Britannia Radio

There is beginning to emerge a consensus amongst all the top 
financial and economic commentators that the high street banks should 
be just that - retail banks for transmission of funds and loans to 
the public and small and medium sized businesses compatible with the 
savings they can attract.

The excrescences that fastened themselves onto suvch banks in recent 
years - the investrment banks - should be separated and if they 
prosper bully for them and if they go bust - bad luck.

The commentat0ors may subscribe to this view but the politicians 
don't seem to have heard about it and go on making matters worse by 
the day.

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TELEGRAPH 20.3.09
It's OK for banks to play roulette - but not with our savings
Lord Turner should have split investment - or 'casino' banking - from 
deposit-taking, says Jeff Randall.

Jeff Randall

How difficult is the business of commercial banking? Not very, 
according to George S Moore, a former chairman of Citibank. In his 
autobiography, The Banker's Life, he wrote: "If you're not actually 
stupid or dishonest, it's hard not to make money in banking."

Mr Moore's observation, penned more than 20 years ago, leads us to 
infer that, in recent times, some of the world's most powerful 
financial institutions have been managed by executives who combine 
the intellect of a glowworm with the integrity of Captain Jack Sparrow.

To say that money has been "lost" does not reflect accurately what 
has occurred. "Lost" suggests a possibility, however remote, that it 
may be found. Not so. The money has been obliterated. Like Monty 
Python's parrot, it is no more, it has ceased to be, it has joined 
the bleedin' choir invisible.

There was a time when £25 billion was the stockmarket value of an 
average British bank. Today, such a sum is more likely to represent 
its annual deficit.

Between them, the Royal Bank of Scotland and Lloyds Banking Group 
have dumped £585 billion of "assets" (dodgy loans and devalued 
collateral) in a box marked "Toxic Waste" - and we, the taxpayers, 
are insuring them.

For context, that's £10 billion more than Alistair Darling said he 
would raise from taxes, rates, excise duties and National Insurance 
in his 2008 Budget. The scale of the banks' misjudgment of risk 
defies comprehension. So, too, does the amount of rope extended to 
them by dozy regulators.

Against this backdrop, the Financial Services Authority and the Bank 
of England are scrambling to reassert their grip on a system that 
nurtured a conspiracy between reckless lenders and irresponsible 
borrowers. Between 1997 and 2007, house prices rose on average by 155 
per cent, while wages increased by only 18 per cent. Yet right up 
until Northern Rock began to crumble, aspirational home-buyers were 
being suckered into the property market with 125 per cent mortgages 
and loans of six times salary.

When the debt bomb finally exploded, both the FSA and the Bank 
suffered massive reputational damage. This week, repair work began in 
earnest. On Tuesday, the Bank's governor, Mervyn King, set out his 
vision for recovery in a speech to the Worshipful Company of 
International Bankers (I promise you, I'm not making it up). The next 
day, Lord Turner, the FSA's chairman, unveiled his response to the 
banking crisis in a 122-page report.

Despite carefully scripted comments of mutual respect, it's clear 
that these organs of rectitude are battling for supremacy in the new 
order. In terms of setting out past failures and acknowledging its 
role in them, the FSA's mea culpa has been more fulsome than the 
grudging acceptance of shortcomings by the Bank. Both, however, seem 
like humble flagellants compared with Downing Street's shameless 
campaign of self-exculpation.

As a matter of convention, neither the FSA nor the Bank openly 
criticises the Government. But for anyone paying attention, the 
pointers are unmissable. Lord Turner, in particular, delivered a 
damning verdict on the tripartite system of banking regulation, 
established by the Prime Minister, that fell apart spectacularly in 
the credit crunch's first tremor.

As No 10 tries to rewrite history, let's not forget that at the 2007 
Mansion House dinner, Gordon Brown boasted that London's success was 
based on "light-touch regulation, a competitive tax environment and 
flexibility".

He told an audience of Square Mile grandees: "In 2003, just at the 
time of a previous Mansion House speech, the Worldcom accounting 
scandal broke. And I will be honest with you. Many who advised me, 
including not a few newspapers, favoured a regulatory crackdown. I 
believe we were right not to go down that road. we were right to 
build upon our light-touch system."

When asked in the press conference if his report consigns Mr Brown's 
light-touch approach to the dustbin of history, Lord Turner did not 
flinch: "Yes." Among the black ties of the worshipful company, Mr 
King was more expansive: "To rely solely on the discretionary 
judgment of individual bankers and regulators is asking too much of 
human capabilities." We need regulation that joins the dots between 
assessing systemic risk and supervising individual banks, the 
governor said - "The present system has not delivered that."

The FSA's proposed rules, quite rightly, will require banks to hold 
more capital to support risky activity. This will blunt their 
capacity for bumper profits in boom times, but should make them more 
able to resist meltdown when the economy turns sour. It's hard to 
quibble with that.

In addition, Lord Turner proposes dragging the activities of hedge 
funds and other non-banking finance houses into the FSA's regulatory 
net: "If an activity looks like a bank and sounds like a bank, we 
regulate it like a bank." Another sensible suggestion.

But that's about it. The rest of the report is a conflation of missed 
opportunities and woolly thinking. For instance, the FSA wants to 
examine not just bankers' probity, but also their technical 
competence. How will that be done? Where will be the bar of 
acceptability? An economics degree? Basic banking qualifications? 
What about a GCSE in Adding Up?
As for the FSA's support for a European "super-regulator", don't get 
me started.

Lord Turner's most glaring omission is his decision not to impose a 
clear regulatory distinction between conventional deposit-taking 
institutions and the casino division of financial services, also 
known as investment banking. These are the chaps who, when times are 
good, enjoy treating other people's money as chips on a roulette table.

Nothing wrong with that, as long as the cash they burn has not been 
left for safe-keeping by widows and orphans. But when depositors at 
boring Halifax discover that a testosterone-fuelled derivatives 
dealer in another part of the group has been punting on the wheel of 
unfathomable instruments, is it any wonder that faith in the system 
quickly fades?

The state was forced to bail out banks in part because their casino 
operations had run amok. Time, then, to cut adrift these bits of the 
banking business, and fulfil the prediction made by Michael Lewis, 
the bond trader-turned-author, that by the late 2080s the Wall Street 
phenomenon of big-shot investment bankers with "interior decorator" 
wives will give way to big-shot interior decorators with "investment 
banker" husbands.

If they are as clever as they claim, those still in the game will 
have no trouble in making vast profits and multi-million pound 
bonuses. In which case, good luck to them.

If, however, they lose their trousers when the ball pops in the wrong 
hole - tough. No rescues, no bail-outs. They're on their own. After 
all, only the stupid and dishonest fail to make money in banking.