Black day for bankers cannot spare politicians’ blushes

By Gerald Warner
Published on 24/06/2012 01:56

NOT so long ago, if a major credit rating agency such as Moody’s had downgraded 15 major banks on a single day, the markets’ reaction would have been seismic. When just such a downgrade happened last Thursday evening, its effect was to push up bank shares on Friday – by 1.5 per cent in the case of the totemically toxic Royal Bank of Scotland.

Last week was hectic for RBS: besides the Moody’s downgrade, a report from business academics revealed the interesting managerial style of Fred Goodwin which it characterised as a “culture of fear” and “economic violence”, involving the ritual humiliation of senior executives. This fresh picking at the scab of old RBS wounds did the bank’s image no favours, an embarrassment exacerbated by severe problems that developed in its electronic banking system, leaving many customers deprived of cash. Yet RBS shares bounced upwards on Friday, as did those of Barclays, HSBC and Lloyds.

Does this mean that Moody’s, along with Fitch and Standard and Poor’s, has become a toothless watchdog, disregarded by the markets? Hardly, though after their dismal failure to sound the alarm in advance of the 2008 banking crisis there is a plausible argument that the rating agencies contribute little to market wisdom. That will not stop investors paying obsessive attention to them, for the same reason that people follow racing tipsters: the desperate desire for information to promote or safeguard personal prosperity. In the case of the Moody’s downgrade last week, not only had the move been well advertised in advance, but George Osborne took the precaution of throwing a further £140bn at UK banks, ostensibly to encourage them to lend to businesses.

No small entrepreneur should hold his breath; but householders may experience a sharp intake of theirs when the banks use the downgrade as a pretext for fleecing them further, even while the Bank of England base rate remains at floor level. The banks have no more reformed in the wake of 2008 than MPs have cleaned up their act since the expenses scandal. Last year RBS made a loss of £2bn, of which £850m was attributable to its provision for repayments of mis-sold PPI. For this achievement, RBS employees were rewarded to the tune of £785m in bonuses, defended by chief executive Stephen Hester last February and described by George Osborne as “necessary”. It is not in the least necessary and RBS is 84 per cent taxpayer-owned, an investment on which Joe Public will only break even if RBS shares rise above £5.

Those are the minor irritations to which the banking industry subjects the public; the dreadful havoc it may yet wreak remains to be seen. Tomorrow Spain is expected formally to request a £50bn bailout for its banking sector. Is there no end to this charade? The vicious circle into which the western economy is now locked consists of a dance of death in which sovereign debt, bank insolvency and low economic growth hold hands and gyrate at an escalating speed around the ruins of prosperity. Sovereign debt is aggravated by repeated cash injections to undercapitalised financial institutions; banks become unhealthy because of their exposure to sovereign debt; and economic growth is stifled by lack of available credit and the austerity invoked to resolve the debt crisis.

Bankers have behaved arrogantly, even insanely. Beyond their personal greed, they promoted extravagant private indebtedness across whole nations. They invented financial instruments they did not understand. Their guilt is notorious. Yet even their culpability pales beside that of politicians. The term “sovereign debt” is more weasel than any euphemism coined by Wall Street wide boys. It sounds solemn, even stately; but it cloaks the reality of grand larceny committed by governments against their populations. It conceals the Soviet-style conviction of the intruder state that it is better qualified than the helots it rules to spend the money they earn. So presumptuous and impatient did the Frankfurt Marxist agenda of governments become that they borrowed beyond their means to finance their totalitarian ambitions.

Reckless though the Gordon Gekkos of Wall Street were, it was not their greed but the intervention of Bill Clinton’s administration and its successors in the housing market, using legal compulsion to force lenders to service sub-prime borrowers, thus subverting America’s $12trillion mortgage market, that caused the 2008 collapse. This is not a “crisis of capitalism” (capitalism would not reward a £2bn loss with £785m in bonuses) but of markets debauched by political correctness. It was relentless expansion of state control and lavish subsidy of agencies promoting statism and political correctness, nationally and internationally, that provoked unsustainable “sovereign debt”. Bankers and politicians are hanging together lest they hang separately, but it is the politicos who have first claim on the lamp-post. «