I must say that I was quite shocked to read in the newspapers recently that subprime mortgage-backed securities are getting back in vogue and are attracting “fresh interest amongst investors” in spite of a number of market experts describing the housing market as a “bubble on a bubble”.
Clearly, memories are very very short and the hunger for yield is obviously trumping any modicum of common sense. There seems to be absolutely no doubt that “debt” is our next big problem at all levels of society — household, national, corporate etc.
The emergence of CLOs (Corporate Loan Obligations) is another element, which would cause great concern especially when currently the covenants relating to these are being watered down significantly according to press comments. So called ‘Covenant Lite Obligations’!
As we have discussed in previous articles, the root cause of this development is absolutely down to the regulators who have failed miserably in separating Investment Banking activities from customer deposits.
The notion that “Chinese Walls” can mitigate the risks here is laughable, especially when you have gentlemen like Slaley at Barclays, whose ethical practices have been sanctioned by the FCA in the UK, running large multi-national banks.
The only way to prevent this kind of behaviour is to absolutely spin off investment banking operations and have them floated off separately to Investors who enjoy that level of risk. That burden of risk must not fall again on tax payers and depositors.
In previous articles, I have referred to what I describe as being the “ethical deficit”. A couple of matters have been reported in the Media very recently where McFarlane, Barclays Bank chairman, has suggested strongly that up to 50% of claimants for PPI compensation (mis-sold insurance cover) are fraudulent.
Given Barclays own issues with the chief executive, I do think that that is a bit rich! Additionally, I note that an investment banker has been appointed to run Santander. Again, I would have concerns that allowing an individual with that type of background to get close to ordinary customer deposits is probably not a good thing!
Once again it was noteworthy to read in the media in recent days that Barclays seems to have become embroiled in a further mis-selling scandal this time to do with “3rd party” distribution of its consumer finance products through retails/auto dealerships etc.
It appears that heavily incentivised promotion of finance packages by sales staff in such entities has resulted in numerous situations where people have taken on far too much debt under pressure. The worrying thing here is that it does, once again appear that lessons following the financial crash of 2008 do not appear to have been learned. Also, it suggests that the regulator was asleep at the wheel!
In previous articles, we have discussed the impact of Brexit, particularly on the UK Financial Services Community. I was very interested to see that the ‘Duff and Phelps Annual Survey’ of the Worlds top Financial Centres voted London in 2018 as number one!
This does seem somewhat counter intuitive given the number of headlines about banks moving operations to Frankfurt, Dublin etc! I think a key element are the so called “soft” measures such as reputation, infrastructure, quality of life, English language and access to excellent “human capital” with large quantities of trained motivated finance professionals etc.
For this Brexit fan, pretty encouraging!
Glasgow-based John R Wright is an academic, veteran banker and a former CEO of Oman International Bank and Gulf Bank, Kuwait.
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