advance of a regulatory crackdown, the most aggressive money manipulators employed by humbled banks in Wall Street and the City of London now are defecting to unregulated hedge funds, where mention of “capital ratios” draws a blank stare.

There’s also no assurance that even the regulated will now be better behaved. Jim Flaherty, the Canadian finance minister, rightly warns of the need for still more reforms. After all, “many of the institutions that failed around the world were regulated,” he says. “The key is effective regulation.”

The U.S. and Britain, with their bevy of regulators, failed utterly to see, much less prevent, the excessive risk-taking conducted on their watch.

Basel III imposes no changes there, alas, since it remains that human nature among lenders and overseers alike cannot be regulated.

In a world of easy solutions, I’d clone J.P. Morgan to run the world’s financial institutions, bank and non-bank alike.

Morgan was no saint, but he at least knew when to keep his wallet zipped. “The first thing is character,” Morgan told a congressional inquiry on lending standards. “A man I do not trust could not get money from me on all the bonds in Christendom.”

Now, if we just put that into law, we could be assured there will be no need of a Basel IV to re-engineer global oversight after the next meltdown.

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