Mar 26, 2008

Jeff Randall: When going gets rough, banks yell for nanny

By Jeff Randall
The Telegraph, London
Wednesday, March 26, 2008

Bank customer: "What's the difference between a recession and a depression?"

Bank manager: "In a recession, you lose your job. In a depression, I lose mine."

Remarkable, isn't it, just how quickly champions of laissez-faire solutions can become advocates for state intervention? All it takes is for their gravy train to break down.

When freedom to play with barely any restrictions was making them rich beyond imagination, big-shot financiers applauded "light-touch" regulation. The looser the rules, the louder they cheered.

Now, however, as credit is crunched, losses mount, and prospects for lucrative employment come under threat, many titans of unfettered enterprise are suddenly crying out for nanny.

Not for them the tough love of supply and demand. No, sir. These are desperate times, requiring generous measures of tender, loving care.

The essential plumbing of commerce, it is alleged, has become dysfunctional. Or, as Josef Ackerman, chief executive of Deutsche Bank, said: "I no longer believe in the market's self-healing power."

Whyever not? Nowhere on the tin does it say that markets will correct themselves without someone being hurt. Indeed, for markets to function properly, pain, somewhere along the chain, is inevitable.

Markets work because they create winners and losers, not jobs-for-life security. Financial Darwinism doesn't just underpin the survival of the fittest; it ensures the extinction of pea-brained dinosaurs.

Corporations with too much fat and insufficient speed end up in evolution's Room 101. This is often forgotten when the trees are full of fruit.

In his book, "The Final Crash," Hugo Bouleau (the nom de plume of a City investment manager) predicts: "Reckless lending will come back to haunt many a greedy banker and catch up with those directors that set excessive sales targets, forcing bank employees to fund unsuitable projects, chase ever riskier clients, and sell inappropriate investment products."

This process is already under way in London and New York. Had it occurred anywhere else, one could be sure that Wall Street and the City would be nodding their approval.

After all, job losses = cost reductions; company insolvencies = sector consolidation; falling prices = buying opportunities. Great value is often found on a rubbish tip.

"But hang on a minute," the bankers yelp. "It's happening in banking. Banking. That means us."

Yes, boys, I'm afraid it does.

A smack by the invisible hand of market forces no longer seems such a good idea, does it? Far more appealing is the soft touch of Other People's Money. Cue: chorus of calls for taxpayers' funds to rescue distressed lenders.

We are told by the banks that they are too important to be allowed to fail, that their operations are so inextricably linked with the real economy we would be plunged into a 1930s-type calamity if a big one went under.

Forget moral hazard, we are urged; it's in everyone's interest to bail them out.

Those who got us into this mess are demanding that we get them out of it. They put a gun to our heads, insisting that, without immediate action, everyone will feel their pain. (Funny, I don't recall feeling the joy of their jackpot bonuses.) Catharsis for a few will lead to nemesis for many.

Central banks seem to agree, so the Federal Reserve fixes a deal at Bear Stearns. This is no Northern Rock, a haven for small savers, but one of Wall Street's most egregious examples of knock-'em-down-drag-em-out investment banking.

At a time when so many Americans are losing their homes, it's hard to think of a company less deserving of state support.

Paul Krugman, professor of economics at Princeton University, forecasts: "As Bear goes, so will the rest of the financial system. And if history is any guide, the coming taxpayer-financed bailout will end up costing a lot of money."

The banks have landed us in this bad place because, over many years they learnt how to wriggle out of regulation. Special investment vehicles were created to park risk. Derivatives were invented that became the financial equivalent of Frankenstein's monster -- they took on a life of their own. In short, there emerged a parallel system of Wild West behaviour.

The banks' cocktail of greed and irresponsibility will, I'm sure, produce a wave of fresh regulation to clamp down on recent excesses.

Many of the new strictures will be counterproductive -- they always are -- in the same way that Sarbanes-Oxley legislation, after Enron and WorldCom, drove public share offerings out of New York and into London.

Never mind. For hyper-ventilating politicians -- those who can think of nothing better than sticking their fingers into the free-enterprise pie -- the sub-prime mortgage mess has turned into a two-inch tap-in. It's an unmissable chance to justify far-reaching extensions of their activities.

Christopher Fildes, who graced these pages for many years, once warned that while bankers and investors are counting their losses, the next worst thing is "the spectacle of finance ministers ... and their supporting cast of bag carriers and sherpas hurrying to meet each other and to think of something that they or their spokesmen can subsequently announce. They are tempted at such times to take initiatives."

One dreads to think.

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