Category Archives: Banking

Banking, Economics, Free Market Capitalism, Moral Hazard, Political Decision, Regulation, Shareholder Value

Ultra-Fast Destruction of Real Economy Firms

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Around 80% of publicly quoted shareholdings are now controlled by financial institutions, rather than the end shareholders. The traders acting for these institutions have quite different objectives from those of the ultimate shareholders. Members of a company pension scheme, for example, are likely to have a personal desire for the survival and longevity of their employing company. However, unbeknown to them, the investment decisions made on their behalf for their pension fund, are made on the basis of short term gains, which may well be best served by the acquisition and break up of that same company and the redundancy of most of its employees. But it is worse than that.

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Bank Bonuses, Banking, Corporate Governance, Political Decision, Regulation, Shareholder Value

Vince Cable’s Fight

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Vince Cable’s closing speech to the Lib-Dem’s first in-government conference has been greeted by City and business types as ‘intemperate’, as ‘emotional language’ and ‘playing to the gallery’. But he is surely right to suggest that good real economy businesses are being destroyed for the short term gain of City speculators and their ‘accomplices’ who make fat fees from takeover deals. Cable is merely making a statement of truth, which has been highlighted several times on this site regarding particular situations such as the Kraft takeover of Cadbury.

Moreover, he is also right to suggest that, left to its own devices, capitalism tends to the establishment of monopolistic positions. Again, as is highlighted elsewhere on this site, you can have free markets, or you can have competitive markets. But you can’t have both. Competition has to be protected, or it will be destroyed by those same speculators and their accomplices.

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Accounting profession, Banking, Free Market Capitalism, Political Decision, Public Sector, Shareholder Value

Limits of Economic Advice to the Coalition

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David Cameron’s special advisory committee of ten on economic strategy includes five business graduates, five knights of the realm, three retailers, three asset strippers, two accountants, a banker, a lord, an advertising exec, a publishing exec, and Sir James Dyson. Only the last named has a background in manufacturing and is likely to have got his hands dirty at work.

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Accounting profession, Audit profession, Banking, Corporate Governance, Regulation

Basel’s New Banking Game Rules

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The new rules on bank liquidity, now agreed by the Basel Committee on Banking Supervision, will contribute to reducing banks’ risk-taking. But not a lot, and only slowly. Under pressure from the banks themselves, the rules have been softened and their implementation slowed down. Timidity in tightening requirements is justified on the grounds that too fierce and too rapid rebuilding of bank balance sheets would take too much out of the real economy and so contribute to the much feared double dip recession. But beware!

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Bank Bonuses, Corporate Governance, Political Decision, Regulation, Shareholder Value

Breaking up the Banks

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The little UK bank reporting season is over. £15Bn profits have been reported. Bonuses are being calculated. The time they took us all over the brink is becoming a distant memory, along with the ‘too big to fail’ mantra. Sir John Vickers’ commission on banking regulation won’t report for another twelve months and by then the boot will be firmly on the other foot. Government will need the bank’s profits to push share prices up so the public holdings can be disposed of at a profit, or at least at not too big a loss. It will be business as usual, at least till the next time.

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Bank Bonuses, Corporate Ownership, Economics, Moral Hazard, Shareholder Value

Paradoxes of Free Market Ownership

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The hero of the free market philosophy is surely the entrepreneur, the one who has the entrepreneurial spirit to start from small beginnings and build something not only with their own sweat, blood and creativity, but also by putting their own money at risk. They control and own. Most of them fail but a few succeed and go on to greater things, giving employment to large numbers and addressing some want or need in a uniquely satisfying way which assures their success. That is the free market hero; and socialism’s arch villain.

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Bank Bonuses, Corporate Governance, Corporate Ownership, Economic History, Financial Reporting Council, Free Market Capitalism, Moral Hazard, Shareholder Value

Common Theft by Financial Intermediaries

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“The directors of … companies, being the managers of other people’s money rather than their own, it cannot well be expected, that they should watch over it with the same anxious vigilance … Negligence and profusion must always prevail … in the management of the affairs of such a company.” So wrote Adam Smith 250 years ago. And that remains a core concept in the right wing free market fundamentalism that drives us today.

