The banks are at it again, and the ducks are close to lining up for a re-run of the GFC.
The banks are at it again, and the ducks are close to lining up for a re-run of the GFC.
Seven years after the start of the GFC, which was largely caused by poor-to-fraudulent bank lending practices, it is remarkable to suspect that history is being repeated, with banks seeming to have forgotten their mistakes or believing they can get away with it … again.
Back in 2007, the cause of what became known as ‘the great recession’ was sub-prime lending, a theory based on an assumption that if you lump enough housing loans into a single financial package, the handful of loans likely to turn bad would be cancelled out by the majority of good loans.
It didn’t work, obviously, because bank staff was rewarded for making as many loans as possible without checking the capacity of a borrower to service the debt, and without ever inspecting the property against which a loan was being made.
Today, there are variations on that theme but the two critical facts are that: the banks are at the centre of what’s going wrong (again); and the banks hope governments will bail them out should everything go pear-shaped (again).
Overseas, banks are pumping as much credit as possible into red-hot property and stock markets, which is essentially the same issue that drove the sub-prime lending theory – oodles of spare cash generated by excessively generous central bank policies and plenty of willing borrowers keen to get a slice of interest rates close to 0 per cent.
In theory, just as with sub-prime, the game can only go on as long as property and stock markets are not panicked by a rise in interest rates, a development that’s in the ‘night-follows-day’ category and of which the Bank for International Settlements (the banks’ bank) warned last week with an alarming report that noted how financial markets had become “euphoric”, and detached from reality.
Unfortunately for worrywarts such as Bystander, there are a disturbing number of examples surfacing about banking problems here and overseas, including:
• widespread fraudulent loans provided by banks to investors in the Chinese metals market, including an estimated $US80 billion in dud loans made to gold traders;
• sanction-busting loans made by the biggest bank in France, BNP, resulting in a record-breaking $US8.9 billion fine levied by the US government.
- • interest rate rigging with a number of banks caught manipulating the London Interbank Offered Rate, the world’s ultimate interest rate, which effectively means every borrower on the planet has been scammed to a greater or lesser extent by the banks.
• dark pool share trading, in which a number of banks appear to have defrauded their clients by allowing high-speed traders to capitalise on what was supposed to be a safe and private securities trading platform; and
• deep concern in Australia that employees of the Commonwealth Bank provided bad financial planning advice, which not only cost customers dearly but which appears to have been covered up by the bank – until exposed before a Senate inquiry.
So far, a single issue such as sub-prime has not emerged to inflict the same degree of damage to the banking sector and, in turn, the wider economy.
But there are certainly enough events surfacing that could become the trigger, which is why the BIS issued its warning last week.
Rarely has an organisation as important the Swiss-based BIS published such a clear warning that bank lending practices have deteriorated to a point one step short of a crisis.
The event most likely to spark a re-run of the 2007 melt-down is a rise in interest rates, which will cause every investors and mortgage holder to question their capacity to service loans, and for commercial banks to question why it made such large loans to customers who can’t service their debts – a repeat of sub-prime.
Apart from warning that global markets are overheated, the BIS issued a chilling warning that central banks “should not fall into the trap of raising rates too slowly and too late”.
Apart from all that, isn’t it astonishing that, seven years after the near collapse of the global economy because of dodgy bank lending practices, they’re at it again – and we’re close to being dropped in it, again.
On in, all in
ONE of the advantages of being a stranger in a foreign land is that you can sometimes see a bigger picture that eludes the locals, a position I have been in for the past few weeks as a debate has raged in Britain about its place in Europe.
There is, of course, nothing new in this situation. It was the same topic discussed around dinner tables when Australians and Brits gathered more than 20 years ago.
The difference this time is that the average Brit has just about had a gutful of being told how to live by politicians from countries which rank as serial failures when subjected to social, political or financial tests, such as Germany, Spain, Italy, Greece and Portugal.
The latest insult to Britain was the imposition of the ultimate European insider as the region’s new president, Jean-Claude Juncker, a man who once ran Europe’s smallest country, Luxembourg, but who has been elevated to run the whole show.
In some ways, the Britain versus Europe squabble is a battle between socialism (Europe) and capitalism (Britain), though it is probably much deeper than that and comes down to one country basing most of its laws and values on freedom of the individual and the rest of Europe seeking to enforce a strait-jacket of communal uniformity – as laid down by a handful of eurocrats living the high life in Brussels.
The European presidency fiasco has both weakened the prime minister, David Cameron, and shortened the odds of a British exit from Europe when a vote is taken roughly three years from now.
Alcoa steps out, again
MAKING the wrong decision is not a fault restricted to countries and banks, with the big aluminium maker Alcoa making an astonishing investment last week in an aerospace parts maker, Firth Rixson.
For $US2.9 billion Alcoa has bought its way back into a part of the aluminium industry it sold out of a few years ago because it recognised that it was good at making aluminium and lousy and manufacturing finished aluminium products.
What’s changed? Nothing, just new management, which thinks it will be different this time around; much like the banks, which have failed to learn their lessons of how to avoid making bad loans.
