As the FT has noted this morning:
Jeremy Corbyn has labelled the financial sector “speculators and gamblers who crashed our economy”, warning global banks that operate out of the City of London that he would be a “threat” to their business if he became prime minister.
And before anyone gets too excited, let's remember that Adair Turner (Lord Turner) said in 2009, according to a Telegraph report, that:
The City had grown "beyond a reasonable size", accounting for too much of British output and taking away too many of the country's brightest graduates.
It should be cut down to size through new taxes if necessary, he said during a round-table discussion organised by Prospect magazine.
"I think some of it is socially useless activity," he said, referring to the complex financial instruments that have largely been blamed for triggering the biggest global financial crisis in decades.
He was chair of the Financial Services authority at the time. There's nothing very radical about what Corbyn said in that case.
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Very disingenuous to say “speculators and gamblers” crashed our economy without further explanation…The Dunfermline Building Society, Chesham Building Society, Scarborough Building Society, Derbyshire Building Society, Northern Rock, A&L, Bradford & Bingley, RBS, HBOS and the biggest joke of the lot the Co-op all went bust and were bailed out in some form. The link is bad property loans. So they and their clients were the speculators and gamblers who caused the nation a problem. Take a look in the growth in the money supply over the 10yr period up to the crash, most taken out in property loans – and there is a very strong argument that there was insufficient political supervision and regulation…so don’t think it was hedge funds or city fund managers that were responsible, they are largely irrelevant.
The bad property loans were created in the US by slicing and dicing mortgage debt by banks
This over-provided mortgages
That fuelled the bubble
Small lenders were caught in the fall out
Your claims is niot just ignorant and disingenuous, I am quite sure you know it is wrong
I’d add that in the UK all those organisations were taken over by the kind of management who either were from or believed in the City speculation culture. Driven by a combination of personal ambition and greed for the rewards they’d be able to give themselves as they grew their businesses way beyond what was safe, relying on short-term, volatile funding.
That as Richard said fuelled a huge housing bubble as people were able to borrow at ridiculous salary multiples. The collapse in the US started the cascade of falling dominos.
I’ve worked with both building societies and the City (old and new). Watching good building societies like the Northern Rock being corrupted by that new City culture and the likes of Matt Ridley was desperately sad.
Bad loans weren’t created by slicing and dicing mortgate debt – CDO’s to give them their proper name. The CDO’s went bad because the underlying loans went bad. And I’m not sure what you mean when you say that this led to “over-provding” of mortgages, fuelling the bubble. CDO’s were a seperate problem and ultimately it was the mortages provided mostly by smaller lenders that went bad and caused the crash.
Not sure either how lenders in the US meant all the UK lenders David mentioned going bust as well.
But hey, let Corbyn destroy the City and UK finance. It will never come back once it’s left and it only employs 1.5 million people, and provides 12% of tax receipts. I’m sure lot’s of nationalised industries paying huge amounts of tax will spring up in it’s place.
Truly the man is an idiot.
Bad loans were capable of being resold because of CDOs
And because the nature of the loans was not known the market oversupplied capital leading to a bubble and then a bust
Vey politely, you’re talking utter nonsense and it was the resold bulk sellers of mortgages who created the problems
You’re talking utter nonsense on banks and 2008
Which somewhat discredits your view on Corbyn
I get the feeling you don’t really understand what a CDO is.
You can sell loans, including bad ones, without CDOs, and the nature of the underlying loans in a CDO is known. What a CDO does in bulk up those loans into sizes that institutional investors need and tranche the default risk and thus return.
CDOs were also a relatively tiny part of the overall mortgage selling/reselling/underwriting market – and then only in the US. The amounts in Europe and the UK are and were very small – so how does that explain the UK crash?
CDOs might be high profile, but the main cause behind the 2008 crash was retail banks lending too much to people who they shouldn’t have, and the retail banks going under. CDOs can ONLY fail if the underlying assets fail – and the reason they did fail in such a big way is that more of the underlying assets failed than was expected by the models.
