A Wunch.

Nowadays it has become a business where they lend money they do not have, the whole economy is built on money or wealth which does not yet exist, only on the expectation (or rather, hope) that it will exist in the future. This is what makes the modern financial world an irresponsible risk to the rest of the society.

Yes but again, if they bought all that sovereign debt with money they have that would be quite legitimate, the problem is that they buy debt with money they do not actually have.

Last year, with most of the Spanish banks bordering bankrupcy which was strangling Spanish economy to death because companies could not receive financing from the banks (caused by a crazy real-state bubble which is not the purpose to discuss here), the EU Central Bank finally provided an injection of capital for 40 billion euro to re-capitalise the Spanish banking sector. What has happened? Since the interest of the Spanish debt is very high (around 6%) the banks are using the money they received to buy Spanish debt instead of pumping it into the real economy. The economy is not moving at all because the companies do not yet get any financing from the banks, a relatively safe and attractive 6% interest from the Spanish government is more interesting than lending money to a company which who knows if they will make profit or losses. The government is happy because they can show decreasing risk premium figures but it's all a masquerade quite removed from real economy. A lot of money pumped in but not to boost real economy, just to make 'the investors' quiet and safe.

ITV, some years ago, were showing a League Cup Semi Final Mach live. Gary Newbon, one time sports reporter and latterly chief editor, was on the touch line for a live feed. Cue thousands of fans behind him, who started chanting::

"Gary Newbon.....he's a wa**ker, he's a wa**ker....."

The camera cut out, and the editor went back to the studio. Cue embarrassed silence, whereupon Jimmy Greaves turns to a distraught presenter (Tony Wilson), and says deadpan:

"I didn't realise Gary was a merchant banker, Tony!"

The adverts followed immediately as the entire studio collapsed laughing. 

Many a true word spoken in jest, eh?

To be fair, the opium trade was legal back then, and it is still legally cultivated for medical pharmaceutical use today.

The term Bankers is misleading for a start. The vast majority of people who work for banks receive average or lower salaries. The people who serve you in your branch for example probably get paid less than you. Even the branch manager these days is little more than a glorified supervisor. If they get a bonus at all, it might be 3 or 4 % of their salary, and then only if they are deemed to have "performed" really well. I'm sure we all know people who work in banks who would laugh at the idea that they get enormous bonuses.

The people getting the big bonuses are the people in the top jobs and the traders in the global markets who effectively gamble with the banks' money. These people are not "bankers" in the traditional sense, they are commodity traders who might just as easily be dealing in petrol or gas or gold. These traders should be grouped together under a global title, not just conveniently called bankers. 

Looking at bonuses themselves, these are an effective incentive if they are used properly. They are used in all walks of life. No one ever questions a footballer getting a huge bung for winning the cup, do they? A bonus is the "at risk" part of your salary. A "Banker's" salary might be say £100,000. His employer's say to him, we will pay you £50,000 guaranteed. To get the other £50000 you have to make the company £1 million. If you don't, you don;t get the bonus. If he does, he appears to get a bonus of the equivalent of his salary. What if they had jsut paid him £100,000, would you be happier because it was less transparent?

Taking it further, the employer says to the"banker" for every £1 million profit you make for the company, we will give you £50,000. The guy makes a profit for the company of £10 million. His bonus is £500,000. He has added £10 million to the companies profits though. Does this show that incentives a work? Maybe.

And what happens to those profits? They go to the rich eh? well actually most of them go to you and me. The big investors in companies are pension funds, and other investors such as unit trusts, mortgage equity savings, etc. You and I demand that our pension funds make as much money as they can for us. The pension funds in turn put pressure on the companies they invest in to perform well and make big profits. The companies offer their staff bonuses to make big profits. Who is behind the banker's bonuses, why it's YOU!!

So a bit less of the hypocrisy. It's very easy to put your head in the sand and point the finger at others. A bit more honesty all round when it comes to our own greed would not go amiss.

There's a great lack of understanding or heads in the sand here about how things actually work. As I've said before, I don't seek to justify the way things are, but let's live in the real world. I notice too that no one has refuted the notion that it is our own greed that is at the root of the issue.

The incentive to get people to do their jobs is called salary. If those people who can do the job were not paid bonuses where would they go? More to the point: what are those people actually for? If they are not "doing the job" and making money for their employers then what are they there for? Seriously, what is the point of an investment banker who cannot invest money? What is the point of a bank trader who cannot trade?

