Newspaper article The Evening Standard (London, England)

Lest We Forget, Banks Can Be Allowed to Fail

Newspaper article The Evening Standard (London, England)

Lest We Forget, Banks Can Be Allowed to Fail

Article excerpt


MY law of banking lays down that disasters happen when the last man who can remember what happened last time has retired. If so, the bankers need medical advice. They must have been suffering from an epidemic of amnesia.

Only this can explain what was worrying them most when they were polled in the spring of last year. Top of their list of prospective banana-skins (they told the Centre for the Study of Financial Innovation) was excessive regulation.

This must now be the least of their worries except that, having slipped up so comprehensively, they must expect the regulators to move in on them.

Some of them were propped up because they were too big to fail, or too sensitive to fail, or because they would have set other dominoes falling. The cost of all this remains to be seen. Piles of unfamiliar paper or its electronic equivalent are accumulating in the vaults of central banks. In them will be found what a Victorian banker called "securities which are not security". A political price will then have to be paid.

All the banks misjudged and mispriced the risks they were running, but as their results trickle out, we can see that those who stayed closest to their basic business have come off most lightly. The ambitious innovators suffered. As Wells Fargo's chief put it, the banks had been at pains to devise new ways of losing money, which was surprising when the old ways worked so well.

The new ways, of course, came with new markets and new financial instruments, which the banks could happily trade, slice, dice, re-wrap and sell to each other. They thought that they were spreading their risk, or passing it on to some gullible resinsurance company in Germany or Switzerland. This was not how it worked out. Some of the unopened parcels have begun to smell, and have been reclassified as toxic.

The specialists in this kind of banking has been hardest hit the investment banks, but also the generalist banks, like Citigroup, which thought that they had to join the party and stay there, at least until the music stopped. …

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