Thursday, 23 October 2008

The crazy world of international banking

There is a chilling article in this week's New Statesman by Iain Macwhirter called the mad world of shadow bankers. Reading this I find it hard to add any further comment. Unregulated market capitalism of this kind is crazy and unethical. Our pension funds and taxes and the poorest in all our societies will now pay the price for such carefully thought out semi-legal corporate thoughtlessness.

The madness of the shadow banking system became apparent over a year ago when Northern Rock was nationalised, but regulators ignored the implications. The Treasury minister Yvette Cooper discovered to her dismay that Northern Rock didn't own half of its own mortgages: £50bn had been hived off to a Jersey-based company, Granite, registered as a charity benefiting Down's syndrome children in the north-east of England. Needless to say, the charity didn't get any cash - this was a special-purpose vehicle that allowed the Rock to trade in complex securities without having to meet the stringent capitalisation requirements of a normal bank.
But it wasn't just the Rock. Most banks and other financial institutions did exactly the same, setting up "orphan companies", often under charitable trusts, that did not appear on their published balance sheets. This is one reason why such apparently well-capitalised and solvent institutions as Royal Bank of Scotland collapsed so suddenly. Their true liabilities had been hidden for years in the shadow system while they made huge profits from lending.