My view on Corbyn is aside from that though. In purely economic terms this is an ignorant man, who wants to throw the economy back to the 70s. He wants to nationalise everything, have the dead hand of the state run as much as possible, and then tax the few remaining productive parts of the economy until they are no longer so. I’m sure that is a country where investors will be flocking to put their money into. Let alone is frankly deplorable track record with who he associates with, and the fact that under him Labour has become a party where anti-semitism, chauvinism and plain old entryism and the de-selection of non-Corbyn followers is commonplace. Then there is the shadow chancellor who thinks nationalising things won’t cost a penny (so expropriation then?) and can’t even give basic answers about the economy.
Yes, I’m sure the UK will be safe in their hands.
I was the first person to write about Northern Rock’s CDOs. And you continue to deny the fact that mortgage sales would not have happened without the onselling via CDOs, which collapsed (rather oddly) post 2008, because they were key to this. I sure as heck do know what I am saying. But you need to read about asymmetry.
And on Corbyn you really need to stop reading the Daily Mail
You seem to be the first person to write about everything. Maybe you have a crystal ball or are infinitely wise. I somehow doubt it though. Of course Northern Rock had been on-selling mortgages – every bank does it and has been for years prior to the financial crash, and well before the advent of CDOs which are simply one of many methods of doing so. It’s called securitisation. And again, the problem lies not with the selling of the mortgage (as the mortgage simply changes hands) , the problem is that the retail banks sold too many of poor quality. I.e. they lent out too much money to the wrong people. So not speculators and gamblers, unless you call people buying houses such.
As for Jeremy Corbyn – [Ed note: I have a life and could not be bothered to read the diatribe that followed for many lines from here and deleted them]
I can think of a great many things I have never written about
Let’s start with the Kardashian’s (did I spell that right?)
Hi Richard,
The bad loans were a contagion that in their stand-alone form (or grouped together with like loans) would only have been bought and sold at a discount that truly represented their risk.
As you say, the complex slicing and dicing which went on led to a situation where no one seemed certain what was in the package that they were buying which opened up the possibility for the corruption of the rating agencies to really have a big effect (people assumed that they were doing due diligence when in fact they were looking after their own bottom line). The ultimate effect was to drag the overall debt quality down rather than up.
I rather like a parallel with TB infections from contaminated milk – infection rates were massively increased when milk was transported in large rail tanks rather than individual churns – because 1 bad batch could contaminate a whole rail wagon of milk.
It is also unfortunate that a lot of very clever people probably spent a lot of time doing mathematical risk analysis on CDOs when paying a researcher a few thousand dollars to go and interview the people taking out the mortgages would have given a much clearer idea of the risk.
@david “insufficient political supervision and regulation” and who started that I wonder?
‘david’
Richard is quite right.
You are right too to point out that the mortgage loans themselves were not good. Mortgage lenders (USA based) were offering loans to people without equity (so that they could just walk away when they could not pay); signing people up with no evidence of income appraisal or using low teaser rates to hook new clients they knew would not be able to pay when the higher rates kicked in. This was because of the bonus culture in US mortgage selling.
The banks selling these mortgages however did not bother to look at the mortgage backed securities (MBS) that they were selling as long term investments to pensions funds and the like.
Many MBS were rated high AAA but were in fact mixed up tranches of AA, BBB, BB-, CC etc. The fact is david that the banks did not bother to look at what they were selling. And when they had a tranche of mixed ratings, they then mixed them together saying that they were ‘diversified’ and had them re-rated as AAA by the ratings agenices!!!
This was because it was felt that the risk was being spread but as Satyajit Das (an author of a text book on derivatives) has pointed out all it did was increase the infection rate of bad loans and brought the financial system to a halt in 2008.
And if they did know that they were peddling rubbish (and there is plenty of evidence to suggest that they did), then what the banks did then was to insure themselves against the product failing so that they got a big fat pay out anyway from the insurance company when things went wrong.
Please watch the widely available films:
Inside Job
The Flaw
The Big Short
Margin Call
You will learn a lot.
