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Feb 062012
 

If you read certain articles, you might believe that the current UK government is anti-business. The Tories ? Anti-business ? That is simply preposterous – the Tories would never let the government be anti-business. They are after all in politics to help their business buddies.

What certain bankers don’t understand is that there is a certain level of anti-banking here – which is not anti-business. Banks are merely a subset of business, and given that many banks are “too large to fail” comprise a rather special category of business that is not very business-like.

And the government is not really anti-bank at all, but anti-preposterous banking bonuses. Banking bonuses seem to have risen out of proportion to the value that people add to a bank. As mentioned before, no person is wholly responsible for the success or failure of a bank – a CEO may come up with a great plan, but his or her underlings have to carry out that plan. And the success of the CEO is dependent on how effectively his or her plan is carried out.

Personally I do not have a problem with bankers earning millions in bonuses (and I’m very unlikely to ever get such a bonus), providing that :-

  1. They are properly taxed.
  2. They are proportional to the bonuses given to every other employee in the firm.

It is interesting to see that the bosses of National Rail have voluntarily given up their bonuses into a fund for improving the safety of railway crossings. Whilst there was some pressure about the potential size of their bonuses, it was nowhere near as much as that received by the banking bosses, and they gave up their bonuses a lot quicker – nice to see that some business leaders see that their bonuses may be a little excessive after all, rather than whinging about how the government is “anti-business”.

Jul 152011
 

In a classic example of a deceptive news story, the BBC announced today in their TV news bulletin that 8 European banks failed the stress test – meaning they might not survive a financial crisis.

But later listening to Euronews (and in fact in the online article by the BBC), I hear a slightly different slant to the story – 8 our of 90 banks tested failed. Or 9%. Or to put it another way, 91% of European banks passed the stress test.

Merely announcing that 8 failed the test does not give an indication of the scale of the problem – was it 8 out of 8 ? 8 out of 80 ? Or 8 out of 800? Given the current climate in the wake of the recent banking crisis it is not unreasonable to assume that 8 failing the test is a much more serious problem than it really is.

Is it so much to ask that the media actually spend some time thinking about statistics and giving a proper slant to the news they announce ? Saying 9% failed the test is just as quick as saying 8 banks failed, and gives us more information, and the objection that some people may not understand percentages is pretty bogus – those who do not understand them are unlikely to be bothered by the “8 banks failed test” statement anyway.

A case of over simplification leading to unintended (or was it intentional?) deception.

Feb 212010
 

Pssst … want to make a quick bundle ?

Just vote for the Tories and they will let you buy shares in the Banks we own for cheap. Sounds good doesn’t it ?

Sounds like a bloody stupid idea to me. To sell the shares cheaply, the government would have to make an enormous loss on the money it used to bail out the banks in the first place. Now saving the banks was probably the right thing to do, but so would be hanging onto those shares until they can be sold at a reasonable profit … or at least not a disastrous loss!

It’s all very well offering to throw money at the electorate to increase the chances of your party winning, but surely the government finances are in no state to start throwing money away like this ?

Perhaps when you are considering selling your soul … sorry I mean vote, for a handful of bank shares you should think a little more broadly than your wallet.

The funny thing is that the Tories seem to want to encourage the less well off (even students!) to invest in shares. I’m not sure what planet the Tories are from, but it probably isn’t the best idea to encourage these people to gamble with their money (which is what share investments are – a gamble) before they have a sensible amount of savings.

Oct 132008
 

Now that the UK government has ‘obtained’ a large stake in Lloyds, and RBS, the question is whether we should sell off that ownership when things improve. Hopefully we will be hanging onto the banks until we can make a decent profit from helping them out. But what would happen if we kept hold of them ?

Well we would essential lose the capital (or more accurately it would be locked into the investment), but we would get paid dividends every year. Or every year they are paid.

We would also have a greater influence on keeping the banks and bankers well behaved. Given the behaviour of the banks in the past, it would seem to be worth having a “finger in the pie” to keep an eye on their future behaviour.

Some are complaining that the government (and thus the taxpayer) is taking unfair advantage of the shareholder because we are getting a huge number of shares at a very much reduced price. Tough. Those same shareholders were taking advantage of unsound banking practice in the past when they should have been insisting that the banks were properly run.

