A documentary on the financial system hosted by the cheery Evan Davies, in three parts.
Starting with a story about a mistake made by NASA when the engineers used imperial measurments while the engineers thought they were using metric, causing an unmanned spaceship to explode, Evan compared this to the $100 billion gone from the banking system.
Like Professor Niall Ferguson, Evan Davies focuses on Italy as the start of modern banking, and examines the discovery of the Chinese using paper money by Marco Polo.
The Christians of Venice, forbidden to engage in banking, were lent money by Jews. Even the word bank came from these transactions, as moneylending took place on benches, called bancos in Italian.
Two types of bank:
There are the typical High Street banks, and the investment banks.
Northern Rock is a High Street bank, while Lehman Brothers was an investment bank. Lehman brothers had existed for over a hundred years, like Northern Rock. Indeed, both were founded in the same year.
Northern Rock began in Newcastle and allowed first Tynesiders and then people all over Britain to buy their own home,while Lehman Brothers financed Hollywood films and Intel, becoming a giant of Wall Street.
In the 1990’s, Northern Rock became a bank, and was led by Adam Applegarth.
Lehman Brothers, meanwhile, was run by Dick Fould.
Brad Hintz, chief financial officer at Lehman Brothers from 1996-9, said that he was not sure if Wall Street was a happy place, joking “We eat your young”, but said Lehman Brothers had been an exciting place. The European headquarters of Lehman Brothers had 5,000 workers and was located in London’s Canary Wharf. As Evan Davies reminds us, banks must earn more on lending than they pay out on borrowing.
Banks lending long term and borrowing short term are key, according to Andrew Hilton, director of the Centre for Study of Financial Innovation. He regards people who criticise this as silly, saying “that’s what banks do”. Capital should keep banks safe during bad times, but it makes no profit (dead money) so little is kept.
Securitisation was seen as an answer, used by David Bowie to make money by estimating his royalties income and selling the offer of royalties as bonds. They began to be used by banks. Dr Charles Guist, a financial historian at Manhatten College, says that “bankers were making loans…that were going to be someone else’s problem.
In Newcastle, Northern Rock’s use of securitisation rose to £20 billion by 2006. The bank borrowed money short term, lent it out as mortgages, and then sold them off as securities. For Lehman Brothers, they could also make money out of manufacturing securities. Peter Hahn of the Cass Business School helped develop collateralised debt obligations (CDO’s). Banks were now carrying out lending to produce more securities. This led to sub-prime mortgages.
Northern Rock considered many of these too risky, but thought they could sell them to Lehman Brothers, according to Bob Bennett, financial director of Northern Rock from 1993 to 2007. Fred Frankel, who worked at Lehman, says that borrowers were seduced by cheap dodgy loans called “teaser rates”.
The investment banks hired ratings agencies to assess the risks, which is a conflict of interest. In 2006, house prices carried on rising. Banks were lending and even trying to talk their customers into taking out credit cards. The dangers of a property crash in 2007 were ignored by Northern Rock, and in summer 2007 banks began investing in sub-prime mortgages to raise more money.
Inter-bank markets dried up and no-one wanted even AAA ratings. Northern Rock asked the Bank of England for an emergency loan, triggering the current financial crisis and leading to long queues outside branches across Britain. Adam Applegarth was grilled by members of Parliament, but refused to accept blame. The investment bank Bear Sterns broke a deal with the US government in March 2008, and Lehman Brothers’ investors decided to withdraw their money.
In September 2008, Lehman Brothers fired for bankruptcy and all 5,000 London staff lost their employment. Dick Fould was subject to a Congressional hearing and were subpoenaed to appear before a grand jury. There was not enough capital for banks, and governments around the world stepped in with bailouts.
In Britain, there already has been one bailout and a second one, taking the form of an insurance scheme, is planned according to Sky News online.
Evan Davies says that citizens are partly to blame for taking out so many loans and mortages, yet there has been no decent financial education in schools and banks have been keen to encourage reckless borrowing, unchecked by goverments.
The City Uncovered with Evan Davis: Banks and How to Break Them is on the iplayer until Wednesday 4 February.
Next week, Evan Davies will discuss hedge funds and interview hedge fund managers. On at 9pm, BBC 2 Wednesay 21.
Part One: Banks and How to Break Them
In the first of three documentaries lifting the lid on the crisis in global finance, the BBC’s former economics editor and Today presenter, Evan Davis, applies his customary insight and wit to reveal the role the banks played in the biggest financial chaos in living memory.
To find out what went so badly wrong, Evan returns to first principles, and explains exactly how a bank is supposed to work and what happened when banks abandoned their traditional role.
Evan traces the rise and fall of two banks whose collapse symbolises the wider catastrophe – Northern Rock and Lehman Brothers. Just why did the UK experience its first run on a high street bank since the mid 19th century? And what prompted a giant of Wall Street to collapse in the biggest bankruptcy in history?
Part Two: Tricks with Risk
In the second of his series of documentaries on modern finance, Evan Davis heads into the world of the City’s risk professionals – the derivatives whizz kids and hedge fund managers.
Their toolkit of tricks mean they can and do make billions, yet they are often viewed with suspicion and labelled the bad boys. In this film, Evan Davis meets the men behind the myths.
Part Three: When Markets Go Mad
In the last of this three-part series on modern finance, Evan Davis looks at the roots of the current crisis: the bubble in property prices and the effect it had on the global financial markets and the people operating within them.
The markets lie at the heart of the capitalist system. Every second of every day they set prices that determine how much we pay for our food, and the cost of a foreign holiday. But what are they? Who is running them? And why do the prices run wild so often?
Evan Davis reveals some uncomfortable truths about what is really driving our economic system.
Traders Audio
