Bankers come to Parliament

Big scrum of photographers (as I believe it is obligatory to describe them) outside Portcullis House this morning, awaiting the arrival of the banking bosses for their appearance before the Treasury Select Committee. It's days like these when I wish I was still a member; I came off the committee just as it started getting interesting. Anyway, off to a completely different meeting now...

Catch up - banking crisis*

And yes, we're allowed to call it that now. Gordon says so. I've been in the Chamber for a couple of statements from the Chancellor this past week, plus an economics lesson for Cameron at PMQs (the lesson being, don't ask Gordon about the economy - he knows more than you). This coming Tuesday we have the Second Reading of the Banking Bill. Must admit, I was slightly taken aback at the number of British investors who were caught out by the Icelandic problems, and now it appears that even the Cats Protection League has been stung to the tune of £11m. New poll on my website asks: should the Government bail out local authorities in respect of their Icelandic losses?

Banking crisis

Saw a little of Cameron's impromptu performance at Tory conference today. (They've had to rejig the Conference schedule - how many cheesy stunts, months-in-the-making, have had to be pulled so they can look 'serious' and grown-up? Cameron is apparently going to deliver his big Conference speech from a podium, with notes, not walking around with his shirt sleeves rolled up like last year. But isn't that just as much a stunt? He's doing it to 'look' serious and statesmanlike, just as last year he was doing it to 'look' like the sort of guy you wouldn't mind having a pint with. And while we're on the subject, I hope you all saw the story about him going for a jog at Conference, walking when the cameras weren't there, then starting to run again when he saw them?)

I think the Tories are probably doing the right thing, in saying that this is no time for party political point-scoring, and they'll support the Government's rescue package. Of course, this is partly because they haven't got a clue what they'd do in our situation - not least because they're not involved in the high-end discussions, so couldn't really be expected to - and this way they can simply sit tight, try to impress us with their gravitas (which will be difficult for the devil child) and secretly hope for it all to go horribly wrong so that they can blame us.

Actually, that might be slightly unfair. Let's not forget that many of the Tories will be victims in this too. As I never tire of saying, half of the Tory 2005 intake were millionaires. (And that's just the new boys). Not all of them made their fortune in the City, but even those who didn't will probably have their money tied up in property or shares or other investments. Some of them are still combining a bit of financial wheeling and dealing with being an MP. Not sure if they're going to toe the party line. I expect there will be an emergency statement on this on Monday when Parliament returns, either from the PM or the Chancellor. Will be interesting to see how the rank-and-file Tories respond.

On a more serious note, obviously many ordinary people, with modest savings and investments, or their money tied up in their homes, are worried about what's going on. I had a call yesterday from a constituent, a pensioner who gets his pension paid directly into his bank account. He wanted to know what would happen if his bank went under. Of course, up to £35,000 savings would be protected by a Government guarantee, but I guess that takes time to arrange and he's worried that he wouldn't be able to withdraw the money he needs to live on from week-to-week. So when people argue against rescuing failing banks, on the grounds that they (meaning the financiers) have brought it on themselves and have only their own greed to blame), they should bear in mind that we're not doing it for them but for their customers. And to prevent a knock-on effect on other banks, and other customers.

Crash

Take one big investment bank. It employs, amongst other people:

• traders: who follow market movements and book the deals;
• salespeople: who manage the relationship with counterparties and talk to them about what sort of business they want to do;
• research analysts: the economists, who tend to specialise in particular business sectors and analyse developments in the financial world (and also political developments) which are likely to affect commodity prices, equity prices, currencies, and so on;
• credit risk analysts: who assess the creditworthiness of potential counterparties and factor this risk into the price of a trade (this is partly based on ratings given by credit ratings agencies like Moody's and Standard and Poor, but they also carry out their own research)
• market risk analysts: the so-called 'rocket scientists', who use sophisticated financial modelling to predict future market movements and factor this risk into the price of a trade (here's an example - the Black-Scholes model for options pricing)
• lawyers: who document the trades to allow for netting of obligations, which significantly reduces exposure, and ensure compliance with regulatory requirements
• accountants: who monitor capital adequacy requirements (i.e. that the bank has the required capital set aside in order to meet any likely call on its funds - this figure is reached by looking at the credit rating of counterparties, market risk, existence of netting agreements, diversity of portfolios, etc), and
• settlements team: who arrange for payment of monies (i.e. settlement of trades), and (usually automatically generated) confirmations of individual trades;
• senior management: not quite sure what they do, but they get paid a lot for doing it.

And of course there are also the external regulators, like the SEC and the FSA, and bodies involved in monitoring the stability of the financial system, like the Fed, the Bank of England, and the Bank for International Settlements.

So for a top player like Lehmans, there are checks and balances built into the system. (This wasn't the case with Barings, when Nick Leeson was more or less allowed to carry out the entire front and back office operation by himself - but that was then, and this is now, and they were a tiny institution by comparison).

So at what stage of the process did this break down? You can't just blame the traders, as they have to get permission to trade from the back-room boys. I suspect it must have been a combination of the research analysts and the market risk guys both wildly miscalculating what was going to happen in the housing market, and the credit risk guys being over-optimistic about the creditworthiness of the sub-prime mortgage lenders with whom the bank was trading. And then the accountants were presumably happy for all those eggs to be put in the property market basket. And the regulators weren't asking the questions they should have been, or were being fobbed off with the wrong answers.

But the buck stops with senior management, doesn't it? So I look forward to seeing how many of them are called to account when the current situation calms down, and how many simply walk away with huge pay-offs...