Or at least it wasn't speculation that killed the British banks. Speculation is usually thought of as all of that investment bank stuff: high speed trading, foreign exchange, CDOs, swaps, MBS and all of that good fun of men shouting at each other over screens. We've just had the Parliamentary report into one of the UK bank failures, Halifax Bank of Scotland, and such activities are given an entirely clean bill of health. Essentially, because the bank didn't do any of those things and yet it still went bust. It was, in the words of the Guardian
Given its reckless lending, HBOS would have gone down with or without a wider financial crisis, and what the commission found most shocking was the comprehensive inability of the top three HBOS bankers to even admit this.
It went bust the way that banks have been going bust for centuries: it lent too much money to people who were not able to pay it back. Or, as the report states in its own words:
This was a traditional bank failure pure and simple. It was a case of a bank pursuing traditional banking activities and pursuing them badly.
The bank just didn't do any of the new whizzy stuff and thus cannot have been killed by doing new whizzy stuff.
This rounds out the reports into who failed and why (although not as yet any prosecutions that might result). And we've found that none of the banks that did fail failed because of all that investment banking.
Northern Rock failed over a funding mismatch. Like all banks, it borrowed short to lend long. The market took fright and refused to lend any more to it: it therefore could not fund the loans it had already make and was thus bust. Royal Bank of Scotland took over ABN Amro at the peak of the boom and paid too much for it. Thus RBS went bust. HBOS, as we've seen, also went bust in the traditional manner. It wasn't caused by the general market failure either: only in Warren Buffett's sense that when the tide recedes you can see who has been swimming without shorts. The bank would have gone bankrupt anyway. It really did only make traditional mortgage and corporate loans. It just made too many bad ones and lost all the money.
Lloyds nearly fell over: because it was persuaded to "rescue" HBOS before anyone knew quite how bad things were there. The Dunfermline Building Society fell over: and as a mutual we cannot even blame the shareholders' greed for profits there. They just lent too much into the commercial property boom.
Now, given that this is therefore banks failing in the traditional manner this does not mean that therefore no changes in the rules are required. An increase in bank capital might very well be a good idea. However, all the other stuff that is being proposed is simply the most ghastly nonsense.
Take the separation of investment and commercial banking that is being insisted upon. It wasn't investment banking that brought anyone down. Indeed, in London, none of the investment banks failed. So why would the solution to traditional bank failure require separation? Similarly, this idea of a financial transactions tax to curb excessive trading. None of the problems were caused by trading of any kind. So how would changing trading help or hinder?
Sadly, what has actually happened is that people who simply don't like markets are using the crash as an excuse to curb markets. This might sound a little odd but there's very definitely a strain of European socialism that thinks there's something not right about people trading in markets. I have to admit that I don't quite understand it myself: I can see the opposition to capitalism, even if I don't agree with such opposition. But why the antipathy to markets I've no idea. But it is there: and it's this that is driving the attempts to re-regulate the financial markets over here.
The problem with this being that they've misdiagnosed the original problem. If it wasn't the trading markets that caused the crash then reforming the trading markets won't prevent another one. And that's really what is wrong with the regulations being imposed: they simply won't solve the main problem: how do we stop the banking system falling over again?
