Hannah Arendt used to talk about the “banality of evil”; last week we saw the banality of bankers. There they sat, the Sir this and Lord thats, uttering po-faced clichés and over-rehearsed apologies to ratty MPs in Westminster. The Sun called them “scumbag millionaires” but they were really a bit of an anticlimax, and far to dull to make proper villains. Goodwin and co were revealed to be just like the countless interchangeable suits who sit around thousands of corporate boards and shuffle paper around a million offices every day; uninspiring bureaucrats whose vision extends no further than the latest management fad.
They’re the people you remember from school – the ones who got their homework in on time but lacked any kind of inspiration or independence of thought. The ones who joined the right societies at university, studied subjects of mind-numbing tedium, and then polished up their CVs for the graduate milk round. They were supposed to be the safe pairs of hands these accountants and actuaries, with their mousy wives living in their characterless suburban houses. Secure and boring. But somehow they grey men managed to blow up the world.
How did it happen? When did it happen? Without a shot being fired, these people not only took over the commanding heights of the economy, they infiltrated the heart of government, sitting on countless quangos and inquiries, advising ministers and civil servants, creating a society in their own image. How did we let them do it? And where did these boring bean-counters and shiny-bottoms get the wherewithal to engineer the greatest financial crisis in history?
Well, it all goes back to the 1980s when the ruminant number crunchers became infected with the virus of greed and turned into voracious financial predators. It was the great financial boom ignited by Margaret Thatcher’s privatisation policies that transformed plodding corporate clones into to reckless gamblers and risk-takers. With deregulated financial markets, the suits discovered that they suddenly had access to the ‘dumb’ wealth of society which had been sitting passively in pension funds, insurance funds, government departments. Deregulation encouraged financial ‘innovation’ and the creation of ‘products’ like dodgy endowment mortgages or “personal” pensions that delivered little apart from commissions.
But it was the sale of public utilities that offered the suits their opportunity to cash in on a grand scale. The sale of state assets in rail, airports, communications gas and electricity yielded billions in commissions and fees that flooded into the offices of the grey men turning them into privatisation tycoons. Look at how well they’d done, selling the country back its own property and calling it popular capitalism. They set up remuneration committees staffed by their friends which awarded higher and higher salaries to themselves under the guise of incentive schemes. The bonus culture was born.
The lords of financial misrule weren’t actually making anything – building companies or creating new markets – but they began to regard themselves as financial engineers, masters of the universe, able to create wealth apparently out of nothing. Ten they started on the property market – a massive pyramid scheme, so huge and complex that it took over twenty years to construct and will take almost as long for society to pay off.
A pyramid scheme, like Bernie Madoff’s Ponzi scheme, is a way of inflating asset prices by creating an artificial scarcity fuelled by buying mania. Like the South Sea Bubble, inflated asset prices only last for as long as ever larger numbers of people can be persuaded to invest in them. The global real estate boom was the greatest asset bubble in history, as house prices in countries like Britain tripled with in a decade. This created trillions worth of paper wealth which was managed and manipulated by the bloated financial services industry which had now begun to crowd out other productive forms of economic activity.
It’s an open secret that the bankers realised that the boom couldn’t last forever, but they did everything they could to prolong it. Banks like Northern Rock and HBOS started selling 125% mortgages and the infamous sub-prime loans to people who could never repay. Then there was ‘securitization’. Instead of just holding on to mortgages for the duration of the loan, the banks started selling packages of mortgage in bonds to other investors and used the proceeds to lend ever more mortgages. They invented sophisticated derivatives like collateralised debt obligations and credit default swaps which used complexity to disguise risk.They started lending on every greater ratios of their core capital, “leveraging” loans by thirty or forty to one. Their command of the language of the balance sheet prevented the rest of us from fully understanding what they were doing. Just take a look at an RBS balance sheet – they’re openly available on the web – and try to work out whether or not it is solvent.
Most of the dodgy mortgage-backed bonds were bought by savers in Asian countries, who are now feeling extremely sore. Back home in Britain people stopped saving altogether as the suits found ever more ingenious ways of ensnaring them in debt – like credit cards, with 25% interest rates. Then there were student loans: an entire generation of graduates landed with £20,000 debts. Governments were persuaded to take out PFI schemes – which are a bit like endowment mortgages for public projects like hospitals and schools. Our children will be paying the cost of these and other financial innovations for decades.
As I say, the bankers knew perfectly well that a real estate asset bubble couldn’t last forever. But they believed that if they got big enough, fast enough, they would be too big to fail when the music stopped. This was why the former HBOS executive, Sir James Crosby, launched his dash for growth, which even the Financial Services Authority realised was reckless insanity. When Lloyds ‘rescued’ HBOS by taking it over last year, they too hoped that the resulting bank behemoth would be too big to fail – that the bigger the losses the more likely the government would always step in with public money.
This was why the Lloyds boss, Sir Eric Daniels, largely dispensed with due diligence before the HBOS take-over- he didn’t want to know how bad the HBOS books really were. And in a sense, he was right; they were all right. As we saw last week, the government has had no choice but to step in to save the bankers from the consequences of their own irresponsibility. After the privatisation of gains comes the socialisation of the losses. It’s been the crime of the century, perhaps of the millennium, and the colourless culprits are getting clean away.