One of the joys of editing this blog is the frequent emails I receive from so many readers. I do try to respond to as many as possible although sometimes this can be tricky if I am away from BBBC central, as has been the case for most of this past week. Thank you all for the great and frequent contributions made publicly and sometimes privately. I wish I had more time to focus on this but as Booker T put it, Time is tight! Here is a guest article submitted by Clameur de Haro for which I am indebted.
Financial Crisis Flavoured With Pesto Sauce
One should by now, I suppose, be resigned to the inevitability of any so-called investigative documentary produced by the BBC depicting a predominantly one-sided and partisan account of its subject-matter. In that negative sense at least, Robert Peston’s documentary “Britain’s Banks – Too Big To Save?”, which aired on BBC on Tuesday evening of this week, did not disappoint: because it maintained, for this viewer, the Corporation’s lamentable standards for that depressing genre, and in a number of areas.
Few readers will fail to recollect, particularly during Gordon Brown’s reign at the Treasury but persisting through his disastrous premiership, Peston’s seeming uncanny closeness and access to Brown and the claque surrounding him, which manifested itself in a number of apparent journalistic coups either presenting, or at least sympathetic to, the Brownian position. And surprise, surprise – conspicuous by its almost complete absence in Tuesday night’s programme was any disinterested assessment of what part might have been played by Brown and his government, if not in directly causing, then certainly in at least exacerbating the effect in Britain, of the financial crisis of 2008.
Whether its was the programme’s intention to deflect any examination of Brownian culpability by naked pandering to populist banker-bashing prejudice in explicitly attributing virtually all blame to the usual “excessive risk-taking by bankers solely in pursuit of bonuses” mantra is a moot point: but a signal disregard of the extent of any governmental contribution was certainly the most egregious effect.
We can revert to that specific point in a few paragraphs’ time. For the moment, it will do no harm to pinpoint some of the programme’s other shortcomings.
Generally, the overall tone was none-too-subtly characterised by some obvious cinematic tricks – firstly, discussing complicated financial derivative instruments against the visual backdrop of Peston betting at a racecourse, and secondly, recounting the post-2000 rise in the size of banks’ balance sheets against the visual backdrop of champagne being poured into glasses. Heaven forbid that we might not get the message the programme was so visibly desperate to convey – it’s all just toffs gambling wot caused it all, innit?
There was precious little, if any, mention of the origins of the sub-prime crisis: yet, as most interested students and serious commentators are aware, its roots were planted by Democratic administrations in the US. They it was who forced lenders, on pain of severe legal and regulatory sanctions, to extend credit to manifestly credit-unworthy borrowers in furtherance of political correctness-inspired perceptions of unfairly disadvantaged minorities: they it was who encouraged the deterioration in credit quality of the resultant expansion of sub-prime lending by their implicit federal guarantees to Fannie Mae and Freddie Mac, allowing them to source funding at cheaper rates than their commercial competitors.
The role of the principal rating agencies in their assessment of mortgage-backed securities and their derivative instruments was barely referenced at all. Several academic papers, however, demonstrate how the agencies’ miscalculated (because of relying on probabilities based on historical data) predictions of future delinquency and default rates, which failed to factor in the new dynamic of sub-prime and non-prime lending, assigned wholly and unrealistically optimistic ratings to many of the innovative structures created.
The effect of changes in accounting standards on the valuation of banks’ investments didn’t figure noticeably in the narrative. Yet many interested students and serious commentators have long recognised the impact on balance sheets and leveraging which was caused by investments being allowed to be carried on balance sheets at often-inflated and always-volatile market value rather than the lower of market value or cost.
In fairness, there was reference to both the role of the Greenspan-led Federal Reserve in wrongly responding to previous crises by lowering interest rates and expanding the money supply: and to the degree of internal flexibility and autonomy in risk-rating their lending exposures allowed to banks under the Basel II financial regulatory regime, which coincided with the build-up to the crisis breaking.
Needless to say, though, it was overwhelmingly bankers’ wilful and reckless short-termism in pursuit of individual bonuses that made up Peston’s case, with the backdrop of Lehman Brothers’ London office much in evidence. But strangely, Peston omitted to mention that a majority of Lehman bonuses were actually paid in the form of deferred Lehman stock, and with a vesting period as long as 5 years. That’s not exactly short-termist.
It’s nevertheless undeniable, for all this, that yes, the financial services industry was at fault (or more accurately, the proportionately small number of relevant employees in the risk-taking areas and their supervisors). But – and it’s a very large but – the argument remains, uncongenial and inconvenient though it might have been for Peston to contemplate it, never mind admit it, that the Brown/Darling chancellorships bear a considerable responsibility. And this was hardly addressed at all.
The regulatory regime that proved so ineffectual in the UK was the specific creation of Brown and Ed Balls in 1997. Many have argued persuasively that Brown wanted to remove overall systemic prudential oversight and regulation from the Bank of England, so that the Bank would have no mandate to warn of systemic risk when his always-planned, recklessly-profligate, and ultimately disastrous expansion of public spending, masked cynically by his equally disastrous indulgence of a hyper-expansion of personal debt to give the masses the illusion of prosperity, eventually became apparent.
The result was a Bank of England restricted to managing inflation and interest rates through a Monetary Policy Committee nominated by Brown: a fiscal policy in effect untrammelled and unchallenged through its residing in Brown and his partisan political coterie in the Treasury: and an Financial Services Authority obliged by Brown to concentrate its regulation on an individual institution-by-institution basis, and on such weighty issues as how long call centres took to answer incoming calls, rather than on the stresses building up in the entire system.
The resultant accident waiting to happen was compounded when Darling, with Brown tweaking his puppet-strings, decided to rescue Northern Rock. The Crock wasn’t in any way systemically pivotal at the time, and to allow its flawed funding model to send it under would have reinforced the concept of moral hazard and possibly sent out a signal that might have partially alleviated the catastrophes of one year later, particularly in the equally badly run HBOS. But the Crock was saved with taxpayers’ money solely to avoid the political fallout to Brown and Labour from the collapse of its mortgage business and the consequent job losses in one of Labour’s electoral heartlands.
Brown it was too who hoodwinked a not then grievously-exposed Lloyds TSB into taking over, quickly and, as it later transpired, with insufficient due diligence, the wreck that was Asda Salesman Hornby’s HBOS, and Brown also who, until 2007, was tribally exulting the successes of a Scottish bank to all and sundry. It’s very arguable that, but for the malign influence of Brown, the regulatory regime might well have been better positioned to mitigate the scale of the damage. It’s noticeable that, in both Canada and Australia, the extent of the crisis was comparatively muted.
Yet this absolutely fundamental question as to the extent of the crisis in Britain, as distinct from other countries, was largely ignored by the programme. That its central conclusion – in future, banks might be too big to bail out and also too big to fail – might be countered by a better governmental regulatory structure than that which Brown designed and presided over, didn’t come into it.
But then again, this is Robert Peston and the BBC we’re talking about, isn’t it?
