Casino Banking With Other Peoples Money

As the legendary Sam Grizzle once remarked "You play with your money any way you want to and I will play with their money any way I want to" Sam a long term poker pro with a gritty sense of humour has been in and out of money for as long as anyone in the game can remember and a lot of the time is playing with borrowed money. Which is okay its his life and his choice. Sam's profits and loses and his daily round of raising the stake money is a matter for him and his creditors. If Sam goes broke he will not be propped up by the Fed or any other government agency although if they were willing I am sure Sam would welcome their assistance for the usual 50% of the profits. More on Sam Grizzle

However Bankers seem to have this deal whereby if they make money they get to keep it but if they make a catastrophic loss the tax payer gets to pick up the tab. The people who make the mistake seem to thrive and survive the shareholder gets wiped out and the public purse deals with any systemic risk involved in so called casino banking. Apparently the industry hates the phrase Casino Banking I must therefore use it a lot although the murky waters of of credit default swaps are frankly less transparent than most casino games.

I am currently reading an account of the 2008 meltdown in financial markets To Big to Fail by Andrew Ross Sorkin. The book is a narrative of events following the failure of Bear Stearns which culminated in the failure of Leahman Brothers, RBS, Lloyds TSB and AIG. The consequences are still felt across the developed world in lower economic growth stubbornly high unemployment and a fall in real wages.

A number of things are striking. The key players who created the problem in the first place are still in place and whilst they might have lost some of their vast wealth they are hardly destitute. Secondly three years latter the regulators and governments have yet to tackle in any meaningful way the key issue of To Big to Fail.

Here is the conundrum. If a financial institution's failure poses a systemic risk to the whole financial market place governments are pretty much have to step in. The consequences in the real economy are just too severe for the market to deal with the fall out. It was the near collapse of AIG that prompted the Bush administration to bail out Wall Street having let Leahman's fail (which was entirely in keeping with Republican free market orthodoxy). Had AIG collapsed it would have taken half of the Banks in America with it and the economic fallout might have impoverished a generation.

The problem has gone away as speeches by Lord Turner  and Mervyn King have made abundantly clear (see blog by Robert Peston for highlights or this) It is worth remembering that these are not a couple of anti establishment Marxists but absolute pillars of the UK business community. 

It would now appear that attempts to bring the mega casino banks to heal are faltering. In the US the tier 1 capital requirements look likely to be set at pitifully low 8% and  the some of the major players are being allowed to return capital to their shareholders. Have the US authorities taken leave of their senses or are being lenient on the banks to try and garner short term economic gain? 

The industry is now waiting with baited breath for the findings of the banking commission which in the light of the comments by Lord Turner and Mervyn King will not recommend the status quo and the casino banks are not likely to like the outcome. Barclays, HSBC and Standard Chartered the three major UK banks that are not state owned are now threatening to quit the UK.

This is an interesting stand off between a global industry which only exists in part because of an implied state subsidy in the form of guarantee's and a sovereign state which is trying to regulate the activities which it is subsidising in a way that reduces the subsidy.

It is plain to me that the State has to call the Bankers bluff almost no matter what the short term economic consequences. Failure to regulate will only bring the next banking crisis closer and if you want to see what that looks like go to Ireland or Iceland.