Bad Banks and their effects on us

dandelion

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Recently I have posted on two threads about misbehaviour by major banks.

The most recent thread ' http://www.lpsg.com/images/misc/tag.png Barclays chief executive Bob Diamond has resigned with immediate effect

was about Barclays, which recently was publicised for fixing the inter-bank LIBOR rate for its own commercial advantage. Not the only bank involved, apparently, but the first to settle for a stonking great fine in punishment.

Previously RBS board blackmail government into giving bonus

was spurred by the essentially bankrupt and nationalised RBS bank top executives paying themselves big bonuses. Not the only people doing this, Diamond from Barclays was also paying himself a huge sum despite his bank at the same time being under investigation for criminal activity which had happened while he was part of the management there. The entire industry is guilty of overpaying itself 'performance' bonuses when the performance in question might have been to run the company into the ground.

In the last few days Standard Chartered bank has been accused of money laundering. In this instance US authorities have been interested specifically in banking connections with Iran, which they reckon Standard Chartered has deliberately hidden. One commentator this morning suggested that if SC is forced to reveal all its transactions the information might be enough to cause the collapse of the Iranian government, by effectively closing gown all its international trade. Busy people,then.

Not the first instance of money laundering. HSBC has been accused of laundering massive amounts of Mexican drug money. Lord Green, who was chief executive from 2003 to 2006 while this was happening is now an adviser to the the UK government on banking (but it was happening for longer than this, so I wouldnt want to unfairly place all the blame on him!). Other banks too have from time to time been accused of money laundering.

Famously, the collapse of Greek government finances was aided and abetted by Goldman Sachs, who were employed to help hide the real level of national debt inside complex financial instruments.

Lehman brothers, and other US banks, were heavily involved in the process of providing mortgages to people who could not afford them, and then creating financial investment bonds based upon those mortgages and the imagined returns which they would make, These were sold worldwide...creating a world recession when it was discovered the bonds were worthless. The cost of this has been staggering.


Rather than the diverse threads about all this, I thought we should have one thread with a general title to bring together discussion on bank scandals. Being in the Uk the news we get concentrates on British banks, but it would be fascinating to know how all this is reported in the US. I am sure there will be a new bank scandal along any minute now.
 

dandelion

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The latest scandal to come my way is not exactly new. The UK banking sector has for a long time been selling payment protection insurance to people taking out loans. This is supposed to protect them against not being able to make repayments if something goes wrong in their circumstances. Unfortunately this was so badly miss-sold that in some circumstances at least, the small print of the documents meant that under no circumstances could the person insured ever make a claim. It was utterly pointless!

This saga has reached the stage where the shadow financial industry is busy cold-calling anyone they can (me, for example) inviting them to hire their firm to claim back money. Since there is now a relatively straightforward way to make claims and the banks are busy setting aside billions of pounds to meet claims, this is just another example of the banking industry taking a cut from the unsuspecting public.

The BBC just started a series of programs about Fixing broken banking, BBC - BBC Radio 4 Programmes - Fixing Broken Banking, Episode 1 and the first was about the PPI scandal. Apparently the insurance market was regulated by an industry standards board, naturally made up by members of the industry. The BBC interviewed someone from one insurance company which was providing legitimate PPI insurance, with far better benefits than the standard contracts being sold by all the major banks, at a fraction the cost. He reckoned the major banks were taking about 90% of premiums as commission whereas his company was perfectly happy to issue insurance at around 15%. His problem was that no bank would sell it, instead selling policies from companies they had links with and which gave massive commission to the banks. He complained to the regulatory body, which saw nothing wrong with the situation, but told him to shut up complaining because it was forbidden for one member to criticise another.

Eventually the UK financial authorities had a massive build up of complaints and banks have been forced to come clean. The BBC also reported bankers complaining that the problem was a failure of legislation. Government had not prohibited them doing what they did (well, apparently it had, because they are now being forced to pay back the money) and so they had naturally taken advantage of this opportunity to make loads of money.

