'Ace Debt & Contract News ': Are we having fun yet

Tuesday, 8 October 2013

Are we having fun yet - getting deeper in debt?

As anyone who's been there recently can testify, the blame in Spain falls mainly on the banks – as it does in Ireland, in Greece, in the US, and pretty much everywhere else too. Here in the UK, feelings were nicely summed up by the Parliamentary Commission on Banking Standards, which reported on 19 June that 'the public have a sense that advantage has been taken of them, that bankers have received huge rewards, that some of those rewards have not been properly earned, and in some cases have been obtained through dishonesty, and that these huge rewards are excessive, bearing little or no relation to the work done.' The report eye-catching called for senior bankers to face jail.1 In the midst of this cacophony of largely justified accusations, the banks have had a strange kind of good fortune: the noise is now so loud that it's become hard to hear specific complaints of wrongdoing. That's lucky for them, because there's one particular scandal which really deserves to stand out. The scandal I have in mind is that of mis-sold payment protection insurance (PPI). The banks are additionally lucky in that there's something inherently unsexy about the whole idea of PPI, from the numbing acronym to the fact that the whole idea of a scandal about insurance payments seems dreary and low-scale. But if there hadn't been so much other lurid wrongdoing in the world of finance, and if mis-sold payment protection insurance had a sexier name, PPI would stand out as the biggest scandal in the history of British banking.

This is a big claim to make: an especially big claim to make at the moment, when bank scandals come around with a regularity which in almost any other context would be soothing. Here's a short recap of some of the greatest hits of the noughties. Just to keep things simple, I'm going to leave out the biggest of them all, the grotesque toxic-asset and derivative spree which took the global financial system to the edge of the abyss. That was the precursor and proximate cause of the difficulties which are affecting the entire Western world at the moment, but the causal mechanisms connecting the initial crisis and our current predicament are a separate subject. The crisis and its consequences are too big to count as a scandal: they're more like a climate. We can all agree that we'd prefer a different climate. We can all agree that we have no idea when this one will change.

Even once we've banished the elephant to his corner of the room there's plenty of scandal and disaster to be getting on with. I'll deal with two outliers first, because they are exceptions, for multiple reasons: they involve foreign banks, they are trading-floor disasters of a traditional kind, and they didn't cost any money to anyone apart from the banks themselves and their shareholders. These losses were caused by Kweku Adoboli, the UBS wunderkind who lost £1.4 billion in 2011, and Bruno Iksil, the 'London Whale' at JPMorgan Chase, who in 2012 lost an amount described by his boss Jamie Dimon as 'a tempest in a teacup', until it turned out to be $6.2 billion. There were a number of classic features to these mishaps. The financial instruments involved were complex; they were things no one outside the City had heard of until they blew up (in Adoboli's case, they were 'forward-settling Exchange Traded Fund positions', in Iksil's they were credit default swaps on an index called the CDX IG 9); and although both banks are foreign-owned and based, these actions happened in London. Adoboli's feats were deemed criminal and he has gone to jail; Iksil's weren't and he hasn't. (Adoboli's frauds were in cash terms the largest in British history.)