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Bank Bonuses, Economic History, Economics, Free Market Capitalism, Regulation

Banking Regulation

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Industry has always depended on credit. Without it we would not have had an industrial revolution. When Adam Smith described his pin factory which, through the division of labour, increased production from, at most, 20 pins per day per operative, to more than 48,000, all that was needed was a market for that massive increase in production. Markets had previously been small and localized affairs, requiring little in the way of transportation. Industrial markets required mass transportation which was first achieved with canals and turnpikes. But canals took many years to build before they could ever earn a penny return. That required a great deal of money and at that time money was scarce. Wealth was accrued in land and property rather than in spare cash. The only way such projects as canals could be financed was to get money from huge numbers of people whose repayment would come out of the future earnings of the projects themselves. The same applied to the later railways, and the whole industrialization process. So banks have always played a central role in the financing of industry.

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Bank Bonuses, Economics, Green Business, Political Decision

The Long View

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Since the financial crash, and all the stuff about speculative financial markets, hedge funds, greedy bankers and their obscene bonuses for doing precious little of real worth, and then all the stuff about global warming, and BP’s poisoning the Gulf of Mexico … with all that going on it’s difficult to stand back and take a longer view of our situation. But it may be useful and instructive to try.

DNA scholars like, Spencer Wells (‘Pandora’s Seed: the unforeseen cost of civilization’), study human evolution from the genetic record stored in our DNA. Homo sapiens separated off as a distinct species around 195,000 years ago. Human population seems to have been relatively stable for around 115,000 years while people migrated from Ethiopia across Africa and the Middle East, it is presumed in search of food supplies to hunt and gather. Then population appears to have crashed, almost to extinction, around 70,000 years ago, probably as a result of climate changes reducing food supplies. Around 60,000 years ago population started to recover and spread across the globe. Then around 10,000 years ago, a watershed in man’s history, population started its continuous expansion from a few million to over 6 billion today, with a massive increase starting in the late eighteenth century. The change 10,000 years ago was caused by the conversion from hunter-gathering to farming and 250 years ago by industrialization.

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Accounting profession, Audit profession, Bank Bonuses, Company Law, Corruption

Going for Goldman

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The problem with the Securities and Exchange Commission’s long overdue pursuit of the potentially fraudulent practice in Goldman Sachs is that it is likely to take a long time to conclude, will cost an arm and a leg, and its outcome is far from certain. If and when the UK authorities follow SEC’s example, it would be likely to cost more, take longer, and be even less likely to produce convictions.

The problem is that such legal actions engage with the details of credit default swops (CDSs), collateralised debt obligations (CDOs) and the whole panoply of financial derivatives that have been deliberately invented to mislead and defraud. CDOs were invented so as to deliberately disguise the real extent of liabilities and so make a firm appear less risky and therefore capable of taking on more debt, which was done with the same deliberate intention to mislead and defraud. This is a minefield where the attribution of blame and intent is full of deliberately confusing and opaque detail.

It would be better to step back from the detailed machinations and simply take a view of the truth and fairness of a firm’s published accounts. It is not difficult to do with the benefit of hindsight. Where balance sheets have been seen not to reflect a true and fair account of a company’s position, the auditor who certified the balance sheet should be prosecuted. They are paid vast sums for their expertise and diligence in certifying company accounts. Auditors who are party to misleading accounts, are guilty of either incompetence or dishonesty. They should surely have to face the full force of the law and be struck off by their professional body. Similar treatment should be meted out to those who presented the misleading accounts. And those who gained through their deliberate misrepresentation and have taken large bonuses as a result, should be similarly treated, with their fraudulently earned bonuses being repaid.

This would be a major change in accepted custom and practice, but it is to be hoped the SEC’S action against Goldman Sachs is a first step in that direction.