The program used this saga as an example, that the traditional relationship between a bank and its customers has totally broken down. At one time a bank might be expected to give reasonably impartial advice to a customer. Now they had reached the point of hard selling insurance which could never, ever, pay out.
 

Jason

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We need simpler financial products.

Loans should attract a rate of interest which relates to the risk. However banks decided to camouflage their rates. Instead they offered very low interest rates plus compulsory PPI, and they actually made their money on the PPI. Any bank that didn't go down this route but just charged a fair interest rate appeared uncompetitive - so in effect the whole industry piled into PPI. The issue should have been regulated years ago. Now we have correctly decided that the PPI was a scam because most PPI was useless to the people who bought it - but the remedy is problematic. A fair remedy would be that the PPI was refunded but the loan interest adjusted, which in most cases would make little difference. Instead we have the unfortunate system where banks are being forced to pay large sums of money to people who took out a loan - and the reality is that this cost may well end up as a state cost as much of our banking system is state owned.

I think the lesson is that we need much simpler banking products. Personal banking should offer a limited range of current and savings accounts, not the bewildering variety they all offer. Loans should be simpler. And we need to get away from premium current accounts which offer useless supposed benefits. Possibly we do need to pay for banking.
 

dandelion

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Bad banks??.... are there good ones?
Actually, yes. In the UK (dont know where you are) there used to be building societies, which are mutual organisations which belong to the people who have accounts there. Traditionally they borrow money from individuals and lend to other individuals, in the case of the building societies, on property. Any profits belong to the organisation, ie to the members.

The then Uk conservative government introduced legislation aimed at abolishing building societies. It passed a law that if a majority of account holders passed a motion to do so, the society would be turned into a limited company and everyone became shareholders. So we then had a wave of people putting £1 into accounts in different societies, so they could vote to turn them into companies and then sell their shares for maybe £1000. A few have survived, the nationwide compelled all new account holders to agree that in the event of a sale the account holder would give his new shares to a charity.

Banking is useful, even essential. What would you do if there were no banks? what is not useful is being ripped off by monopoly providers who dictate the terms for their services.

Loans should attract a rate of interest which relates to the risk. However banks decided to camouflage their rates. Instead they offered very low interest rates plus compulsory PPI, and they actually made their money on the PPI.
I do not accept this argument. Yes they made loads of money on selling PPI, but I do not accept they made loans at a loss. merely at a more reasonable rate. Banks could have continued as profitable businesses without the PPI. I would be pretty certain they could even have survived cutting their rates further, but why would they?


A fair remedy would be that the PPI was refunded but the loan interest adjusted, which in most cases would make little difference.
Absolutely not. Even if your point was true, behaviour like this needs to be punished. The banks chose to use a trick and when it fails they deserve to loose what they risked. We should bail out banks for yet another trick they tried to play on us?

the reality is that this cost may well end up as a state cost as much of our banking system is state owned.
I see little sign we are going to privatise banks properly, as we should. Perhaps instead any individual bank employee who got a bonus from selling PPI should be fined? You reckon they did not understand they were ripping off their customers?
 

Jason

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... behaviour like this needs to be punished...

Punish individuals. Individuals who have broken the law should go to court and if guilty face the sentence of the court.

Punishing "the banks" or any other abstract concept is almost always useless and creates a sense that "they" are responsible, a dangerous and false doctrine. I recognise that there is such a thing as corporate responsibility and the corporate person, but I'm leaving this aside here.

The "banks" in the UK have for decades worked according to a series of regulations produced by governments and supervised by regulatory systems set in place by governments. This is not a matter of Conservative or Labour or EU or any other policy - rather these are policies which in broad terms have been approved by all politicians and all the people they represent. Most people have just wanted their free current account banking, cheap loans, over-inflation savings rates and haven't even bothered about how this is being done.

@Dandelion, think of what you feel should be done to "the banks". Think of it as Dandelion delivering a punch. Now deliver that punch to your own chin. My point is that WE are responsible, not THEY. I accept that there are individual bankers who should be thrown in gaol and the key lost, but for the problem of "the banks" the guilty party is us. We have sinned exceedingly in thought, word and deed through our fault, our own fault, our own most grievous fault.

