Thursday, February 12, 2009

How the banking system "works"...

Well, I guess that sometimes things just fall into my lap. Seems too that this is one of those occasions.

First, the outgoing (jumping if not pushed) “bankers” apologised to a Parliamentary committee. Interesting that the only printed reports exclude one of the more pertinent points. At the end of the tv report on the late news last night, each of the four was asked what banking qualifications they had. One claimed a Harvard degree in business administration should be qualification enough, one was a lawyer and the other two claimed (I think, as the responses were somewhat muffled) “experience” as their primary qualification.

But it gets worse. The “whistle-blower” is someone who does get it. And don’t for a moment think that the processes involved and the analysis in the US would be any different – they would not.

A sampler –
In my view, as an experienced risk and compliance practitioner, the problem in finding the real cause of the banking crisis is being made more complex than it needs to be.


- But let’s start with the cause and this fairly obvious proposition: even non-bankers with no “credit risk management” expertise, if asked (and I have asked a few myself), would have known that there must have been a very high risk if you lend money to people who have no jobs, no provable income and no assets.

If you lend that money to buy an asset which is worth the same or even less than the amount of the loan and secure that loan on the value of that asset purchased and, then, assume that asset will always to rise in value, you must be pretty much close to delusional? You simply don’t need to be an economic rocket scientist or mathematical financial risk management specialist to know this. You just need common sense. So why didn’t the experts know? Or did they but they carried on anyway because they were paid to do so or too frightened to speak up?


- In simple terms this crisis was caused, not because many bright people did not see it coming, but because there has been a completely inadequate “separation” and “balance of powers” between the executive and all those accountable for overseeing their actions and “reining them in” i.e. internal control functions such as finance, risk, compliance and internal audit, non-executive Chairmen and Directors, external auditors, The FSA, shareholders and politicians.

He’s been reading my mail!!
- When I was Head of Group Regulatory Risk at HBOS, I certainly knew that the bank was going too fast (and told them), had a cultural indisposition to challenge (and told them) and was a serious risk to financial stability (what the FSA call “Maintaining Market Confidence”) and consumer protection (and told them).

- I told the Board they ought to slow down but was prevented from having this properly minuted by the CFO. I told them that their sales culture was significantly out of balance with their systems and controls.

- I was told by the FSA, the Chairman of the Audit Committee and others that I was doing a good job.


after I was dismissed and to prove just how seriously HBOS took risk management, I was replaced by a new Group Risk Director who had never carried out a role as a risk manager of any type before. The individual concerned had primarily been a sales manager and was a personal appointment of the CEO against the initial wishes of other Directors


- I am quite sure that many many more people in internal control functions, non-executive positions, auditors, regulators who did realise that the Emperor was naked but knew if they spoke up they would be labelled “trouble makers” and “spoil sports” and would put themselves at personal risk.
Read the whole thing – it makes the blood curdle.

And, as I said at the start, do not imagine that there will be any difference if the truth ever emerges from Merrill Lynch or any of the other American banks being bailed out.

Let’s start the process by having all of these (hopefully ex-) employees forfeit their personal stock holdings to the government.


Al said...

I'd like to see a guy like that come out here. The guy's right, anybody should know that you don't loan money to people whom you don't believe to be "good for it." We, the people, weren't aware that this was going on--we wouldn't have stood for it. [I wonder if a rapper could do anything with that rhyme. Sorry about that.]

Why did they think they could get away with it?

T. F. Stern said...

I find myself in agreement with you on this point. Loaning money to people who have a marginal ability to pay it back isn't a loan, it's a gift.

When parents do this with their children the damage done is that the child doesn't respect the value or effort required for that money to include a lack of respect for the parent who handed over the "loan" with full knowledge that it would never be paid back.

When a bank or lending institution does it the same thing occurs only it takes down a community trust with it. In the case of government extending money in this manner, the loss of trust shakes the foundations of society as a whole and eventually leads to collapse.