Champagne bankers aboard the new Titanic

It was during the fall of a long, warm sunny autumn that we started to forensically sift through the debris of the big bang, the end of Western capitalism as we knew it. We counted the British and American casualties of the failed oil wars and peered through the shutters of bankrupt small businesses, as the ranks of the homeless, the destitute and the newly unemployed steadily swelled. We were unaware of the ticking time bomb triggered by the decades of excess and post-war consumerism, as the age of state-subsided humanity drew to a close. A surreal sense of detachment surrounded us as we watched the indecipherable balance sheets of 2007 turn into the credit crunch of 2008, precipitating the collapse of the world’s banking system and stock markets in 2008, leading to the Four Year Depression of 2007-10 and the creeping tide of the third world war.

Let us not deceive ourselves. The economic crises of the early 20th Century and of 1929 led to major depressions and two world wars, as ailing superpowers dashed to preserve their dwindling global interests, to cull the rising queues of unemployed youths, and to distract from domestic economic depression. The crash of 1929 was triggered by the same debt-fuelled share purchases (margins) and hyperbolic optimism as the option- and derivative-fuelled boom of 2007. The wars that follow great depressions are perhaps inevitable and terrible economic tools which are wielded to reinvigorate the military-industrial complex, generate a virtual currency of war bonds and collapse collective wage bargaining agreements. How the capitalists crowed when the Berlin Wall fell some twenty years ago, and how those Eastern minds who declared that ‘amorality and inhumanity were the unacceptable faces of capitalism’ must be nodding sagely as the collapse of the world’s banking system continues unabated, despite the many trillions in monopoly money which the Western governments are desperately pumping in an effort to refloat confidence. The same trick was tried in 1929, and it failed miserably. Well if history offers us any silver lining, it was the rise of socialism which followed after world war as people learned once again to collaborate in communities.

An ounce of prevention is worth a ton of cure perhaps, but what purpose is to be served in bailing water out of a sinking ship before the torpedo holes have been plugged? Therein lies the problem and root of the malaise – we have created a system that is too corrupt and too large to be allowed to fail. The liquidity of the system has all but dried up, no bank knows what their true losses are or is prepared to admit them, and their share values have fallen through the floor. Bankers long reaped where they did not sow and tilled barren soils with the earnings and savings of others. This month they have turned in their hour of need to the governments of their creditors. Seeing their greedy children helpless, vulnerable and exposed, what actions have the Old Lady of Threadneedle Street and the Father of all Parliaments taken to correct their errant ways? Will they punish them and take away their privileges? No, they have offered them prospective loans of over £100bn in cash and £400bn in liquidity (a total to date in excess of £500bn in virtual imaginary money to be paid back at some infinite point in time with few strings attached). Have they demanded seats on the boards of directors and preferential share holdings? No, they prefer to trust the demonstrably corrupt directors and to secure their tax payers only non-preferential shares in return for their hard-earned money and increased public debt. Have they demanded tough new laws and regulations to ensure that banks and hedge funds can no longer be absolved from corporate and financial accountability when greedy, irresponsible investments turn sour? No, it is an attempt to restore confidence in ‘business as usual’, as bread winners are laid off and small businesses are denied capital and charged over 15% for overdrafts. Will the Bank of England charge the banks 15% interest? Of course not, they’ve just cut interest rates by another half a point to 1.5% to ease the pressure on the banking sector. Hang on a minute, wasn’t it Alan Greenspan’s panicked lowering of interest rates to 1% after 9/11 that caused this recent cycle of boom and bust fuelled by irresponsible lending? It seems that it was only when every conceivable solvent and competent borrower and home owner had accepted high interest loans from this injection of cheap money that they eventually turned their attention to sub-prime loans to maintain their bubble of artificially inflated stocks and property portfolios. Quod erat demonstrandum, if ever anything was.

Once again the corporate bankers have clamored for their ship to be rescued before blame can be apportioned, simply on the grounds that they are too big and intrinsic to the fabric of the economy to be allowed to fail. Others might ask how such irresponsible risk-taking behavior can ever be corrected after these rogue giants are unconditionally restored to their former strength. Surely the gods of Westminster and Washington could have demanded that the unruly titans of the banking and investment sector were shackled by new legislation and regulation before attempting to restore them to rude health? After all, they were in no fit state to refuse anything. If the banking industry does survive the crisis, will they now listen and tamely accept new punitive legislation when they are back on their feet? I sincerely doubt it. They will soon return to their old ways of super-sized salaries, monster pensions, criminal bonuses, false inducements, and of creating new bubbles to supercede the dot.com and sub-prime fiascos of recent history. What ever will they come up with next? Perhaps they will start to sell futures in the careers of university graduates, or maybe they will formally sell data bundles of information in companies, shareholders and other populations who have been commercially stripped of their privacy. After all the UK civil service has already ‘misplaced’ the databases of the military, new mothers and health-care workers…

