The credit crunch has in many ways been a story of the banks and a major banking crisis. All these years later after a proliferation of promises about reform we find that we have not truly shaken the issues off. One of the worst cases of this is Italy that has a decade after all this began still not completed its round of bailouts as the developing Carige story makes clear. We keep getting investors supposedly prepared to put their money into troubled Italian banks when then pull out. What can it be about the heavy losses of the Atlante bailout vehicle that has caused this? In Germany we see that the position of its main bank Deutsche Bank can be highlighted simply by quoting its share price, which as I type this is a mere 6.82 Euros.

In the UK we got on with the banking bailouts which is both good and bad, The good bit is that if you are going to do it then it is better to be swift and decisive. The bad part is that letting Northern Rock fail would have sent a signal to the other banks that they are subject to the same laws as everyone else. Instead we have moved forwards with nobody in a senior position in a UK bank being prosecuted even when there have been signs of fraud and misrepresentation on a major scale. To my mind there were three major issues.

  1. The merger of Lloyds Bank and Bank of Scotland which was very expensive for shareholders and requited a bailout.
  2. The rights issue of June 2008 undertaken by Royal Bank of Scotland.
  3. The Qatari investment in Barclays at the height of the crisis that turned out to be a case of some shareholders being more equal than others.

The UK establishment was never going to address point one for the simple reason that it had its fingers all over it! Instead we saw a classic cover up and fudge with Victor Blank being Knighted. Point two was kicked into the long grass as there was no settlement of any sort until 2017 which to my mind did not get even close to addressing this. From the BBC back then.

“The rights issue deals with concerns over the balance sheet,” said David Cumming, head of UK equities at Standard Life Investments, which holds a 3.5% stake in RBS.

This was how it was presented so how only a few months later did it collapse as highlighted by FN News below.

The investors bringing claims against RBS allege the bank omitted crucial financial information from the prospectus for its 2008 rights issue, which raised £12 billion. A few months later, the bank collapsed, requiring a £45 billion taxpayer bailout.

Frankly I find it hard to think of a more open and shut case and yet it went on for years.

Barclays

The Financial Times summarises the issue here.

The charges turned on £322m of side deals and a $3bn loan the bank extended to Qatar in 2008, as Barclays twice turned to the Gulf state in emergency cash calls that kept the bank from a government bail-out.

Again on a prima facie basis that looks completely clear-cut as management paying someone to back the share price is misleading shareholders, especially as the truth was withheld for quite some time. In some ways they may as well have revealed it as nothing seems to ever happen about it anyway.

The charges against the bank were ultimately scrubbed by the courts last year and the bank has not had to stand trial. Related proceedings have been pursued against its former chief executive, John Varley, and three former top bankers, who all denied the charges against them. A jury trying the case was recently discharged.

Even the Financial Times finds itself mentioning this.

The SFO’s decision represented a rare example of a major bank facing UK criminal charges. ( SFO is Serious Fraud Office).

In my career the SFO has had a simply dreadful name symbolised by the way that Ernest Saunders got his prison sentenced reduced via a diagnosis of Alzheimers something from which unlike everyone else who gets it he subsequently recovered.

Where was our watch-dog the Bank of England? Well rather than representing us it found itself crying “The Precious! The Precious!”

The Bank of England warned prosecutors that a criminal charge against Barclays could present an existential threat to the lender, showing that regulators still worry about large banks being “too big to jail”. According to people familiar with the matter, in 2017, Sam Woods, the BoE’s top banking supervisor, told David Green, the then-director of the Serious Fraud Office, that there could be unpredictable consequences if there were charges against Barclays over crisis-era payments to Qatar.

This is classic Yes Prime Minister style action as of course “unpredictable consequences” cannot be challenged. Or if you prefer a type of what has become called Project Fear. It is perfectly safe as you cannot be specifically questioned because you have been deliberately vague. It is another form of regulatory capture as Sam Woods found itself mimicking the case made by Barclays itself.

Mr Woods questioned whether a corporate criminal charge would be in the public interest as officials believed it would present a small – but not insignificant – threat to Barclays’ safety and soundness. Barclays itself made similar arguments to the PRA, according to other people familiar with the situation.

Yet the problem is again highlighted by a share price of 160 pence which is not much of a return on the dark days of the credit crunch and some 26% lower over the past year. Putting it another way the share price suggests we have seen a fair bit of zombification at Barclays.

Metro Bank

The cases above relate mostly to past issues but Metro Bank brings us more up to date. This week has seen something of a mini bank run triggered by social media scaremongering such as this tweet from Emily Barthlow.

Please transfer all your money out of THEY ARE GOING BANKRUPT I REPEAT THEY ARE GOING BANKRUPT

Whilst Metro Bank plainly has problems highlighted by a share price of £5.70 such tweets ignored the fact that the deposit protection scheme is there for deposits of up to £85,000. Why is Metro Bank vulnerable to such rumours? City-AM explained yesterday.

Metro Bank also attempted to reassure customers that its £350m capital raise – in response to a major loans blunder – was “well advanced.”

Despite today’s bounce, the bank’s stock is down 77 per cent since the lender admitted in January that a swathe of commercial loans had been wrongly classified and should have been among its “risk-weighted assets.”

As to the classification error it was yet another triumph for the prescience of Yes Minster.

Sir Desmond: “Well, they placed their own interpretation on Treasury regulations. Someone has to interpret them.”
Sir Humphrey: “What about the Treasury’s interpretation?”
Sir Desmond: “It didn’t seem appropriate.”

The modern twist is that we had what I think is the first bank panic via Whatsapp.

Comment

In some ways we have been on a very long journey and in others on a very short one. In terms of time passed it is the former but it terms of approach it is the latter as the banks seem to remain above the law. We get thrown the occasional tit-bit such as some Libor or foreign-exchange riggers but nobody at the top seems to ever be held accountable let alone punished. Indeed establishment figures seem to develop a habit of being ennobled as we note that Paul Tucker of Li(e)bor fame at the Bank of England is now Sir Paul Tucker. I cannot avoid the thought that this is a reward for keeping quiet.

So whilst banks are pressed to keep more capital we are left wondering what has really changed? After all in a real crisis capital will be seen as insufficient anyway due to the nature of banking. We are left with bank directors provided with Star Trek style deflector shields in any crisis and in my opinion that is  partly why we rumble on with a zombified banking sector and weak economic growth. Putting it another way what Keynes called “animal spirits” are weakened by all of this.