Monday, 19 January 2009

Irresponsible risks

”Almost all their losses are in subprime mortgages in America and related to the acquisition of ABN Amro. These are irresponsible risks taken by the bank with people’s money in the UK”

Gordon Brown, talking about the RBS today.

Oh Lordy, oh Gordy, where do I start?

At the heart of every bank is a dilemma - profitability versus liquidity. In order to be profitable, banks must take risks. However, banks also need hard cash to cover any losses from risk taking and ensure that when the depositors turn up looking for their money, there is something in the till.

When bankers salaries are linked to profitability, they will take enormous risks. The bigger the bonus, the greater the risk-taking. This simple relationship has been known since the earliest days of banking.

This is why banks need to be regulated by governments. It is the public interest that banks do not sacrifice liquidity for profitability.

Back in the mid-1990s, the UK had a world class supervisory capacity. The Bank of England did it superbly. The approach was a little clubby and masculine. A raised eyebrow from the governor was more than enough to put any banker in their place. Nevertheless, it is worked.

However, Gordon, you destroyed it within a week of coming to office. You created the FSA, who have incompetently allowed the likes of RBS, Northern Rock and the B&B to take "irresponsible risks with the peoples money".

Now, the UK taxpayer has to pony up with the cash to cover the greatest financial disaster in a century. It is a disaster that started the day you walked into 11 Downing street.


John Pickworth said...

I couldn't have nailed it any better.

They systematically dismantled every facet of the State for the sake of it; whether they worked or not. They replaced them with so-called modern alternatives and pretty much none of them worked as advertised.

Nick Drew said...

good post, this should be shouted from the rooftops

(if the man in the street below is eveb listening anymore)