The idea of somehow "punishing" the banks is conceptually wrong - it is also impractical. In the UK we the people own most of the banks. Do we want to wreck our own investment? @Dandelion, how much additional tax are you personally prepared to pay for the fun of punishing the banks?

The correct action now is to hug a banker. Turn the other cheek. Take an interest in our banks and start making right decisions and start getting them to work better. To do this we all have to be responsible, and we all have to accept responsibility.
 

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Please bear in mind that the Standard Chartered story is also largely about the US bullying the financial world into processing all $ transactions through New York. London is resisting these restrictive practices that the US thinks it can enforce now that they think that they have destroyed the Euro as competition in international trade.

Having said this, the banks are rather like the US. They like to present a lovely cuddly image to people, but the people really pulling the strings do hard ball like most people don't understand. I think that they have gone too far and need to fall.
 

tamati

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also need to seriously punish the universities that hock degrees in unsustainable greed.

one of the happiest days of my life was when i closed my bank account. now I strictly deal in cash and barter, and have one prepaid card for purchases that cash or trade wont cover.
 

Drifterwood

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also need to seriously punish the universities that hock degrees in unsustainable greed.

one of the happiest days of my life was when i closed my bank account. now I strictly deal in cash and barter, and have one prepaid card for purchases that cash or trade wont cover.

My lifestyle doesn't allow for a cash only existence, but I haven't needed the banks for loans for more than ten years now, and it is very liberating. It's probably unrealistic for most people as the system drives us into debt. We really need to reverse this reliance on debt.
 

dandelion

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Punish individuals.
fair enough. Make bank clerks personally liable for malpractice which they carry out at the instruction of their employer. This could work.

Punishing "the banks" or any other abstract concept is almost always useless and creates a sense that "they" are responsible, a dangerous and false doctrine.
This is rubbish. Take the analogy of pollution. we have laws about this and punish companies which nonetheless produce pollution. This is just clearing up financial pollution. If its true we have no way to punish the owners of banks, that rather suggests to me the banks are out of control and this must be changed! Banking is NOT an industry which can go overseas, witness the US' exerting control over standard chartered.


The "banks" in the UK have for decades worked according to a series of regulations produced by governments and supervised by regulatory systems set in place by governments. This is not a matter of Conservative or Labour or EU or any other policy -
The conservatives deregulated banks in the 80's (i forget the exact date) and destroyed mutual financial institutions owned by their customers. The US has also deregulated banks. Look what we got.

We need to re-nationalise these institutions and set them up again as socially owned.

Most people have just wanted their free current account banking, cheap loans, over-inflation savings rates and haven't even bothered about how this is being done.
But it hasnt been done.

My point is that WE are responsible, not THEY.
The conservative party started this...let me think...is the PM from a family of stockbrokers...the chancellor is a wealthy company owner...is there a theme here about people who are interested in helping the rich stay rich? It is pure propaganda that nothing can be done about this. The government has no interest in trying, and every interest in persuading us it cannot do anything.


In the UK we the people own most of the banks. Do we want to wreck our own investment?
It is stupid to say this is an investment. Thats like saying the government would act to make sure food keeps arriving in Britain for people to eat and would do anything necessary to ensure this - but then would change its mind and stop bringing in food because it discovered it was losing money on the deal. The vital interest is make the system work properly again, being side tracked trying to make a profit on having been forced to buy them up when bankrupt is completely absurd.

@Dandelion, how much additional tax are you personally prepared to pay for the fun of punishing the banks?
I reckon the cost of not fixing this problem will be higher than fixing it, so I am calling for the cheaper solution.

Take an interest in our banks and start making right decisions and start getting them to work better.
Exactly. So start by punishing the past miscreants and making sure laws are in place to stop future bad behaviour. People seem to think having a law against theft and putting people in gaol when you catch them is a good idea even if you never do catch most of the thieves and it is exceedingly expensive to keep them in gaol.
 

