Monthly Archives: November 2009

A Lack of Trust: “Banking in the Wake of the Crisis”

A couple of weeks ago, I went to the RSA twice in a week: first to see Steven Levitt and Stephen Dubner on their new book – they rather painfully described it as a “freakquel” – Superfreakonomics. I would tell you about it but I couldn’t do it better than they do, so if you’re interested keep an eye on the RSA’s event page where they said a video of the talk would be posted.

Then I was back to see a discussion entitled Banking in the Wake of the Crisis: how will confidence be restored? It was slightly misnamed: John Kay and Heather McGregor largely agreed with each other, and reckoned their solutions were unlikely to be enacted by the UK authorities.

Their prescription was essentially to

  • break up conglomerate banks into their retail and investment bank constituents
  • regulate the retail banks to prevent them risking customers’ deposits and creditors’ assets
  • make it clear that investors in the investment banks could lose their capital

McGregor was a bit more optimistic than Kay, though neither believed that government of whatever flavour would have the guts to do what was necessary to prevent a recurrence of the banking crisis.

Kay in particular believed that retail banks should take a leaf out of general retailers’ books and sell their customers what their customers want. I thought they had done – they provided cheap credit and enabled borrowers to borrow 125% of the value of their house, thereby creating an asset bubble. They provided credit cards to people who couldn’t actually afford the repayments.

Kay didn’t mention that HBoS, one of the collapsed UK banks which was taken over by Lloyds, was run by Andy Hornby prior to its collapse. Before joining HBoS, Hornby was managing director of retail of Asda, one of the UK’s largest food retailers. He had a solid retail background. This wasn’t what HBoS needed.

Kay’s view of retail banks providing products that customers want seemed to ignore the recent mis-selling scandals: endowment policies, personal pensions, split capital trusts – there is a long list of financial products which have been designed to provide customers what they thought they needed and which ended in disaster for those customers.

I am also not certain that the fundamental proposal – splitting retail and investment banks – would prevent contagion between the two. If we let investment banks fail – as happened to Lehman Brothers – how would we stop the effect ripple through the financial system?

McGregor believed that an essential prerequisite for more stable markets was increased competition in investment banking. She reckoned that investment banks such as Goldman Sachs made excessive profits in an uncompetitive market. She then went on to discuss, however, that the market was bound to be uncompetitive: if a company is trying to raise capital, they can’t very well do the rounds of bankers – indeed, it would possibly violate insider trading rules.

Both she and Kay put the one necessary condition for a return to confidence: trust. This has also been a recurring theme of Mike Mainelli‘s recent lecture series at Gresham College. Lack of trust explains why the wholesale money markets froze last year (lending banks didn’t trust borrowers to pay back), and explains why banks aren’t lending to retail borrowers despite record low interest rates (ditto). McGregor pointed out that the word “credit” is derived from the Italian and Latin words for “trust”. No one seems to trust bankers much at all; not even other bankers.

Winning back that trust will be difficult. I am not sure that governments can legislate for it; I am not sure that splitting up conglomerate banks will accomplish it. Kay and McGregor believed that sorting out the finance industries many conflicts of interest might bring it up about.

Trust, sharing and caffeine: Steven Johnson on Priestley, coffee houses and innovation

Steven Johnson was in London last week, mostly for a talk with Brian Eno at the ICA; but he also fitted in a conversation at NESTA, which I was able to get to.

Johnson was talking about his new book about Joseph Priestley, the Enlightment scientist and theologician and, as I learned on Tuesday, freind and influencer of the Amercian founding fathers.

What interested me most was Steven’s description of the Enlightenment mileu: an ecosystem of interested individuals and environments – largely coffee shops – which promoted the free circulation and sharing of new ideas. With open discussion and scepticism testing their ideas, these environments promoted a new synthesis; the whole was greater than the sum. Johnson reckoned that the discovery of photosynthesis and its roll in releasing oxygen into the atmosphere was down to the sharing of ideas between Priestley, Benjamin Franklin and others.

This seemed to resonate with those in the audience interested in open source technology and working, free-flowing ideas and co-operation being central to their working methods. (This also reminded me of Mike Masnick’s talk in Edinburgh learlier in the year, where he said that it was the sharing of ideas around Silicon Valley that made the area so innovative.)

Johnson also believed that dissent and scepticism were important qualities which facilititated innovation. This requires a tolerant society, able to accept dissent – not something that was guaranteed in the Enlightenment: Johnson described how Priestley had been chased from his Birmingham home by rioters who took exception to his dissentng religious views; they burnt down his home and he took exile in the young USA.

