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At last, an honest banker

March 4th, 2009

“It is as if, too often, people had given up asking whether something was the right thing to do, and focused only whether it was legal and complied with the rules. The industry needs to recover a sense of what is right and suitable as the key impulse for doing business.”

These are my thoughts entirely about the reasons for the demise of once proud banks such as RBS and Halifax Bank of Scotland, and I had already formulated that view in October 2008 by which time such banks were already insolvent (after having spoken to experts on such matters, including Professor Stewart Hamilton).

What is hugely refreshing is that the person making the remarks is Stephen Green, chairman of HSBC. He was speaking as he unveiled the bank’s results earlier this week.

Compared to the stomach-churning display of ‘buck passing’ and ‘self-denial’ that we witnessed from Sir Fred Goodwin, Sir Tom McKillop, Andy Hornby and Lord Dennis Stevenson in the Treasury Select committee, this is hugely to be welcomed.  There are parallels in the gulf between honest and dishonest bankers and the current rift between Prime Minister Gordon Brown and chancellor Alistair Darling over the causes of the recession.

It is going to be impossible for anyone to sort out the absolute bloody mess that UK banking has become until more senior bankers accept that they allowed their industry to become dysfuntional in 2000-08. (I suspect that the RBS boss Stephen Hester does acknowledge this privately, but I hasn’t quite summoned up the courage to say it publicly. As usual, I suspect lawyers are getting in the way of the truth and free speech).

Green also said he regreted the purchase of US mortgage bank Household Finance Corp — a deal that occurred on his watch as chief executive. This too is so refreshing. He knows that HSBC’s sortie into US subprime lending, although it was initially profitable, has been an absolute disaster for the bank and is not the sort to pretend otherwise.

During the annual results, at which HSBC also unveiled a £12.5 billion rights issue, Green confirmed that Household has caused a £7bn write-off and a £17bn provision against bad loans, telling reporters understatededly: “It’s an acquisition we wish we hadn’t done with the benefit of hindsight, and there are lessons to be learned.”

Writing more generally about the banking crisis, Green said: “Inappropriate products were sold inappropriately by many. Compensation practices ran out of control and perverse incentives led to dangerous outcomes,” he added.

“There is genuine and widespread anger that the contributors to the crisis were in some cases amongst the biggest beneficiaries of the system.”

In a world of growing financial imbalances, awash with cheap credit, banks pursued securitisation based on “overly complex product structures” and “excessive gearing”, added Green. The complexity and opacity of some financial instruments reached the point where “even senior and experienced bankers and professional investors had trouble understanding them”.

That meant the banks started buying and selling assets whose risks they had not properly assessed. The madcap pursuit of market share led to over-gearing, which in turn meant they allowed themselves to become dangerously exposed to the fragile wholesale markets. Given the fact that these markets had temporarily dried up in the aftermath of 9/11, this may seem extraordinary, however the (w)ankers convinced themselves it would be alright.

Green said:

“When the securitisation market began to collapse, banks found themselves with assets that they could neither sell nor fund, so forcing large losses on the asset side and a funding challenge on the liability side for which they were entirely unprepared.”

Failed bankers like Goodwin and Hornby might have earned themselves a little bit more respect and even sympathy in recent days if they had been big enough to admit this sort of thing. Maybe, just maybe, Green’s intervention will come to be seen as some kind of turning point for the whole banking saga?

It is also worth noting that a member of the Fraser clan, Simon Fraser, has today become a non-executive director Barclays.

  • To read an excellent article by The Herald’s Alf Young, which is where I discovered the above quotes, click here.
  • Also see how Stephen Green’s approach puts him at odds with activist shareholders like Knight Vinke in this piece by Matthew Lynn – A hellfire sermon or HSBC’s boss
  • Also here’s a good analysis of the need for radical economic change written by British Columbia-based environmental thinker and author, Guy Dauncey: Jumping to a New Global Economy

Short URL: https://www.ianfraser.org/?p=768

Posted by on Mar 4 2009. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

2 Comments for “At last, an honest banker”

  1. I’ve only just read this and now I understand how Green’s vision, in his role at the helm of HSBC, differs so greatly from the bully boy tactics that are common place at HBOS.

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