Why we should have let the banks go bust

baileysbattlebus

Thrugelmir wrote: »

Another rip-off bank. The profit they made per customer was obscene.

FYI, Girobank personal banking was free (the first to offer free banking) - that forced the major banks to publish their tariffs - they never had before. Under a conservative government they had to introduce charging to discourage new customers from signing up.

The first to offer telephone banking

The first to do direct transfers between accounts - instead usual cheque clearing which had and still has 3 - 5 day clearing

girobank captured the cash deposits of businesses

First to use digital imaging.

A huge amount of payments are processed through Giro (A&L) today.

They weren't rubbish - they were pretty good.

Count_Dante

HBOS were felled by ordinary lending to businesses, not by investment banking. Is it not the case that you can have low risk investment banking and high risk regular banking?

CLAPTON

penguine wrote: »

Investment banking.

My understanding of the subject is very basic, but I think the knock-on global effects of the sub prime mortgage market came from the mortgages being bundled up into CDOs (and classified as low risk when only some of the mortgages were low risk) and sold on to investors which included commercial banks.

This is from wikipedia's entry on CDOs:

Thanks for the posting but I'm not really sure whether CDOs etc are specifically part of investment banking rather than retail.

I see investment banking being about lending to industry and commerce (a worthwhile activity one would feel) maybe HP finance to support specific companies products, foreign exchange dealing etc.

Clearly a major development over the last 10 years was the enormous increase in interbank leanding facilitated by CDO and other securitised paper but that would I think be common to both banking activities.

Masomnia

carolt wrote: »

As someone who is avowedly left-wing, I see no problem witha safe state-run bank to stash my cash, and let the investment banks do what they will.

Isn't that what NS & I is for? Granted they don't do current accounts.

The probem with letting banks collapse is that the bad debt is passed on to other banks, dragging them down with them. See Lloyds taking over HBOS. Without government money they'd have all gone down, I really believe that, and I don't see any positives coming out of it, not for decades anyway.

Some of you are talking about the good banks being penalized, but what good banks exactly? Lloyds was conservatively managed, but can't take the strain of other banks bad debt without help. Barclay's has needed a bailout from the Arabs.

Standard Chartered and Co-operative are the only ones who are doing relatively OK. How many of you have accounts with them?

Thrugelmir

Masomnia wrote: »

See Lloyds taking over HBOS. Without government money they'd have all gone down, I really believe that, and I don't see any positives coming out of it, not for decades anyway.

In normal circumstances Llloyds would never have been allowed to merge with HBOS (or anybody else for that matter) to create a business of the size it is. EG over 30% of the mortgage market.

LloydsHBOS can now selectively dominate the UK domestic lending market and reduce overheads by merging operations. All without government interference.

Generali

Alan_M wrote: »

So how would the speculating bit of the bank actually get funded if all the deposits were in a separate "retail" bank? In my simple mind I thought all the deposits were put in a central pot and the bank was then allowed to lend out or "play" with 10-11 times that amount of money.

I have a feeling I'm showing my ignorance to how these things work.....

It depends on what you mean by speculating really.

To take a pretty traditional model of a big UK retail bank, they take in deposits and lend that money out again, holding a proportion of it in reserve.

The reserves are held partly in cash at the Central Bank but plenty is held in 'risk free assets' - AAA rated Government bonds (aka Gilts). Is that speculation? Well Gilt prices move up and down so perhaps it is.

Then what else happens? Well over the course of the year, the bank will make profits (they hope) by lending at high rates of interest to people who are likely to pay them back. Over the year until they pay out a dividend to their shareholders they have accumulated profits they can 'play with'. Perhaps they use that to buy shares in good companies. Is that speculative? What about if they use some of the money to put into small biotech firms which may make billions of quid for their investors or may well end up as damp squibbs?

I think you're getting slightly confused with the 10-11 times thing. Banks can only lend out the cash that they have. Due to something called Fractional Reserve Banking (Google it - it's a pretty simple concept which revolves around the fact that if you borrow money and spend it, the recipient will put it into their bank account so their bank can lend out the money again, less what has to be kept in the reserves) total bank lending ends up at many times the level of total savings.

Alan_M_2

Yup, just shows what little grasp of the entire system that I have.

Now you've made me think about it I'm not sure what I'd define as specualtion.

How and at what point does a bank invest in vehicles such as the much discussed CDO's etc (that despite reading I still don't fully understand)? Is that pure speculation?

Generali

Alan_M wrote: »

Yup, just shows what little grasp of the entire system that I have.

Now you've made me think about it I'm not sure what I'd define as specualtion.

How and at what point does a bank invest in vehicles such as the much discussed CDO's etc (that despite reading I still don't fully understand)? Is that pure speculation?

Well a CDO is just another sort of an asset really so even buying them isn't necessarily 'purely' speculative as it's just a case of trying to work out what constitutes a good price.

Re CDOs. Imagine you are a bank and you have just written 100 mortgages for GBP100,000 each. That means you've lent GBP 10,000,000 to house buyers and over time you will get a certain cashflow from the loans as people pay back the interest and principle.

In the 1930s (I think) someone came up with the idea of a Residential Mortgage Backed Security. That is, you package up the 100 mortgages as a bond and sell it on to investors. The investors get the cashflow that comes from the mortgages and you as a bank get the money you lent out back to lend out again.

More recently, someone came up with the idea of a CDO. It's like a RMBS but it's split into a number of 'tranches' (slices), in my example 3. The top slice is the 'AAA' slice and this gets all the mortgage payments first, then comes the 'mezzanine' slice which gets the next lot of repayments. Finally comes the equity tranche which gets the last lot of payments.

This structure means that the equity holders take any losses from defaults and missed payments. Normally they have to be completely wiped out before mezzanine holders lose money. Lastly, the AAA holders take a hit. To recompense them for taking more risk, equity and mezzanine level holders got higher rates of interest.

The idea was that the AAA level was so massively unlikely to lose money that they really were as safe as Government bonds and had the bonus that they paid slightly more interest.

Of course, investors didn't take into account the deadbeats that were getting the loans so losses were far higher than was anticipated. It was a lack of due dilligence that led to problems as much as anything else.

CLAPTON

lets have some examples of speculation

-in the 19th century in the US, speculators would offer farmers money today, so they could buy and plant seed in exchange for them selling their products at the fixed agreed price... now one year on that may be a good deal or a bad deal but was that immoral.. did both parties benefit or suffer.

- most (virtually all) housing in the UK is build by speculators.. i.e. they build before they have orders.. bad or good

-almost 100% of retail outlets (tescos etc) buy and offers goods before they have firm orders..i.e they are speculating... bad or good.

so what do you mean by speculators?

icefall

Investment banking could be separated from retail banking.

No more privatising the bonuses and socialising the losses.