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Barclays over the edge

What happened to the corporate citizenship that Barclays was proclaiming back when LIBOR was being corrupted? Even the Chancellor has taken Barclays to task for manipulating the crucial LIBOR interest rate. “Through 2005, 2006 and early 2007 we see evidence of systematic greed at the expense of financial integrity and stability and they knew what they were doing.”

The financial consequences of these banking practices, which are not confined to Barclays by any means, begin with the fines from the regulator at a few hundred million pounds. But the consequential losses – and the work involved to unravel them – could be vast. (Imagine calculating how many people paid too much for their mortgage back when LIBOR was nudged up? And paying them.)

One lesson for the CSR community is that you ignore the core business at your peril. The biggest corporate impacts usually start when the core business is done irresponsibly.

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UK Banking review turns its gaze within

The new ‘Independent Commission on Banking’ will be an insider job. Its task is to ensure that the financial crisis, which has had such huge effects on the UK, does not happen again.

But who is set to do the review? A series of insiders: they are very worthy, very knowledgeable and most impressive. But they are insiders all the same. We have bankers and more bankers, people who regulated banks and people who have written about those who regulate banks. But there is no consumer representative, no representative of manufacturing industry and no labour representative.

This is the governance of the insider. It may produce inner peace for the British Bankers Association, which has already welcomed it, but it is hard to see how it can deliver a banking system fit for society.

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The FSA and regulation

Adair Turner’s speech is about as exciting as you could expect the FSA Chairman to be at the Mansion House. It apparently caused someone to be ‘appalled, disgusted and ashamed’ – and generally upset breakfasts.

What was causing the upset was his remarks that there should be more restraint on innovation and that it was not his job to be the cheerleader for the City, pursuing growth at all costs. While this should be obvious to most people, it is a shock to those engaged in the City.

What is happening here is that the scale of the fianncial crisis has revealed the dependence of the rest of the economy on the City – and therefore laid bare the real purpose of a regulator: to protect society from the economy, not the other way round. Adair Turner is getting to grips with the same  conflict of interest that is at the heart of many regulators. They are sometimes not quite sure whether they are regulating the public or the industry in their care.

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Crashing & Crunching

It is important to separate the crunch from the crash.  The credit crunch led to, and preceded, the crash. However the consumer economy, especially, was over-leveraged and just waiting to collapse.

The credit crunch arose because house prices started to fall in the US.  But this was compounded by several factors.  Firstly lending institutions had over-lent to borrowers who could not afford to take out a mortgage; the trick was to disguise the actual level of repayment through very cheap instalments for the first 6 months or so.  Then the mortgages were sold on; so those who had done the deal were no longer liable for anything if the house-owners defaulted, which they were likely to do if they could not afford repayments and the price of their house was falling.

On top of that, the mortgages were typically sold on after being mixed with other loan portfolios of a different risk profile, a practice that was rewarded with spectacular personal bonuses for the bankers involved.  As a result it became impossible to discover which bank actually owned which mortgages, and particularly who had the mortgages which were not being repaid.  But everyone knew that it was going to be a bank.  The other banks knew this too, so they could not, with a clean conscience lend to each other since they could not know what the risks might be and whether they would be repaid.  And all the banks were in this position.  So no one bank trusted or wanted to lend to any other.
In the end, the banks became reluctant to lend to anyone.  Initially banks did not want to lend to house-owners, since house prices were generally falling.  However because of the cost of money to the banks, it soon became necessary to raise the cost of borrowing for all.  The price of money (interest rates) rose.  The result, a credit crunch: credit of any kind is hard to obtain and expensive.  And banks started to fail.

This is now beginning to affect the ‘real’ economy, which is the one in which people make things other than money.  It is harder for businesses to borrow even for short term working capital.  And individual borrowers are starting to find their credit card payments are too onerous.  But quite independently of the mechanism of the credit crunch, the real economy has been suffering – partly driven by the cooling of the Chinese economy and by rising commodity prices.  The realisation of this, coupled with the nervousness created by the credit crunch, the computer-based automatic selling of shares and the practice of short selling, (that is selling shares you do not have) turned the fall in the stock prices of banks into a general stock market collapse.

But compared to the looming environmental crash, the economic crash is trivial…

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What price for a car?

If, as happened to VW shares recently, prices rise and fall so dramatically – perhaps by 25% in a few minutes as seems to be common place, how can the market be pricing stocks correctly?

If it was right before the fall, it must have been wrong afterwards. Or perhaps it’s the other way round.

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Trust & the City

The root of the banking crisis is a lack of trust.  Trust is central.  Money is trust and its price is high – as measured by the interest rate.  What this means is that the banks will not trust each other, and will not give each other much credit.  The literal meaning of credit is ‘to believe’.

The cause of the lack of trust is the sale by most of the banks to most of the others of loans containing ‘junk’ derived from the US housing mortgage market.  The fatal error was to disguise the proportion of junk in these loans.  It is not clear how far it is feasible to discover, and be transparent about, those proportions at this stage.

But without transparency over the content of such loans, there will be uncertainty.  And there will therefore be little trust, even if the banks are re-capitalised.  So short of writing off the loans, which contain good quality loans as well as bad, can there be a resolution to the crisis?