Sir John Gieve on moral hazard
Last autumn, it was clear that something had to be done. After years of flawed thinking, reckless lending and hubristic empire-building, banks including RBS and HBOS had brought themselves to the brink of collapse.
In the event, Gordon Brown, the prime minister, decided the banks needed to be saved and stepped in with a £50 billion-plus rescue package which involved the effective nationalisation of both. It also entailed putting them on state-sponsored life-support machines that incorporated a raft of other measures, including insuring their dodgiest loans.
The formerly suicidal patients have, for now, been stabilised. Seven months ago it was perfectly possible either HBOS, acquired by Lloyds TSB in January, or RBS, could have gone down the swanny. That now looks a lot less likely. But they remain damaged bodies that will require further surgery if they are to return to the private sector any time soon.
Brown and his chancellor Alistair Darling were right in one respect: a quick solution, even if wrong-headed, was infinitely preferable to dithering after the Northern Rock collapse a year earlier.
But Brown and Darling’s largesse to failed bankers does not come without risk. Not least, the existence of a 100% reliable, state-funded safety net is hardly going to dissuade bankers from becoming reckless all over again during the next economic boom.
Sir John Gieve, who stepped down as deputy governor of the Bank of England four months ago, pointed this out on a visit to Edinburgh last week. Addressing an audience at the David Hume Institute on Thursday evening, John Gieve said: “The government has dispelled any constructive ambiguity on how far it is willing to let banks and investors suffer. There’s now a safety net covering every significant bank, even banks that have failed.
“Moral hazard is a real issue now. In recovery, this could make the next cycle much worse,” added John Gieve
If banks are deemed too big to fail, they will believe they can once again get away with taking outrageous risks.
This is already becoming apparent in the UK mortgage market where, I am told, state-owned banks have reverted to offering 95% loan-to-value mortgages. Barclays, which is still in private hands, is not issuing mortgages with a loan-to-value above 75%.
John Gieve also warned investors against deluding themselves that the green shoots of recovery spotted by some commentators are sprouting. Unemployment is expected to continue rising well into 2010 and possibly into 2011.
“There are some signs that the global crisis may have passed its most acute phase, though it’s too early to announce a recovery. As fears subside, we must not allow the impetus for reform to weaken,” said John Gieve.
This, to me, is critical. It seems that, with the banks stabilised and the focus for the public’s wrath shifting towards miscreant politicians, the UK government has abandoned any plans to overhaul financial regulation in this country.
This much was evident from Alistair Darling’s disappointing Mansion House speech to the City grandees last week.
So why does this alleged former Trotskyist believe that banks should once again be left to their own devices? Is it because he knows Labour is going to lose the next election and so can’t be bothered with the aggro it would entail over the next 12 months?
Walls of Jericho
Property development was until recently seen as a passport to riches by many.
People who made paper fortunes in the sector in Scotland included Iain Wotherspoon of Kilmartin, John Kennedy of Kenmore, Remo Dipre of Gladedale, Grahame Whateley of Castlemore, Manish Chande of Mountgrange, Chris Buchan of Heritor’s, Colin Cumberland of Applecross, Ken Ross of Elphinstone, Geoff Ball of Cala Homes, Sir David Murray of Premier Property Group and Sir Tom Hunter of West Coast Capital.
Most of these guys had a bank of choice — HBOS — whose corporate arm bent over backwards to lend them extravagant sums often, seemingly, without giving sufficient thought to commercial viability or future asset prices.
In recent weeks the debt-driven edifices some of these men constructed have been put into administration and in coming weeks others may well follow.
But if and when they do, are we going to see more handy pre-packaged administrations along the lines of the one pulled off on Friday by Donald Macdonald for the Aviemore Highland Resort?
Reputation in shreds
Britain’s public enemy number one, Sir Fred Goodwin, had become such an albatross around the neck of Royal Bank of Scotland’s chairman Sir Philip Hampton that the latter knight would have resorted to virtually anything to persuade Fred the Shred to hand back at least some of his £700,000-a-year annual pension.
Goodwin has succumbed at last. Where his own reputation is concerned, the gesture may turn out to be too little too late. For Sir Philip, the jury is still out on whether the move will be enough to put a stop to what he has described as the public flogging of RBS.
This Scottish Agenda column was published in Sunday Times Scotland on June 2009.