Johnson reckoned that the equivalent to the coffee house is now to be found online – natch. Modern media open up access to anyone with an internet connection, and we can all contribute, borrow ideas (copyright or not…) and play around with them, creating new syntheses in exchange.

His description of the coffee shop sounded to me very much like Tuttle: I think the face-to-face, social aspects of meeting together add a lot to the online fora the internet facilitates. I think it helps the serendipity and the fluidity of conversations. One never knows who is going to be there, and it is easier to explore and disagree face-to-face than it is online. The offline gathering engenders trust – and that is important if you are sharing ideas, debating and arguing.

Learning to Skip: distant memories

What with the all the fuss about BNP’s Nick Griffin being on BBC’s Question Time a couple of week’s ago, reading Al’s posts about the British Council’s film archive1 and being prompted to think about politics generally, I have been remembering an experience I had over forty years ago.

I was in a film about race relations in London – set in Notting Hill Gate. This was the time of the Notting Hill race riots; Notting Hill was a run down area, not home to politicians and film stars as it is now. In 1965 – when my story is set – the Second World War was still memory rather than history; people were still arriving on ships from the Carribean like the Windrush; tension was high.

But really, it was just a story about a little boy and a little girl: Jemima and Johnny. I played Johnny (and originally it was called Johnny and Jemima, which is how I still think of it…); a little girl played Jemima (obviously enough). In the film Johnny’s father was a rabble-rouser for the National Front (the precursor to today’s voter-friendly, unracist BNP); Jemima’s family recently arrived from the Caribbean. The film was set among the rubble in bombed streets of Notting Hill and Westbourne Park (no Trellick Tower; no Westway); the two warring families on different sides of the race divide had to work together to rescue us.

I don’t actually remember much about making the film: early November mornings, dark and cold; walking through Portobello market to buy chips; playing with a white rat; having to be taught how to skip down the street.

jj pic1
Me. And “Jemima”. Not quite skipping.

It was only by chance that I was in the film. The director, Lionel Ngakane, a South African emigre, was a friend of my parents; he saw me at a party and exclaimed “that boy must be in my film!” So I was. My brother was too, part of a gang of kids running through the streets.

It was a low, low budget film. Lionel couldn’t afford to record sound, so it was overdubbed afterwards. For reasons I never understood, he used an actress to speak my lines, and the voice never really sounded right. They spelt my name wrong in the credits and couldn’t afford to correct it: my one shot at fame and IMDB have my name wrong!

Lionel was an interesting character. I saw a lot of him over the years; he often talked of making a sequel to Jemima and Johnny, but nothing came of it. The film was shown at various film festivals and won a prize at the Venice.

I was never certain why Lionel was exiled from South Africa. He was an active supporter of the ANC, and there was a story that he had been gun-running, smuggling guns into the country. It is possible a much younger me made that story up, though. For whatever reason, he had to leave South Africa, unable to return; he believed that he was being watched by South African agents in London.

One of my earliest political memories involves Lionel. When I was about ten, Lionel’s father died, and Lionel applied for a temporary visa to return to South Africa for the funeral. He surprised that he was given permission to visit. On arriving in South Africa, however, he was arrested, questionned and put on the first plane back to London. Young though I was, I thought this was unbelievably cruel and mean-spirited; I could half imagine the South African authorities not allowing him back, but to say he could return for the funeral and then to stop him on the brink seemed incredibly mean.

I remember speaking to Lionel in April 1994. He had just cast his vote in the first democratic elections for South Africa at South Africa House in London. He was ecstatic – he couldn’t believe it. Not only was he able to vote in a South African election for the first time, but he had been actively welcomed into South Africa House – a building he had picketed many times and which he had never been allowed in before. Now they were happy to have him enter! He wept down the phone.

He returned to South Africa permanently in the late 1990s and died a few years later.

Jemima and Johnny is still being shown – it can be found in the BFI. My then-partner saw a screening in the Edinburgh Filmhouse when it was shown as part of a series about Black Britain a few years ago – I couldn’t go. It has recently been discussed on Radio 4 in a programme about black British cinema. I have a copy on video tape somewhere, which I really should get transferred to DVD, I guess.

1I must declare an interest – I am involved in the Counterpoint projects, but not in an editorial or content-creation role – it is just that my involvement has pricked these thoughts!

Is it possible to monetise social capital?

Last Friday at Tuttle, I was talking with Emile Embiabata about ideas he has to monetise social capital generated through social media. This is something we have discussed before, and whilst it interests me, I also don’t quite get it: I am sceptical about the ability to monetise social capital, because in doing so the capital one has built up will, I think, become devalued.

Social capital is something that people at Tuttle seem to have in spades: indeed, it seems to be the underlying principle behind Tuttle, and what differentiates Tuttle from other, more income-focussed, networking events. As someone pointed out to me last week, Tuttle isn’t about sharing business cards, it is about sharing ideas.

