ΒιΆΉΤΌΕΔ

sell it to a european bank. some of them are much better capitalised and relatively unscathed by the crisis. e.g. deutsche bank announced a buyout of the german postbank the friday before lehman went bust. there are plenty of others that are very solvent right now and may be looking for a bargain. but the government would still need to sweeten the deal.

Robert,
I'm not an economist and I hope someone has already considered what I'm about to suggest. If so I'd be very interested to find out what they had to say.

This is my naive proposal: Instead of propping up financial institutions that have gambled and lost how about spending the same amount on building new public housing stock? I know this would accelerate the collapse of the housing market but people need housing at affordable prices.

I can't see the logic in giving the banks more money to pour down the same hole - why are they being rewarded for destroying ordinary people's lives?

I would like to see an end to all City bonuses for the next 5 years.
The rest of us live without bonuses, why can't they?
We are bailing out their mess, so we should have a right to say how the City is run.

if bradford and bingley fails,what does this say about brown the 10 year wonder at number 11!!!. a bank or building society of 150 years wrecked by a greedy system, many lives wrecked, god i hope it doesnt happen it doesnt bear thinking about.I mean where can you put money these days? apart from the greedy power companies...what a sorry state we are in, how could this have been allowed to happen? who are these people running our banks and financial institutions? arthur daley and dell boy come to mind.

To my simple way of thinking - Brown needs voters to vote for him. Older people tend to have savings in banks, older people are more likely to vote. Nulabour needs their votes.

Cynical?

If we take a longer term view then at some stage house prices will start to rise again, hopefully in line with inflation. At that stage these banks will become profitable, their assetts will rise in value and the sun will shine.
If the UK taxpayer owns these we will benefit, if we let the bank go bust some will lose money, we all lose confidence and the spiral down will go on.

..but no money for the execs.

I wonder who is next?

Sadly the poor old taxpayer will get the bill for all of this just as we head into recession / depression. How will the taxpayer afford it all when there won't be any work?

The system is really in trouble and it's anyone's guess where it wil end.

The only thing we can be certain of is that it will get even more hairy than it is now.

2:

A very good idea. Actually, I don't think it would add too much further downwards pressure on house prices (which, let's face it, have further to fall anyway).

The sale of Council houses was a good policy - giving people the opportunity of home ownership - but the tragedy was that the income from the sales was not used to build more affordable housing. A missed opportunity.

Building housing right now would be a good move. It could be done remarkably cheaply in a depressed building market. Government could free up building land for this purpose through the planning system, but it could also buy up some of builders' distressed land banks.

The building industry and related activities are in recession, so a building programme would have a beneficial effect on the economy.

New houses would take time to come on stream, so the effect on the prices of existing houses wouldn't be too severe.

There's a parallel here with the recovery from the Great Depression in the 1930s. Recovery only came about when government spending was increased (in that instance through re-armament). A building programme could have the same positive effect now.

@ Post 6

In the next 2 years after this mess has sorted itself out house prices will rocket again I'm afraid.

As a result of a growing population we should be building 250,000 houses a year to meet that growth. In August we built just over 5,000 new houses. Pro-rata that for the year and you get 60,000 houses, or 190,000 houses short per annum from Gov't figures (assuming that the number of build completions doesn't drop further in the coming months).

When the credit restrictions ease and people enter back into the housing market, there will be increasing demand but no supply as so many medium and small housebuilders have now gone bust. You're larger builders like Barratts and Taylor Wimpey are not building and are using the proceeds from existing stock units to fund their debt payments; they will not have the capital to get back up to speed for a long time, even if they can last for the next two years without the banks foreclosing on them for breach of covenants. New smaller builders will not be able to enter the market as the costs of entry will be very high as the banks will have become very risk averse.

When you get increasing demand and little supply the price increases. I have seen reports from market analysts in a number of well respected Chartered Surveying firms that are indicating that the price rises will be greater than we have seen in recent years.

Why two years time? This is the time it will have taken the average person to save a reasonable deposit for a house - (if they still have a job that is! )

Robert,

Forgive my stupidity, if that's what it is, but isn't there a glaring problem with these mergers to rescue ailing ex-building societies?

When LloydsTSB merged with HBOS, we were told that Lloyds were one third the size of HBOS. In that case, won't all the debt that HBOS had, be an even bigger burden to Lloyds?