In other words, the wholesale reselling of mortgages as CSOs etc created asymmetry and that resulted in over supply and so house price increases and so a bubble, that burst
Of course this was not created by small building societies
Shall we stop the nonsense on this, Bitcoin and other issues that appears to be overcoming people today?
@ Pilgrim Slight Returns
I don’t think you should be using films as your guide to CDOs or MBS. Dramatised versions of events are a very bad place to start.
CDO/MBS by definintion have tranches of varying credit risk. They are not all just AAA. They work by taking a huge pool of underlying mortgates, and then using the usual historical default rates to give you a percentage of the pool which will default. Then you tranche the pool up into different ratings, where the AAA holder gets the lowest return but his part is the last part to suffer defaults, and he lowest rating tier holder gets the first defaults but the highest return.
This is nothing different to what holders of large amounts of mortgage debt have been doing for years, but in a pre-packaged manner. It all falls over though when mortgages start to default en-masse,and the higher rated tranches start to suffer losses as well – but to the same extent that a holder of non-CDO mortgage would have suffered. CDO/MBS are ONLY a bulking up of a large amount of underlying mortgages.
Now you can rightly say that some banks were selling rubbish and certainly that people got the risk of rising default levels in mortgages wrong, but that is not because of CDOs – which are just a repackaging of the underlying risk.
Ed
There is no doubt you are suffering from an overdose of cinematic experience. It is called virtual reality because your version of events does not exist in the real world.
CDOs changed the perception of risk asymmetrically and that was fundamental to the crisis.
Now stop bullshitting.
Richard
Please, explain how a CDO changes the risk asymetrically. Clearly you are an expert on this as well, despite having no experience of banking or finance whatsoever.
As anyone who has ever traded a CDO knows, the risk over the whole CDO is *EXACTLY* the same as the risk of the underlying assets. The tranches seperate the risks out.
Oh dear. It looks like you only read the text book
That is the theory
But even Alan Greenspan realised in the end that the assumptions did not reflect reality. Clearly you did not get the memo
In which case I really cannot be bothered to explain at length that the reality is that the banks did not tell the truth, and the rating agencies didn’t notice that because the fee was enough to,persuade them not too. And customers bought them on the basis of the rat8ng alone. The result? The banks knew they were selling poor quality debt and the customer didn’t. I rest my case. And please don’t bother to reply: the case has been proven at every level
Enron was written by a school mate of my daughters. An old friend who was a senior partner in a big accounting firm, specialising in oil and gas, had been trying to explain Enron to his daughter, a close friend of my daughters. After they went to to see Enron, she pointed out that the play explained it far better than he had ever managed. She’s a lawyer now…
Theatre and film often explains things in ways that mere words cannot. Enron the play and The Big Short are perfect examples, showing how those who are inside ‘The Matrix’ become incapable of recognising the fallacies of the world they have become cocooned in.
I am very impressed indeed by Jeremy Corbyn’s honest and courageous response.
It makes a refreshing change to the New Labour “pro-business” arse-licking of a Gordon Brown or a Chuka Umunna.
Quite right that Corbyn is a threat to rampant neo-liberalism – and so he should be!
Yes some CDOs tranches were toxic and hurt investors particularly insurance companies and American US banks holding them on their trading books…i don’t think the list i provided (co-op, Chesham b/s etc) were caught up in it with the exception of RBS and perhaps HBOS. What hurt the UK was bad lending practise high loan to value, self certified mortgages and ALSO asset liability mismanagement…i.e lending long (mortgages which is the asset) and borrowing short (overnight money which is the banks liability). This model is crazy but was largely unregulated (regulation is now in place)..when risk took over the short term money markets dried up and all the aforementioned UKbanks and building societies were insolvant – the reason the UK ran into problems was the banking system operating on a flawed model – lending long and borrowing short and building their loan book up without appreciating the risk..lets not pretend the UK wasn’t responsible for its own actions of course it was!!!
The crisis began in the US though. Let’s not pretend otherwise
Indeed it did begin in the USA.
The FBI had been investigating mortgage mis-selling in the US until it was pulled off the case to deal with the attack of 11/9.
