How Bankers Turned A Blind Eye

Bank ex-bosses told MPs that they couldn't possibly have predicted today's financial crisis. This is nonsense, as the first warning signs appeared years ago...

"When I was young, people called me a gambler. As the scale of my operations increased, I became known as a speculator. Now I am called a banker. But I have been doing the same thing all the time."

(Sir Edward Cassell, banker to Edward VII)

The most entertaining spectacle this week wasn't in the West End or on primetime television. In fact, this particular show took place in the House of Commons, where MPs on the Treasury Select Committee roasted four ex-bosses of two fallen giants of the banking world: HBOS and Royal Bank of Scotland.

I watched this performance with particular interest, not least because I worked for an insurance arm of HBOS from 1999 to 2002. Hence, I wasn't surprised to learn that City watchdog the Financial Services Authority (FSA) revealed that it had had concerns about risk management at HBOS as early as 2002.

During my time at various financial firms, I saw widespread evidence of a target-driven regime supported by aggressive, high-pressure sales; excessive `price gouging' of customers; and widespread overpricing and corporate greed -- all leading to a culture of `growth at all costs'. To me, it was clear that HBOS and rival banks were in danger of becoming wizards of the dark arts of marketing, rather than the once-sober organisations which commanded public respect.

Alas, when, as an employee, I spoke up in favour of better deals for our customers, my bosses weren't interested.

The writing was always on the wall

Almost to a man, banking executives claim that no-one could have foreseen the financial disaster which brought banks to their knees and forced them to beg for hundreds of billions from taxpayers. This is nonsense.

I would argue that the root cause of today's credit crunch and banking meltdown is simple. In their headlong rush to trouser ever-greater profits and bonuses, these arrogant executives (few of whom were qualified bankers) forgot that risk and reward are fundamentally linked. In fact, I think of risk and reward as inseparable -- two signs of the same coin, if you like.

Today, Lloyds Banking Group, the new owner of HBOS, warned that HBOS was set to lose a mammoth £10billion in 2008, wiping out several years of profit. Shares in Lloyds immediately fell almost two-fifths (40%) before bouncing back slightly.

Sadly, it's clear that reckless lending at Halifax and Bank of Scotland to both homeowners and property firms will hurt the group for years to come.

Bust follows boom as sure as night follows day

During a long winning streak -- house prices increased every year from 1996 to 2007 -- it's easy to forget that the good times don't always roll. Nevertheless, as any hardened gambler will confirm, all winning streaks have a beginning and an end. Therefore, they cannot and do not go on forever.

Indeed, as an ex-marketing manager, I have been criticising banks' excessive risk-taking and lack of lending controls since I left financial services to become a financial writer seven years ago. In fact, so concerned was I with the twin bubbles in housing and credit that I sold my family home in April 2005 and have been renting for four years. Likewise, I sold all of my banking and financial shares in early 2007.

In recent years, Fool.co.uk has done its best to highlight some alarming signs on the highway to today's financial disaster. Here are five examples:

March 2004

Buy-To-Let Investing - By The Room -- avoid `buy to let' hotel group GuestInvest (which duly went into administration last October).

June 2004

Why I'm Selling To Rent -- the thinking behind my decision to sell up and rent (more than two years before the peak, as it turned out).

July 2004

Oops, We Owe Over £1,000,000,000,000 -- it took over three hundred years to reach £500 billion of personal debt, but only seven years to double this to a trillion pounds.

October 2006

Hazardous Home Loans To Avoid -- slating Northern Rock for its 125% mortgages and Bradford & Bingley for its 130% home loans. In 2008, both collapsed and are now taxpayer-owned.

January 2008

How Often Do House Prices Fall? -- more often than bankers realised, as it turns out.

Don't get me wrong. The Fool didn't get everything right. And on a personal note, I arguably started fretting about house prices too early. I was concerned in 2003, but property carried on rising for another four years.

That said, I think bankers and politicians made far bigger mistakes. Hence, I offer.

Further reading for bosses of blown-up banks and short-sighted politicians:

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Dr Richard Bookstaber

Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor

Other People's Money: The Revolution in High Street Banking by David Lascelles

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