Okay they can shut a few branches, and lose a few jobs, but I would have thought this was a drop in the ocean.

I think nationalisation and subsequent merger with Northern Rock would be a good long term solution.

Obviously the merged bank would be run from the Gosforth palace: it would provide an alternative to a return to the "big four" banks.

The Anglo Saxon banking model is dead, long live the European mixed economy model

9:

Good point. We must at all costs avoid a repetition of the asset bubble, and that might involve using interest rates (and sound principles on mortgage earnings multiples and LTVs) to prevent house prices over-inflating. A building programme right now could be valuable, in itself and as a pump-primer for the economy.

I'm not very sanguine, though, about when a recovery might actually start. My own view is that the UK economy is in real trouble.

Hitherto, we've relied on the City to generate huge trade surpluses in financial services, offsetting our deficit in physical trade.

From here on, two adverse things may happen. First, the ability of the City to generate foreign currency earnings for the UK is going to be severely impaired (which I think puts it mildly).

Second, significant ongoing declines in oil and (especially) gas production are going to create a very large deficit in energy trade.

To my mind, no one has yet explained how we're going to pay for escalating energy import costs with a principal foreign earner (financial services) no longer capable of generating huge overseas earnings.

EVERYONE BEWARE!
If house prices rocket again in the next five years we could all be in for a monster crash.
Besides that , "property" has become a dirty word at all banks, and is likely to remain so for a long time.
Banks can no longer rely on property as good collateral, especially when it is wildly over-priced.

Can someone spell out what happens if they were to let it go belly up?
The financial compensation scheme would pay out on deposits I presume, so that's the tax payer on the hook right? I also presume that Bradford and Bingley no longer have the deposits, they have 'invested' them in magic beans or some other super smart banky sure thing. Jobs would be lost, how many? No doubt parts of the business would be worth 3 or 4 whole pounds to Barclays, Lloyds or the Santander group. I guess I'm trying to figure out how much of the 'Β£52bn of assets' 'Β£22bn of retails deposits plus Β£27bn of non-retail deposits' we as tax payers would be liable for.

I think the country's army of estate agents should be asked for advice. They know how to sell inflated assets.

A sad day for Pensioners and pension funds.

And of course daylight robbery of the small shareholders.

One question:

How can Mr Pym say on the 25th:

"The changes we have announced today focus the business as a strong savings bank, reduce the size of our lending activities, and increase our capacity in arrears collection.

We are a strongly capitalised bank now undertaking a complex transition with regrettable job losses, but we are planning to put the problems of the past behind us and have a business which is fit for purpose going forward"

And yet Mr Peston be talking of nationalisation on the 27th?

What a strange situation.

"Eliminating duplicated overheads".

Translated: sacking people.

Short term solutions equal long term problems.

Other than as a method of expressing frustration with the business world and media, there seems little point in my expressing any further comments on this blog.

Voters get the governments they deserve!

Sheep will always follow Shepherds.......

Words accomplish nothing, or was it actions speak louder than words ?

One of those.

The shortsellers and armchair anarchists win the day!

#6 - Andywr - ''If we take a longer term view then at some stage house prices will start to rise again''

House prices will only rise at similar levels again in the UK and America if banks lend at high salary multiples with little or no deposits and at low interest rates, and in the US and to a lesser extent in the UK to people who could not afford the loan in the long term.

All those factors allowed the property market to be propped up when it is now clear people were taking greater and greater risks to help get on the property ladder and help inflate the property market.

The average mortgage arrangement fee is now Β£1,100 with a 10% deposit, and banks will now factor in your out goings for council tax, and gas and electricity to see if you can afford the repayments.
They aren't going to start lending recklessly again to help prop up the housing market in the short term or the long term.

If the taxpayer is going to end picking up the tab for all of the bad debt and failed banks (which let's face it, we are), wouldn't we be better off just nationalizing the entire financial service industry and having the assets aswell?

I know that the banking 'experts' will say that'll lead to a collapse in confidence in the UK as a place to invest, but I suspect that has already happened, seeing as these banks are only surviving with lender of last resort funding.

BAN ALL CITY BONUSES?
Where's the incentive for City folk?
The incentive is that you hang on to your job.
They've banned short selling...now ban bonuses.

Can any one say how much the war in Iraq and Afghanistan is costing us (UK). From the debate US spent $700bn just on Iraq, if we had this money we could have sorted out economic problem.

