Thursday, 20 October 2011

We need bankers to trust their instincts again – or it’s all over

Blogger DMossEsq informs us that Goldman Sachs made a loss during the last financial quarter. This surprises me. Even given the parlous state of the global economy I should have thought it was almost impossible to make a loss in banking – unless, of course, they’re still investing our money in the sort of hare-brained schemes that brought capitalism to its pin-striped knees in the first place.

But, given how much we’re all having to pay into the kitty to keep the banking system going, I’d be surprised if even this collection of gold-obsessed ring-wraiths would still be up to those sorts of tricks.

It’s far more likely that the farcical, overweening belief in their own omnipotence (how can I be this rich and not be infallible?) has been replaced by paralysing fear resulting from the new-found knowledge  that they’re just as stupid and fallible as the rest of us. Now, they won’t lend to anyone – especially not each other: they know just how bloody useless bankers are!

Here’s something that’s puzzled me for years – is banking actually that difficult? I know it requires a certain level of numeracy (well, not that much, judging by the events of the past decade), an ability to analyse lots of information and to act decisively when required – but that doesn’t strike me as any more demanding than the pressures facing, for example, top civil servants, news editors, proper businessmen, sportsmen, pilots, soldiers or top-flight accountants.

People, businesses, countries, Third World kleptocrats and pension funds give you vast amounts of money. You invest it for them. If your investment decisions prove sound, there’s a profit. You keep a ridiculously large chunk of that profit to maintain a lifestyle that would have embarrassed a Roman Emperor, and pass on what’s left to your clients, along with their original stake.

Of course, there’s a lot of very dull, detailed stuff in the middle, but I don’t expect it’s any more difficult than the rest of trying to figure out which ISA to invest our paltry savings to try to keep up with inflation (except, of course, that's impossible): bankers are just operating on a larger scale. The key bit, of course, is what they do with other people’s money to make a profit. In the Noughties, bankers leant oodles of our cash to people who couldn’t pay it back.

They ignored their instincts, and It’s all a matter of instinct.

In his fascinating book, Blink!, Malcolm Gladwell advances the theory that almost all of our best decisions are made within the blink of an eye. We know within a split second whether something is right: marriage partners, friends, which car to buy, whether you’ll be happy in this house rather than that one etc. Certainly, all my best decisions have been made instantly. Whenever I’ve had doubts and gone ahead in spite of them, disaster has ensued, both in my personal life and at work. I suspect that, in the Noughties, bankers acted against their business instincts by investing money in schemes which they knew to be wrong – but which brought them vast short-term rewards: greed over-rode what their gut was telling them. And the whole world is paying the price.

Now, their fear – of losing it all, of yet more public opprobrium, of making fools of themselves by once more lending money they won’t get back – that fear is once more making them ignore their instincts. And that’s a shame, because those very instincts are the only thing which could possibly justify the grotesque rewards these people lavish on themselves. And those instincts are about the only hope we have of preventing the world from plunging into the economic abyss.

We need these people to rediscover the very thing that enabled them to reach the top of their profession in the first place - their ability to immediately tell the difference between a decent proposition and a gobbling turkey.

I’m not sympathising with these greedy bastards, by they way. But merely heaping yet more thoroughly-deserved abuse on them isn't going to help. Until someone comes up with a way of punishing bankers that doesn't harm the rest of us, we need them to rediscover the courage to do their jobs properly.

If that doesn't work out, then we can take our revenge.


  1. I have just been reading a brief history of the Fugger family of Augsburg who were Europe's pre-eminent bankers in the 15th and 16th centuries. They died out after the Thirty Years War, but were immensly rich and powerful.Their most pronounced family trait was a great sense of humour and in Swabia a really good joke was known as a "Fuggerwitz" ["Witz" is German for a joke] and the object of a joke was a "Fugwitz". During their reign the generic term for a banker was "Ein Fugger".

    A very interesting post on our contemporary "Fuggers". When it comes to banking or economics I am scarcely literate [but then neither does anybody else seem to be these days]. I take it the rot set in with the "Big Bang" reforms of October 1986 "which abolished fixed dealing commissions, removed barriers between broking and market-making, and allowed high street banks to taste the glamour of investment banking by buying up Stock Exchange firms" [Martin Vander Weyer, Spectator 22/10/11]. I take it this allowed Cristal-guzzling, pole-dancing aficionados free rein to zoom around in their Porsches with £50 notes stuck up their noses. I give you Nick Leeson of Barings to Kweku Adoboli of of UBS [$ 2.3 billion down the Swanee in the case of the latter].