 

http://www.cnbc.com/id/29735469/AIG_039Retention039_Bonus_Paid_To_Execs_Who_Already_Left" rel="nofollow - So called retention bonuses don't work when they are paid to employees who have already left the company .

Easy Livin wrote: There's a great lack of understanding or heads in the sand here about how things actually work. As I've said before, I don't seek to justify the way things are, but let's live in the real world. I notice too that no one has refuted the notion that it is our own greed that is at the root of the issue.

What is there to refute? The purpose of investing in a bank is to get a return on your money, without that incentive you may just as well store your cash under the matress, if saving money with a return that barely keep track of inflation motivated by greed then so be it.

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What?

I'd suggest you speak for yourself there.  Do you know how conservative - and expensive - retail lending is in countries like India?  I am a qualified accounting professional and work for a large company but when I approached the bank for a home loan, I was only eligible to a loan of about 60% of my take-home pay (though I sought less anyway) and a still smaller percentage of my gross.  But what is the point of prudence, I wonder, if credit is built up like a pack of cards elsewhere in the world and upsets the best calculations.   I'd also like to point out that credit growth was fuelled very largely by an errant Federal Reserve that drove interest rates down to an all time low and then quadrupled it in a matter of a few quarters. If that is not the perfect recipe for financial disaster, I wonder what is.  As I said earlier, I'd not single out the bankers alone for blame because govts, rating agencies were all in it together.   It's a gigantic scam and its perpetrators still live in furious denial of the truth.

I still have a lot of cash on the sideline because I also think this is the case, but sometimes I think I'm wrong.

Oh and as for blaming the government. Lets remember that the government is a reflection of the people. The party in power got the most votes and were democratically elected by you and me. The "I didn't vote for them" excuse doesn't wash as the problem emanate from all sides. If you didn't vote at all but could have, you are even more culpable. If you think you could do better, stand for election and persuade the electorate that your way is better.

As I probably have already said too often, I don't seek to condone or justify the way things are, but I do get irritated by those who seek to blame others for the issues without accepting their own share of the responsibility.

And I wholeheartedly agree with you. An important point - they had to have people to lend to in the first place. That was us, on a credit binge which would "never end". 

Years of political activism taught me one thing above all others. You can fool most of the people most of the time.

God, I'm getting cynical in my approaching dotage

 

Having said that , the EUs answer of limiting Bonuses is not the answer as they will just up the wages which doesn't depend on performance at all.  So it will be worse. 

 

From a UK perspective it is really very sad that we have become so dependent on the banking sector.  I blame it on that B*tch Thatcher who thought we could get everything from the service sector.  Ans successive governments have carried on asi.  We have been sold short. 

Easy Livin wrote: Oh and as for blaming the government. Lets remember that the government is a reflection of the people. The party in power got the most votes and were democratically elected by you and me. The "I didn't vote for them" excuse doesn't wash as the problem emanate from all sides. If you didn't vote at all but could have, you are even more culpable. If you think you could do better, stand for election and persuade the electorate that your way is better.

It remains to be seen who the American people will vote for to bring about change.  They probably thought they were doing so by voting Obama who wrote a book about all these amazing changes as part of his presidential campaign and got the Nobel Prize for it.  Except, they simply voted in one Wall Street Govt to replace the other.   Reagan and Clinton both backed Greenspan and so did Bush.  Bernanke was a Bush appointee and continues admirably with his task of note-printing well into Obama's second term.   Are the American people then to blame for not somehow voting the Libertarian party to power, which has only a 1% share of vote today?   It's been a long time since adult franchise truly reflected the will of the people.   That system was corrupted long ago and bought over by the wealthy.  

Ultimately a system exists to further the power of the ruling class and increase their hold over the middle and working class.   Democracy is a beautifully stable way to achieve it without incurring their wrath (perhaps, until now, when distrust of govts may just have hit an inexorable nadir).   If the people are responsible for the govts they vote to power, why is the President or the Senate given sweeping executive powers?  Shouldn't there be a public referendum for important decisions (like whether Citigroup deserves a bailout)?  And surely that is not even as tough to administer as before with the advancements of the internet.  This is a power struggle, that's what it is, and being the only sections that were really affected by the crisis, the middle and lower classes are rightly protesting it. 