Jason

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I do so love winding up @Dandelion! Though I also mean what I say - you and I Dandelion and indeed everyone else have to accept that WE are responsible for the mess, not THEY. If you have a problem with the banks, the politicians, the media, big business or any other group the starting point for a remedy is to accept personal responsibility. Yes it is collective, shared responsibility, but we can all play our part.
 

dandelion

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I do so love winding up @Dandelion!
Got no serious comments then?

Yes it is collective, shared responsibility, but we can all play our part.
How?

Throw stones through the windows of banks?

Ton of manure protests dumped outside branches?

Organise protests at the homes of bank employees and make their lives miserable?

Start our own banks? (oh dear, that is exceedingly hard to do because of lots of laws forbidding us to do so! And when we had some people owned banks, the conservative government closed them all down)

Er, what, exactly can we do individually? We have MPs to make laws on our behalf and they know perfectly well how the public feel about bankers, but....no action. Replace the current lot of MPs with a different party?
 
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Jason

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Individually? You can do quite a lot.

First of all you can decide who you want to bank with. The market includes plenty of mutuals, the Co-op, and a very large number of high street banks. There is choice.

Yes, why not start your own bank? This is what many communities throughout the UK are doing with credit unions. It really is possible to start your own bank.

You can certainly play a role in the governance of a bank as even a very small shareholding will give you the right to ask questions at AGM. Mutuals do require input from members (yes I know they are good at giving members a choice with a big arrow saying "vote here").

If you have ideas about how banks should be run there is no reason why you shouldn't contact the minister responsible. If there is an issue around a bank in you local area, contact your MP.

You can certainly be active in a major political party and help formulate their policy, including towards banks. If you don't like any of them you can stand for the Dandelion party - in the UK we do occasionally get independents elected to Westminster - and there are many independents at council level.

So yes Dandelion, you personally can do a lot. So can I - so can all of us. And the flip side is that if we don't we have to accept we are responsible for the mess.
 
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Fuzzy_

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We need simpler financial products.

More problems:


  • Complicated, systemic products sold and exchanged worldwide (like the ones with deeply-hidden sub-prime mortgage investments)
  • The US Federal Reserve
  • Bank bailouts
  • Lack of ethics training
  • Far too much leveraging (especially with hostile takeovers)
  • Weak regulations in directives market bets (not hedges)
  • weak monitoring of hedge fund investors
 

Jason

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Interested to see ethics training on Fuzzy's list.

We need people in business and public life people who have a sense of right and wrong. Time and again we hear of some scandal where the legal issues may be horribly complicated but the moral issues are actually straightforward - someone has done something naughty. Half a century ago in the UK we did recruit people with the "right" moral code through the old boy network - and this same network regulated their behaviour. But this has now long gone. We do need some system where interview panels routinely look at the moral rectitude of the people they are employing in senior posts (and perhaps junior posts also). Perhaps we need character references (as opposed to professional references) and for interview panels to look at the private life of people they plan to employ.
 

123scotty

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i think now is the time to bring banking into state ownership. the banking sector is now beyond any control. moral or otherwise. it is nothing more than a rich mans bookies a gambling game for the rich. the banks can blackmail governments, distort figures to there own end.and as for the money markets who lurk around waiting on disaster so money can be made is yet another murky side of the banking industry. the banking sector should be taken out of private hands as these hands are very untrustworthy. the banks are there to service accounts private and commercial. but i think the banking as it is at the moment regulated for shop window and cosmetic effect will continue.it will continue as long as the the money for the boys mentality is still there
 

Fuzzy_

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Interested to see ethics training on Fuzzy's list.

We need people in business and public life people who have a sense of right and wrong. Time and again we hear of some scandal where the legal issues may be horribly complicated but the moral issues are actually straightforward - someone has done something naughty. Half a century ago in the UK we did recruit people with the "right" moral code through the old boy network - and this same network regulated their behaviour. But this has now long gone. We do need some system where interview panels routinely look at the moral rectitude of the people they are employing in senior posts (and perhaps junior posts also). Perhaps we need character references (as opposed to professional references) and for interview panels to look at the private life of people they plan to employ.