    To be continued

  2. Part 2

    As Vander Weyer says "the impact of the Big Bang itself was merely to multiply city pay levels and to transfer huge risks to high street bank shareholders and depositors, and ultimately to taxpayers." Enter Sir Fred Godwin and his chums from the other banks. If Sir Fred [does he still have the knighthood?] had been an American he would be in jail. There was a documentary about RBS a few days ago and he came across as a nervous, shifty Uriah Heep who had been found out. A Fugwitz, in fact. An earlier documentary stated that when the crunch came he simply could not grasp what had happened. Nick Leeson:" I became blinkered to all that was happening around me....the important thing was to keep the myth - and the status alive - at all costs....Very quickly a form of tunnel vision descends....However bad it gets failure is still never an option." Sir Fred Godwin nearly lost me a lot [to me] of money and yet he was not punished and I harbour dark thoughts about him

    And about the discredited FSA. And all these useless credit rating agencies like Moody's, Standard&Poor and Fitch who by their actions [ably abetted by an army of financial commentators and correspondents] are accelerating the plunge into a financial meltdown. As Vander Weyer says in another article these bastard rating agencies are the ones who in the boom "fuelled the flames by awarding top AAA ratings to all manner of toxic mortgage-backed paper".

    To be continued

  3. Part 3

    It is not entirely the fault of the bankers. On the subject of sub-prime mortgage lending [which triggered the whole mess in the first place] the good Doctor Dalrymple has this to say "There is abundant evidence of widespread fraud in sub-prime mortgage lending in the United States, and of a system set up to promote it. But this system can be traced back to the Community Reinvestment Act in the United States that enjoined banks to make loans on racial rather than on purely financial grounds, and penalized them if they refused to do so. The banks were forced, by law, to lend in socio-demographic areas where the risks of default were intrinsically very high; and with the ingenuity for good and evil that characterises capitalism, they soon devised a means of turning a very bad and improvident practice into a goldmine, at least for a few years."

    This is what Godwin exposed his depositors to through his ill-judged acquisition in the US and Holland {AMRO]. It is not so much a matter of the "Fuggers" trusting their instincts again, but more a matter of competence. There is something rotten about the whole of this industry - a mixture of too many senior people being way out of their depth surviving for long periods on articulate incompetence before they are unmasked and all sorts of toothless regulatory agencies fossicking around to no avail.

    I very much apologize for the length of this comment.

  4. The Big Bang took place on 27 October 1986.

    Karl van Horn, a wily American investment manager working in London, said at the time that "the best business to be in 12 months from now is second hand Porsches". He was wrong. By eight days. World stock markets crashed on 19 October 1987, the UK's going down 26.45%.

    Just thought I'd mention it.

  5. Thank you, SDG, for your Fugging interesting comments. Indeed, the problem wih toxic debt started in the USA with governments encouraging the banks to lend money to Mexicans who couldn't pay it back, in order, one presumes to garner gratitude and votes and to transform them from being poor people - and therefore a problem - into middle class people by waving a magic money wand at the sweet little dears. Carter, Clinton and Dubya are all implicated in this. Governments and banks and regulators then went into "unscrupulous optimist" mode because it would have been really nice if the fantasy had all worked out. In thise circumstances, anyone advising caution is instantly labelled a "fuddy-duddy" and ghastly little barrow-boy creeps like Fred Goodwin rise to the top, like scum. I suppose that's why the best people to have in charge of financial stuff tend to be old, white-haired, dull and deeply conservative. "Sir" Fred kept his knighthood (I'm not sure what the mechanism is for relieving him of it), but suffered the horror of having his £703,000 per annum pension reduced to a paltry £342,500. One's heart bleeds. I, too, was a customer of one of the banks this dork destroyed (it's now publicly owned), and I - along, I suspect with any Briton who even vaguely understands why we're so deep in the economic crapper now - harbours dark thoughts about him.

    Was it Karl van Horn, Mr Moss, who said he was getting out of the market because "too many stupid people are getting rich"?