The current financial difficulties show how things have changed over the last 25 years. Back then, a chairman of a leading but financially troubled Midlands engineering group gave me some advice.
If you owe the bank £50,000, they own you. If you owe the bank £50m you own them. In the days before anonymous corporate banking centres, no bank manager wanted a high-profile insolvency on his books, so everything was done to avoid the plug being pulled. As to the chairman, the bank blinked first and sent the receiver packing.
Now it seems the reverse is true – as a corporate banker it is the norm to have blood-spattered shoes, even if it is the body of another bank being carved up as a consequence. The same attitude seems to apply to managing risk. A lot is said on the subject and even more is written about it but I sometimes wonder whether anyone really understands it.
I wonder what risk assessment processes were in place at the banks when they were buying the various subprime mortgage packages and other securitised investments.
In truth these mortgage-backed securities were skilfully packaged in such a way that the originators of the mortgages had sold them on, safe from likely future problems.
What is even more surprising is that these subprime mortgage-backed securities were being rated along the same lines as government bonds, even though they were nothing of the sort. Their ratings got inflated as they went from one bank to another.
So what happened to risk management? Due diligence was on holiday, it seemed. The kindest thing to say is that the boxes were ticked and the audit and risk committees went for drinks feeling they had done a good job.
The next kindest thing to say is that no-one understood what the risk was. The securitisation process had laundered the nature of the asset backing to an extent that the financial institutions were buying blind products they did not understand. They chose to ignore the risk, presumably to make big bonuses. As a consequence, faith in financial institutions has been shattered. They passed around the equivalent of the emperor’s new clothes over and over again, destroying their own balance sheets and liquidity. Far from managing risk, they expanded it.
While the bankers thought they were only pushing around bits of paper with fancy titles, what they really had in their hands were the hopes, aspirations, homes and jobs of millions of people. And what of the regulators and politicians? The best you can expect is the sound of stable doors slamming.
Chris Blythe is chief executive of the CIOB