Much as it pains me to do so, I have to set folks right before the molten lava of Daily Mail volcanic accusation starts raining down on the banks as from tomorrow.
I have no grumble at all with those who say “no bonuses at all until you pay the taxpayer back”. In a sane world, this would happen without even the need for debate.
But you can’t say the same about one set of profits.
Not everyone is an accountant and 95% of people can’t read a balance sheet or set of company results. Why on earth would they want to do either? But if you’re in the Don’t Know How category on accountancy results, think before you throw a wobbly.
How a company works financially – even a bank – is not that difficult to grasp. Retained profits are used to guard against a rainy day, or spent on buying assets that may range from buildings to bonds. The two together become the company’s capital, and the amount in total is called the capitalisation.
The only difference with banks is that their product is money: they make it by lending at a higher rate than they take deposits.
In the days when banks were prudent – and after the 1929 fiasco – it was absolutely essential (a matter of honour and, in many countries, law) that the capitalisation was sufficient to guard against even the most bitter of future winds and outrageous of fortune’s arrows. Further, the amount of liquid surplus in hand with which to trade, lend and invest had to be a high percentage of the amount of deposits taken in from ordinary savers like you and me.
The idea behind these regulations was as sound as a bell: with tons of capital, if the bank got into trouble it could borrow easily using the capital as security – until such time as the crisis had passed. And if that crisis became such that ordinary savers got nervous – a so-called ‘run on the banks’ – there was tons of liquid cash and lots of calm teller faces to ensure people got their money back…until the anxiety passed, and people put the money back in again.
Until Northern Rock in 2008, there hadn’t been a serious run on any major bank since 1760 – and looking at these entirely sensible regulations above, you can see why: the system was pretty much failsafe. And so of course, it was only a matter of time before some idiot suggested deregulation; and it was equally a racing certainty that this idiot would be a banker – or rather, a large number of City financiers. In 1985 it sort of began as Big Bang, but this was something of a misnomer because the truly enormous bang happened in the mid 1990s when all the building societies joined in. Unfortunately, the second bang was a backfire.
The truly crazy supposition underpinning Big Bang was that, left to themselves on the subject of money, human beings would never do anything daft. Whereas, since around the late 1990s coming up to 2000, all these freed-up financial institutions have been lending without anywhere near enough deposits, buying stuff that was hopelessly overvalued, paying far too much for the deposits they got, and lending far too much to people with either not enough money to repay, and/or a load of old tut as security.
In ten to twelve years, if you put your mind to it, you can knacker a bank pretty extensively. And if while you’re doing this, everyone around you is shifting packaged nonsense around and calling it a form of currency between banks, you can bankrupt it many times over. Although a gross oversimplification of what happened, in essence this deadly confluence of stupidity was working 24/7 until 2008.
Thus, the amount our banks still owe is far, far, far more than one set of happy profits. They owe some of it to us (but at 0%, we’re not depositing with them) and lent a lot of it to the buyers of flats in St Petersburg which probably don’t even exist. It is so much, the profits Lloyds will declare tomorrow wouldn’t make much of a dent in it: and the vast majority of it may well be a bad debt, period.
So believe it or not, we should not listen to all the ‘if you’re in profit why aren’t you lending?’ slurry that will follow the initial sets of results this coming week. In fact,we should be very worried about their ability to even stay upright: UK banks face a deadline of the end of 2012 to repay £165bn of high-quality liquid assets supplied to them by the Bank of England under the Special Liquidity Scheme.
Everyone from Vince Cable to Paul Dacre wittering on about the banks lending more is engaged in posturing – and they probably know it. The only two fair charges to aim at the financial community are first, why are there still bonuses; and second, why are so many of the guilty still in place rather than in jail? The City clowns have pat answers to these questions, but every last one is a three-card trick. Indeed, the fact that we are about to go into Crash 2 directly relates to the failure of governments everywhere to reform the system during the interim.
As we’ve discussed here before, there are also extremely damning questions one can direct to government – the main one being the unforgivable scam of forcing everyone to put up with 0% interest rates in order to let banks build up deposit profits on gilts…all entirely at the taxpayer’s expense, and to the detriment of cash-strapped entrepreneurs.
But all this pales into nothingness in the blinding light of what’s coming: that moment when the cartoon banks around the world are seen to have no wings, and thus drop suddenly out of screen. So go easy on the buggers: they’re going to need every penny – and the more they make, the better it’ll be for us in the medium term.
A propos of nothing very much on this clammy Sunday evening, you may have noticed that the Telegraph hack covering the BP disaster is called Alex Spillius. I’d like to think that there is an editor somewhere there whose sense of humour comes out in such ways from time to time.