Those of you in love with BREXIT and think that Europe created the 2008 downturn please note.
And I did say ‘please’.
Roots of the 2008 recession were high oil prices and double digit food inflation. The banks played their part but the main drivers were completely different stories.
Sorry, that is not true
leading on from the above comments
34,300 more people have died in the winter 2015/16 from fuel poverty
120,000 excesses deaths from 2010 to 2017 following the global economic crash IN THE UK
Over 5,000 people have gone on to take their own life after having their money stopped
In Iceland the bankers were sent to prison for their GREED
WHY ARE THE BANKERS STILL GETTING BOUNESES
The BBC have DEFLETED the blame,that should have be laid at the feet of the Bankers and aloud the blame to be put onto the poor people
MONEY was taken from the public purse and given to the bankers, that gap in the public purses, is being paid back by the misery and suffering of the British people.
how many more deaths due to BANKER/AUSTERITY do we have to put up with
It feels like the actually useful parts of the City are vanishingly small and could be managed by a few hundred people and a lot of chips.
How can paper/money shuffling ever produce any wealth?
It`s a serious question.
Providing access to capital is useful
Banking as a payment mechanism is useful
Insurance can be useful
All add value
And then we get to the rest…..
“The City had grown “beyond a reasonable size”, accounting for too much of British output”
Too much of British profit and income is what I think he meant to say. The City doesn’t really account for any ‘output’ at all. They don’t produce anything. They just clip the ticket of those that do.
When Corbyn becomes PM he should probably put Turner in to govern the BoE.
Looks like there will be problems for Labour with the BoE. Someone called Richard Sharp from the Bank is reported by the Telegraph as saying that further increases in government borrowing will put the country at risk of collapse similar to Venezuala.
That sounds like a politically loaded opinion!
CV here
http://www.bankofengland.co.uk/about/Pages/people/biographies/sharp.aspx
Goldman Sachs
And what look like hedge funds
And we put him in a position of authority?
I despair
Despair is the word. I hate to always live up to my pseudonym but all these people are so embedded in powerful positions, supported by the media, treated with reverence by the BBC etc., that for a new government to change anything seems a Herculean task. Presumably this Richard Sharp and others like him cannot just be replaced overnight, they have some sort of tenure. John McDonnell must be a very brave and optimistic man.
In response to Mr Adams i believe gordon Brown set up the FSA and gave it banking supervision. I agree with Mr Stafford that the management culture at high street banks and building societies was one of the major problems..the were expanded their loan book to ridiculous proportions as they were allowed to fund long term mortgages in the short term money markets..i reiterate what a crazy business model that is. The lack of supervision was down to Gordon Brown. In fact he has publicity stated this.
The “slice and dice” mechanism which is early referred to was financial engineering of the most ridiculous kind simply because they repackaged risky low quality mortgages predominantly in the US. Again the fundamental problem was bad loans. I will say it again though the UK was responsible for its own actions and it is too easy to now just make glib generalisations/
Brown has rightly been blamed, not least by me
But your claim is absurd: UK building societies did not crash Lehmanm
Now stop wasting my time: you’re right wing trolling and I delete trolls when I get bored of them
Because they are boring
Good article by Solomonl Hughes in Morning Star today: http://morningstaronline.co.uk/a-5c14-Ex-Tory-minister-crosses-the-bridge-to-lobby-for-shady-Santander-bank#.WiFgeDdpFSI. Mentions Shriti Vadera and shows that New Labour were heavily involved in the revolving door charade which led to the dominance of the finance sector – and how it continues.
Has anyone seen the reasoning behind the claim that JC’s policies will destroy the City and UK finance?
All that I have heard is the claim that Labour intends to borrow too much and that there is a risk that interest rates will rise and therefore future interest payments will be unaffordable.
The claimants, of course, never mention the need to stimulate the economy and never discuss the potential benefits (which are many and have been discussed many times on this site). And, naturally, the size of any stimulus package is never compared to the QE initiative.
