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The death of Casino Capitalism – A Failure of Personal Reponsibility

January 16, 2013

This post examines the “2008 crisis” as discussed in worldwide media and argues that there wasn’t a single crisis but rather two distinct crises. This post looks at the first crisis which originated in the financial markets and destroyed more than £1 trillion of bank equity value. The origins of this crisis and the almost universal reaction raise interesting questions about personal responsibility, given that the majority of loss came from borrowers who simply didn’t have the money to pay back the funds they had borrowed. Rather than questioning the motives and responsibility of the borrowers – the focus turned on the lenders who had lost their money.

The second crisis was and still is a government budget crisis which has the capacity to destroy not equity value but the fabric of society and nation states – it will be discussed in the next posting. This crisis was ultimately derived from a short-sighted, power-greedy often pseudo-socialist agenda intent on grabbing power at any cost and increasing the benefits/ pensions/ working conditions etc of their voting group – even to the point of national humiliation and bankruptcy such as Greece. The gall of those UK politicians who steered our country to the brink, such as Ed Balls and Liam Byrne to continue in public office after the biggest and most dangerous spending splurge in British history is startling.


There has been much ink split on the incentive structures within investment banking. As an ex-Director of Lehman Brothers back in the late 90’s I had direct experience of the kinds of risks which back then were seen as acceptable.  Traders and management were entitled to a bonus based on their profits generated in each department. In the event massive losses occurred, many traders left the bank and started up elsewhere. Of course, this is easy to say and rather more difficult to effect. If a trader had been dismissed or left a bank as a result of losing several million US Dollars, it wasn’t a simple matter of finding another job. Investment banking wasn’t and isn’t the public sector (of which I also have experience as a teacher). Failure was punished quickly, efficiently and ruthlessly. Failed traders didn’t cause the financial crisis – arguably it was success that caused it. As traders proved themselves money makers, their bosses would grant ever larger position limits, granting them the ability to take great risk. This situation didn’t happen over a short period, rather it took many years for an individual to be given the capacity to take positions in markets that would create significant exposure.

I am aware of stories of huge losses racked up by Nick Lesson style traders – the billions lost in UBS, Sumitomo and other institutions that have employed failed traders. These losses, although painful for those involved didn’t however, have the capacity to create the sort of equity destruction of the 2008 period- in fact in all of those cases, the losses were not sanctioned by the bank – they arose as a result of fraud – something that can and does happen in all businesses – its just in these Lesson – cases the numbers are bigger. The real damage caused by the collapse in the financial sector related to huge management-sanctioned-risk.

Throughout the aftermath of the financial crisis politicians, regulators, protest groups and media commentators began to use the word “bankers” as a catch all expression to deride and castigate activity that led to the collapse in financial markets. The expression, however  was lazy, inaccurate and confused. Banking has served the UK and funded its public services for decades. It is one of most successful industries and pays its way handsomely. It employs 100,000’s of people, makes a massive contribution to tax revenue, facilitates businesses, funds mortgages and is the bedrock for our economy.  For the full detail on its phenomenal contribution to the UK see:

Those calling for the castigation of “bankers” generally would feel rather sorry if our financial services sector collapsed and our economy began to resemble a backward, undeveloped economy incapable of providing even the most basic services, let alone a welfare state. It was interesting to see that after all the carping about “bankers bonuses”, the greatest loser from the shrinking of the City bonus pool was HMRC – there was an estimated £4 billion they didn’t collect in income tax following the crisis directly from the pool. That’s £4 billion that had to come from elsewhere. Whilst it remains the case that the CDO/CDS market led to the destruction of bank equity capital and caused a severe restriction on lending, those “bankers” count in the dozens. To see the castigation of a responsible industry that employs millions is crazy. So is a potential regulatory regime that may constrain an industry that was working well in all but a tiny number of cases.

The proposed “breaking up” of banks and the subsequent language of those unfamiliar with the industry may be in danger of damaging an important sector that we all need to work well. Some intellectually challenged commentators have even suggested that the government itself create a bank for lending – clearly something beyond its competence and something that would require the tax payer to take on commercial risk. Do we want untrained, unqualified Civil Servants deciding on whether you can have a mortgage, or whether you can borrow money for your business?


In short, the real collapse in banking took place because people borrowed money they couldn’t afford to borrow. Banks were unable to get their money back and as a result those people who had invested in banks had to pay for the losses. When the crisis struck in 2008, there has never been a greater incidence of wealth distribution from rich to poor in human history and it took place in a matter of months. Shareholders of banks were systematically wiped out with share prices falling almost uniformly by more than 90% and in some cases 100% (Northern Rock). This equity loss (in excess of £1 trillion) had to cover the losses on property loans that had gone sour – in other words the shareholders (and in some cases the bond holders) had to cover the losses on investments made by people who couldn’t afford it.

