Monday, April 11, 2011

Bankers are just clever civil servants


Banks © fintag

News comments:
Some of the Banks are too big to fail, apparently. (yahoo)

This is of course not just PR spin from the self preservation society known as Investment Banking but spin from the regulators and kick back lovin' governments. Big Banks are the engine rooms of capitalism and without them the world would go back to pebbles and bartering. This suits the authorities. Regulators can be given huge budgets and create jobs and Governments can use the banks to help them place their crappy government debt. It's a win - win.

And yet banks have failed all over the world and life goes on.

Take 2010. 157 banks in the USA collapsed.

Take 2011. In the first 4 months of this year in the USA, 26 Banks have failed.

There has been little global media coverage because this is normal. It really is. When a bank runs into cashflow timing issues, the next day the bank is closed down. The problem is the big banks are too big for the authorities to foreclose. This is good for the stakeholders of the banks who enjoy all the upsides without worrying about not getting their capital back because Governments can no longer afford to help their regulators foreclose banks. The bankers love it because their jobs are safe and they can take big bets with limited downside. Even if the bank fails, like Lehman, there are lots of other banks who will buy the assets (people) like Nomura and Barclays did post its demise, so job security is built in too.

Life as a civil servant is pretty cushty. On the whole. But you aren’t paid that much because it’s a public duty to serve the people. But you have a large government's balance sheet to keep you protected.

Life as a banker is pretty cushty. On the whole. You are paid a lot because you are in an oligopoly and its your duty to serve the other bankers because you are in it together. And you have a large government's balance sheet to keep you protected.

Conflicted man talks nonsense
So here is Paul Volcker bemoaning banks cannot be made smaller:
" break them up to the point where the remaining units would be small enough so you wouldn't worry about their failure seems almost impossible” (telegraph)

Why is a banker worth so much?
What does a bank actually do? What do bankers do? They manage cashflow. That is all they do. Manage cash. They might provide advice and take fees so they can go to the other banks who charge fees for access to their cash. They might sell bits of paper for fees and cash. They might buy assets from other banks and sell them to other banks. They might lend money to enable someone to buy a house. They might borrow money from Joe Public and given them a return for doing so.

When Depositors want their cash back, the bank has to sell something to pay them back. Or it borrows from another bank. Lehman lost the vote of confidence and when nobody would lend to them, and despite crawling to the lender of last resort, the FED who said no too, the bank went down. Lehman went bust and PWC and many lawyers made a mint from clearing up the mess.

When markets are liquid, banks like Lehman could borrow very easily. When the other banks started to say no, that was the end of Lehman. It was a big test in the end. The US government had to let Lehman go to see what the impact would be. They were proven right. It has had no lasting impact at all. In fact the banks were so scared afterwards, they began to behave better. Now the banks are back to their old tricks. As regulation comes in, out come the new products, the arbitrage, the off balance sheet vehicles, the CoCos, the ETFs, and so on. It is business as usual. Too big to fail.

Fixing the problem
So what are the answers?

1. No bank must be allowed to list on a stock market.
2. Any banker earning above the salary of the President must have unlimited liability for the rest of their lives. If the bank goes down, then so do they. No ifs, no buts.
3. The board of a bank must be partners.
4. Tier 1 capital should be 20%. If a bank wants it less than this, it pays an insurance premium to a bail out fund or better still the lender of last resort.
5. The lender of last resort must have unlimited liability. It must be the regulator and if it messes up, all partners must be liable.
6. No bank must have more than 20% of market share (however defined).
7. Retail banks (loans/deposits) must be ring fenced. Assets can never be repackaged and sold on.
8. Borrowing to build real estate to be banned completely.

Something like that.

Today's shorts:
End the Fed (end the fed)

Today's longs:
Banks too expensive for poor people (telegraph)

Microsoft and Google to become banks.


Claire said...

All I can say is that big banks (so-called “too big to fail”) just don’t care of their consumers and easily foreclose their homes. That’s why I am sure it’s not worth to take out a mortgage from a big bank. Recently I have heard that there’s lawsuit against 10 big banks because they wrongly foreclosed property of their consumers. Those people had a right to proceed making payments and could stay in their houses but because of someone’s stupid mistake they lose their homes. I think that it’s not worth to apply to big banks – there are lots of alternative lenders like community banks, no fax payday loan lenders, peer-to-peer lenders and other ones who can provide available financial assistance and better service.