Beyond Basel

Friday, April the 17th, 2009. CAC 40: + 1.77%
At home with a nasty cough

Sir Fred Goodwin, former boss of RBS

It's been a while now since Basel came along.

Basel I and II, for those of us not initiated in the world of finance, are sets of rules and regulations, mainly applicable to banks that had to do with methodologies used to calculate risk. Operational risk, credit risk, and other types. I'll save you the details. They are as interesting as they are helpful. (Tick: "not" in both cases)

It meant quite a change. More specifically, a change in the amount we paid IT consultants with a halfway decent understanding of how banking works. For all this stuff had strict deadlines and, through their ginormous daily rates, at least their finances were secured for a while. Not so, however, the money placed in the accounts by John Doe.

It did not help. One thing Basel I and II did not do, is to maintain trust in the financial industry. Or in anything at all, for that matter.

Credits kept on rolling freely to those who had some collateral, and because credit was easily available, the market value of that collateral, often real estate, went up too, as more people could afford to buy. More value means more encouragement to make some of that liquid, and that completes the circle.

When somebody had the bright idea to package some second rate debts together and swap that against other, often equally questionable vehicles, banks, particularly investment banks, saw their chance to make their books look even more glorious.

Alas, when somebody started to call in those debts it triggered a chain reaction and everything went horribly wrong. Then came Northern Rock, Lehman Bros, RBS... The rest, as they say, is history.

Fortunately, the governments were prepared to bail out some of the major banks, to prevent a "total collapse of the economic system." Unfortunately, governments have no money and use the tax-payers', the same ones who already suffered and had just seen their savings and investment vaporised.

Don't think for a minute though that this solves the problem. On the contrary, look at what's being done with those large sums.

On the day that the UK government decided to bail out RBS, their CEO, Sir Fred Goodwin, contractually doubled his pension to £ 703.000 per year for the rest of his life. This, as compensation for leaving his post where he had exercised a management of misery and a policy of bullying.

His explanation: well, it's on paper. If the government is not careful with that they sign, how can he be held responsible?.

The sad thing is: he's right. He may be unethical, selfish or anti-social. It would be safe to say he's a nasty piece of work. But he's not wrong. Governments are, like the banks, utterly careless with their expenditure for one simple reason only: it is not their money!

I dare say we don't really need such big banks to keep the economy afloat. In Switzerland the only two really large banks lost enormously in 2008, albeit one considerably more than the other. But the reality is, people currently are taking their cash elsewhere, and more often than not this is to a local savings bank, who don't have an investment division. Not because they know so much about banking. Because they have learned. They learned not to believe and not to trust.

If anybody thinks that the problem will soon be solved by getting credit to flow again, think again. If anybody believes the cases of "boss-napping" in France were incidents that will blow over, keep dreaming.

The real problem is on a deeper level than regulating credit default swaps. It has to do with plausibility, with trust, having a vision. People don't need a cheaper mortgage. They need a solid house to live in, and the security that that house will still be there tomorrow. Just as they don't need bonuses either. Most people would prefer an employer who will invest in your happiness rather than cutting costs and award only those who devised yet another idea how to squeeze staff even more.

I suggest a new charter that would go beyond Basel I and II. Call it Basel III if you like, or Timbuktu or Wolverhampton for all I care. What matters is this:

It should not be about credit, that will start to flow again at some point. But it won't be enough. What is needed now is credibility.

Fix that, and we shall prosper!