If we add trident to this there is another Β£25bn to sort the economy, economy is more important than defense.

So if we stop these wars their will be enough money to resolve without increase the tax burden.

A thought for Robert Peston: to get to the nitty-gritty of what is happening, why not interview as publicly as possible Bill Bonner? He is the founder and editor of The Daily Reckoning.

This is a current article of his: [Unsuitable/Broken URL removed by Moderator]

All the best.

It's right that we're all concentrating on the central issue of the saving the financial world. However, I do find it strange that Gordon Brown, a central player in this unholy mess by dint of his bombastic economic wizadry (?), can jet off to the USA (from near-bankrupt UK) to lecture us all on global financial best-practice. If nothing else one has to admire the man's chutzpah. Unfortunately for Mr Brown, the British peple rumbled him a while ago and he'll be ejected from power in the most undignified fashion in due course. That's what happens when you're as arrogant and unpleasant a politician as unelected "Prime Minister" Brown.

In the good old days before rampant 'short term greed', home buyers always put down 10% and the mortgage was a maximum 90% - this gave the banks a 10% contingency on house prices. 110% mortgages are obviously a disaster waiting to happen..

Incredibly low borrowing rates where everyone was encouraged, and especially companies almost shamed into massive borrowing and leveraging.. surely there has to be more GDP than debt and that tipping point probably went before 2006 (probably long before that..) so this was another disaster waiting to happen..

Come-uppence is due and certainly, although already heavily regulated, the Gov buyouts should add even more rules - as clearly the culture of many financial institutions is bordering on obscene..

However that said the idea of "stopping all city bonuses" is impractical often large sections of financial institutions are running intelligently and profitably (a friend worked in one euro bank where one dept which employed just 20 people had losses of tens of billions..) so the idea of blanket ban is unfair..

Shareholders as the owners of the errant banks should surely be punished for not exercising sufficient control over the management that they employ.

The taxpayer should share in the potential benefits of any recovery by taking (at sharholders expense) an equity stake in each rescued bank and in order to offset the risk that they now own.

Although governments are generally poor managers perhaps in this case as hopefully short term major shareholders they can exercise the control over management that has been lacking and without additional legislation.
Until the sector recovers and the equity can be resold at profit for the taxpyers benefit.
It is a normal business transaction in that case.

25:

It's sad but true that, in addition to a failed economic model, the UK and the US seem to end up with sub-par leaders. Labour has a majority in the Commons, but it's hard to think who they could promote to replace the hapless Brown. Most of his cabinet colleagues are plonkers. Brown is clueless on the economy. End of boom and bust? Yes, right.....

In the US, the thought of the bumbling, panicky McCain as president is scary - as if eight years of Dubbya hasn't been bad enough!

If it's true that they had a gearing of 180 then nobody would want to touch them with a bargepole - nor should they.

Let the depositors have their money back - they will be mostly covered by the FSCS anyway. Then let the counterparties and shareholders take their losses. No point putting public money into this black hole.

Flog off the foreclosed Buy-to-let properties for what they will fetch - I know this will accelerate house price falls but they are going to fall anyway so might as well get it over and done with.

I fully endorse the idea of banning bonuses and would actually go alot further. Remember that one way for these snakes to pay bonuses without appearing to is just to re-hire the employees at a higher salary each year.

If it was up to me I would put the worse ones in prison, seize all the assets of a good number and sack the rest with no redundancy pay. It's pay-back time.

"Nationalisation is only a last resort". Sounds familiar doesn't it. I think there was very similar talking before they bought the Rock with our money...

May I ask you to pose a few simple questions to anyone you interview, who is or may have been in a position of responsibility, during part or all of the last decade?

β€œWhere were they when all this trouble was brewing and why did they not do something about it and what is going to happen to them now that they have been shown to have been utterly incompetent?”

It seems incredible enough to think that a socialist (Is that what β€œLabour” is?) has seemingly allowed our entire economy to be based on the upward spiralling property prices and consumer spending but it defies belief to read that the Financial Services Authority has allowed banks and building societies to lend such absurdly huge amounts of money to people who clearly had no chance ever of maintaining their repayment plans.

#16

Why is it daylight robbery, as the warning goes - Shares can go down in value as well as up - if you don't want to or can't afford to gamble one should not play financial roulette!

