Sunday, 8 May 2016
The corruption of our banking sector explained (And how we should learn from the Icelanders)
‘Banker’- a word that the majority of us probably stigmatise on a day to day basis, be it with greed, wealth, The Wolf of Wall Street or simply that opening panorama of The City of London at the beginning of The Apprentice. A continuously repeated topic amongst the leading generation is the issue of who and what caused the famous global financial crash of 2008/2009. When considering our own economy, many blame the then Labour government- specifically its chancellor, Alistair Darling- for not imposing enough regulation on the banking industry and more often, simply the careless act of overspending the tax payers’ money. I can tell you now, that the latter part of this myth simply isn’t true. This myth however, is likely to stay imposed on our generation’s interpretations of the famous crash, with much of the right-wing media repeatedly insisting on its viability. Therefore, I’d first like to set the record straight and give you a basic introduction on what really happened and is still happening today. It’s quite an amazing story:
Let’s take a step back in time to 1987- the time of ‘the great’ Jordon Belfort (The Wolf of Wall Street)- when a little known concept called the Collateralized Debt Obligation (CDO) was first introduced into the western banking system; in a nutshell a CDO is a collection of mortgages sold to an investment bank, which is the sold on to shareholders such as pensioners and equity investors at various levels of interest, before supplying the mortgages to those who they are really meant for- home owners. So essentially, investment banks were able to manipulate the mortgage market by sharing out their ownership to whoever was willing to invest in them; investment banks were able to manipulate home owners who were largely unaware of the structure of the CDO scheme, leaving them vulnerable to greedy hedge funds and private investors who wanted to make an extra buck off the back of rightful home owners. This was the case as there were little qualifications in place to be able to buy these mortgage shares, leaving the risk of mortgages being poorly funded and insecure. The bankers knew this, but given it would secure them their own profits in the short term, they frankly couldn’t have cared less. Between 2004 and 2008, CDOs were sold in their thousands in the USA and similar ‘sub-prime’ mortgages in the UK, with the majority of shareholders failing to provide efficient funds to keep them stable. Individual investment bankers kept more than their fair share of dividends from them, leaving thousands of households burdened with no funds to secure the ownership of their homes. This corrupt practice would eventually lead to the housing ‘bubble’- a run-up in housing prices fuelled by demand, speculation and the belief that recent history is an infallible forecast of the future. The bubble burst in 2008/09. A shocking, yet rather dull concept isn’t it? And this is exactly why the banks manipulated our disinterest and lack of information, for their own self-interest, eventually leading to the some of the wealthiest in our society profiting from CDOs and the other 98% of us having to move out of our homes or find other means of funding them. Those homeowners effected had little financial security left in their lives and consequently our economies went into melt down, with the average consumer falling victim to the greed and selfishness of the few. This was one of the main causes of the 2008/2009 financial crash. Thankfully, CDOs were banned in industry in 2010. However, just 18 months later in 2011, the CLO (Collateralized Loan Obligation) was established with almost the exact same purpose. So this corrupt practice is still happening today, posing the question, should we be expecting a series of financial crises in just 4 years plus time?
Here’s a good video link explaining CDOs.
Many investment bankers, particularly in the UK and the USA, who profited from this corrupt scheme got away scot free and continue to live prosperous and privileged lives. Many innocent home owners with families or no family at all, continue to live financially disadvantaged lives. Many were simply thrown out of their homes and given little or no state help, as the practices which had resulted in their positions was not seen as an illegal act, merely an immoral one and therefore the majority of banks and their bankers were not prosecuted for this. Instead, the UK and USA kept the majority of their banks afloat by using our money as tax-payers, to bail them out. Now before we jump to any conclusions, there is arguably a large case for having done this; if governments had allowed the majority of banks to have collapsed this could have led to an even greater scale crash and an even greater effect on you and me in terms of inflation and the security of our own savings and wages. Indeed, in a recent interview with the BBC, Barack Obama admitted that he had “a very tough decision to make” in terms of doing what was fundamentally immoral or what was fundamentally the right thing to do in the financial context. However, there is an example out there of an economy who did let all of their major banks fail and brought all of guilty bankers to justice, many of whom were actually imprisoned. Their economy is now thriving and their people are some of the most financially equal in the western world. This economy is that of Iceland and I believe we must learn a series of simple, but significant lessons from them.
The 2008 global financial crash hit Iceland hard- arguably more so than the UK, given the difference in GDP to population size. Their currency crashed, unemployment soared and their stock market was almost completely destroyed. But unlike the majority of western economies, the Icelandic government let all three of their major banks collapse and went after reckless bankers. Furthermore, Iceland’s people demonstrated their anger at this through literally taking to the streets; it was estimated that 3% of the population gathered in front of parliament to demand answers. Their government listened to their concerns and immediately set up a ‘Special Investigation Commission’ to reveal the truth behind the collapse. The SPI’s findings were similar to that of what we now know to be our own, but what was revealed that has not been in our own country, was that almost 100% of credit needed for large corporations and individuals to lend money was dependent upon investment banks. Over the next 6 years, the Icelandic parliament would restrict foreign capital investment and require credit supplied to households to have a 100% dependency rating- i.e., no ‘fake money’ was gambled with when insuring the public had the financial means to buy their own homes. I particularly admire this simple but insightful quote on their reaction to this finding, by a member of Iceland’s SPI, Gudrun Johnsen: “If you don’t know exactly what happened, you don’t know what type of behaviour you need to correct, and cultural change is really difficult. There was a benefit in the entire system going down. We know what failed and as a consequence we were able to clean the house pretty quickly”. In European banking there is simply an unwilling culture not to accept losses. Indeed our own government and the US government responded by literally printing money. It is evident that the Icelanders knew what they were dealing with and how it should be dealt with, as a result of a 3 point democratic process: the public spoke out on their concerns; the government reacted with realistic action; those accountable were justly investigated and were either brought to justice or proved otherwise.
Considering these simple, democratic steps to reform, here’s what I believe the next generation of politicians and bankers must learn from the reaction of Iceland to the 2008 global financial crisis: we must make the financial system more accountable to its customers by demonstrating our own understanding of it as the public, through questioning and demanding regulation; all forms of credit should have a 100% dependency rating in times of recession to avoid long-run debt that is likely to affect the poorest in society; most of all, we must maximise the use of independent regulatory bodies and reviewing commissions to ensure no government bias is undertaken in such a publically dependable circumstance. Of course, it is without doubt that overall, as a generation we must learn that it is within the interest of the majority to bring those accused of the manipulation of hard-earned public finances to account and if necessary, to justice. It is only then we will begin to deter greed and instead promote clean methods of recovery in cases of financial unease, benefiting all who have been affected by it. Indeed there would be a good chance of such crises not occurring at all if the next generation of politicians and industry leaders were to properly act for the benefit of its people, by making these immoral practices illegal and instead providing humane and reliable methods of credit with the aim of improving fundamental living standards- an aim that would undoubtedly lead to a more stable, diverse and equal economy.