So what, other than sheer greed, lies at the root of this latest exodus of evil and mayhem from Pandora’s dreaded box? The seeds of this latest testosterone driven orgy of excess were sown when Alan Greenspan opted to slash interest rates to a single percentage point in an attempt to flood the capital markets with liquidity after the shock of 9/11. As any business man, Shylock or banker will quietly admit, they should never be offered a surge of cheap cash. Although credit is the fuel of the economy, it is highly flammable and has to be kept contained or it will explode. Any business opportunity or appreciating asset such as a share, house or commodity is a natural magnet for cheap credit, and what shrewd business person (or irresponsible gambler) will hesitate to borrow money at 1% when he can make 5-50% by reinvesting it in credit cards, property, or business ventures? Unsurprisingly people borrowed to invest (leveraging) or spend, and of course borrowed money is not ‘real’, but virtual, in that its value has yet to be realized or repaid. Entire companies were bought for billions based upon borrowing from companies who had themselves borrowed and soon, when there were no more underlying funds in the hands of the banks or their secured lenders, those who did not want the good times to end sought to borrow yet more by turning those on low incomes into home owners through sub-prime loans. Now, instead of entering a mild recession, the sub-prime lending strategy, tacitly encouraged by governments who are re-elected on the wave crest of prosperous times, has merely delayed and deepened the inevitable economic downturn.

The simple concept behind sub-prime loans was the encouragement oi those on low incomes to take on high interest mortgages and then to package these loans into AAA-rated bundles and sell them on at a profit. As long as property prices continued to rise there was no problem. While those on low incomes were able to maintain their high interest mortgage repayments, investors were paid off handsomely, and the properties continued to appreciate. Under these circumstances a house could be always be repossessed at a capital gain if a borrower defaulted, preserving the underlying asset value. However, the recent house price deflation and economic slow down of the past eighteen months has meant that any repossessions have yielded only a fraction of their original investment value, if indeed they could be sold at all. Investors saw their high return triple A-rated securities turn into junk bonds overnight, and banks and pension funds which had lent to the legal limit of their liquidity, suddenly became technically insolvent.

New financial vehicles and corporate structures allowed money to move faster than ever before. Banks that were more tightly regulated were superseded by hedge funds which were less constrained and more aggressive. A hedge fund is permitted to claim an annual commission of 2% on all invested monies and also a massive 20% profit on all accrued profits, while having no responsibility for any losses incurred at the roulette wheel. Hedge funds made massive profits during the credit boom as they were unlimited in the proportion of their investors’ money which they could commit. Their directors became very rich, very quickly, and mainstream bankers became extremely jealous, not only of the huge fortunes which they amassed, but also because their own investors deserted in droves to the hedge funds, reducing the leverage and liquidity of the banks. Unsurprisingly the bankers attempted to follow suit. Massive bonus incentives led to increasingly high risk strategies and piled bets, because when an investment made big money so did the hedge fund executives. Soon silly bets were being made on sub-prime loans bearing highly suspicious AAA ratings, until eventually bank stocks collapsed and the savings and pension funds of hard working citizens faced ruin. Ultimately, as ever, the aftermath of the party has to be cleared up by the tax payers, although the CEOs and chief executives of the banks and investment funds have long since departed to sunnier climes with their tax free super bonuses and very limited liabilities.

At this point let us just pause briefly to stare in disbelief at the roll call of dishonor – to wonder at the CEOs who cashed in on this zero sum game over the past three years as their investors lost billions. Angelo R. Mozilo of Countrywide pocketed $362 million before the bailout, while James Cayne of Bear Sterns grossed $42m. Richard Fuld of what was Lehman Brothers ‘trousered’ $186.5m, as Martin Sullivan of AIG, the colossal insurance group bailed out to the tune of over $85bn by the Fed, raked in a cool $25.4m. Stan O'Neal of Merrill Lynch lost his company over $10bn in toxic debt, but left with earnings of $66m. Kerry Killinger lost Washington Mutual some $19bn in the subprime mortgage bonanza, but still cashed in to the tune of $36m, while Charles Prince of Citigroup, who oversaw $57bn in write-downs, still siphoned off $41.5m from his ailing company. Where are these corporate criminals now? Are they in jail? No, these untouchables are living the high life, ensuring that they do not invest their takings in anything as stupid as subprime loans.