Absolutely. It's not just the US, and it's not just executives, though. Everyone involved in lending has a position of authority that they can exploit. Lehman's executives regularly used cosmetic accounting tricks to make its quarterly finances seem more stable. Obviously, there was horrible deceit at the top, but what about the loan officers of, say, Bank of America. They would sit across couples who had children and tell them that they could afford this mortgage at a certain rate knowing that, within a few years, their bank will not only take their house from them, but all the principle they put into it up until then. That's shameful, yet it was standard business practice.
 

Jason

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i think now is the time to bring banking into state ownership.

I think there's a case for this for the very large banks - with competition provided by a host of small, private banks. There would need to be some sort of maximum size for these private banks.

There is a problem in that nationalisation of a bank such as RBS would transfer the liabilities onto the UK. At the moment the UK is acting as a guarantor, but doesn't actually have the debt (and of course we all hope with reason that the bank will get its house in order and the debt will go away). It would be an enormous debt for the UK to pick up, in addition to the massive bailout already paid. RBS provides a curious issue in respect to Scottish independence. An independent Scotland accepting the existing RBS bailout as their debt would be instantly bankrupt - and there is no way an independent Scotland could nationalise it. I think there's a real need to get the independence referendum over before a decision can be made about RBS. If Scotland goes independent then it is Scotland's nightmare; if not then I think the case for nationalisation may grow.
 

dandelion

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If Scotland goes independent then it is Scotland's nightmare; if not then I think the case for nationalisation may grow.
The Uk government relaxed the rules on banking which alowed RBS to do what it did. Difficult then to put the blame for this and the cost of fixing it onto people who had nothing to do with it.
 

Jason

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The Uk government relaxed the rules on banking which alowed RBS to do what it did. Difficult then to put the blame for this and the cost of fixing it onto people who had nothing to do with it.

The Scots are part of the UK and have as much and as little to do with it as any other sub-set of the UK. Yorkshire folk had nothing to do with the RBS mess - but they have paid the price, as has everyone from Lands End to Muckle Flugga.

If we get as far as an independent Scotland the "velvet divorce" will be supervised by the UN (as the Czech and Slovak divorce). Of course there is room for discussion and compromise. But a key idea is that companies that have their head office in Scotland and which operate under Scots law will be part of Scotland (just as those outside Scotland operating under English law will be part of E, W or NI). Had Scotland had an independence referendum a few years back when RBS was hugely profitable and voted for independence then I have no doubt Scotland would have been claiming this prize - and rightly so. RBS belongs to Scotland just as Bank of Ireland belongs to Ireland.

Splitting a country through a UN process is not about "blame" - it is about the just allocation of assets and liabilitiess using internally established criteria, and it should be a blind-justice process. Thus the sea boundary between Scotland and the rest will be set using established principles, the national debt of the UK divided - it is all reasonably straightforward at least in outline.

I think a point is that it is inconceivable for an independent Scotland to remain solvent even with just a proportional split of the national debt. Add in the RBS financial problems and Scotland goes into even worse territory. Had Scotland split before the crisis hit then Scotland would have been overwhelmed by the debt crisis - the position is worse than that faced by Ireland. I think the choice for Scotland is to remain part of the UK or to accept austerity and IMF bailout. Now I don't necessarily see this as a reason for not voting for independence - I think national self determination trumps affluence and the austerity may be a price worth paying - but I do think the people of Scotland need to know what they are voting for.

Devo-max is a non-starter as it would tend to destroy the UK (just as devo-max in the Eurozone is destroying those countries). I think the realistic decision is between independence or the status quo (possibly tweaked a bit). However if the UK government has the courage it should be a choice between independence or reduction of the powers of the Scottish parliament to a regional assembly (as Wales, NI). The asymetrical devolution is straining the UK constitution - the West Lothian question doesn't have an answer.

Sorry if I'm off topic Dandelion, but I think there is a link into what I see as the heart of the thread. We are in my view all personally responsible for the banking crisis. Scotland cannot advance the argument that Scotland's biggest company governed by a mainly Scottish board and working under Scots law is somehow the responsibility of the English when it goes wrong. Rather the Scots are responsible as much and as little as everyone else in the UK.