Five big banking balls-ups

As the Government promises to watch the banks more closely, we highlight some of the absolute howlers our top financial institutions made both before and during the credit crunch.

Bankers haven't always been a laughing stock.

Before the credit crunch, it went almost unquestioned that the people working in the City were pretty sharp individuals, and knew what they were doing. Turned out that wasn't exactly the case.

As a result, the Treasury last week unveiled plans to improve regulation of just what it is that the banks are up to in an attempt to protect us all from a repeat of the past two years.

Typically, this involves yet another new 'council' to oversee financial stability, in addition to the three separate organisations - the Treasury, the FSA and the Bank of England - which already have responsibility for doing exactly that.

If only the existing lot had spotted these particular balls-ups...

1) Relying on the securitisation market

Call me a traditionalist, but I have always liked the principle of only lending money that you have.

And back in the old days, banks and building societies tended to do quite well out of that particular business model, lending out money they had brought in through savings accounts.

Then some bright spark came up with the idea of packaging up a load of mortgages, and selling them on as securitisations. Nothing wrong with that, so long as your entire business model is not based entirely on having investors happy to take them off your hands.

The trouble is our banks (particularly those that had recently demutualised - the likes of Northern Rock and Bradford and Bingley) fell over themselves to sell as many securitisations as possible.

And when the market started to dry up, they were left with a balance sheet they couldn't handle.

The lesson learned: Don't lend out money you don't have, Mr. Bank Manager!

2) Ridiculous lending policies

Now in this country we did not even get close to some of the dodgy loans the American banks dished out, but we had a pretty good go.

I don't have a problem with sub-prime lending per se, but there has to be a limit as to who you will lend to. That palpably wasn't the case - how could anyone ever justify giving buy-to-let mortgages to sub-prime borrowers? It's just utterly moronic.

The abuse of self-cert and fast track mortgages are also likely to come to the fore in the coming months. Essentially, lenders got lazy and took their eye off the ball. Then ninjas (people with No INcome, Job or AssetS) whacked them on the bottom line with a big stick. And we're all paying the price.

The lesson learned: Carefully consider who you lend to, and what you are lending them.

3) The bonus culture

Let's sum up what happened. Bankers were trading financial products neither they nor their bosses fully understood, and were rewarded handsomely for short-term gains with bonuses and pay packages that can only be described as obscene.

What sort of maniac came up with that system?

It's dangerous and counterproductive to have so much riding on what is essentially a giant gamble. If you don't know what a collateralised debt obligation is, for goodness sake don't reward your staff for investing in a shedload of them.

The lesson learned: Make sure you know exactly what it is your staff are doing to get those bonuses.

4) Listening to the rating agencies

So once banks had packaged up the loans into mortgage-backed securities, they passed them over to the rating agencies to give an objective judgement of the quality of that investment for the pack of investors considering it.

Makes sense, except that the rating agencies were essentially paid for by the banks themselves. And funnily enough, that didn't help them maintain a completely independent view of matters.

Somehow, having seen stacks of awful loans given an AAA rating, the banks then trusted the rating given by these agencies when buying up securities from other banks.

Take Bradford and Bingley. Part of the reason they hit the wall was that they were buying up loads and loads of rubbish loans from GMAC-RFC.

Given that Bradford and Bingley were able to shift a stack of their own ropey buy-to-let mortgages with lovely high ratings, surely an alarm bell went off SOMEWHERE that these GMAC loans might be equally rubbish?

The lesson learned: If you are going to employ independent rating agencies, it helps if they are actually independent.

5) Carrying on regardless

It's now almost two years since Northern Rock crumbled, and the best part of a year since the bank bailout, and what has changed? Not a lot, in all honesty.

The new head of RBS is still getting a £9m package. Okay, he's not quite in the same league as Fred the Shred, but hell, £9m isn't too bad, is it?!

Has there been any real change in stopping these blasted bonuses and mad payment packages? Of course not.

Without wanting to keep bashing RBS (they just make it so damned easy), they even had a sponsored box at Wimbledon! That's a disgraceful use of public funds.

And it's not the residents of the boardroom or the gambling chancers that have received their P45s and are joining the back of the dole queue - it's the ordinary workers who did nothing wrong that are left to fend for themselves in the worst employment conditions in a generation.

Oh sure, the directors went before the press, and the political committees, and said sorry, but nothing has changed.

It's a case of carry on as you were.

The lesson learned: You need to learn lessons from your mistakes..... D'oh!

The Government's role

I've had a dig at the Government's handling of the credit crunch before, and will likely continue to do so, but had the banks not been run so incompetently, there would have been no need for Gordon and gang to step in.

We can only hope and pray that at some point the penny drops, and those at the head of our banking sector sort their act out.

The City of London, indeed our entire economy, relies on the strength of our financial sector. It's high time bankers got their act together and stopped ballsing everything up for everyone else!

More: The five biggest credit crunch cock-ups | Greedy Bankers Are Bailed Out Yet Again