The possibility that the banking sector intends to lend too much and that individuals and firms will have to fund increased interest payments is also ignored. Why? What is the difference between public borrowing and private borrowing?
The logic of austerity has taken us to a position of absurdity. We have people, we have land, we have natural resources but we dont have money – so we all have to starve and we can’t look after our old people; we can’t defend ourselves because we can’t afford an army. At what point do people wake up and realise that money came after the productive activity that ensured survival; a group of people marooned on a desert island do not sit around waiting for the arrival of a sack of money.
On secon thought perhaps the guy from J P Morgan would.
No one said small building societies crashed Lehman they bankrupted themselves.. Right wing trolling?? Is that what it’s called when someone disagrees with you??
You may disagree as much as you like
But nonsense is another matter
And you were writing nonsense
Now, very politely, unless you have something useful to add, please don’t bother
Let’s just let your followers post.. any contrary opinions are indeed nonsense
I wasn’t aware I had followers
Many who comment here clearly disagree with me too
But they do so intelligently
‘We’re all individuals’ as Brian said…
Unsurprisingly BBC then had the editor of GQ on in which Corbyn is on cover , on the R4 Today show to do a hatchet job on Corbyn. Whatever you think of the man the flagrant bias in most of the media railing against the loss of neoliberalism is breathtaking.
https://skwawkbox.org/2017/12/01/r4-todays-gq-editor-interview-is-bbcs-3rd-corbyn-fail-in-ten-days/
What the conversations with ‘Ed’ and ‘David’ illustrate to me is how many in the City are still in complete denial about their role in the crash and the continuing destructiveness of many of their activities. What Adair Turner referred to as the socially useless elements and others as pure rentier, value extraction.
As long as they are in such denial, they make the case for wholesale reform of the City.
The country needs a set of sound financial institutions but ones that provide services of a financial nature to the rest of the economy. Respected commentators like Adair Turner, Martin Wolf, Anthony Hilton and others have been pointing this out for years. None of them could be described as paid up Corbyn supporters
The last is certainly true!
And so is the rest of what you say
Hi Ed
The films ‘The Flaw’ and ‘Inside Job’ are straight forward factually analysed documentaries.
‘The Big Short’ is a dramatization of a book by banker (ex-banker?) Michael Lewis. It is seen as factually correct in many aspects and is worth a look. I’ve read the book too.
‘Margin Call’ is made by a director whose Father works in Wall Street and may have acted as a consultant.
I’ve read lots of balanced books, reports and academic papers that corroborate the accounts in these cinematic productions. Be assured that I would not dare to come to a blog of this quality, with this sort of intellectual power and recommend them if it did not think they would contribute to our understanding of what happened up to 2008 and how it can be stopped from happening again.
I see good cinema as art. And why shouldn’t art contribute to the debates on the nature of power, economics, politics and other fallible human behaviour?
Watch them Ed and then tell us what you think?
I explained that bad lending practice, a flawed business banking model and poor regulation caused UK banks and building societies to fail and get accused of talking nonsense!
For the record I have worked in the city and have first hand experience of the good and bad of its activities. My insight is not based on textbooks or newspaper articles.
But that is simply untrue
That is not why they failed
First, the failed because of a global economic crisis
Second, they failed because the scale of bad loan books was disguised
Third, they failed because when the scale of the issue in some banks was realised liquidity dried up
Of course there was bad lending: indisputably. And indisputably that had a cost. But it did not cause the liquidity crisis that led to failure
Maybe because you work in the City you cannot see that
david
There are plenty of ex- city workers now writing about what was wrong before 2008. Look at Satyajit Das’ work for instance. He’s scathing about it. Go and look. There are others. There are loads!
Go into Blackwell’s book shop on Holborn and take a look!
You should know that American based insurer AIG was involved and AIG had (has) an office in London. Some of the merchant banks that went down in 2008 had offices in London. AIG was heavily implicated in the ‘confidence infection’ that caused the financial system to freeze up.
These and others were trading in American originated MBS products/derivatives to investors in the UK and abroad.
