Saturday, December 01, 2012

The financial black hole in the banking system created by regulatory incompetence and complacency from all the component parts of the regulatory sector.

Just when I thought that we might have reached a lull in the storm of bad financial news with which the British investor and saver has been buffeted in recent months, even more bad news hoves to in the headlines.

If, like me you thought that £16 billion worth of financial crime perpetrated by the major banks in the PPI scandals without any regulator doing the first thing to prosecute any of the organised criminals who engaged in these acts of institutionalised fraud wasn't bad enough, we now face even more vast financial shortfalls which dwarf the present figures.

Britain's banks now face a financial black hole of up to £60bn from regulatory demands, hidden losses, and potential mis-selling costs that threaten to jeopardise future growth of the country's economy, the Bank of England has warned. Why on earth are we, the ordinary tax-payers and clients of these banks, putting up with this lunacy, without raising any voices of concern. According to the Prime Minister, we are all in this together, well, I am looking to him and the Chancellor to get a grip on this madness, and to bring some sense to the situation. If this means banging some recalcitrant heads in H.M Treasury, the Bank of England and the FSA together, well, so be it, but for fuck's sake man, do something!

In its Financial Stability Report (FSR), the Bank has now revealed that the big four lenders - RBS, Lloyds, Barclays and HSBC  (all the usual suspects you notice) may need to take £15bn of extra provisions on consumer loans and European debt, “a further £4bn-£10bn” to cover fines and customer compensation, and “between £5bn and £35bn” to meet regulatory risk standards. These figures we are told, hide additional penalties for fraudulent sales of unsuitable financial products, and potential fines for Libor-rigging.

Now, and too late as always, for the next few weeks, dozens of regulators will be crawling all over the banking industry’s books – telling directors where they have been too optimistic and instructing them to provision for bigger losses.

The upshot will be that banks are made to plug a potential capital shortfall of as much as £60bn – by raising equity, selling assets, disposing of businesses or restructuring – to put them on a stronger footing to support growth. “The danger to be avoided is that of inadequately capitalised banks holding back our recovery,” Sir Mervyn King, the Bank’s Governor, said.
The proposals, in the Financial Stability Report (FSR), also had the implicit backing of the Treasury, with one proviso – that taxpayers would not be on the hook for a single penny. This may sound very benevolent as far as the tax-payers are concerned, but the truth is that the propeller heads in the Treasury know only too well that the public backlash for more public money being given to the banks, could easily trigger serious social unrest at this time.

But why has it taken so long for the regulators to act. It's all very well for Sir Mervyn King to pontificate about dangers to be avoided, when we are already in that danger zone, he sounds more and more like the small boy whistling in the dark room because he is afraid of the bogeyman!

And the bogeyman in this case is the fact that the banks have been misleading the public, their creditors and their shareholders by mis-stating their financial shortfalls. How do we know, well Sir Mervyn says so!

Here what uncomfortable words our Sir Mervyn offers. Quoting from the Daily Telegraph Business page of 30th November he says;

"...Markets have lost confidence in the banks which have been 'misleading' investors due to their 'complex and opaque' numbers and, to recover investor's trust, lenders needed to set aside capital for 'expected losses' and for potential compensation and fines over customer fraud and Libor rigging..." (Sir Mervyn uses the phrase mis-selling when I refer to fraud, but I am unwilling to collude in this lie, and I call it what it is, which is institutionalised fraud)! 

Now, I want you to consider this latter paragraph very carefully, because it contains a bombshell which I am not certain Sir Mervyn meant to drop! In fact, such a big bombshell is it that it was carefully removed from the on-line version of the Daily Telegraph report! Sir Mervyn is a seasoned Mandarin, that is a senior public official who is well versed in using language elliptically, or as Alan Clark once put it, '...being economical with the actualite...' so he must know wherof he speaks!

Sir Mervyn states that the banks have been 'misleading' investors due to their 'complex and opaque' numbers. By using the words 'complex' and 'opaque', Sir Mervyn really means 'impossible to determine' or 'having a complete absence of transparency', or even 'deceitful' or just 'a bloody great bunch of downright lies'. Putting it at its simplest, The Daily Telegraph estimates, '...the markets currently reckon the banks are worth £90bn less than their book value. In other words, no one quite trusts the banks’ numbers...' and if you accept that analysis, then we are talking about fraud on a scale hitherto unimagined.

Essentially, the markets are saying, and Sir Mervyn and the other regulators are now, very belatedly acknowledging that the main big 4 British banks are hopelessly undercapitalised when it comes to calculating how much equity they have available to counter an unforeseen financial crisis, and when it comes to the amount of fraud they have perpetrated, they have not told the truth about the outstanding liablities. The Daily Telegraph reports that "...UK banks have taken £13bn in provisions against mis-selling, Libor fixing and other control failures but the FSR cited analysis that suggested they “may incur a further £4bn to £10bn of costs"...”

Ignoring the use of the weasel words 'control failures', which is just another way of talking about penalties for fraud and money laundering in other jurisdictions, we could be talking about a round figure of between £20-£23 billion in costs of fraud and financial crime alone!

Not only have these figures been understated, but the other important costs which British Banks are exposed to have been mis-stated. The British public have been deceived, but more importantly, their auditors have been deceived, their investors have been deceived, and their shareholders have been deceived. That's the problem with the banking sector, when it comes to telling lies, they are in a class of their own. They just can't help themselves, like the scorpion, it's in their nature! They find it simpler to lie and deceive and cheat than they do to just come out and tell the truth.

Just in case there might be any doubt, let me rehearse the criminal offences which accompany the activities of making false or misleading statements when the person making them is a company director (ie on the main board of a bank)!

Under Section 501 of the Companies Act 2006 - A director will be guilty of an offence if he knowingly or recklessly makes to an auditor of the company a statement (oral or written) that

(a) conveys or purports to convey any  information or explanations which the
auditor requires, or is entitled to require and 

(b) is misleading, false or deceptive in a material particular.  

A director found guilty of such an offence may be liable for imprisonment not exceeding two years and/or a fine (on conviction on indictment) or liable for imprisonment not exceeding 12 months and/or a fine not exceeding the statutory maximum (on summary conviction). 

Under section 397 of Financial Services and Markets Act, 2000 any person (including a director) who knowingly or recklessly makes a false, misleading or deceptive statement or who dishonestly conceals a material fact is guilty of a criminal offence if his purpose in doing so is to encourage others to deal in securities in a company or if he is reckless as to whether his
actions will have that result.  It should be noted that section 397 can apply not only to the contents of a prospectus, other documents and oral statements (particularly forecasts), but also to omissions from such documents or oral statements.

 A person will be reckless if he deliberately shuts his eyes to the fact that his statement is misleading or if he does not even consider its accuracy - it does not require any dishonest intent. 

Under section 397(3), any person (including a director) who creates a false or misleading impression as to the market in, or price or value of, any shares in order to encourage others to deal or not deal in them is guilty of a criminal offence.  There is no need for the prosecution to
prove dishonesty on his part or an intention to create a false impression.  All the prosecution need establish is an intent or purpose to create an impression which, in the event, turns out to be false or misleading.  

Defences are set out in section 397, but are only available to a director if he can prove that he reasonably believed that his act or course of conduct would not create a false or misleading impression. 

Under section 398 of Financial Services and Markets Act, a person will be guilty of an offence if, in  accordance with any requirements imposed by or under FSMA, he knowingly or recklessly gives the FSA information which is false or misleading in a material particular.  This section only applies where there is no other provision under FSMA which creates an offence in
connection with the giving of information.  The definition of reckless set out in paragraph 11.1.2 above will apply equally to this section.

A person guilty of an offence under this section will be liable to a fine not exceeding the statutory maximum (on summary conviction) or an unlimited fine (on conviction by indictment). 

Section 19 of the Theft Act 1968 

A director or other officer or person purporting to act as an officer of the company commits an offence if, with intent to deceive its members or creditors about its affairs, he publishes or concurs in publishing a written statement which, to his knowledge, is or may be misleading, false or deceptive in a material particular. 

Can someone please tell me how misleading and deceiving the public and the regulators about the true size of the debts your company owes, or the value of the assets your company possesses, which is exactly what Lord King has accused these banks of doing, does not fall within any of the provisions of the offences outlined above.

I mention these offences here because I believe that those who might read my blogs deserve at least the right to know the facts of the case, facts which are so carefully obscured and hidden from them by the powers that be. Such knowledge might encourage us to get our MP's to start asking the awkward questions in the House of Commons, and demanding that these gilded public officials be held to account for their failure to act in the interests of investors and the public at large. We are, after all, their paymasters, it is our taxes that pay their bullet-proofed salaries and generous pensions, and perhaps we should start demanding some accountability for their inability to do their job properly.

Of course, nothing will be done about it, no charges will be brought, no bank directors charged, no bank officer required to appear at the Old Bailey, because these people are a protected species, as they are so fond of telling us. They have got away with this kind of behaviour for so long now, it has become second nature to them.

That is because they possess a criminogenic personality, they are pre-ordained to behave in ways which are more likely to end up in their committing criminal offences, because they have never, and this is the point that we, the public, should be demanding be redressed, they have never been properly supervised and regulated by that timid regulatory triumvirate, the Treasury, the Bank of England and the FSA! Individually and jointly they have all sat back, and allowed the banks to go and play in the cesspit of the global financial markets, and have never once exercised their supervisory and regulatory powers to punish and stigmatise outright criminal behaviour.