One might intuitively believe that now the party is finally over, providers of luxury goods, cruises and services would have hit a brick wall. Au contraire, Cartier, Gucci, Cunard, Ferrari and Fairline have never had it so good, as the rich choose to rest their capital from property portfolios and the stock markets and embark on a monumental spending spree while the dust settles. Naturally they will wait until asset prices reach rock bottom prices before they pitch their cash back into the market and reacquire yet more for less. Sudden recessions are perhaps the most powerful tool of the rich, and are much desired. For those who have the capital, recessions mean cheaper goods and services, auguring a spring of golden investment opportunities and a time to be busy. For the poor they represent only misery, dispossession and destitution.

So what can regulation can the state offer to remedy and restrict the excesses of gold-fevered minds? After all, the free market has repeatedly failed to foster adequate training and education or to champion sustainable development. Regulators could make it illegal for directors to receive bonuses in the absence of profits, and should also limit the percentage of profits which may be apportioned to such bonuses. As far as the taxation of profits is concerned, it is simply ridiculous that companies or banks can avoid paying tax on the grounds that they have borrowed money. Interest should not be tax deductable to close the loophole that encourages spurious borrowing. To quote a senior hedge fund manager, it is ‘palpably absurd’ that a corporate director pays a smaller percentage of their earnings in income tax than the maid who cleans their offices, or that Sir Phillip Green pays his wife, a non-domicile, hundreds of millions in salary to avoid paying income tax. Do the super rich really need houses with five swimming pools, a helicopter and a mooring for a luxury yacht? Our world only has finite space and resources, so if some individuals sequester more wealth, land and property then, by definition, the rest of us must share less.

Surely the weak and pitiful excuse offered by Standard & Poor’s ratings agency as to why they did not perform due diligence before assigning sub-prime loan packages AAA ratings for maximum investment security must be seen as the smoking gun in this murder-mystery? They must be punished to serve as an example to all accountants and fund managers that willful corporate negligence constitutes a crime akin to genocide, even if the mass murder is perpetrated with a pen on a luxury yacht and not with a machine gun in a killing field. The buck has to stop somewhere and, even if ‘no individual is innocent’, some are surely more guilty than others. The Chinese hang corrupt officials, and while this does not stop all corruption, it does far more to deter it than paying disgraced former CEOs hundreds of millions in severance and lost bonuses. Once upon a time banks were banks and building societies were just that, although over the last twenty years the commercial waters have been muddied considerably. Once upon a time banks were restricted to lending less than 80% of their liquid assets, although in the run up to this crisis they were lending up to 98%. Where once every penny was accounted for, now our banks are simply unable to estimate the value of their assets or write-downs, as dubious financial vehicles such as options, derivatives and ‘shorts’ have been used as a smokescreen for massaging figures and hiding toxic debts. It would take a 'state-of-the-art' supercomputer many days to crunch through all the numbers to ascertain the true scale of the crisis, even if such data were available and not constantly changing. Curiouser and curiosier, as Alice peers down the rabbit hole in the vain hope of seeing just how far it goes…

Banks should be forced to pay the government hefty insurance if they expect to be bailed out when times are bad, even though this goes against the instincts of those whose nature it is to hoard and to beg for low interest loans during hard times. After the Wall Street crash of 1929, the Federal government created some stability by ensuring that in future banks would be limited in their size and sphere of influence. Many European banks are now simply too big to fail, and with recent mergers, are getting even bigger… If the current system does survive this downturn, suddenly flooding the market with more liquidity ('cash') and slashing interest rates will only make the next boom and bust cycle even bigger.

Accountants should serve as regulators and not business buddies, held accountable for their financial oversights, and not simply permitted to write legal disclaimers on every report and set of accounts they publish. Aggressive accounting practices have become a euphemism for a lack of due diligence and ‘cooking the books'. Such practices should simply be outlawed. Banks should not be able to spend or lend more than 70% of the liquid assets which they hold, and they should have to declare their positions in terms of lendings and assets to the FSA and the Bank of England on a daily basis. In short, accountants should be made accountable, even if this does seem a contradiction in terms (to them at least).

Last, but certainly not least, the absurd notion that CEOs and directors should be able to collect their winnings and simply to walk away from the table without deficit when they lose should come to an end. In any zero sum game on the stock market or table at a casino, when you gamble you take home your winnings and leave your losses at the table. Investment banks and hedge funds aggressively risked their investors’ money and profited handsomely when their stock was rising. Now that they have lost their paymasters’ money, should the creditors not be able to knock on the doors of their luxury mansions and demand recourse? Regrettably, when the financial Titanic went down in 2008, the CEOs and bank chiefs were not aboard as they had already claimed first option on the life boats. Perhaps the most disturbing revelation of all is that most of them had already jumped ship with their takings long before the financial iceberg finally loomed into view…

‘President Gas is tap dancing, for the banker is a thief, he isn’t very honest, but he’s obvious at least’. Psychedelic Furs, President Gas