And, in the future, if I hear of any bank dishing out these obscene bonuses, I will immediately withdraw my savings from that bank.
I advise anyone reading this, and all Americans, to do the same.

26:

Yes, and in some ways it's even worse than that.

If companies are financed on debt capital, the interest that they pay is tax deductible. But if they're financed using equity capital, which is surely better than a debt-based structure, dividends are NOT tax deductible. Hence the growth in private equity.

Not only is the playing field not level, but the tax system has actually favoured debt capital over equity. This is crazy, and should be reformed as a matter of urgency.

I love my champagne as much as the next chap. Are we asking the right questions?
The 'valuation' of our economy bears no relation to the reality of people's lives,except that both are based on debts which will never be repaid and therefore we should stop clinging to their supposed 'value'.

Maybe it's time to look at social, national and global inequality a little harder?

The markets saw to the end of British Manufacturing. Hopefully it will now see its own end coming and we can move past the inherent belief that value is driven by greed and where the greediest are valued and rewarded most highly.

Enough of getting senior execs and government officials to think outside the box for a grotesque rescue package. We should start thinking outside the market itself. It's been our creation after all and because of the pain of the 70s and 80s we seem to have accepted its infallability without question.

Is there an alternative? (Not an idealogical one - but human beings have always been good at finding successful solutions in a time of crisis).

#25

These problems are not of Brown's making, all he and Blair did was to buy into the dream as a means to get elected, the real seeds to all this were planted in the early 1980s under Thatcher.

I can understand that the City, with its speculative and bonus-based culture, has become very unpopular.

But can someone answer me this - if the City slumps, and even more if it's penalised, how are we going to replace the huge foreign currency earnings that it generates?

Basically, a surplus in financial services offsets our huge deficits in physical trade. If we lose that services surplus, how on earth are we going to pay for imports?

We do have a solution in the UK.
Currently the Housing Corporation (soon to be split - great timing!) provides funds to build social housing and enable people to purchase a home - or rather a share. This is called ΒιΆΉΤΌΕΔbuy or Shared Ownership.
Now - if the Government would "purchase" anyone's mortgage if they cannot pay, in return for their property (which will then be owned by a Housing Association) the people pay rent and continue to live in their property, the banks still get their money - through the payment of the mortgage, so no one is defaulting on the loan, and there is no "poison asset".
This way the banks can use these "assets" to make loans, houses are not repossessed, and the housing market does not go in to freefall - and Gordon will like this, Housing Associations are not public bodies, so the government loans do not impact on the PSBR !!
So what are we waiting for?

#36 Yeah, Brown and Blair were just bystanders these past 11 years.

All our current problems were caused or planted by Thatcher 20-30 years ago.

The most direct way out of this would be for the government to levy a temporary property tax related to property value on all residential property, and using this money to loan long-term against a p0rtion of defaulting borrowers' outstanding mortgage, allowing the freeholder/leaseholder to stay in the property. In return the government keeps first charge on the property, which cannot be sold unless and until the gov. loan on a property is repaid in full with interest. The gov. thereby maintains a hold on a significant portion of housing stock, and the mortgagee and bank maintain at least a portion of their obligations to one another. Non-mortgaged and non-distressed house owners could take consolation from this new tax that it would prevent their house losing value and their savings being destroyed. Whether this is fairer than to just let the situation go bust is a mute question... but I can't think of any fairer way of propping this up...

Let me put right some of the erroneous beliefs that appear to be held by many bloggers:
1) BB was not a bank that paid out idiotic bonuses - so why talk about bonuses as if they were part of the cause of its current problems?
2) BTL mortgages have historically had a lower default rate than plain vanilla residential mortgages - as well as earning a higher rate of interest. Hence they are MORE profitable than ordinary residential. 3) Also if a BTL mortgage goes wrong most (but clearly not all) investors are people of substance - so it should be possible to recover any shortfall on sale of the property from the borrowers other assets.
4) It is unfortunately true that BTL has suffered a higher rate of mortgage fraud than residential - and BB has attracted more than its fair share. But in a weak market for property these come the surface very fast - so the fraud losses recognised in the half year profits should represent the bulk of such losses.

I have absolutely no doubt that BB could trade through this were it not for runs on retail deposits - however these are caused. It is unfortunately true that the LEAST secure form of funding for a lender is retail deposits - but this is the way that most commentators appear to wish mortgage lenders to go. WHY???

