Not such a good idea after all?

From the BBC News of 29 September 2008

Analysis

By Ian Pollock

Personal finance correspondent, BBC News

With the nationalisation of the Bradford & Bingley, the last of the demutualised building societies has lost its independence.

The end of an era for demutualised building societies

Some people have been tempted to argue that this proves that converting from a building society to a bank was always a bad idea.

What looked like a good way of expanding business and becoming a modern, thrusting, go-getting organisation for the modern age (in other words, a bank) became something different – a new and exciting way to lose money.

But John Wriglesworth, an analyst of building societies for the investment bank UBS in the 1990s, and later a senior executive at the Bradford & Bingley, sees things differently.

“The reason the demutualised societies have gone has been due to investors having panic attacks,” he said.

“It has been a self-fulfilling, cataclysmic spiral into the abyss.”

Way back when

Just 11 years ago, demutualisation among building societies was all the rage.

“It has been utterly, unbelievably, astonishing” 

Adrian Coles, Building Societies Association (BSA)

The year 1997 marked a sea change for a movement of safe and sound financial organisations, most of which had started up in the 1800s.

One after another some of the biggest names jumped ship.

The Abbey National had struck out on its own back in 1989 to become a bank and, overnight, it converted its savers into shareholders.

But with the Cheltenham & Gloucester agreeing to sell itself to Lloyds bank in 1995, the dam burst.

Within the space of twelve months in 1997, the Alliance & Leicester, Halifax, Northern Rock and the Woolwich, all well known mortgage lenders, decided they wanted to be banks as well.

The Bristol & West jumped directly into bed with the Bank of Ireland that year, and two years later the Birmingham Midshires did the same with the Halifax.

By the year 2000 the Bradford & Bingley was the last to join the stock market.

Adrian Coles, of the Building Societies Association (BSA), disapproved of all this at the time, but does not hide his amazement at recent events.

“It has been utterly, unbelievably, astonishing,” he said.

“Seeing the swift disappearance of the former societies in the firestorm, which I don’t claim to have predicted, has also been astonishing.”

No guarantee

In fact the B&B directors campaigned against converting to be a bank, but were defeated after a saver from Northern Ireland, Stephen Major, succeeded in forcing a vote on the issue among members the year before.

“There’s no guarantee it wouldn’t have happened anyway” 

Stephen Major

“It’s unfortunate but that’s the way these things go,” he told the BBC regretfully.

“Nine years ago we didn’t think about credit crunches or that building societies or banks could go bust.

“There’s no guarantee it wouldn’t have happened anyway,” he added.

According to the BSA, the total value of the payouts in 1997 amounted to £36bn in shares and cash into demutualisation.

The B&B members were simply too keen to cash in on the value of their society, and so it went the same way as the other societies.

Share options

So why did all this happen?

Branch closures and job cuts are now likely.

Until the mid 1980s building societies dominated the mortgage lending business, more or less as a cartel.

That changed with the 1986 building societies act, which also paved the way for demutualisation.

The house price boom of the mid and late 1980s alerted the banks to the rich picking to be had in home loans, as well as selling endowment investment policies, house insurance and, so they thought, estate agency.

They also recognised that the quickest way to get a large slice of this profitable business was to buy up an existing lender.

And according to John Wriglesworth, directors of building societies were only too keen to join them.

“They used words like ‘freedom to compete’ and ‘access to capital,’ but the main reasons were excessive pay, share options and testosterone”.

Investment banks from the City and Wall Street did their best to speed up the process, touring the boardrooms of the larger building societies, convincing their directors that now was the time to break the mould and demutualise.

The fact that these investment banks often made large fees as advisers to the eventual flotations or takeovers was not a coincidence.

Funding

For the past decade the banks, building societies and other specialist lenders have all taken part in the biggest house price, and mortgage lending, boom in the UK’s history.

“There was no reason for the Northern Rock to go down the sub-prime route, or for the Bradford & Bingley to go down the buy-to-let route” 

John Wriglesworth

One thing that has helped the banks in particular has been their ability to borrow money from other financial institutions, rather than just from savers, to fund their mortgage lending.

Building societies are restricted by law to funding just 50% of their lending this way and the average among societies is much less, at about 30%.

