Posts Tagged ‘Northern Rock’

That Mr Obama seemed like such a nice man (and not a crack whore in sight)

January 29, 2010

Mr Obama seems not to like the banks. You can hardly blame him. Banks’ reaction to news that they will be prevented from trading speculatively (prop trading), cut down in size, not allowed to be too big to fail, and be forcibly separated from their retail banking arms was strangely muted. Perhaps they are in shock. Perhaps they think it’s not going to happen.

This all goes back to the concept of “casino” banks. Banks lost stackloads of money because they gambled it all away like a crack whore with a misappropriated suitcase of laundered drug money.

In reality, the casino analogy is quite neat (not so sure about the crack whore comparison though), not because investment banks are gamblers, but because they are the casino. Banks put up capital and risk money, but like any casino they should always end up on top (back to the crack whore again?) as long they keep an eye on the numbers, are careful about the risk and don’t get over-excited … which they unambiguously failed to do. In that sense investment banks and retail banks are not that different: don’t be stupid and it’s a guaranteed money-earner, get stupid and, well, credit crunch all around. Much is said of their complexity, but banks are no more complicated than, say, a hospital – an institution most people feel more than qualified to comment on.

The separation of investment bank and retail bank is a red herring. In the UK it was the retail banks (Northern Rock, HBOS, RBS) which lost devastating amounts of money, on retail business! Follow this technical detail carefully: they loaned money to people who could not pay it back. Oops! But, strangely, the massive shift in regulation could actually be good for banks. By forcing a true political conflict and getting into the detail, the banks may force some people to be on their side and, even, win an occasional debate. It could be even better for London; most US banks have a huge London presence, and it should not take much to move there. Alistair Darling will be pleased. There is even speculation that some of the banks will turn themselves into hedge funds and so side-step the regulation.

Is this a good thing? After all, banks can be destructive, but then  so can hedge funds – anyone remember LTCM?* – but then so can building societies, and car companies, and pension funds, and tulip bulb markets, and … and crack whores? Well, they’re strictly a bilateral transaction, when it comes to getting fucked on a big scale, you need larger institutions.

* Long Term Capital Management, a hedge fund that went spectacularly wrong, losing almost $5bn in 1998. There were significant fears its bankruptcy would cause a chain reaction in the markets, and so the Fed organised a bail-out, funded by, errrr, investment banks.