Saturday, June 27, 2009

A talent for making losses

It is perhaps the greatest paradox of our time.

Over the last two years, the UK banking sector generated catastrophic losses. According to the Bank of England's latest financial stability report, UK banks have accumulated losses amounting to almost ₤400 billion. Those losses were calculated as the difference between the mark-to-market value of assets held on bank balance sheets compared to their "original" book value.

As the chart suggests, banks have continued to identify more losses despite the unprecedented assistance from the taxpayer. It doesn't look like it is over yet. Banks still need to come clean and admit to the full extent of their wealth destroying activities.

The banking crisis pushed the economy into recession and required a bailout amounting almost 90 percent of GDP. Yet, the executives who run these enterprises continue to earn multi-million pound salaries. The sector is still awash with extravagent bonuses.

In the past, talent was the justification for these huge compensation packages. Gifted people deserve extraordinary wages. But looking over the wreckage of the UK financial system, these jokers only ever had a talent for making huge losses for their shareholders.


  1. Hi Alice,
    Great blog.

    Can you elaborate on the meaning of banking (in comparison to trading) book assets?


  2. chuck,

    I have amended the post. I hope I have answered your question.

    Thank you for your comment and your kind words.


  3. "required a bailout": what that means, I fear, is that in hopes of stopping them going bust, the government decided to risk the Sovereign State going bust. Bloody silly, if you ask me.

  4. Have a got this right - about 7K per man woman and child in UK?

    In some ways that seems cheap given the high living that has been going on. I fear we will see more pain elsewhere in the system unless we figure out some structural reforms aimed at growth.

  5. I think the question that we don't yet have an answer to (although it was touched on in an recent article by Martin Wolf in the FT) is this - what is left in the City once you take away all the financial hocus pocus, trading activities, tax rorts, accounting tricks, ponzi schemes and assorted money-go rounds?

    i.e. to what extent does the City (and financial services) genuinely add value to the economy and to what extent does it simply function as a way of sureptiously stealing from the future economy and funelling the proceeds into the hands of a few.

    My belief is that the City can only facilitate commerce but it can't be commerce itself which means it must get much much much smaller. I think we implicitly acknowledge this with the talk of the credit crunch spilling over into the 'real economy'.

    The City will never shut itself down or reign itself in. Talking to my banker friends it is clear that they are still deluded. They believe that because they are smart and work hard that they are worth every cent of their big bonuses. QED. They also can't imagine a future other than a slow return to 'normal' (being the world than that existed 2 years ago).

    Ultimately I think it's the Germans and French that will shrink the City. They suffer the losses when it turns to custard but they don't get the tax or employment benefits in the boom.

  6. Jo Jordan,

    Do you think this is a high or low number.

    This only the mark-to-market losses on financial assets. As far as I can tell, it doesn't cover future credit risk losses from such things as defaulted mortgages.