Emile’s idea – and I have no concept of the technology behind it, so I hope he doesn’t mind me discussing his idea – is that the capital that one builds up through posting thought, links and – particularly – likes and dislikes on sites such as Twitter, Facebook and so on are actually worth something. If people respect one’s views – if you have a high social capital – those views are likely to have a value. Every time someone clicks on a link to, say, my favourite restaurant because I have tweeted about it, I could get rewarded. The more people respect my views, the more valuable my tweets about my favourite restaurant are likely to be.

The main difficulty I have is that at the moment my views are completely independent. If I tweet about a restaurant (which I don’t think I have ever done!), it is because I like it, and want to share it with people. But if people who read my blog, my tweets, or my Facebook updates know that I am rewarded for posting those views, will they be worth the same? Will they not ignore them – because my independence has been corrupted – sponsored by my restaurant. (By the way, if any restaurants wish to corrupt me, I’m sure we can come to an arrangement…)

Emile countered this by pointing out that if my opinions were defiled, my social capital would be reduced, and people would click on my links; I would lose Twitter followers, and I would get less well rewarded by his system.

It would therefore be self-correcting: if I were honest and true, my stock would rise; if I were spammy and corrupt, people would ignore me, and my views would be worthless.

He may have a point; we agreed to keep talking about it, with me retaining my sceptical, independent and transparent outlook.

I’ll let you know what happens!

“Are Bankers Good or Bad for Society?”

Last week, Chris Skinner spoke at Gresham College, asking “Are Bankers Good or Bad for Society?”. (He was talking on the eve of the eightieth anniversary of the Wall Street crash…) Then today there is the news that the Government are considering splitting up RBS, Lloyds Banking Group and Northern Rock by selling off some old high street banking brands – Williams & Glyn from RBS, and TSB and Cheltenham & Gloucester from Lloyds. If not more bankers – it would seem this is more a sale-and-rebranding exercise – at least more banks. So we’d better get used to it.

Chris’ talk was interesting, though he seemed to conflate bankers, banks and money. His answer to his rhetorical question was generally “yes”, but within a moral, societal context. Regulation and competition have a role here, introducing a moral dimension – though Chris was sceptical of the effect of regulation (he thought regulators would always be trying to catch up with bankers, rather than leading the way).

Banks – and hence bankers – do perform some very useful roles for society, such as:

  • facilitating financial planning and management
  • enabling individuals and organisations to borrow and lend
  • spread the risk of lendinging
  • allocating capital within the economy
  • thereby enabling trade and projects that would otherwise not be undertaken
  • thereby promoting innovation

They do others things too, of course; at the moment they seem to provide society at large – and media and politicians in particular – with hate figures to mock and pillory. Of course, bankers are just a reflection of society: there are a few selfish, greedy bankers out there just as there as selfish, greedy people in all professions. It is just that the riches available to those working in banks can seem so wildly excessive and the people receiving can seem remote from the society they serve.

Over the past decade or so, they have also completely misjudged the risk of the business they were in. Chris quoted David Vinar of Goldman Sachs from 2007:

We are seeing things that were 25-standard deviation events, several days in a row

As Chris explained, a 25-standard deviation event should be expected once every 100,000 years – that is, they are pretty rare! – not several times in a week. That is a pretty big error to make, and resulted in severely flawed, highly complex business models based around derivatives – and the economic crisis we find ourselves in.

Chris then went on to talk about the future of banking and the role of competition to make bankers behave well. He could have been talking about the suggested split up of RBS, Lloyds and Northern Rock. I doubt this will introduce any more bank branches – we won’t have greater access to banks – rather, existing branches of these institutions will be relabelled with the revived banks’ brands. This probably won’t be too hard – I remember meeting an RBS bank manager in a branch in north west England that proudly proclaimed that it was a former “Willy Glyns” branch rather than RBS. It might be harder for customers – will customers be given a choice which bank they will go with? Customers are famously more likely to get divorced than change their banks, so will they really benefit from being moved wholescale from one bank to another, new one?

On the other hand, increasing the choice of high street (retail) banks for customers should provide them with more choice, and competition could lead to innovation of products and reduced costs.

Then again, it will lead to the loss of the economies of scale that lead to the banking mergers in the first place – so some costs may increase instead.

I guess we’ll just have to wait to find out!

Edit: John’s comment reminded me that Chris was concerned by the increase in moral hazard resulting from the nationalisation of banks. Mervyn King recently identified this as a critical issue. If banks believe that the Government will step in if things go wrong, they essentially become a one way bet: heads they win, tails the taxpayers lose.