Banking in the 21st Century

This is what we are best at… and we are incredibly bad at it!!

What are banks supposed to do best?

Frankly it is embarrassing to have to say that you "lost" several billion dollars. What when your core business is banking? Banks tend to portray a very conservative image... security, safe investments, risk management, portfolios. What is really going on?

How could it have all gone so wrong?

"Subprime" is a great scapegoat but I am convinced that the root of the problem lies much deeper.

Sure most banks have been burned badly by their self invented "Subprime" crisis, and Société Généralé managed to lose even more money thanks to lax internal controls and overconfident trading. Don’t be fooled they are not alone.

In the UK we have the Northern Rock fiasco, and another French bank, BNP Paribas has been fined recently by the FSA for sloppy internal controls. Most of these banks have been in business for a long, long time, why is it that suddenly now we are realising that all is not so rosy?

Could it be that making money is relatively easy in a bearish economy? When the bear begins to boar those banks with the shaky foundations are shaken out first. Northern Rock indeed!!

There is more than one way to rob a bank

1. Traditional: Billy the Kid, The Italian Job,
2. Cyber-crime: Hacking, teeming and lading.
3. The Third way: Bank "loses" several billion dollars.

This third way is new and very, very smart. No one even thinks to look for the winners!! They are far too busy trying to find the scapegoats.

If the banks have "lost" so much money, some lucky people somewhere must have made a fortune, why isn't anybody wondering about that?

One group of winners could be the bankers themselves. And just maybe some of this relates to the unreasonably high bonuses bankers made in 2007?

All about timing

Pump the bubble almost to bursting point, take your bonus. Retire to the suburbs, buy your Porsche. Its ok, by the time it comes crashing down it will become something that Douglas Adams famously called "somebody else's problem".

What I would really like to see is a three way analysis of the situation.

• How much money each bank has "lost".
• A grouping of “winners” and how much each group probably made.
• An analysis of where that cash is now. In property? In Porsches? Under the mattress? In the bank?

Frank Bank

I had the good fortune to have a very frank discussion with the CEO of a Wealth Management arm of a famous International Bank. Here is a brief summary of their position. (Some details have been changed to protect me).

• 15 billion dollars of managed funds.
• 150 employees across three continents.
• Ambitious growth plans.
• Very limited, from that I gathered almost non-existent, internal controls.
• One inexperienced accountant and an assistant just out of university.
• Monthly reporting is outsourced due to a knowledge gap.

Internal controls had been sacrificed at the outset to the god of growth. Now the growth is continuing at a breathtaking pace and there is an awful lot of pedalling to do for the accounting controls to catch up.

It sounds like a very similar situation, albeit on a smaller scale, to Société Générale. And I think I am beginning to see a trend here.

Banking is very much a "closed shop". Normally you can only work in a private bank if you have prior banking experience. They say that their industry is so specialised and complicated that they only want people who understand the system. This argument has been more than slightly tarnished by recent events. You only have to look at the results to see that this approach is one of the roots of the banking crisis. It encourages "group think" and stifles change. Change is what is needed now.

• Debits and credits are no different in a bank to any other business.
• Futures and Derivatives are like taking a punt on a two horse race. (And you'd stop after losing your first billion).

Maybe the reason for Bankings "closed shop" approach is a collective fear that a fresh look at their operations might uncover even more bad news. They really can't take the risk.

I would really appreciate all your comments on this subject.