Thursday 25 June 2009

The Banks Always Knew The Score

. . . so failure is culpable

It has long been our contention that the risk-management functions within the banks always knew the score. If evidence is needed, look no further than this solid GS presentation, which provides an excellent aide memoire for anyone interested in risk management. Non-execs of banks, please note.

It's dated 2009 but there's nothing here that couldn't have been written before 2007. Indeed, most of it was being practised in *ahem* Enron when I was, err, familiar with its goings-on a decade before that. You could almost say it wasn't rocket science, although one or two of the calculations involved actually are.

As far as an outsider can tell, Goldmans has always maintained these disciplines internally (whilst no doubt exploiting the hell out of counterparties who didn't). Oh yes, and they are doing very nicely, thanks.

So - why didn't the others ? Because - see GS slide 8 - the correct risk discipline requires explicitly recognising the cost of carrying risk, on the P&L. Lazy bankers would prefer not to be reminded of their risks in such a bonus-impacting manner. And of course it was no part of Gordon Brown's job as Chancellor to confront lazy bankers: "what I didn't want was for Britain to be outside the mainstream". The rest is history.

Take 'em out and shoot 'em, the lot.



Anonymous said...

So can you answer the BIG question.

Did it all start in America?

roym said...

i though Americans started it here?

dearieme said...

I first noticed a few years ago that the expression "not mainstream" had become a favourite criticism delivered by the dimmest of my colleagues.

Nick Drew said...

dearieme - also that GB used it against Cameroon the other day, it's obviously one of his low-intellect fixations

anon, Roy - FWIW, I reckon

(a) greed is universal (bankers, MPs, TU's, you, me ...);
(b) the really monstrous 1-way bonus culture started in the US;
(c) in flagrant breach of his duty to recognize a&b, and his desire to be mainstream, natch, Brown told the FSA et al to lay off; and
(d) to their eternal disgrace, they did what he told 'em

Mark Wadsworth said...

There's a unit trust manager called Bedlam who openly refused to invest in bank shares since about 2003.

Even I noticed back in 2004-2005 that mortgage interest rates were lower than the better savings accounts rates, which struck me as rather odd. And I had been banging on about UK properties being overvalued since about 2004 as well. Etc.

Anonymous said...

Merv King has been a member of the "Group of 30" for many years.

It was established in 1978 to consider global standards for central bank oversight They have published many papers.

Anyone saying that this situation was not anticipated, was unpredictable, in light of Basel accords and G. S. Act repealed is either stupid, a liar, or both.

Politicos, and banksters, - Hang 'em high, with a slow descent.

Nick Drew said...

2004 was a good call, Mark.

I liquidated most stocks in Jan '07 (well, except dammit for managed pension-plans, of course ...), a bit early but hey

Anon(2) - G30, now you're talking. The G30 stuff on risk management is the bible. Note that they always advocated systematic stress-testing on top of the routine VaR calcs - widely ignored, as we know, but it was Best Practice from at least the early 1990s

stupid and a liar ? not our Prime Minister, surely ?

Anonymous said...

The big guys are betting on hyper-inflation