Outside the marginals

a commentary on the politics that followed the UK 2010 & 2015 elections

Five years after Lehman, all tickety-boo?

Robert Peston on his BBC blog (9 September 2013) poses the above question.

At the end of this week, on 15 September, it will be the fifth anniversary of the collapse of the US investment bank Lehman Brothers. …

The question is whether the financial system is now in shape, and capable of absorbing the inevitable knocks and bruises to which all constructs of frail humans are prone, without inflicting too much cost on the rest of the economy or taxpayers.

What has been done in five years to prevent banks holding entire economies to ransom when they run into difficulties?

My fear is that very little has been done – as Peston seems to say, but I am not sure that much can be done about it.

There is a sub-species of “banker”, let us adopt the name they have given themselves,”Masters of the Universe” who are so amoral that they will find a way round any regulation.

They are typical of the sort of people who think they don’t need to understand what they are doing – as long as it turns a profit before it all falls apart. (This is in contrast to the number one piece of advice given to “amateur” investors: Don’t invest in something you don’t understand – you won’t be able to get out quick enough when it all goes wrong. When it does go wrong others will profit from the situation thereby amplifying your losses.)

Examples of this attitude regularly occur.

Why not take some of your insurance policies, wrap them up in a bundle and market these “policies” on the reinsurance market as a means of “risk reduction”. Basically hiding risk in a new wrapper. It will be cheap, lower the seller’s risk and turn a nice profit. Someone else can pay for the consequences – The Government, other Lloyds names and future insurance customers in this case.

Why not wrap up all sorts of food waste with rendered animal remains and feed it to animals (often herbivores) that will later be slaughtered for human consumption? It will be cheap and turn a nice profit. Someone else can pay for the consequences – the tax payer in this case is still paying for BSE and vCJD – the extent of which is not yet fully recognised.

Wrap individual household mortgages up with investment vehicles masquerading as insurance policies and market them as low-risk low-cost endowments (a nice “comfortable” word). It will be cheap to set up and turn a nice commission. Someone else can pay for the consequences – the policy holders and future owners of the financial institutions.

Take mortgages in bulk, wrap them up – “securitization” (another nice comfortable word) – and dump this risk through credit default swaps to insurance companies or other counter-parties. Again cheap to set up, off-loads risk and turns a nice commission (what is called a “win-win” – by the winners). Someone else can pay for the consequences – we the taxpayers of the world are still paying for that financial crisis.

Why not take sundry animal carcasses, and other mechanically recovered meat, mix it and trade it across the continent and allow that meat to be incorporated into processed meat products like mince, lasange and pies? Again cheap to set up, off-loads otherwise difficult to dispose of material and turns a nice commission. Someone else can pay for the consequences – we the customers of the supermarkets will pay for the horsemeat scandal because we can be sure that the supermarkets will not let the cost hit their profits.

In all the above cases there is a middle man, who is not risking much of his money (if any) but is taking a (very) nice cut when the trade is done. When it all falls apart where is that trader?

“They” don’t want to learn from these mistakes – they probably don’t see them as mistakes – after all they” came out on top and we paid the bill! And they are endlessly inventive (innovation and entrepreneurship are “in words”) and always able to find a new niche in which to operate. I think the House of Commons approved phrase for this is whac-a-mole.

Has anything changed or are we still in thrall to these “Masters of the Universe”?

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