Sep 202008
 

Lehman Brothers collapse, Northern Rock run, HBOS takeover. All were in theory good stable banks suffering slightly because of bad debt (US subprime) which may be why the financial markets are so twitchy about them. Even though the markets were in large part responsible for the takeover of HBOS (nothing apparently wrong with them – they just suffered an inexplicable share price collapse).

Now the US government is promising to throw hundreds of billions at the problem by buying up bad debt on top of the trillion dollars already used to protect the banking system. Probably a very sensible move.

But it is slightly peculiar that a freemarket government (and a particularly keen one at that) is bailing out private companies. Perhaps banking is a special case; after all we have seen a housing crisis in the US cause financial panic world-wide, even in industry sectors that have very little to do with banking. But if banking is a special case, it needs special treatment.

The traditional view is that intervention to save banks is wrong, because to rescue banks would encourage banks to take risks they would otherwise avoid. There would be some truth in that if in fact only banks with poor practices failed and the people responsible for bad practices did in fact suffer. Well, HBOS only “failed” (actually got taken over at a rock bottom price) because their share price collapsed for no good reason and because other banks may have been reluctant to lend to a bank in that situation. Lehman Brothers? Well their CEO isn’t suffering too much … he was paid a $22 million bonus last year, which is more than enough to last any reasonable person a lifetime.

Going back to the root causes of the current problems, we can see that it was initially caused by a great deal of irresponsible lending done in the expectation that with rising prices, there were huge profits to be made. Indeed the US is investigating numerous cases of fraud committed by the lenders.

Over the last thirty or so years, the trend has been to remove regulation from the banking sector to give it more freedom on the grounds that regulation was stifling the free market in its quest to make ever greater profits. As it has turned out the greed and irresponsibility of some lenders has shown that bankers cannot be trusted to behave responsibly without strong regulation or close supervision.

First of all, because banking is world-wide, any action by governments has to be done on a world-wide basis to avoid distortions in the banking market where a bank in a country with less stringent regulation would have an unfair advantage.

Secondly because bailing out bad banks has been and will always be so costly, banks should pay a higher rate of tax than other companies.

Finally each bank must have a supervising member on its board of directors who would attempt to identify bad practices and stop them.

Sep 162007
 

The fact that the Northern Rock is undergoing the beginning of a “bank run” will not be surprise to anyone reading this; it is all over the news at the moment. It is understandable that people want to take their money out of Northern Rock; in some way perhaps people are remembering the bank crashes during the 19th century when many people lost all their savings. But we live in a very different society these days.

In a way bank runs are a self-fulfilling prophecy; an unsupported bank will crash during a bank run even it is otherwise healthy. No bank keeps enough cash in the till to pay out to all their savers; they need that money to lend to others so that a saver earns interest! The only hope an unsupported bank has is that the panic will fizzle out before they run out of money.

But the Northern Rock is not in that position as the Bank of England is standing behind them as the “lender of last resort”. What people don’t realise is because the Bank of England is always available as the lender of last resort, other banks who are being cautious may not lend Northern Rock money when without that lendor of last resort, they could well do. And the Bank of England is not going to lend money to a lost concern.

There are two things that make the panic amongst Northern Rock customer more than a little silly. Firstly it seems there is full government protection for depositors with less than £35,000 in their account (something that should be trumpetet a bit louder). Secondly Northern Rock has not used the ‘lender of last resort’ facility as yet … they arranged the facility just in case.

The funny thing is that people are busy trying to read something into the fact that the apparent average age of the person queueing is in the “grey zone”. Use some sense people! Most young people have to work … which kinds of limits the amount of time one has to queue outside a bank, and those who don’t work don’t tend to have much in the way of savings.

There are a couple of opposition politicians who have made a speach about the problems. They are busy throwing rocks at the government and the banking sector for alleged failures … now is not the time for that sort of thing. Politicians throwing rocks is to be expected of course, but now is not the time to do anything to undermine public confidence. Of course you can expect politicians to do anything for their own advantage rather than put the public good first. Are you listening David Cameron and Vincent Cable ? If the current situation gets any worse, you will have to carry some of the blame.

By all means come back to this subject later when things have settled down a bit.

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