Of course, this wasn’t a socialist nirvana, those people who had borrowed the money and found themselves unable to pay it back were not happy about the outcome – they suffered too. The UK government to date hasn’t lost money by involving itself in the equity of banks such as Lloyds and RBS, nor has it lost a penny investing the assets of Northern Rock or Bradford and Bingley. In fact, it is likely the government will probably find itself sitting on a significant profit in years to come providing they don’t mismanage their investment and destroy the sector with ill conceived and reactionary policies. Since September 2012 the UK governments shareholdings have doubled in value as the world economy begins to thaw and the pseudo-Socialist deranged spending of southern Europe is controlled by calmer voices in the EU and in Germany in particular.

The technical complexity that allowed sub-prime borrowers access to funding is without a doubt a story of intrigue. The best account of it I have read is by Michael Lewis in “The Big Short”, but I would like to focus not on Collaterised Debt Obligations (CDOs) and Credit Defaut Swaps (CDSs). The derivative structuring departments of investment banks merely respond to demand in the market – they don’t in the words of Jack Nickleson – make the odds, they just deal the deck. Instead I would like to focus on who is responsible. There can be little doubt of the ingenious methods used by bankers at Deutsche Bank, Goldmans and other investment houses. They were experts in facilitating lending agreements between those wanting to borrow and those wanting to lend. That is, after all, the principle function of a bank. Investment banks just deal with more complicated arrangements. There is also little doubt that some of the institutions that ended up buying these loans make mistakes by relying on the rating agencies to give the loans a clean bill of health (AAA in some cases). The reality, however, is that the man-in-the-street isn’t getting involved in trading subordinated, sub-prime syndicated debt. The investment bankers who bought and sold these securities were simply part of a system that allowed demand to meet supply in ever more ingenious ways. The ultimate question, in my view has to be who was responsible for the debt in the first place.


The analysis that followed almost uniformly, however, placed the blame for the consequences of the disaster on those that lent and lost, rather than those that borrowed who couldn’t pay back. This is interesting analysis as it tends to move responsibility away from the individual and on to those who ultimately take the loss.

Taking that analysis a step further, one has to ask how far this sort of thinking ought to stretch? Is the cigarette vendor responsible for the smoker? Is the barman responsible for the drinker? Is the fast food operator or pizza restaurant  responsible for the diner? Clearly in all three situations there is a potentially bad outcome. The smoker can get lung cancer, the drinker can get sclerosis and the diner can become obese. Clearly, the buyer doesn’t intend for those things to happen – but are we saying that the seller bears responsibility for doing so?

Many would argue that the bankers – who supplied the funding for people to buy property – were aware of the fact that this couldn’t be paid back? I would suggest this is self-evidently false on the basis that the people that lost the most in this scenario were the lenders, not the borrowers. But a more fundamental question is do we want to look to the State and ultimately politicians to decide upon how we conduct our lives? Do we want Parliament to tell us what we can borrow, what we can eat, where we can go, what we can do?

At some stage there appears to have been a disconnect between the extent to which individuals bear responsibility and the extent to which that responsibility is borne by those that allowed them to make the decision. My view is that the notion of personal responsibility has shifted too far from individual choice and we are in danger of creating a society that seeks to blame others for their errors. Nick Cohen, in his book “Waiting for the Etonians” tells a story of a young woman who had borrowed too much on her credit card. He implies her debt and subsequent inability to pay it back were the fault of those that lent it to her. The temptation was simply too much. She had to have those clothes, she had to have that holiday, she had to buy those consumer electronics. It was their fault, not mine!

If we value freedom, we need to distinguish between those things we are happy to take responsibility for and those things we don’t. I realise that many will suggest that the State is necessary in many of our decisions. The fact that there is massive information asymmetry (i.e. sellers know much more about what they are selling than the buyer) is an important consideration. I am not suggesting for a moment that our food, for example doesn’t conform to safety standards, nor am I suggesting that a sensible Health and Safety regime isn’t required. I am however, suggesting that greater balance is needed.

If we want people to be free to buy a house with borrowed money (in the form of a mortgage), we must accept that the value of the house might fall and the value of the debt might exceed the equity put into the house. If we don’t want people to be free to do that, we need to radically intervene in the economy and start to allow the State to act like our parents – constantly reminding us to only spend what we can afford etc.

I for one don’t want inept, inexperienced, incompetent politicians telling me that I can’t do things that contain ANY risk. I suggest this goes for the majority. To those that want a completely anticipated risk free life, where the State makes all their decisions for them, I would suggest they grow up and start taking responsibility for their decisions.


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