HBOS and the banking crash

So, we\’ve got the FSA report into why HBOS fell over.

Fascinating stuff really. For there\’s not a derivative, toxic or not, in there. There\’s not even trading problems. It was a simple, classic, over-extension of credit to the property sector. It\’s happened before, no doubt it will happen again.

But do note that: it\’s nothing to do with \”The City\”, the wholesale money markets, FX, share trading, bonds, derivatives, CDOs, CDS, futures, options, excessive trading. It\’s purely and simply lending too much money to the wrong projects.

And that pretty much caps the investigations into what did go on. Lloyds was buggered because of the losses in HBOS that it didn\’t know about when it was \”encouraged\” to take it over.

RBS fell over because it bought ABN Amro at the top of the market. No, it wasn\’t derivatives, options, futures, FX or any of all the rest there either. Northern Rock suffered a classic liquidity failure. It wasn\’t even their 125% mortgages, their Granite bonds, certainly not futures, options, FX, that caused it. They were simply borrowing short from the wholesale markets in order to lend long on mortgages. When those mortgages could be bundled, securitised, they sold them on as those Granite bonds.

And it wasn\’t the Granite bonds that failed. It was the financing short term of the mortgages already issued but which had not yet been securitised which was what failed.

So who else was there? Dunfermline Building Society? Too much in commercial property. And so on through the list of the British institutions that did actually fail.

Sure, there was plenty of hubirs around, plenty of very silly decisions, but they were all about rather plain old banking problems, problems that people have fallen over before and which people will fall over again. But here\’s the really important point: none of them, none of them at all, were the result of excessive trading (of leverage, perhaps, but not trading), none of them were as a result of High Frequency trading, none were in Foreign Exchange, options, futures, commodities…..

And yet the solution proposed is a Financial Transactions Tax. Something which has absolutely no relevance at all to hte problems which actually happened.

So, err, why?

20 comments on “HBOS and the banking crash

  1. The problem is you are dealing here in facts and truth. Politicians deal in fear and popularity.
    There is no mileage for a politician in saying it is because we borrowed and they lent too much on overvalued assets. After all if they blame us will we vote for them?
    Unfortunately probably yes.

  2. Because, in this so-called democracy, they can ?

    Don’t we all know, more tax is the solution for every damn thing ?

    Please explain the exact differences between modern government and the mafia ?

    Alan Douglas

  3. At the risk of being somewhat repetitive :the problem is too much credit going into property;the solution is therefore a small tax on property,to make it head off somewhere more virtuous.
    The Schedule A of taxation on owner occupation (abolished by the Tories in 1963) did the job;even better might be some form of Land Value Taxation as this would nudge speculatively withheld land onto the market.Of the various forms ,the so-called Sentinel Tax that does n’t touch existing values but is triggered only by from here onwards land-price inflation is very fair to people with property that has increased in value while they’ve lived in it.
    None of these has any chance at all since we live in a political monopoly, a One Party Homeownerist State,where nothing ever will be done about the diversion of cheap credit into
    property price inflation,even with clear evidence of its wrecking the economy.

  4. Unfortunately to most of those not in finance banking appears either too complicated or too boring to understand.

    People associate their High St bank with dull (in)competence doing stuff like mortgages and “fives or tens”.

    So when banks go under to the tunes of tens of billions they assume that can’t be because of NatWest on the High St doing something silly it must be because of those bankers in the City.

    The fact that Robert Peston et al always report on the banking crisis from outside Canary Wharf or similar investment banking backdrops just leads people to assume the crisis is because of investment banking.

    Throw in understandable envy (inv banker pay) and media talk of “casino banking” then it isn’t surprising the man in the street is confused.

    In hindsight the inv banking community should have spent more time explaining what they do, why it is a good thing that they do it and educate people that the banking crisis was a failure of “ordinary” banking and not inv banking.

  5. Not just a silly and unworkable “transaction tax”. An equally silly and unworkable separation of investment and retail banking that will only affect three banks and would not have prevented ANY of the failed banks from collapsing. It’s all intended to fool people into believing that banks are “safe” so that they will carry on depositing money with them. It has no real effect at all. None of the proposed reforms, either here or in the US, address excessive risk-taking in retail and commercial banking (including NR’s ridiculously short-long financing model). Roll on the next property price bubble and banking crash caused by stupid bank lending.

  6. “Sure, there was plenty of hubirs around, plenty of very silly decisions, but they were all about rather plain old banking problems, problems that people have fallen over before and which people will fall over again. ”

    Shouldn’t the Government have worked this out before bailing out banks? A simple problem with simple origins should never have required such enthusiastic interference by the State.

    I could half imagine the CDS/CDO stuff being a bit of a Trojan horse – that there wasn’t an ability to cut through the bullshit of it all being down to complex financial products and was really about idiots borrowing too much to then extend credit to too many people in too large an amount.

