Driving in my car this morning, the radio was reporting news of a problem in the banking industry. Initially I was not paying much attention to the story, thinking it was more about the story from yesterday involving Barclays being fined £290m for fraudulently manipulating the LIBOR rates. Then I realised that, no, this was another story about the banks miss selling SWAPS to small businesses and that thy were going to have to repay compensation exceeding that they have had to pay out over miss sold Payment Protection Insurance (PPI).
I’ve not even mentioned yet the position of the banks in the economic downturn.
It struck me that something is very wrong in the world of banking and it is time to face a few truths. So, where do we start to look at the problems in the banking system and is it just a banking problem at all?
Lets start by turning the clock back to the 1980s and the deregulation of the banks – the so called big bang in 1986 allowed the financial services sector much more freedom from state control. This is turn led to the rise of the Yuppie – remember them. Making money was what it was all about. Greed was good as Gordon Gecko said.
This self regulation and freedom from proper, stringent regulation allowed the chasing of profit to be the only thing people cared about in the financial services sector. Currency/ FX and other trader were feted as being some sort of hero with their multi million pound bonuses.
Well those bonuses had to come from somewhere. It seems the banks didn’t care where the money came from as long as it came in. The shareholders got their dividends and the staff got their bonuses. What else mattered? Sadly, it seems that to those with their troughs in the snout nothing else did matter.
One of the first signs that things were not all rosy in the financial sector came with the miss selling of endowment policies. These were monthly investment policies which we were told would pay off our mortgages and leave us with a surplus. However, the projections supporting the sale of such policies were based on the mega high inflation of the late 1970s and early 1980s. This was not reflective of interest rates over time and there was no reason to believe that these rates would continue.
Banks got caught out after the PPI miss selling scandal broke. It became clear that banks and other financial institutions were selling PPI alongside loans and convincing people these were necessary, or even essential to take out. Often they were sold to people who could not benefit from the insurance police – e.g. self employed people. Eventually, the banks have had to compensate people who were miss-sold such products.
Then we have the miss selling of pension products… the lending policies that resulted eventually in the bubble bursting across the world and the current recession starting.
Since then, just this week, we have the news of Barclays being fined and others being investigated for fraudulently manipulating lending rates to their own benefit to boost profits etc. Then today the miss selling of products to small businesses that I referred to above.
So, what is being done about it? Well as the BBC reports….
Bank of England governor Sir Mervyn King has called for a change in the banking culture, saying that customers have received "shoddy" treatment.
He added that bank leaders had "let down" the many honest and hard working people in the financial sector.
Sir Mervyn’s comments come on the day banks were found to have miss-sold financial products to small businesses.
It is the third major scandal this year, following manipulation of lending rates and loan insurance miss-selling
… The Governor of the Bank of England is calling for changes in the banking culture. Well, forgive me for being cynical, but as Governor of the Bank of England throughout this whole sorry mess, shouldn’t he have been ensuring this did not happen. The blame for a lot of this can be put solely down to sloppy/ bad or even shoddy practices whilst on his watch. Its too little too late Mr King from you.
So, you’ll probably be thinking that I am of the view that all the problems in the world are down to the banks. Well, if so, you would be mistaken. I do not blame the banks anymore than I blame you or the person next to you.
You are probably wondering what the football clubs in the title have to do with the above words. Well, all 3 football clubs got into financial trouble as a result of their greed and overspending. Portsmouth… well, where does one start. They have been into administration nearly as frequently as Darlington. Glasgow Rangers were illegally not paying the tax on the wages they paid their players, never mind the tax schemes they came up with to avoid tax.
In the same way that bankers were greedy, so to were the fans of these clubs, the players and more especially the owners of the clubs. They spent money they did not have, in some cases to pay bribes (bungs) to get players to join/ stay at their clubs. Why? because they wanted to get their club to a higher level by any means possible – in another word- greed.
The lot of many (not all) people who find themselves having their house possessed is for the same reason, greed. They either bought houses bigger than they could afford or they spent their money on themselves instead of saving for a rainy day.
People have changed since say the 1970s. Back then people saved up to get a deposit for a house. This involved making sacrifices, living with parents, not having wild nights out etc. Back then far more people were prepared to live in rented accommodation. It wasn’t seen by people as essential to buy a house.
I watched an interview on a local news programme not so long ago when a female was complaining that her and her partner could not afford to save the deposit for a house and that the Government should help them. What was special about this interview? Well, the lady was drinking in a very trendy ( and no doubt expensive) wine bar and wearing designer clothing. Clearly she was having a good time- and why not. However, if she chooses to spend her money going out, then how does she expect to save up enough to buy a house?
People hark back to the 50s, 60, 70s and even early 80s as being era when life was so much better financially, but was it? I would say its our changed values that contribute to our financial problems. Prior to the 1980s, people repaired things. TV sets lasted many years and were repaired when they broke down. These days we change TV sets, because there is one with a slightly wider screen or a flatter case, irrespective of whether the old TV works or not. In the 1970s, if you had one colour TV, you were lucky. These days, houses have TVs in most rooms. you can even get TVs for the shower.
Have you ever stopped to think why street robberies were so less common in the 1970s? Well, its not because society has become more violent, but simply that nowadays you have a mobile phone or more, an ipad and or ipod and other high value items on your person. Back then we had our house key and the change in our pockets. We have become more materialistic and we want it all now.
When was the last time anyone you know darned socks or altered clothing to make them fit?
This wanting everything now attitude is greed in another form and it is what the bankers were guilty of and what the football clubs were guilty of.
Let he who is without sin cast the first stone?
So, am I suggesting that we do nothing regarding the situation if we are all guilty of greed? No, the big difference between the bankers greed and yours, is the number of people who suffer as a result.
We need a proper, fair and transparent system of regulation for the financial sector. A fine of 1/6th of their profits for one year is not going to stop Barclays Bank. We need to ensure that their is personal liability upon the directors of offending companies. They will claim they did not know what was happening lower down the company and that it would be wrong to punish them. As directors however, they are happy to take the huge rewards for the success of their companies, claiming its down to them. So, similarly, they must take the blame for the companies failings as again it is down to them.
The serious threat of lengthy prison sentences for offending directors would concentrate the minds of the directors on stopping the fraudulent and illegal activities of their companies. As for football clubs, the demotion of clubs several divisions will make people think. Darlington have dropped 3 divisions (on top of the one they were facing through relegation) for example and it has made people really think again about the attitudes towards the club.
Darlington fans would say that they are being harshly punished (some may say) for the greed and miss management of their previous owners. However, to some degree the fans of all those clubs in financial trouble are partly responsible themselves. How is that, you may ask? Well, it was in part the insatiable demands for success from the fans (whatever success means to each club’s fans) that helps drive the clubs owners to overspend.
Leyton Orient for example are owned by Barry Hearn who has ensured the club cleared its debts by selling land to build flats in the corners of the ground. He has decreed that the club will no longer spend more money than it earns. This means not paying transfer fees, limiting wages and reducing the squad sizes. This has not gone down well with some of the fans, BUT it helps ensure that the club will be around next year and will not face the spectre of administration or worse. The calls on some message boards for Barry Hearn to go are very short sighted and strange. Calling of someone to resign/ sell the club because they run it like a business and ensure it will survive in the long term is part of the cause of the problem.
Fans are wanting short term success and ignoring the long term consequences of such short term-ism.This is also exactly what the banks have been guilty of!