Regulators Ignore Innovations In Lending

Well, surprise, surprise. The latest Bank of England Quarterly Bulletin confirms that banks aren't lending as much as people need, and this is a brake on growth.

Politicians obfuscate by blaming banks for not lending, while insisting banks must conserve capital. Lord Myners has even U-turned into believing it's a good idea to split up the banks in order to create more banks, believing this will mean more competition.

But it's tough to see why more high street banks will mean more competition to provide unsecured loans to people and small businesses, given they're all bound by the same capital rules. We had lots of banks, and they had to consolidate to solve their capital problems. Metro Bank is said to be expanding rapidly, raising more cash to buy old bank branches others have been forced to sell for competition law reasons. But I don't see any truly disruptive difference between them and the other high street operators.

There's also a bigger problem here, as suggested by the finding in the latest British Social Attitudes Survey that only 19% of us think the banks are run well, down from 90% in 1983 and 60% in 1994.

Surely these circumstances demand a new regulatory framework for efficiently directing deposits to where they are needed most. Yet the existing framework prevents regulators from spending any time on this problem. Zopa's request for peer-to-peer lending to be included within the regulatory framework has not produced any joy, even though such platforms enable lending that doesn't tie up a bank's balance sheet and unlent funds remain in the banking system as commercial deposits. Loan volumes at Zopa have exceeded £100 million - 1% of the personal loan market - at a default rate of only 0.7%. Ironically, these numbers do not represent the sort of risk to consumers or the financial system that is claimed to command regulatory attention (which is itself debatable, given the lack of timely attention to the problems in the securitisation market).

In other words, if you have a highly capital-efficient financial innovation that represents a great deal for consumers, expect policy-makers and regulators to ignore you.

You're better off developing Kick-out bonds.

Image from Good Design.

Aged 30 To 34?

Yesterday the National Centre for Social Research published its British Social Attitudes report. More on that later. But I did notice the finding that:

"Those aged between 18-29 years old are more likely to feel discriminated against than any other age group, and are viewed more negatively than older people."

Meanwhile, the Chartered Institute of Personnel and Development also reported that two thirds of new jobs go to under 35's.

So I guess if your aged 30-34, you're golden.

WikiChill: Might Ain't Right

I can't decide which set of DDoS attacks are more mis-guided or counter-productive. Whoever is trying to 'take down' WikiLeaks may as well be jousting at clouds; and those attacking the global payments and cloud computing infrastructure may as well be... well, jousting at clouds. In fact, it's just cloud versus cloud, and both are only succeeding in making innocent crowds angry.

Somewhere in the middle of the WikiLeaks phenomenon is a discussion worth having. But that discussion can't occur while spooks and hackers - the masters of mystery and anonymity - remain the key protagonists, and self-important politicians embark on an arms race of overreaction.

Officials: let the leak thing play out. If WikiLeaks didn't exist, you would have invented it. Focus on changing your protocols to avoid what you really can't cope with. Adopt a decent email policy.

Hackers: focus your energies on inventing something distributed yet productive that will advance the cause of humanity. WikiLeaks does not need your help.


Image from PhysicsBuzz/Wired.

Who Warned Whom About Madoff?

As noted by FTAlphaville, a fascinating aspect to the Madoff Trustee's case against HSBC is that accountants KPMG were asked by the bank to investigate Madoff's operation twice, and issued a damning report on both occasions, in 2006 and 2008 respectively.

This adds to the evidence that suggests Madoff's Ponzi scheme was quite a poorly kept secret from about 2000. Harry Markopolos said it took him four hours to spot the Ponzi scheme in 2000, using publicly available documents. Michael Ocrant published an article after a series of interviews in 2001, as did Barrons (see paras 215-220 of the Trustee's Amended Complaint against HSBC). And according to the Telegraph, Goldman Sachs banned its asset management and brokering divisions from dealing with Madoff's funds about the same time, while "a raft of blue-chip financial institutions have suspected something was wrong for years."

As the Trustee's cases unfold, it will be interesting to discover how far and how fast word spread, and who warned whom.

But the big question is why supposedly sophisticated financial institutions appeared to ignore the warnings? The Trustee claims certain activity occurred with the "intent to hinder, delay, or defraud creditors". But why? He cites the desire for fee income (at para 16). Perhaps the banks and other intermediaries may also have thought that all was fine, so long as their more valued clients got their 'magic' returns paid or their principal out, regardless of the fact that the money came from other participants. They may also have concluded, however unwisely, that it was too late to let go of a balloon that had risen to such lofty heights, and their best chance of recovering their more valued clients' funds was to risk putting more in... If that's the case, then the business of working out where those new funds came from must have been very bloody indeed. Note the Trustee's allegations (at para's 146-148) that Madoff's involvement was deliberately kept out of the 'feeder fund' promotional documentation.

Ugly.

Yet, as is apparent from "Fooling Some of the People All of the Time", investors can remain in denial even in the face of the most dogged attempts to convince them they're being foolish.

WikiLeaks: A Hard Case. Expect Bad Law

Given the enthusiasm with which numerous governments have attempted to thwart WikiLeaks, and their lack of a ready legal basis for doing so, we should keep an eye out for some exceptionally bad legislation.

We cannot expect the politicians to do nothing about this. There is just too much irony involved.

I mean, how galling must it be to claim the Internet is 'lawless' and then find that global commercial service providers seem to have no trouble enforcing their own cross-border terms of service?

And how can one now lay claim to being "diplomatic" when everyone's seen how much care diplomats take when writing to each other?

Never mind that "WikiLeaks" is just a brand name, and the material it publishes has already been leaked by... government officials.

But wait! There's hope yet. I reckon there's a line of official thought that might run something like this:

"We can't possibly have a law that specifically prevents official leaks. How would opposition parties ever get elected? It would be the end of democracy!

Well what about a law approving leaks in certain circumstances, like when they promote democracy? And let's not just make it a national phenomenon. Let's do it by international treaty. We could set up a single, not-for-profit organisation, not controlled by any national government, that would have as its charter the publication of leaked government information that it judges to be in the public interest. All officials could then simply disclose their leaks to it, and impartial editors from around the world could approve disclosure.

We could call it, "WikiLeaks"!"

Image from ThoughtTheater.