Martin Vander Weyer: Five simple rules to avoid the next crash

The show trials of bankers have been entertaining enough, but what have we learnt that can stop history repeating itself?

Related Topics

Enough with the show trials already. Enough with the Treasury Select Committee and its peacock chairman, John McFall, with his gritty questions that never quite elicit anything we didn't know already. And more than enough of those lawyer-scripted, without-prejudice public apologies: the guilty men are never actually going to prostrate themselves and say: "Yes, as a matter of fact you're right, chairman. I was unqualified to run a bank, and my judgement became utterly warped by the size of my bonuses, so now I'm personally responsible for billions of losses. Sorry."

We have been distracted from the fact that the Government is exhausted of new ideas as to how to get us out of this mess. But before examining that, let us consider a simple list of warnings to watch for next time round.

The first signal is, of course, a boom in bankers' pay. Research from New York University has shown how it soared in relation to other professions in the 1920s, the mid-1980s and in spades in the present decade, each time offering a perfect indicator of the crash to come. We need banks themselves to accept that if they pay grossly more than comparable professional work – making millionaires of middle managers and deluding directors into thinking themselves on a par with great entrepreneurs – then things will inevitably go to the bad. Unsound trading decisions will be taken, huge strategic risks will be ignored, shareholders' and clients' interests will be endangered, and off we go to perdition once more.

Second, beware of banks not run by bankers. In the line-up of former HBOS and Royal Bank of Scotland chiefs in front of chairman McFall this week – Lord Stevenson and Andy Hornby, alongside Sir Tom McKillop and Sir Fred Goodwin – not one had significant hands-on experience of the small-scale lending decisions and day-to-day customer interface that are the bedrock of the seasoned banker's professional formation. At Northern Rock, we should remember, Adam Applegarth was a marketing man with no banking qualifications, and his chairman, Dr Matt Ridley, was an expert on Charles Darwin. Lifelong, branch-trained managers are not immune to errors – they made plenty in the 1980s – but they are an innately cautious breed who are unlikely to go haywire on the spectacular scale of the current bust.

Third, beware of excessive sophistication. Securitisation of mortgages was, when first invented, a useful way of increasing liquidity in the US home loan market. But it became so over-elaborated that it almost wrecked the global financial system. Likewise, derivative instruments were devised to help farmers and manufacturers protect themselves against future risks, but the complexity of modern derivative trading turned them into what Warren Buffett called "weapons of financial mass destruction".

Next, watch for over-priced mergers, a sure sign that the top of the cycle has been reached – or just passed. RBS's £50bn consortium takeover of ABN Amro, desperately outbidding Barclays, will go down as one of the worst misjudgements in financial history. And if it's true that Lloyds TSB had an opportunity to back out of the HBOS merger, but chose to stay in because it offered a "once in a lifetime" opportunity to grab more market share, then the £10bn loss revealed last Friday puts that deal in a similar category of folly.

Finally, watch out for obfuscation and self-delusion. The annual reports of RBS, HBOS, Northern Rock and Bradford & Bingley before they collapsed were models of corporate correctness which gave no hint of the horrors hidden on and off their balance sheets. Bradford & Bingley's should become a set text for business-school students: up to their eyeballs in toxic buy-to-let lending, the directors confirmed "they are satisfied that the company has sufficient resources to continue in operation for the foreseeable future" and gave far more space to diversity analysis and green toilet-flushing systems.

Five simple warning signals for the next financial crisis. But to get to the next one, we have to extract ourselves from this one. How on earth do we get there?

In the short term, the Government and the Bank of England have the biggest role to play through liquidity and insurance schemes for bank lending, the implied promise of further capital support from taxpayers, and the prospect of near-zero interest rates and new-minted cash pumped into the system. As the Bank's Governor said last week, these measures will work positively – but we have to be patient. If President Obama's fiscal stimulus package begins to stabilise the US economy and housing market, that will help. If, later this year, UK homebuyers begin to feel that house prices are affordable and unlikely to fall much further, that will help too.

Only when banks can draw a line under the property crash and put a final figure on what it has cost them will they begin to move forward again. When they do so, our five key points should be framed in their boardrooms. Don't let pay scales run out of control. Promote your shrewdest lifelong bankers to the highest levels, and don't override their opinions. If your young thrusters invent new lines of business you don't understand, just tell them to stop. If anyone offers you a global mega-merger, show them the door. Finally, make sure the risks you take are crystal clear to shareholders, customers, regulators – and most important, yourselves. That way, we might not have to go through all this again – at least, not in this lifetime.

Martin Vander Weyer is editor of 'Spectator Business'

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Finance Director

£65000 - £80000 per annum: Recruitment Genius: Finance Director required to jo...

Recruitment Genius: Medico-Legal Assistant

£15000 - £25000 per annum: Recruitment Genius: This is a unique opportunity fo...

Ashdown Group: (PHP / Python) - Global Media firm

£50000 per annum + 26 days holiday,pension: Ashdown Group: A highly successful...

The Jenrick Group: Quality Inspector

£27000 per annum + pension + holidays: The Jenrick Group: A Quality Technician...

Day In a Page

Read Next
David Cameron faces the press as he arrives in Brussels for the EU leaders summit on Thursday reuters  

On the Tusk of a dilemma: Cameron's latest EU renegotiation foe

Andrew Grice
John Profumo and his wife Valerie Robson in 1959  

Stephen Ward’s trial was disgraceful. There can be no justification for it

Geoffrey Robertson QC
Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas