More on splitting up the banks

Myners was quoted in the Telegraph on 23rd January 2010 as saying “The argument is that hedge funds, private equity and proprietary trading are a source of risk – that is not our general view. In the UK, the three activities were not responsible for RBS, HBOS or Northern Rock, who, on the whole, failed in the rather classic way of making bad loans.”

This is either stupid or disingenuous. Banks made bad loans because an investment bank would then, for a large commission, underwrite (using their prop desks) the repackaging of these loans to others – hedge funds, other banks etc.. Banks therefore could make any loan and flip it keeping the fee and moving on to the next borrower.

How hedge funds and prop trading didn’t contribute to this I do not know.

I can certainly excuse Private Equity from the equation – these guys are mostly borrowers and are in any case unrelated to the banks.

One very interesting and tricky issue is how can splitting up the banks by itself offer a solution to the securitisation of these loans? The answer, and Myners is right here perhaps (although he hasn’t given this as the reason), it doesn’t. Stopping banks from making mad loans and flipping them is best curbed by either capital requirements or outlawing the activity by forcing banks to hold a significant portion of all loans that they make.

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