    If the Treasury ministers, FSA and the rest were truly oblivious to the sharp practices going on in the mortgage industry and the crackpot lending practices then it goes to show just how insulated the Man from the Ministry can be.

    Yet I seem to recall a number of MPs having mortgages from the likes of Northern Rock and building up property empires. They were canny enough to borrow cheap money for themselves but didn’t want to look a gift horse in the mouth?

  7. Bless you, Mr Reed, Schedule A indeed. I’ve mentioned it from time to time at Wadsworth’s gaff but he’s wedded to his beloved Luncheon Voucher Tax.

  8. @Gareth:
    “Shouldn’t the Government have worked this out before bailing out banks? A simple problem with simple origins should never have required such enthusiastic interference by the State.”

    That’s what always struck me. Gordon Brown, for all his many other faults, was a technocratic details man and you’d think he’d have been better a arranging a bank bail out strategy.

    Instead he seemed to get a phone call from (Sir) Fred that RBS was about to close its ATMs and he panicked……

  9. Wot DBC said.

    Also, the problem here is that the definition of “excessive” lending is post hoc, and this is the basic problem with banking as a basis of an economic system. Nobody at any given moment can know whether calamity is building up, until it happens. The system is too strongly incentivised to accumulate risk which will later prove excessive. People seem to hope that you can get around this by expecting bankers to be moderate, but there is simply no way at any given moment to know what moderate is. The system is thus, at irregular intervals, bound to fail.

    There are just some systems that do not work. Communism for instance. It does not work. You cannot reform it to make it work (without reforming it that it ceases to be Communism). Only a fool says, “well, Communism failed last time, but this time we’ll make it work”. You can’t, because basic analysis of the fundamentals of teh system show that system to be dysfunctional.

    Likewise, banking, at least as it is currently done. It simply doesn’t work. The market, Gawd bless it, tried to destroy it three years ago. Instead, we insisted that this dysfunctional system be patched up to carry on. This is simply not rational.

  10. Shinsei67-

    That’s what always struck me. Gordon Brown, for all his many other faults, was a technocratic details man and you’d think he’d have been better a arranging a bank bail out strategy.

    You’ve forgotten the other data point we have, which is that Gordon Brown is also a pillock.

  11. So maybe the answer really is to separate the retail and investment divisions of banks…

    …to protect the investment side when the retail over-extends itself.

  12. The solution to poverty in the Soviet Union wasn’t to starve Ukraine either, but Statists are never long on logic.

  13. Whatever the problem, the solution proposed by politicians is always whatever they wanted to do anyway.

    c.f. global warming, the euro, etc.

  14. RBS, HBOS, Dunfermline…all failures of Scottish hubris, and cheered on by Scottish political boosterism.

  15. Chris R

    The ICB’s report recommending ring-fencing of investment and retail banking backed off from full separation precisely so that investment banking could if necessary bail out retail:

    “….although global wholesale and investment banking poses risks to UK retail banking, there are times when it might help to cushion risks arising within UK retail banking” (Executive Summary, p.10 of the ICB’s Final Report)

    “….among other things, capital could be injected into the UK retail subsidiary by the rest of the group if it needed support…” (op cit, p.12)

    And the report specifically mentions risks in retail banking arising from property prices. The committee knew what the real issues were. They did a very good job of disguising them.

  16. Politicians want a tax for the revenue it gives them to spend on their constituents (the real drive behind the FTT is the EU who intend to take the money). As such they need a suitable victim for their larceny and Banks fit very nicely as long as you don’t look at the facts too closely…

  17. Shinsei67 – “Gordon Brown, for all his many other faults, was a technocratic details man and you’d think he’d have been better a arranging a bank bail out strategy.”

    I think Brown a talentless, micro-managing bully, but if he was a “technocratic details man” then he was surely an incredibly incompetent one, as evidenced by:

    – massive (really massive) VAT carousel fraud
    (from 2007 “According to official figures from HMRC, carousel fraud cost British taxpayers £3bn last year” http://www.channelregister.co.uk/2007/05/24/sarwar_money_laundering_carousel/);

    – the cock-ups of the abolishment of the lower rate of tax, and the “…complicated and disaster-ridden tax credit system”
    (from 2008 http://www.dailymail.co.uk/news/article-557678/Brown-hints-compensation-low-paid-hit-10p-tax-band-change.html);

    – the stupid way he sold UK gold, “…signalling such a large sale of bullion to gold traders helped to drive the precious metal to a 20-year low”
    (http://www.telegraph.co.uk/news/politics/labour/4162054/Gordon-Browns-decision-to-sell-half-of-the-UKs-gold-reserves-cost-UK-5billion.html);

    et cetera, et cetera…

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