Sadly I fear that the future of BB is now outside of its own hands - destoyed by a mix of management doing too little too late and public fear whipped up by the media.

I can only hope that shareholders get their just deserts - which to my mind is probably around 65p per share. But I won't hold my breath.

Major shareholders are pension fund and insurance, so we have to help. Brown was charging these speculators 10% tax, even their cleaner would have paid more.

Under this government main form of redistribution was to take from the middles class and give it to super rich and single parents.

Brown is like the naked king parading, believing him to be wearing the finest robs, this is this mans prudence. As Jo the public, we have to pay for his incompetence.

Perhaps what is needed in the longer term is to rescind the limited liability laws, at any rate for companies worth more than (say) ten million pounds.
This would ensure that the directors of large financial institutions knew they were personally repsonsible if their bank failed, and this should induce them to take more care with it - and to ensure the employees who make the big bets have someting to lose as well.

Some have been saying that the LTD (PLC) state has distorted the market for years.

For years those of us who supported capitalism have been saying that it isn't a zero-sum game - that everybody wins in the long run. Perhaps we were wrong. Perhaps we need to make sure that banking is a zero-sum game, and that the banks losses are to be made up out of the assetts of their senior employees.

The Vast majority of those who have borrowed have kept faith with the banks. The banks have betrayed their good faith, re-selling their borrowings to each other and misrepresenting the value of these "bundled borrowings".

there is no way out of this but for the banks to "take it on the chin", accept their losses and re-generate confidence and energy by "writing off" a substantial part of their mortgage stock.

The alternative is a financial meltdown rapidly followed by economic and social chaos.

43:

This is a very good idea, but there might be an easier way of doing it - reverse the limited liability element of Big Bang.

Until Big Bang in the 1980s, stockbroking firms did not have limited liability - they were partnerships with full liability. As a result, they stuck to the core business of advising clients and buying and selling shares for clients. They could earn good incomes, but not stratospheric earnings. Market-making was conducted by jobbers, not brokers. It was a long-established, stable and professional system, and arguably in many ways a lot better than what we have now.

Comments seem to be vaporising into the ether, is this a form of censorship or just server trouble...

How will B and B be rescued? The question is why will B and B be rescued?

Bail out the hapless borrowers and innocent shareholders - yes. But the directors and management?

The reason why it was a mistake to nationalise Northern Rock was because it was problems with the system that were its downfall rather than problems of their own making.

We now have HBOS and Bradford and Bingley is similar positions and the Vince Cable nationalise them all answer does not address the problems of the system.

The problem in the system is that money lent in the wholesale markets now has to be repaid by banks who have lent this money and have no way of getting it back in.

Borrowing short to lend long is what banks do.

Liquidity is a public good and in times such as these the only body that has access to liquidity is the Bank of England. This is because money lent to the Bank of England comes with a government guarantee.

The answer to the problems in the system is for the Bank of England to step in and perform the role of market maker of last resort.

#41

The media isn't whipping this up, they are just reporting/commenting on what is happening in the market.

As for share price, (in the case of nationalisation) a just price will be the listed price @ point of failure and not a penny more, it will hurt but the main concern should be the ordinary depositor - on the other hand if a private buyer can be found that will pay or offer more...

This comment was removed because the moderators found it broke the house rules. Explain.

For those who do not understand the situation with BB, see the well written notes by #41.

#49 boilerplated: actually EU rules state that upon nationalisation the shares are acquired at market value.

Market value for a listed company would usually be an average of the share price over the past 3 to 5 years. Although this should be decided by an independant expert and on a going concern basis (hence this is the reason why there are currently legal proceedings ongoing with regard to the valuation of already nationalised NR)

#9

No, no, no. House prices are not going to rocket because the lending won't be there to fund rising prices. You're looking at the market solely from the point of view supply and demand.

Ferrarais are what many woud like to drive but people can't get the loans to buy them at a reasonable rate of monthly payment. Many people will want a house but they aren't going to get it because banks will not lend to them, and if they do lend it will be at far less income multiples than previously. House prices are coming down and staying down for a long time - unless the governments of the world try to wipe-out debt by creating inflation, but that will bring its own problems.