They have repeatedly turned a blind eye to blatant criminal conduct, the organised criminality associated with PPI frauds and the other fraudulent activities involving financial risk-management derivative products. They never lifted a finger when the LIBOR scandals broke, preferring to hope that someone else would pick up the prosecutorial challenge. They never said a word, except to bleat how unfair it all was, when an American regulator decided to give Standard Chartered Bank a good and thoroughly deserved drubbing for sanctions busting and money laundering. They sat back without demur when Lord Sassoon, who is the Commercial Secretary to the Treasury, a ministerial position in HM Treasury, maintained that the FSA were not responsible for supervising HSBC's criminality in the Mexican money laundering activities.
What does it take before this bunch of privileged, protected untouchables are held up to public ridicule and opprobrium for failing to do anything to prevent this level of financial crime.

I know that my words will have an irritating effect upon some of those within the agencies I accuse of this spineless level of inactivity and inertia. Some will tut-tut and say 'How dare he speak of us in these terms'! or 'What can this former detective know about the ways in which we think and operate'!

Well, I do know how they think, I have been up against them in the past, and I was fortunate enough to held a series of senior Mandarins to account in the David Langford case, which you can read in an earlier post on this blogsite. Once you have gone head to head with them and faced them down, you begin to realise what a bunch of pompous over-promoted bullies most of them are, who cannot bear to think that they might have to be held up to the sanction of public accountability.

Well, they do have to be accountable, and it is up to us to make sure that they are not allowed to get away with this parade of anomic incompetence. Look at the failures regarding Northern Rock and HBOS and ask yourselves how such incompetence was allowed to go unnpunished. The UK is in the most appalling financial mess, brought about largely buy the criminal activities of the banks, operating in a regulatory vacuum because those charged with their supervision and regulation, failed to do their jobs properly and effectively. 

They must not be allowed to continue getting away with this incompetence, and we must raise our voices to be heard, and demand accountability.


lifeafterdebt said...

Well said Rowan. Another great post. We are definitely not all in this together and unless those who chose to deceive their investors,their share holders and their customers are named, blamed and shamed there will be no incentive for the industry or the people within it to change. Personally I am less worried about what would probably turn out to be token prison sentences from which these multi-millionaires could return to the proceeds of their ill gotten gains but feel, at the very least, their personal assets and all assets acquired during this period of criminality should be seized from anyone who has played any part in the condoning of fraudulence and personally profited. However I suspect there will definitely be a law against asset stripping of this kind! Wrote this a while back as equally frustrated at the lack of consequence for those who masterminded the calculated plundering of the lives and the livelihoods of millions of unsuspecting people both at home and abroad

AbogadoNZ said...

Well said again Rowan. Caroline's comments are on the nail too!

OK now for the hard part - a long list of potential charges has over time been carefully articulated BUT inaction seems to be the order of the day. How are we going to get some traction here and cause sufficient embarrassment and concern that charges have to be laid. Somehow a stunt has to be pulled in public that points out the collusion between the political arm and the administration. Is there a way we can raise a few bob in the blogosphere to bring a private prosecution. It would have to be done in a such a way that publicity were involved and use a well known face (Bill Nighy for example) to front it. What I have in mind is well resourced and highly public confrontation not with rent-a-mob but with stable middle class, middle aged men and women. We would need to gatecrash something that was being publicised anyway and alert friendly portions of the media. Somehow the head of the FSA and other regulatory bodies have to be publicly confronted and asked to explain why they are colluding with criminals who in turn are passing the costs onto us, the public. We have to name names and risk the consequences. It would have to be well planned and executed but the messages have to be brief and in front of the mainstream media. Any thoughts???

simoncz said...

Is there no way we could get some public spirited lawyers to help force cases against these types?
I expect it would be a very long and expensive process which is probably why nobody has tried it.

Rowan Bosworth-Davies said...

Thank you all for these great comments. My own fear is that the moment any kind of private action were to be mounted, the Attorney General's office would instruct the Crown Prosecution Service to take over its prosecution, and then conveniently drop it for some spurious cause. I am intending to ask my MP to table some PQs the see if we can get some wriggle room started!

AbogadoNZ said...

I am not at all sure playing the game is going to deliver a solution here. Some form of direct action is going to be needed. If the regulators cannot be shamed into doing their jobs may be we the community should try and find ways to prevent them from doing theirs. If they can be shown NOT to be carrying out their duties some disciplinary action will have to be taken. Perhaps we could start by seeking via the internet the work and home contact details of the directors and senior managers of half a dozen banks and the regulators. Then those details need to be made available to those who wish to complain and have their say. The community is going to have to demonstrate its displeasure to get the message home. We all need to get in the face of bankers, regulators and Parliamentarians to such an extent they cannot carry out their ordinary duties or cut through the clutter created. I am not suggesting anything criminal mind but a little civil angst never hurt anyone....

Diplodocus Rex said...

Waht do you expect from a chancellor who yesterday said he was going to get Starbux to pay a "reasonable amount of tax" to help the country pay off the "deficit". That clown doesn't know the difference between debt and deficit. How on earth do you expect him to grasp anything even remotely more complicated?

Anonymous said...

Your contents are wonderful and advisory.
How To Use A Limit Order

Blogger said...

eToro is the most recommended forex broker for newbie and established traders.