ENOUGH with the show trials already. Enough with the Treasury Select Committee and its chief, John McFall, with his gritty questions that never quite elicit anything we Britons did not know already. And more than enough of those lawyer-scripted, without-prejudice public apologies: The guilty men are never actually going to prostrate themselves and say, “Yes, as a matter of fact you are right, chairman. I was unqualified to run a bank, and my judg-ment became utterly warped by the size of my bonuses, so now I am personally responsible for billions of losses. Sorry.”
We have been distracted from the fact that the government is exhausted of new ideas as to how to get us out of this mess. But before examining that, let us consider a simple list of warnings to watch for next time round.
The first signal is, of course, a boom in bank-ers’ pay. Research from New York University has shown how it soared in relation to other professions in the 1920s, the mid-1980s and in spades in the present decade, each time offer-ing a perfect indicator of the crash to come. We need banks themselves to accept that if they pay grossly more than comparable professional work — making millionaires of middle man-agers and deluding directors into thinking themselves on a par with great entrepreneurs — then things will inevitably go to the bad. Unsound trading decisions will be taken, huge strategic risks will be ignored, shareholders’ and clients’ interests will be endangered, and off we go to perdition once more.
Second, beware of banks not run by bank-ers. In the line-up of former HBOS and Royal Bank of Scotland chiefs in front of chairman McFall this week — Lord Stevenson and Andy Hornby, alongside Sir Tom McKillop and Sir Fred Goodwin — not one had significant hands-on experience of the small-scale lending decisions and day-to-day customer interface that are the bedrock of the seasoned banker’s professional formation.
Third, beware of excessive sophistication. Securitization of mortgages was, when first invented, a useful way of increasing liquidity in the US home loan market. But it became so over-elaborated that it almost wrecked the global financial system. Likewise, derivative instruments were devised to help farmers and manufacturers protect themselves against future risks, but the complexity of modern derivative trading turned them into what Warren Buffett called “weapons of financial mass destruction.”
Next, watch for over-priced mergers, a sure sign that the top of the cycle has been reached — or just passed. RBS’ 50-billon-pound con-sortium takeover of ABN Amro, desperately outbidding Barclays, will go down as one of the worst misjudgments in financial history. And if it is true that Lloyds TSB had an opportunity to back out of the HBOS merger, but chose to stay in because it offered a “once in a lifetime” opportunity to grab more market share, then the 10-billion-pound loss revealed last Friday puts that deal in a similar category of folly.
Finally, watch out for obfuscation and self-delusion. The annual reports of RBS, HBOS, Northern Rock and Bradford & Bingley before they collapsed were models of corporate cor-rectness which gave no hint of the horrors hidden on and off their balance sheets.
Five simple warning signals for the next financial crisis. But to get to the next one, we have to extract ourselves from this one. How on earth do we get there? The British government and the Bank of England have the biggest role to play through liquidity and insurance schemes for bank lending, the implied promise of further capital support from taxpayers, and the pros-pect of near-zero interest rates and new-minted cash pumped into the system. As the bank’s governor said last week, these measures will work positively — but we have to be patient.
