Corporate Greed and the Banking Collapse

As I have said here before, probably to the point of boredom, I used to work in the Photographic Industry. I was forced to leave that career path because of an incident that has relevance to what is going on in banking sector and the corporate world.

I found myself working in one of the Kodak labs, just a technician although my experience had been managing departments. Therefore, I was rather disturbed to discover that Kodak were quite deliberately breaching the copyright of professional photographers by reproducing copies of prints for people. I even pointed this out to managers there and was told “Whose to know”. I was not in a position to refuse to carry out the work, but as a photographer myself, I did not like this situation one little bit. So I made sure that I got a copy of the British Journal of Photography, the trade magazine, as that was where the jobs were listed. However, to my surprise was an article that reported that a professional photographic company, Parasol Portrait Photography, were suing Kodak over breach of Copyright. I thought carefully about the matter and contacted the solicitors dealing with the case. I made my statement to them, a sworn affidavit, as I felt that all professional photographers need some protection from the “big boys” who were all to ready to rip the small guy off.

I never heard anything for months, oh and I did loose my job due to a change in shift patterns. Then one evening I responded to a knock at the door, there were two well dressed thugs at the door who pinned me to the wall and told me that unless I withdrew my statement I would never work in the industry again. Well I never withdrew my statement and they were right I have never been able to get work in the photographic industry again.

Although Parasol won the case, Kodak got away with ripping off many hundreds of other professional photographers who relied upon print sales to earn a living. Also they were able to use their power to stop me working in the industry. They did that quite simply by closing the credit accounts of any studio or lab that I applied to a job for, and when I was not offered a job the accounts were reopened. I know this as prospective employers told me this. But none were prepared to see their living damaged through making a statement to that effect.

However the point I am making by relating that experience is that almost all companies, no matter big or well known they are will bend the law or break it if it means they cam make money. While my experience is relatively small fry in the pond of corporate greed, it stems from an attitude that making money, no matter at what cost, is right. We only need to think of Enron as an example to see that that is actually wrong.

Further there are aspects of what Enron did that are mirrored in the present situation. But I think the history of this needs explaining.

Because of federal laws that prevented banks lending more than a ratio of more than ten times its deposit assets, the banks came up with all sorts of clever ways of bundling up loans into securities that meant that they were selling on the risk and this kept the loan off their balance sheet. However, this also meant that to continue making profits the banks had to lend more and more money. When the banks had leant to all the people that could realistically repay the loans, they looked to other potential customers. These are what we now know are called the “Sub Prime Market”, even here the banks could have still made money from making sensible loans. However, they started making loans to people to that were never going to be able to repay.
Now to you and I that is not sensible, but remember that the banks were packaging these up into securities and selling them on to other banks. That way when the borrower defaulted it was not the bank that bore the cost.

In this way the banks in America and to a lesser extent in Britain, could keep on making record profits as long as the public, us, kept on buying credit. Also for this to keep working property values had to keep on rising. I have already explained in a previous posting, that in the UK this was perpetuated by the myth of a housing shortage. So when the value of property started to fall in the US, the banks that were playing this game stated to their profits falling.

However, what has been the really toxic effect has been the way that all the banks have been packaging up their debts and bad loans and selling them on. As when other banks buy them they appear on their balance sheets not as loans but as assets.

It is the fact that all the banks have some of these on their books that is causing the real problem, as all the banks know they have them but none are being honest about what their exposure is. Therefore because the banks know that other banks are hiding these worthless assets, banking system will not lend cash to other banks.

Now if that was not complicated enough, the banks have also created very complex financial products and systems that further hide where their cash is or where their debts are. These systems meant that they, the banks, could earn interest by what appeared to be from moving vast sums around the banking system. In ways that make money laundering look like child's play. But all these systems were in fact just forms of gambling. As the same money was in effect being asked to do three or four thing at once.

The banks may just as well have been playing poker. As often this money was not theirs to play with. Ever wondered why the banks take so long to clear a cheque? During that time they are gambling on the various stock markets around the globe with yours and my money. But also with the money from pension funds and insurance companies.