Plus, housing demand is not so much due to our growing population: it is due to the explosion in economic migrants who will leave or be forced from the country as unemployment gathers pace (if history is anything to go by). There will be massive supply, little realisable demand and prices will keep falling. Negative equity will be the norm for homeowners who will have to take the burden of higher interest rates on more expensive properties and higher taxes. (This is if we do the sensible thing and pay off our debts to get back on an even footing.) The economy will shrink and that will be that. It won't grow again because it was credit that kept it going and we'll be competing with the Far East for a manufacturing base which is the only way of creating MASS employment. (Forget the high-tech economy: it employs hundreds of thousands - manufacturing and retail employ millions.) The only way to forestall this is protectionism, but that is unlikely to occur because...we need Foreign investors to stop ourselves falling into a vortex, and they are not going to shut themselves out of a market they are propping-up.

Welcome to the dark side of globalisation and free markets - which other countries have experienced for a long time, by the way. This is the Asian Century.

45 FriendlyCard

This is a stunner: resuscitate the unlimited liability of stockbrokers. This will not happen of course. Not yet. Not before all bubbles have been flattened and we experience the full horror of one or more deep recessions. Eventually people will lose the delusions foisted on them, and demand it.

Nevertheless, your suggestion is a stunner for several reasons.

It is looking at the kind of regulatory environment we should have in the future, so history need not keep repeating. It does not require formal knowledge of economics to understand or explain. It gives a big benefit for a small effort, and is easy to implement. It looks at past regulatory mistakes which can be reversed, so there is no question of blame, simply unintended consequences to unwind. It helps to reduce the size of the gambling sandbox, so it automatically shrinks the problem.

Putting pensions back into gilts also achieves most of these benefits.

An overarching objective of the regulatory framework should be to create an environment that is hostile to deluding the public. It has been common knowledge to anyone who has studied finance in the last half century that no-one can predict future share price movements.

The risk-free rate is all we can be reasonably sure of. The rest is speculation. There is no harm in that provided we speculate with our own money.

If a sound regulatory framework is introduced, financial services will shrink from about 20 to about 4 percent of GDP. The other 16 percent is puffery. Although tough on jobs, it will allow many people to choose less demeaning work. Sales is an honourable activity, but the selling of fake promises plunders all of our futures.

Keep the ideas flowing!

If house prices are going down will we all be placed in lower council tax bands, or will the council just revalue our properties, and will the extra tax they propose (nice views, conservatory, nice kitchen, etc etc) be scrapped.

This mess has been cause be over excited estate agents over pricing properties, to get bigger profits and to increase values which was a blessing to councils for increasing revenues in council tax, higher bands = more money from council tax.

We need a public body to value properties, (RICS) not estate agents with one thing in mind, more money for seller and more money for % commision. Seen this since 2000.

#51,

RF2684,
Sounds like a good reason to bail out of the EU never mind bail out failing banks! :~)

But seriously, I suspect that those rules were intended to discourage the post war Attlee type Nationalisations of profitable industry and services, not to give a return on a failed industry OK for normal times but these are sure not normal...

How many times do I have to hear PM Brown saying that he has the experience, knowledge, know how to fix this country (economics is only a part of it).
In 11 years this Party has divided everyone including their own party.
Like the grand ole Duke of York, boom, bust, u-turns, ducking and diving, up and down we go.
Now the banks need to get rid of their toxic missmanagement.
Who in their right mind would buy that.
Oh Yes, I know who, off we march again.

#48 fireyshandy, I beg to differ.

Borrowing short and lending or investing long is 100 percent recipe for disaster.

An example in the case of the individual business is buying fixed property by stretching creditors. When creditors tighten their terms the business folds. No liquidity. Panic stricken behaviour followed by terrible consequences.

The solution is to talk to creditors and restructure the balance sheet. Long term application of funds, that is, investment in assets, must be matched by long term sources of funds, that is, equity or debt. This needs time and credibility.

Sometimes it is possible. It is easier if the business is trading profitably.

Not for one second is borrowing short and lending or investing long sound practice in any business. For a bank I would think the matching discipline would be a useful adjunct to the capital ratio anyway. A low capital ratio is bad enough, but to further expose by mismatching ones assets and liabilities would be lunacy.

HBOS went for this very reason did it not?

If this were a common business model with banks, no wonder they are so clueless. For regulators in the future it is clear that they cannot rely on the banks applying good business practice. They should make failure to match long and short a criminal offence.

