It's easy to blame the bankers, but who's really responsible when our finances go belly up?

Who is really responsible when financial disaster strikes? asks John Redwood MP.

Gherkin in the City
Sir John Redwood MP
On 18 September 2011 08:54

The rogue trader at UBS has allowed another round of banker bashing. Why aren’t more bankers in prison, the BBC and others ask. Wasn’t the granting and packaging up of low grade mortgages a crime? Shouldn’t they all be prosecuted?

I agree that if a banker steals money or perpetrates a fraud they should go to prison. If someone steals your car from the street you expect the criminal to be punished. If a banker takes your money, saying he will invest it safely, and syphons it off to his own bank account he should have his liberty taken away.

This much is not in dispute. What should be in dispute is who are the worse villains in the less clear cut cases?  

Let’s take the case of the dodgy mortgages. These were granted to lenders by banks, then often packaged up and sold to other investors in the market. In due course the mortgage holders reneged on their debts, the investment packages fell in value, and large sums were lost all round the market. Who is to blame?

Is it the banker who granted the mortgage to someone who failed to pay it back?

Is it the borrower who should have known better and should not have borrowed more than they could afford?

Is it clearly the borrower to blame if they lied about their income?

Is it the regulator who supervised the mortgage bank making the transaction?

Is it the politicians who urged the banks to lend more to people with low incomes, so they could own homes?

Is it the banker who took piles of these mortgages and packaged them up, saying that as a portfolio they were a sound investment?

Is it the Rating Agency who assessed the package of mortgages and  said it was a high class investment?

Is it the professional investors who bought these packages, believing them to be good?

Is it the Central banks, who created large amounts of credit allowing the banks and other investment firms to buy up all these investments in the good days?

Is it the Central banks and banking regulators who then withdrew the easy money and exposed the dangers of these types of investment?

Many of the people operating in these markets acted in good faith. The original borrower thought he could afford the mortage at outset.

The bank thought he would repay. The Rating Agency thought a portfolio would perform just fine, as the loss rate would be under control.

The Central banks may genuinely have believed that Chinese competition was ending inflation so more credit was justified.

Doubtless there were some borrowers who knew they might not be able to afford the mortgage, and took a chance. Some falsified their return to get a mortgage they should not have had.

Some bank staff may have had doubts about the suitability of some mortgage applicants, but were pushed by management and bonus targets to lend.

Central Banks might have turned a blind eye to excessive credit because they wanted to please the politicians.

Some politicians may have realised it would end in tears, but wanted to crank it up before their re-election.

In these cases it is by no means clear who should go to prison, and why that would make the world a better place.

The Rt Hon John Redwood MP is the Member of UK Parliament for Wokingham and the Chairman of the Conservative Economic Affairs Committee. His articles are cross-posted on his blog by agreement.

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