The moment that the banks stopped lending each other money, and the flow of capital around the world slowed to nearly a full stop was when banks like Lehman Brothers had to confess that their true debt to assets ratio was not ten to one but thirty five to one. Like Enron, it looks like they were miss-telling the SEC (Securities and Exchange Commission) and the FSA (Financial Services Authority) their true status. I suspect that may also be true of HBOS over here and why the government forced them into a shot gun wedding with Lloyds-TSB.
The reality is that the banks all know that they have misrepresented the value of what they really own and what they owe, and more importantly what they are owed.

I suspect that the banks have been bending all sorts of rules. There have been exceptions, here in Britain banks like Lloyds-TSB were criticised by their shareholders for being to boring and conservative but it has meant that they remain strong and appear not to be exposed to the same follies of other banks. Further, while some banks over here may well fail the worse excesses of Wall Street was not repeated over here, and most of the banks here are still quite strong, although wounded by Wall Street. However around the world the banks will have to learn to earn their profits in much more safer ways.

While on the subject of the excesses of Wall Street, Lehman Brothers Last year paid out thirty five billion pounds in bonuses (that's Seventy Billion Dollars). That means that is money that could have helped save the firm, left the business.

But all multi national businesses have been doing this for years. They will over pay themselves and the rich have become super rich. Even when they fail the business, they still get paid substantial sums. If I were to loose a business millions I doubt that I would get a pay out of a million or more. But we really do have a system where the super rich look after themselves. And this is the other aspect of why the economy is falling apart. Multi national businesses have sold out the countries that created their companies.

In America and Britain these businesses have chased the cheapest place of production. Most notably China, where pay is a fraction of what pay is in Britain or the US. In this way, these British and American corporations have been enriching countries like China as well as themselves of course. All this has added to the outflow of capital from the US and UK economies.
We have the situation where both the US and the UK have gorged on credit and we now have the hangover of debt. Therefore we both have the unholy trinity of debt, falling asset values (housing), and the reality of having passed peak oil. As while all the attention has been on the sudden rise in the cost of oil, no one has seriously looked at why this happened.

While there was speculation and that did have an effect, it was not the whole of the picture. Nor was it that there was or is any real increase in demand, as while production is close to the level of demand, there was no rational reason for the price to shoot up in the way that it did. The only rational explanation is that the oil fields don't contain as much oil as previously claimed. There is a precedent for this, as both BP and Shell had to admit a few years ago that they were over stating the oil reserves that they have.

The increase in the price of oil has the knock on effect of increasing food prices as we require ten calories of hydrocarbons to produce each calorie of food. Thus, every dollar on a barrel of oil adds to the cost of growing and transporting food.

Therefore, while the increase in energy costs are impacting people directly and indirectly, it is the the debt binge that really has caused the problems we face now. The trouble is that the effects impact everyone, especially the people that have not lived on tomorrows hoped for earnings.

The problem we face on both sides of the Atlantic is that the the reliance on the markets and globalisation has failed. Thus far all the solutions being offered rely on us borrowing more. Here in Britain we have the government trying to prop up the mortgage market. When it has been foolish lending that has caused the problem. In the US the government is trying to buy out the bad debt.

However what really needs to happen is the US government needs to buy the houses that are being repossessed rather than buying the debt. That way people will not loose their homes and the families then pay an affordable rent. While there will be many Americans that think that is far to socialist, it is far less socialist then nationalising the banks. Further, if the banks fail then as long as the deposits of ordinary people are protected then the banks should be allowed to go bust. As this is the same principal that the banks are using when they foreclose on peoples homes.

By buying up the houses rather than the debt, at least that way the government will have assets that may rise in value latter, and it will stop the knock on costs of the social problems that making people homeless will create. Further, there will be a revenue stream crated in the form of rent.

This really could be a real opportunity for both the US and the UK to really start treating its poorer people with justice and dignity. I have long thought that it is a scandal that in either country there should be people that are unfed and hungry. Equally this could provide a real opportunity to provide housing for all the homeless.

I don't think that it will be an easy time, but I really do think that we are on the cusp of a genuine change that will mean that business will not be allowed to indulge in the greed of the past. Further, I think that the populations of the world will demand much greater corporate responsibility and social justice from businesses.