Rescuing the greedy from their own folly

· by Steve · Read in about 4 min · (811 Words)

I have a confession to make - in my deep and distant past, I have an accountancy qualification - a legacy of a young man with too little focus about what he wanted to do in life and before it had occurred to him that someone might pay him to play with computers. Not that I think there’s anything particularly wrong with accountancy; in an island dominated by finance it was a safe bet for a mathematically / logically-minded individual with too many diverse interests and no particular clue which one to follow at the time - but I found out pretty quickly that it definitely wasn’t for me. I don’t regret having done it though, since the knowledge, fogged though it is due to time, does sometimes come in handy; in particular, the economics elements. I’m no Warren Buffet by any stretch of the imagination, but I do at least have some grounding in the subject, and I do at least try to stay roughly abreast of economic events. And certainly, it’s been one hell of a year for those.

We’re now in the situation where not one, but 3 banks have been bailed out globally by governments, effectively propping up an ailing business by stumping up taxpayers money as security - Northern Rock in the UK, Bear Stearns in the US, and IKB in Germany. All three were brought down because of their reliance on a system which had poor lending practices built into it, and a level of greed which was suppressing sensible risk analsis. In all 3 cases they themselves were not the bad lenders, but they either bought the repackaged ‘leveraged’ debt as high-risk, high-return (in theory) investments, or relied on other people continuously buying into those kinds of ‘products’ to keep the system sloshing about with fresh money they could borrow themselves. In all 3 cases it was entirely their own fault for taking on excessively risky positions in the pursuit of profit - of course there were environmental factors over which they had no direct control, but these happen from time to time and a good risk strategy should cope with that. Ultimately the cause of failure was that these banks gambled too hard and got caught with their pants down. They bet that the house of cards wouldn’t blow over on their watch, and they were wrong - and they didn’t have the resilience to weather that, because they bet big, because they wanted to win big. More risk equals more reward, except when you lose.

When considered in isolation, I find it utterly distasteful that these businesses should be bailed out by governments. Between them they have made many, many billions in the past, which has no doubt funded some pretty lavish lifestyles at one level or another in the company, but they got too greedy and theoretically should pay the price that comes with that, since they already reaped the successes. But they haven’t really; the taxpayer is now shouldering most of that, along with shareholders who have lost their investment. For Northern Rock the amount being covered is to the tune of the entire NHS budget for a year - a staggering amount of money. However, I do understand why the central banks & governments had to step in, in all practical terms - after all in the interests of all of us, the financial system has to be seen to be stable, and given that people’s savings and pension funds were in danger, letting these companies go to the wall would have had some really nasty knock-on effects. Nevertheless, it does set something of a precedent - that a regular business will just be allowed to go under if it doesn’t perform, but high-flying banking business can take a ton of risks, make a truckload of money in the good times that they can spend on private yachts and penthouse apartments, and then get bailed out when the tide turns and their extravagant risks catch up with them. It’s a skewing of the karmic system that doesn’t feel right at all, despite all the valid reasoning that underpins it in an imperfect world.

I only hope that when the good times roll around again, these banks pay back the favour, with considerable interest. And that maybe, just maybe, a better way will be found to regulate these banking practices - I totally agree that government should not get involved in regulating business any more than it absolutely has to, but if the bottom line is that the government picks up the tab for failure, then these principles are incompatible - you can’t have it both ways. Maybe banks of this size should be required to make large annual contributions to a ‘rescue fund’ to cover those in their number that need bailing out - an insurance policy of sorts?