I completely agree, the too big to fail theory goes against their free market rhetoric.  But then, they never really believed in free markets as an ideology, only in doing whatever was necessary to further their self interest.  

Like them or loathe them (and who actually likes them!?) banks are a cornerstone of our society. What is needed is tighter regulation of speculative activities (including commodities trading) globally. 

I am aware of the potential consequences of not bailing them out.  But that would have been a more just solution when what was happening was not just market failure but financial fraud.  Weren't Enron, Arthur Andersen, Merck allowed to die?  If the market was supposed to take care of itself, they should have had more faith in its ability to do so than press the panic button. 

By the way, the meltdown happened because they let Lehmann Bros bankruptcy go through anyway which sent ripples through the global financial system.  So they neither averted the crisis nor saved taxpayer money, made a fairly equal mess of both.  Both consequences could have been avoided if only the Fed hadn't tightened so drastically.   Cooling off a loose monetary policy has to be a calibrated process, or the consequences will tend to be drastic.  

Funny, still haven't received my bonus check in the mail.  

The insurance business has a common practice called re-insurance, which basically means that the risk of the insurance company is itself insured. Let's say a certain insurance company A operates in region X, if there's an earthquake in region X it is most likely that the insurance company A will not be able to cover all the damages it has insured and would go bankrupt. By re-insurance the damages will be covered by other insurance companies B, C and D, and A can survive. Conversely A is re-insurer of B, C and D so they will pay a part of the costs if the same would happen to B, C or D.

A similar principle should be mandatory for banks so if they do something wrong their customers do not loose their savings and they do not need to be bailed out by yours and my money.

It did not work well enough when it was needed, the EU Central Bank has had to inject 40 billion euro into the Spanish banking sector to keep it from bankrupcy.

Yeah that's what I mean, these schemes provide some protection to the bank's customers (often not enough, you may read about the recent case of the 'preferentes' by the big Spanish bank Bankia where a lot of people have lost their savings, my father among them) but they do not really add responsibility to the banks behaviour.

These are funds collected by the government from the banks by the hard way (by law). In a 're-insurance scheme' on the other hand, the re-insurer will carefully judge the risk it is taking, and will not allow excessive risks being taken by the insured party. It provides a more self-regulating mechanism.

 

Banks function because money moves, if money stops moving they simply cannot operate because they don't hold sufficient fixed deposits to pay their loans. Bank 'A' lends the money to customer 'B' and then borrows the same mount from bank 'C', 'B' uses the loan to buy from 'D', 'D' deposits that money with bank 'A', 'C', or even 'E'  - within the system of 'A', 'C' and 'E' there is now a sufficient deposit to cover the loan. All the need to do is ensure that 'A' funds that movement of money by charging 'A' interest on the loan so that 'B', 'C', 'D' and 'E' can all make money.

No, there's a big difference, a loan needs to be paid back, an insurance does not (sure you need to pay the premium but not the amount of the eventual damage). What I'm saying is that banks should be compulsorily insured against the risks they take.

I think we are talking in circles here, because that's what the FDIC, FSCS and all those other "insurance" schemes are currently doing. The bank can always foreclose on a bad loan, it cannot magic-up a lost deposit. Since protecting the loan has the same net effect as protecting the deposit then it doesn't matter which you pay the insurance premium on - however, from the insurers perspective the deposits are a lower risk so the premiums for the banks will be lower.

This is not the case with banks, when they screw it they screw it and regardless of such schemes, they often take along their customers with them (for example the protection scheme in Belgium covers only up to 100.000 euro, any further amounts are not insured and you just loose them), and then it's nice for them having the government backup with the motivation that 'they are too big to let them fail'.

Banks have needed our money to be rescued from the excessive risks they took, that is a fact, therefore I don't see it the same as the re-insurance case, as far as I know not one of my euro-cents has been used to rescue insurance companies.

I absolutely agree with everything you have said. BUT they will not adopt your re-insurance idea while the existing methods are in place because it costs money.

 

Insurance companies are not saved or bailed-out, their assets and liabilities are transfered to other insurance companies, all the consumer sees is a change in the name on letterhead. Insurance companies are not squeaky clean - anyone with a private pension, life insurance or endowment policy on their mortgage will know they are just as capable of taking stupid risks with other peoples money