Sunday, July 01, 2012

Nothing New - You Can Bank On It!!

During the current stream of news stories regarding the dodgy doings of our banking system, and the huff and bluster of the State in response, it is interesting to look back in history and see a) just how many times we have gone round this circle and b) just how toothless the state is in these matters......

We shall ignore the pre-industrial era crises such as the Holy Roman de-basement of coinage in 1622 that ended with children using the worthless coins as toys, the Dutch Tulip Bubble of 1667 which saw one single tulip become equal to 60 tons of butter and the famous South Sea Bubble of 1720 which resulted in Issac Newton losing £20,000 and declaring with candor that he "could calculate the movement of stars, but not the madness of men."

We shall begin with latter part of the 19th century at the height of Britain's pomp...

1866 - Overend, Gurney and Co. collapsed with debts of £11m (at the time, not today's equivalent!). Directors tried for fraud but too late to prevent massive crisis that resulted in 200 companies including other banks going bust.

1878 - City of Glasgow Bank collapses.Most of it's 1800 or so shareholders completely ruined. The bank cited a £5.2m "deficiency of capital". The State responds by making the Bank of England a lender of 'last resort' and forces banks to maintain their books.

1907 - American Banking Crisis. Numerous runs and collapses including the National Bank of North America. Led to the creation by the State of the National Federal Reserve in 1913.

1929 - The Wall Street Crash. A frenetic market saw over 16 million shares sold in a few short days, collapsing the markets and wiping $14 billion of the New York Stock Exchange. The crash ended the Roaring Twenties and heralded the Black Thirties, threw millions of people out of work and ushered in the Great Depression. Trading continued though and in the next ten years, speculators flooded the market and loans were being offered on shares up to 60% of their real value (sound familiar?) and the American President stated it would be 'inappropriate' to intervene....also sounds familiar, right?! The following years were filled with minor crises, a World War and the Cold War.

1991 - BCCI is closed by the Bank of England. Why? Regulators discovered fraud, tax evasion, money laundering, support to terrorists, arms trafficking, smuggling, unlawful dealing and bribery. Inquiries, court cases and following hoohah failed to deal with many of the issues and underlined the ineffectiveness of the State in regulating Banks. Creditors claimed that the Bank of England had left "an untamed monster on the loose" for way too long and sued it for £850m; the case eventually collapsed with both sides having racked up legal fees of more than £100m. The collapse of BCCI is widely seen as one of the world's greatest financial scandals.

1995 - Barings Bank collapses amongst the infamous 'rogue trader' scandal when Nick Leeson traded futures shares with such effect he destroyed the bank. Even a Bank of England bailout couldn't save them and the bank was declared insolvent and sold to Dutch giant ING for £1.

1996-2001 - Saving and Loans crisis, USA. Savings and loans institutions in the USA were essentially small local banks that made home loans and took deposits from savers. Dating back in many instances to the 1800s, they were comparable in many ways to Britain's building societies. In the 1970s and 80s, however, financial deregulation encouraged S&Ls to venture into far choppier financial waters outside the banks' strict regulatory framework. Predictably, large numbers of them found themselves in deep trouble, and a run began first of all on S&L institutions in Ohio and Maryland in 1985. Some 1,000 of America's 4,000-plus S&L's would eventually go belly-up in what one US economic professor later called "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time". And since the federal government had insured many of the individual deposits in the S&Ls, it found itself facing a mammoth liability when they collapsed: the total cost of the bailout came to $150bn. Another regulatory triumph!

2002 - Argentine Banking Crisis. In a banking system riddle with fraud and corruption and presiding over a failing economy, the State tried closing the banks for withdrawals. As people rushed to get their money out and exchanged into dollars, things got nasty with security guards outside HSBC in Buenos Aries opening fire on investors! The banks were bled of 10% of their total cash reserves.

Today - Since 2007 the world has been in the grips of the latest world-wide banking led financial crisis. Initially the collapse of American housing investments led to exposure of the failings of the entire regulatory system and indeed the entire financial investment system. From Wikipedia:

"The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels."

And so it goes on and on to the latest crisis in the UK with various banks being 'uncovered' as fraudulent and 'unethical' in their dealings. However, a look at the above will see some simple truths- banks are merely one part of the capitalist system but they ultimately have the same goal as everything else, to make profits. And when you can make profits, ethics, right and wrong, morality, etc simply do not come into it. Profit is the only goal. The other key point is that the State via regulatory bodies, inquiries, law courts, investigations, and all the other flim-flam cannot hide their true role in that they are guardians of capitalism giving an impression of control and democracy to the masses to prevent the whole house of cards being swept away.

Banking crises will continue, hand-wringing inquiries will continue, platitudes will be spoken and capitalism will continue lurching from one disaster to the next just so long as profits are being made, and they are. Do not be fooled, invest in your future wisely and work towards something better instead.


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