In the meantime, it would be amusing if bank shareholders could win class actions against directors of failed banks in their personal capacity on the grounds of gross negligence.

On the other hand, were these common banking practices, what a laugh. As it is 100 percent recipe for business failure, not only the entire community of bankers but also that of regulators would have made of themselves a laughing stock. (Pause until we are over the current hurdles.) Ask any smart accountant in industry.

53:

Thanks. Many things appeal to me about restoring partnership (liability) rules for stockbrokers. Without being too nostalgic, I think it was much better.

For a start, brokers really only did one thing - advise clients. They didn't have the capital to speculate, and it was their own money on the line anyway. The emphasis was on client-first ethics. 'My word is my bond'. No complications - provide a good, honest, professional service and you get paid; otherwise, not. You had to be a member of the SE, you were regulated, and there were professional qualifications. Reputation was everything.

Pre-Big Bang, the system had worked well for over a century - and it was trusted. Partners made good money, but only in good years, and not obscene sums even then.

OK, it sometimes seemed (to outsiders) like a bit of a toffs' old-school-tie club, but that was illusory. Brokers tended to be a bit old school tie, but dealers were usually working class trader types and analysts were generally grammar school technocrats (I'm generalising a bit, but that was the tenor of it); overall, it was quite a good mix. It was way ahead of other industries in sex and race opportunity, because ability was key. Even had it been a toffs' club, that would have been better than the subsequent barrow-boy culture.

Limited liability was a barrier against incompetence.

So why change it? Basically, (a) to let in outside capital, and (b) to avoid London being unable to keep up with the all-singing-and-dancing NY market (yes, that sounds a hoot now, doesn't it?).

In suggesting unwinding the limited liability elements of big bang, I'm trying to think positively. Big rewards are OK only if they are risk-related; big risk-free rewards bring the system into disrepute with the general public.

The other point is the sheer importance of the City. It is caricatured as a place where a small number of people earn megabucks. Actually, it employs over a million people, most on earnings which - allowing for the costs of living in London - are not generally excessive.

Above all, the City is VITAL to the UK economy - a million jobs, huge foreign exchange earnings. Unlimited liability, capital limited to partners' assets, a single and professional focus - this would be a solid foundation for sound business.

I think we need sound finance from here on; in mortgages, limited multiples and LTVs. The City can do its bit by returning to the unlimited liability ethic.

#52 GrouchoMarxist1: yes. Your comment should be prescribed reading at the beginning of every post by Robert. As a reminder of what we are facing and why.

However, your last paragraph is not really relevant.

#55 Boilerplated

Personally i would prefer if we are out of the EU i agree with you on that point.

However no matter how or why those rules were put in place, they are the rules and must be followed.

Just because they may not be appropriate now (which is a separate matter of debate) does not mean that they can be throw out of the window.

#60

The EU, and our easier access to the Euro/ECB, might just be our saviour out of this mess, depending on what happens to the Dollar. Some commentators are suggesting that the Dollar might not be the market bench-mark if the "Paulson-Bernahke-Bush" plan doesn't work.

Whew! You can’t bet the financial services industry, can you? When the market rises, it’s been their own personal contribution to the effort and they demand and receive commensurate remuneration. When the market falls, it has nothing to do with them – it’s nasty old market forces beyond their control. A wonderful one-way street; I’ll admit that I wish I could live there – who wouldn’t? – but I don’t.

It seems to me that there can only ever be a certain percentage of organic growth in totality of the capitalist system. Any growth beyond the few percentage points to be found within the system’s β€˜natural growth’ must therefore be financed by something inorganic, introduced into the system – in this case, the disproportionate uptake of debt that's fuelled our recent growth. Therefore, the level of debt that we’ve seen and β€˜enjoyed’ over the past few years – consumers, government and industry alike – can only have the net result of overloading the infrastructure, with the resulting instability that we’re seeing today.

It’s too easy to lambast and blame the consumer for all this, but the truth is that all levels of society have been happily drinking from this particular fountain.

I’m reminded of musical chairs here. Some nasty Mummy’s taken away a couple of chairs and everyone’s running for the remaining few seats left. In the corner, there’s a very chubby boy sitting with a wheezing fat boy perched on his lap. Across the way, there’s another waddler with another winded boy, struggling to catch his breath.

How many more can fit? How many more chairs will be taken away?