Tuesday 21st March 2017
Old wrongs make a new right?
Banks were at the root of the 2008 global financial crisis….
They were too keen to provide mortgages to borrowers ill-equipped to make the repayments – and large numbers of those loans went bad.
Those losses were compounded (and dwarfed) by losses incurred on reckless bets made by the same banks on bonds backed by those very same securities.
The banks found themselves in deep trouble – in the hole for tens of billions.
Some banks went down the plughole. Others had to be bailed out by national governments.
Markets crashed. People lost homes. Businesses went bust. Jobs were lost. It was a mess. A lot of people had a hard time.
- Trust in the system evaporated….
The downturn led to a recession that lasted until 2012. Economists say it was the worst recession since the Great Depression.
Banks came in for a lot of flak – most of it deserved.
Working under feather-weight regulation that was patently unfit for purpose, bankers – fueled by greed – had been running rampant. The bonus culture that permeates the industry had gone berserk….
No long-term speculation was too stupid, reckless or dangerous if it delivered bonus short-term.
The sun shone. Bankers made hay. The Moët et Chandon Dom Perignon flowed like water. The Porsches purred sweetly. The Rolex watches knew the time of day….
But an organism so fundamentally rotten could not thrive in perpetuity….
One day the tottering edifice came crashing down in a cloud of smoke and dust – as if demolition charges had been set beneath it….
Trust in banks, bankers and the entire financial system evaporated overnight.
- All the way back to 2008….
Ordinary people felt they were paying the price for the banks’ unfettered greed and gross stupidity.
Many would have been happy to see a few bankers swinging from the gallows. The public mood was black. Politicians responded.
New regulations were put in place to ensure banks could never again build-up such vast, unchecked and unsupported liabilities. We were told that there would never be a repeat performance.
But time passes. The man-on-the-street has his day-to-day life to deal with. Attention drifts. Focus changes. Memory fades. The world moves on. Political landscapes, priorities and needs-of-the-day fluctuate….
And then one day, you discover yesterday’s big problem is now touted as tomorrow’s great solution….
I don’t know if you followed events at last week’s G20 summit in Germany….
I should probably try and get out more, but I like to keep an eye on these things. And because I pay attention, sometimes I get an early steer….
Last week I heard the starting pistol go off on a race that will carry us all right the way back to 2008….
- Pesky laws and safeguards – who needs them?
In 2010, President Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection Act into law. It was a direct response to the events of 2008. The US legislation had multiple aims….
It was intended to improve accountability and transparency in the financial system….
No longer would banks be free to do as they pleased behind a veil. Now their actions would be logged. Now they could be called to account.
The legislation was also intended to kill the idea that some banks are ‘too big to fail’….
There is a clear moral hazard built into a system where bankers can make huge bets knowing the public will pay the price if the bet goes bad. Dodd-Frank was written to change that.
Dodd-Frank also serves to protect American taxpayers by ending bailouts. And it protects consumers by outlawing abusive financial services practices….
Britain and the European Union also introduced a raft of new measures and regulations – designed to make banks perform more appropriately and to protect the public against having to bail them out again….
It seemed lessons had been learned. Safety measures had been put in place. Confidence was restored. Old sins, if not entirely forgotten, were at least forgiven.
We moved forward in a spirit of trust – albeit a trust forced by regulation rather than one genuinely forged. At least the locks, keys, bolts and chains were in place. The house was secure….
But then, like a burglar in the night, along comes Donald Trump equipped with crowbar and bolt-cutters….
- Yesterday’s big problem – tomorrow’s grand solution….
Trump doesn’t like Dodd-Frank. He wants to repeal it.
He sees Dodd-Frank as ‘excessive regulation’. He argues that Dodd-Frank discourages lending and holds back growth in the economy.
Trump wants to roll-back the financial regulations implemented to protect the public from repeat performances of the sharp-practice and crookedness that led directly to the collapse of the global economy in 2008.
Trump wants to free the banking industry from its regulatory tethers. It is part and parcel of his design to make America great again.
Trump says plenty. He plays to the gallery. He speaks tactically – to distract, disguise and delay. Often, what he says shows no evidence of prior thought.
Some think him a maverick. Others a moron. The truth probably lies somewhere in between. But Trump is powerful. What he says is incredibly influential….
We saw that at last week’s G20 summit where German finance minister, Wolfgang Schaeuble, revealed that finance leaders are ‘not concerned’ that financial market regulation will be rolled back….
- The establishment play….
That comment didn’t get much press coverage. But it was an illuminating admission….
It suggests the global establishment is shuffling into line behind Trump – and setting itself to sing from the same establishment song-sheet.
For sure, Trump promoted himself as anti-establishment to get elected. But that was smoke and mirrors.
Look at the cabinet Trump appointed – ex-Goldman Sachs officers and other notables fresh from elite financial institutions. Trump’s administration is as establishment as any before it.
The cat gets the cream. And it is the establishment that has done best out of Trump’s presidency so far.
Stock values have never been higher. Few stocks have done better than that of Goldman Sachs – the ultimate establishment player. It’s up 25%+ since November.
The banks will be looked after. Trump is already reviewing Dodd-Frank. And he’s quietly stamped-out the prospect of a Fiduciary Rule which would have made financial advisers put client interests ahead of their own had it been made into law….
- Back to the bad old days in search of growth….
In the search for growth, Trump is intent on taking the banking industry back to where it was pre-2008.
The noises coming out of G20 last week suggest European leaders and others will follow….
Of course, little has changed in the banking industry. You can rely on the bankers having learnt nothing. The bonus structure rules and hang the long-term consequences. Greed can’t be cleared up with anti-biotics or leeches. Greed hasn’t gone away.
Given the green-light and an open regulatory road, the banking industry will create another monster. You can rely on it.
You can rely on it crashing down to earth again at some point. You can rely on the effects of that next crash being far-worse and deeper-reaching than those of the last….
And there’s one more thing you can rely on. With all the post-2008 regulation rolled-back, repealed and hurled into the composter, it will be the man-on-the-street – people like you and I – who will stand payment once again. One way or another.
But at least Wolfgang Schaeuble and all the other finance leaders are ‘not concerned’ about that prospect. That’s comforting to know….
That’s how it looks from here….
I’ll be back with more next Tuesday morning.
All the best,
P.S. Government is tapped-out. Who will pay for the next bank bailout? An ex-advisor to the Pentagon says the government plans to use the savings of ordinary people like you and me. As banking regulation is rolled-back, that’s a disturbing prospect. Find out more in this FREE REPORT….