It is this borrowing, and the current difficulty in repaying it, that lies at the heart of the problems that have been experienced by the Northern Rock, Halifax and now the B&B.

“With hindsight they raised more money than they would have done had they stayed as building societies and with the credit crunch that now looks like a mistake,” said Adrian Coles.

But John Wriglesworth argues that losing their independence because of this was certainly not inevitable for the former mutuals, especially for the Halifax and the Alliance & Leicester.

“They had a viable comprehensive strategy – their demise is due to the exceptional circumstances, based on fear breeding fear, not their areas,” he said.

“There was no reason for the Northern Rock to go down the sub-prime route, or for the Bradford & Bingley to go down the buy-to-let route.”

TONY BLAIR – BREEDER OF FERAL RATS

August rioters described as ‘Feral Rats’ without a stake in society.

And who bred these feral rats ?

Tony Blair and and his poisonous government of obnoxious self interested, corrupt little prigs with chips on their shoulders on the make – that’s who ! Years and years of socialist destruction have wrecked Britain, leaving it a traumatised society wrecked and torn apart, impoverised and brutalised by State control of every aspect of daily life.

Successive Labour Governments have steadily eroded everyone’s stake in society as socialism sought to control more and more of the population with it’s Big Brother State of bureaucratic nightmare proportions. Control of everything was the Labour Government mantra as squirming tentacles of government interference reached out everywhere in the Tony Blair and Gormless Gordon years.

The bottom end of British society was where Tony Blair and his destructive cronies caused the most damage, luring the poorer people with endlessly false promises which just trapped them in greater poverty and deprivation as the merely filthy rich became obscenely rich at everyone else’s expense and with lots of help from labour Party pals running the country only for their own benefit.

What a miserably despicable bunch of looters they were !

They looted Britain of self respect, of dignity, of prosperity and integrity. They looted the the pockets of the poor so the rich might become even richer, while those stuck in the middle were looted of opportunity, as well as the poor who were also looted of every hope they might have once had.

Bastards !

Calamitous Consequences of Our Modern Banks’ Ponzi Scheme

“Banking was conceived in iniquity and was born in sin.”

Sir Josiah Stamp, President of the Bank of England in the 1920s, the second richest man in Britain.

Below is an Extract from HANSARD 15 Sep 2010 : Column 903

Financial Services (Regulation of Deposits and Lending)


Motion for leave to bring in a Bill (Standing Order No. 23 )
1.33 pm


Mr Douglas Carswell (Clacton) (Con):

I beg to move,
That leave be given to bring in a Bill to prohibit banks and building societies lending on the basis of demand deposits without the permission of the account holder; and for connected purposes.


Who owns the money in your bank account? That small question has profound implications.

According to a survey by Ipsos MORI, more than 70% of people in the UK believe that when they deposit money with the bank, it is theirs-but it is not. Money deposited in a bank account is, as established under case law going back more than 200 years, legally the property of the bank, rather than the account holder.

Were any hon. Members to deposit £100 at their bank this afternoon or, rather improbably, if the Independent Parliamentary Standards Authority was to manage to do so on any Member’s behalf, the bank would then be free to lend on approximately £97 of it. Even under the new capital ratio requirements, the bank could lend on more than 90% of what one deposited. Indeed, bank A could then lend on £97 of the initial £100 deposit to another bank-bank B-which could then lend on 97% of the value.

The lending would go round and round until, as we saw at the height of the credit boom, for every £1 deposited banks would have piled up more than £40-worth of accumulated credit of one form or another.


Banks enjoy a form of legal privilege extended to no other area of business that I am aware of – it is a form of legal privilege. I am sure that some hon. Members, in full compliance with IPSA rules, may have rented a flat, and they do not need me, or indeed IPSA, to explain that having done so they are, in general, not allowed to sub-let it to someone else. Anyone who tried to do that would find that their landlord would most likely eject them.

So why are banks allowed to sub-let people’s money many times over without their consent?
 My Bill would give account holders legal ownership of their deposits, unless they indicated otherwise when opening the account. In other words, there would henceforth be two categories of bank account: deposit-taking accounts for investment purposes, and deposit-taking accounts for storage purposes. Banks would remain at liberty to lend on money deposited in the investment accounts, but not on money deposited in the storage accounts. As such, the idea is not a million miles away from the idea of 100% gilt-backed storage accounts proposed by other hon. Members and the Governor of the Bank of England.