If the selling of MBS based products was not world wide, why is it that certain non-US pension funds have been taking banks like Goldman Sachs to court for being sold underperforming investments at the time of the crash. Here’s one:
http://www.telegraph.co.uk/finance/financial-crime/9380166/Goldman-Sachs-facing-250m-lawsuit.html
There are others – go and look for them. You seem to be denying that these financial products are sold globally. You are wrong.
And what is clear is that the banks that sold this crap, then insured themselves knowing that they would fail!
So much for fiduciary duty!!
Thanks, as ever, PSR
I stress again a flawed UK banking model.. lending long and borrowing short..do you unberstand the asset/liability mismatch and the scale of the problem..the short term money markets dried up because banks no longer wanted to lend to each
other post Lehman..if UK banks/ building societies weren’t depending on short term funding them the banking crisis wouldnt have been on anything like the same scale..
Why banks operated this model is greed and bacause they were allowed to through poor regulation.
So let’s be clear in the UK the link with US mortgage securitisation (CDOs) is it cranked up the perception of risk which led to short term money markets drying up and the Co op, Chesham, Derbyshire, Scarborough, Dunfermline Bulding Societies becoming insolvent along with HBOS, RBS, Bradford & Bingley etc..theses entities weren’t creating CDOs or selling them or owning there..
I said there was a shortage of liquidity
You agree
You say that caused the crisis
So did I
What didn’t I understand? Except I got there first?
And those small organisations were the collateral damage and you know it
Now stop wasting my time
Jesus… these UK banks and building societies shouldn’t have been dependent on short term money markets!!!!!! …it was madness, they scale of it was mind boggling..if they wernt so dependent the problems in the states wouldnt have had the impact it had on the UK..,no different from a crack addict feeding his habit from wonga..if wonga keep providing the money then there isnt a problem..when they stop we have a meltdown.. is the addiction the problem or wonga no longer providing liquidity??
Oh for heaven’s sake stop being silly
The whole Building Society market was built on short term deposits funding long term loans and it worked until Thatcher came along
You’re now being so daft, and very obviously utterly clueless about both money and finance (both perfect qualifications for working in the City, as you say you do) that no further comments will be accepted from you
yeah you want to politicise everything and don’t listen to reason if any reason is the wrong side of far left..
If you define far left as someone who was senior partner of a firm of accountants, ran VC backed companies and created a string of entrepreneurial enterprises whilst retaining a social conscience, and who firmly believes in the mixed economy, then you have a very odd definition of hard left
But you’re not interested in debate. Unreasoned rhetoric does, it seems
As I commented earlier, when the likes of Martin Wolff, Adair Turner, and Anthony Hilton and many other mainstream commentators agree, these are hardly the views of the ‘far left’ . Unless your views are so far to the right, then everything appears to be far left. Those of us who have followed this blog over the years know that Richard is regularly criticised by those with a more left wing perspective.
I suggest David that you might want to go and learn a little more about finance, economics and politics in the wider world. For starters, as Richard pointed out, building societies ran a model of borrowing short and lending long for decades. It worked very well because they were conservative, lived within their limits and were extremely well run.
When I went from working with building societies in the 70s to the banks in the 80s it was a shock to find out how inefficient the banks were and how poor their controls were compared to building societies. Their costs were a fraction of those of the big banks, even when the range of products they offered expanded to match the banks. Yet the de-regulation and demutualisation agenda of the 80’s would have us believe that it was the banks that were better run. They were (and are) certainly a lot more arrogant
When it came to ethical values and concern for customers (‘members’), the societies left the banks for dead, especially as the banks changed through the 80s. Demutualisation saw an influx of the worst kind of City types into the building society world, and through securitisation a massive increase in risk. And yes, some building society directors were seduced through greed and ambition.
The rest of the story we’ve heard already. As long as key elements of the City remain in denial of their destructive role, both in the past and the present, they are vulnerable to a radical change. Its not surprising to find their sticky hands and money behind Brexit – the EU is a lot more likely to tackle tax evasion, excessive bonuses, a transaction tax than any British government we have had to date