Alf Young: Banks are quids in even after crash

Lehman Brothers crashed five years ago tomorrow but banking is still reaping rewards. Picture: Mark Lennihan

FIVE years ago tomorrow, the leading Wall Street bank Lehman Brothers plunged into bankruptcy and triggered one of the biggest banking crashes ever seen. Inter-bank lending froze. Within three weeks Royal Bank of Scotland, bleeding what little cash it could still muster, threw itself on the UK government’s mercy.

Struggling HBOS, including Bank of Scotland, was thrust into the arms of rival Lloyds. Both Lloyds and RBS only survived when all of us, as taxpayers, became their main shareholder.

Five years on, that state-sponsored life support remains intact. Earlier this week, to comply with European state aid rules, Lloyds spun off 631 branches and 4.5m customers across the UK into a new bank which revives the 200-year-old TSB (Trustee Savings Bank) brand name. The original plan was to sell that business to Co-operative Banking Group.

But over the summer the Co-op became embroiled in a fresh banking crisis of its own making. Having merged with the Britannia Building Society in 2009 to create a super-mutual, the Co-op has now found itself with a seriously over-valued loan portfolio and a capital shortfall its regulator, the Prudential Regulation Authority, puts at £1.5bn.

It had to walk away from the Lloyds branch deal. Lloyds now plans to run TSB as a stand-alone bank. Assuming customers are happy to stay with TSB in sufficient numbers, it will then be floated on the stock market.

That process could make it harder for the UK government to cash in any time soon on an improving Lloyds share price and sell some of the 40 per cent stake it has held in the group since early 2009.

RBS, still 82 per cent owned by the state, is about to change its chief executive again. On 1 October out, at George Osborne’s behest, goes Stephen Hester. In comes Ross McEwan, who has been with the Royal for just over a year, running its UK retail operations. How this New Zealander can get RBS back in the private sector by the end of 2014 – the chancellor’s ambition – is anyone’s guess.

So, five years on from the Lehman collapse, how much has the culture of banking really changed? Before the crash there were four European banks (including RBS) in the global banking top ten. Now there is just one, HSBC. Back then there were only two Chinese banks in that top ten. Now there are four.

In the aftermath of the crash, we thought we had learned that some banks, like RBS, had simply become much too big to fail. All Western banks now have to hold more capital. Returns on equity are well down on pre-crash levels.

Thanks to consolidation, however, surviving American banks are now even bigger than before. In London, the Economist tells us, there are more people working in finance today than there were before the crash.

And what of those two tarnished stars of the sub-prime mortgage scandal across the Atlantic, Freddie Mac and Fannie Mae? The crisis in these two giant mortgage finance corporations helped trigger Lehman’s downfall. Both were taken into federal government protection at an eye-watering cost to US taxpayers of $188bn.

They are still under Washington’s wing. Today they play an even more dominant role in providing American housing finance. Their share of the overall US mortgage market has soared from some 60 per cent before the crash to around 90 per cent now.

But unlike our state-owned banks they are paying huge dividends back to the US Treasury, helping to reduce the federal budget deficit. They paid back nearly $15bn between them last month alone.

In total, $146bn of that original bailout has already been returned. With the dollars flooding in that fast, all talk of radically reforming Freddie and Fannie, let alone breaking these behemoths up, has evaporated.

Over here, fears of another housing bubble in the making have prompted the Royal Institution of Chartered Surveyors (RICS) to call on the Bank of England, through its new financial policy committee, to impose a 5 per cent ceiling on house price rises in any one year. RICS hasn’t really explained how such a nationwide cap could be made to work when house price trends are so variable across these islands.

In evidence to MPs on Thursday, the new Bank of England governor Mark Carney did not seem to share the concerns of the surveyors’ trade body. Activity levels, mortgage applications and valuations were all still, he argued, “in the range of about two-thirds to three-quarters of pre-crisis levels”. Should another house price bubble emerge, there are lots of other things the bank could do, like requiring lenders to hold even more capital.

Politicians on the Treasury select committee seemed frustrated by Carney’s core message, his defence of his principal innovation since arriving: “forward guidance” on monetary policy. Try as this polished Canadian might to explain what he and his eight colleagues on the Bank’s monetary policy committee would or wouldn’t do if UK unemployment fell to 7 per cent, or if inflation looked like staying above 2.5 per cent 18 to 24 months out, the more puzzled the MPs looked.

He wanted to talk about “thresholds” and “knockouts”. They wanted “targets” and straight answers to whether he was “loosening” or “tightening” policy. Chairman Andrew Tyrie wanted to know what Carney thought his constituents might make of all this “down the Dog and Duck”.

Might they conclude that, five years on from the Lehman crash, it’s them and people like them who took the biggest hit. Central bankers cut interest rates to rock bottom and have left them there ever since. Then they started printing money to buy up great chunks of government bonds, in the UK’s case around a third of the outstanding stock of gilts in issue.

Meanwhile, inflation has been above target, at times wildly above target, for most of the past five years. Wages and salaries have been squeezed and living standards under significant pressure. Too many people can’t find a decent job. And planned cuts in public spending are still little more than half way there.

Meanwhile, well away from the Dog and Duck, the kind of quantitative easing pursued by Mark Carney and and his US counterpart Ben Bernanke has principally helped the already wealthy to become wealthier still. According to the FT’s Gillian Tett, the Bank of England has calculated that, by raising asset prices for the already asset rich, “40 per cent of the quantitive easing benefit has gone to the top 5 per cent, including those bankers.”

And what of those charged with finding some value from the ruins of Lehman Brothers itself? Back in April, the administrators of Lehman’s London-based European arm, PWC, told unsecured creditors owed £15bn they can expect to get all their money back.

They may now get interest on top of that. Hedge funds, which snapped up claims in the aftermath of the crash at as little as a fifth of their face value, now stand to make a six-fold return on their investment. Crash, whose crash? Makes you wonder.