My Bill is not just a consumer-protection measure; it also aims to remove a curious legal exemption for banks that has profound implications on the whole economy. Precisely because they are able to treat one’s deposit as an investment in a giant credit pyramid, banks are able to conjure up credit.

In most industries, when demand rises businesses produce more in response. The legal privilege extended to banks prevents that basic market mechanism from working, with disastrous consequences.
As I shall explain, if the market mechanism worked as it should, once demand for credit started to increase in an economy, banks would raise the price of credit-interest rates-in order to encourage more savings. More folk would save as a result, as rates rose. That would allow banks to extend credit in proportion to savings.

Were banks like any other business, they would find that when demand for what they supply lets rip, they would be constrained in their ability to supply credit by the pricing mechanism. That is, alas, not the case with our system of fractional reserve banking. Able to treat people’s money as their own, banks can carry on lending against it, without necessarily raising the price of credit. The pricing mechanism does not rein in the growth in credit as it should. Unrestrained by the pricing mechanism, we therefore get credit bubbles.

To satisfy runaway demand for credit, banks produce great candy-floss piles of the stuff. The sugar rush feels great for a while, but that sugar-rush credit creates an expansion in capacity in the economy that is not backed by real savings. It is not justified in terms of someone else’s deferred consumption, so the credit boom creates unsustainable over-consumption. 
Policy makers, not least in this Chamber, regardless of who has been in office, have had to face the unenviable choice between letting the edifice of crony capitalism come crashing down, with calamitous consequences for the rest of us, or printing more real money to shore up this Ponzi scheme – and the people who built it – and in doing so devalue our currency to keep the pyramid afloat.


Since the credit crunch hit us, an endless succession of economists, most of whom did not see it coming, have popped up on our TV screens to explain its causes with great authority. Most have tended to see the lack of credit as the problem, rather than as a symptom. Perhaps we should instead begin to listen to those economists who saw the credit glut that preceded the crash as the problem. The Cobden Centre, the Ludwig von Mises Institute and Huerta de Soto all grasped that the overproduction of bogus candy-floss credit before the crunch gave rise to it.

It is time to take seriously their ideas on honest money and sound banking.
The Keynesian-monetarist economists might recoil in horror at the idea, because their orthodoxy holds that without these legal privileges for banks, there would be insufficient credit. They say that the oil that keeps the engine of capitalism working would dry up and the machine would grind to a halt, but that is not so. Under my Bill, credit would still exist but it would be credit backed by savings.

In other words, it would be credit that could fuel an expansion in economic capacity that was commensurate with savings or deferred consumption. It would be, to use the cliché of our day, sustainable.


Ministers have spoken of their lofty ambition to rebalance the economy from one based on consumption to one founded on producing things. A good place to begin might be to allow a law that permits storage bank accounts that do not permit banks to mass-produce phoney credit in a way that ultimately favours consumers and debtors over those who create wealth.

With honest money, instead of being the nation of indebted consumers that we have become, Britons might become again the producers and savers we once were.
With a choice between the new storage accounts and investment accounts, no longer would private individuals find themselves co-opted as unwilling-and indeed unaware-investors in madcap deals through credit instruments that few even of the banks’ own boards seem to understand.


Question put and agreed to.
Ordered,
That Mr Douglas Carswell and Steve Baker present the Bill.
Mr Douglas Carswell accordingly presented the Bill. 
Bill read the First time; to be read a Second time on Friday 19 November and to be printed (Bill 71).

The Proposed Bank of England Act

This is a reform that could prevent a future financial crisis, clear the national debt, and restart the economy.
It cures the sickness in our economy and financial system by tackling the root cause of the problem, rather than just the symptoms.
It would make the ‘inevitable’ cuts in public services completely unnecessary, reduce the tax burden by up to 30% and allow us to clear the national debt. It takes control over the UK’s money supply out of the hands of the commercial banking sector and restores it to the state, where it can be used to benefit the economy, rather than providing a £200 billion annual subsidy to the banking sector.

For more information see http://www.bankofenglandact.co.uk


The Grip of Death
 A Study of Modern Money, Debt Slavery and Destructive Economics (Paperback) 
by Michael Rowbotham