"...If you owe a bank £1,000, they can determine your every move, because they can control your life. If you owe a bank £100 million, you own the bank, and they will leave you alone..."
An old con-man once taught me this adage when I was a young detective at the Metropolitan Police Fraud Squad.
What is true with con-men is true also of the banks themselves. When the tax-payer is underwriting your liabilities to your depositors, you can throw caution to the winds, because if you end up spending more than you own, the Government will be forced to step in and bail you out sooner than have to pay all the depositor's losses, while watching you go to the wall.
That is the bottom line in banking, and the banks always knew it.
Oh, they might like to trot out the bromides about being careful and prudent, and employing highly-trained people who need special consideration when it comes to remuneration, but the reality is that when someone else is footing the bill, banks will throw money around like there is no tomorrow.
And, in the case of the vast majority of British banks, they truly did believe there would be no tomorrow.
Now, Sir Mervyn King, Grand Panjandrum at the Bank of England, and someone who should have tried harder to make his voice heard at the salient time, has now come clean about the financial crisis, and he has laid the blame fairly and squarely on the banks for the recession. He stresses that it is now absolutely imperative that there is a separation of retail banking from 'risky investment banking', in order to make the economy safe.
He admits that the Bank of England should have shouted louder to warn about the risks, but they didn't. Why not? Because that's not the way financial regulation is carried out in this country. The British tend to use academics and accountants when it comes to financial regulation. They may take on a few superannuated bankers to advise them on practical issues, but by and large, the men and women who oversee the actions of the men and women with their hands on the till (and in the till half the time), are theoreticians.
King studied at Cambridge and Harvard before becoming an academic. He is a very clever man and no doubt a fine theoretical economist, but he has never worked in a bank at the sharp end. He has never known what it is like to be bullied by some sales manager into making credit card sales, or selling PPI insurance to gullible customers who merely wanted a small bridging loan.
Banks on the other hand are capitalists, red in tooth and claw. They are in the business of making money, and in the age of modern banking, they don't really care how they do it.
When it became clear that the Government would underwrite a significant proportion of depositor's money, the banks no longer needed to operate with any degree of caution anymore. In addition, they had also discovered a wonderful new way of limiting their own downside to lending money, it was called 'securitisation'.
Banks used to have to be wary about the people to whom they lent money, in case the debt wasn't repaid, but with the advent of securitisation, and the ability to treat debts as investment products, the prudency problem was resolved. All that was needed was a steady stream of mugs who needed to borrow money, and you were in business.
Having made a loan to someone you had never met before and about whom you knew nothing, you then sold them an insurance policy to underwrite their indebtedness, just in case they couldn't repay the loan. You made it easy because you made it a single premium policy and wrapped it all up in the cost of the loan package. You were careful not to tell them that they wouldn't be able to activate the policy for fear they might not want it, and in many cases, you told them it was a condition of the loan anyway.
Then, having made the loan, you then packaged it up and sold it on to some other institution, being paid back the cost of the loan you had just made. You made a profit from the sale of the dodgy insurance policy you had just foisted on the mug, so you were quids in.
The second institution then packaged up a load of similar loans and mortgages, and sold them on. It became a vast game of 'pass the parcel'. Everybody was making loads'a money because the banks were paying good commissions and bonuses for making these loans, because no-one gave a damn whether they were ever re-paid or not! Whys should they, they had got them off their book?
An so the merry-go-round went on and on, the level of personal indebtedness rose and rose, people were leveraging their houses for holidays, cars, school fees, credit card bills, and all the time the banks were lending and making the level of debt higher and higher. Gordon Brown and his little mate, Ed Balls, were happy watching the banks paying taxes on their earnings and profits (little realising how little they were actually paying in reality, and how much was being syphoned off offshore).
The Government even went so far as to instruct the financial regulator, the FSA, to soft-pedal on the regulatory line, requiring a 'soft-touch' approach, and all the while, the banks were lending more and more, and making more and more bonuses, secure in the belief that tomorrow would never come, and even if it did, they were protected, because if they showed any signs of collapse, the Government would be forced to step in and save them, or face ignominy for their lack of foresight and absence of prudence.
And all the while, the Bank of England were sitting on the sidelines observing this upward spiral of debt, and doing and saying nothing.
And that, dear reader, is why it all went pear-shaped. No-one wanted to be the boy who pointed out that the Emperor had no clothes on, no-one wanted to be the one to call a halt to the giddy gadarene rush to bonuses and false profits. No-one had the guts to tell Gordon Brown that his policies were flawed and that it would all end in failure. A few shrewd businessmen looked at the figures and realised it couldn't last and sold up and got into cash before it was too late, but the vast majority got burned.
And at the end, the tax-payer had to bail the whole rotten fucking mess out! And we are still paying, and we will go on paying for a very long time to come, and our children's futures have been mortgaged up to the hilt to pay for this mess, and I doubt whether we will see the end of this recession for the next twenty years. I think we will have to get used to a reduced standard of living and an austere environment for a very long time to come.
The one group of people who will not feel the pinch is the bankers, on that you may depend. And that is why I think Mervyn King should be put in the pillory outside the Bank of England, because he had the power to do something about this, he had the staff to crunch the numbers, and he could have done something, anything to voice his concern. But like the good, safe pair of hands that he is, he murmured here, he quietly opined there, he let it be known in the proper quarter that he was making a sermon, and no-one took any damned notice of him!
What is the point of a Governor of the Bank of England if when he speaks, no-one listens?