The Royal Bank of Scotland is poised to unveil the biggest loss in UK banking history after taking a hit of almost £6 billion from the credit crisis. Britain's second-largest bank is this week expected to reveal a pre-tax loss of at least £1 billion for the first six months of the year, with analysts warning it could slide to as much as £1.7 billion in the red. The loss would be roughly five times higher than the deficit racked up by Barclays in 1992 at the height of the last recession. RBS chairman Sir Tom McKillop is already under pressure from investors after the bank's recent £12 billion rights issue. His chief executive, Sir Fred Goodwin, who marks 10 years at the bank this weekend, also faces shareholder scrutiny. The bank is scouring the world to find three new non-executive directors to shore up its board in response to shareholder concerns. The RBS figures will cap another terrible week for Britain's biggest banks as the credit crisis continues to take its toll. HSBC is expected to write off almost $7 billion (£3.5 billion) in bad debts at its struggling American business from the first six months of the year. The charge will drag its profits roughly 30% lower to about $10 billion. Barclays is forecast to reveal a 35% drop in profits to £2.6 billion as bad debts around the world, particularly in South Africa, combine with further losses from its exposure to the credit markets. Some analysts believe Barclays could chalk up another £3 billion of writedowns, in addition to the £1.7 billion it recorded in the first quarter. – Times Online
Free-Market Analysis: Scotland, too! We must admit to a weak spot for the Scottish. They are a brave people, with a fierce, proud culture. They drink single malt, which in all its permutations is a wonderful brew. The women are lovely, the links are challenging, the castles are brooding and built to provide a strong defense. Free-markets received first a philosophical boost first from David Hume and then a practical one from Adam Smith's Wealth of Nations. OK, so he should have called it "Wealth of People" as Murray Rothbard pointed out. But even so, it was quite a bit more than a stab in the right direction.
But somewhere the Scots – at least one or more of their largest banks – have taken a wrong turn! It seems that banks these days, especially big banks, are a lot like fast food joints. They serve up the same kind of meals, in mass quantities, and quickly, and because they are so big, people assume those in charge know what they are doing.
But apparently not. The toll mounts. In Switzerland there is UBS, in America there is Citicorp, in London there is Barclay's. And now there is the Royal Bank of Scotland.
Let's try to figure this out. The execs who run these banks are supposed to be the best and the brightest. They are selected from the finest schools and are educated about business, finance, accounting and investing in the most modern way. How could such bright minds have gone so wrong? Citicorp may not even be solvent. Same with Merrill Lynch. UBS has raised billions to shore itself up. And the Royal Bank of Scotland is about to announce the biggest loss ever.
How exactly do the people running these big operations invest? Do they watch everyone else and then do the same thing? Do they figure that they can get away with it when others haven't? Surely, they understand business cycles. Surely, they understand what a mania is. Surely they could see what was going on when it was going on, and before it went where it did.
If they didn't, how come so many others did? The Internet was alive with information about the coming crash for years before it happened. Everyone in the hard money community knew the market was bound to come tumbling down. But UBS didn't? Citicorp didn't? Merrill didn't?"
It's pretty incredible really. The disconnect between the real world and the fiat money world grows larger by the day. The disconnect between the monied elites, who can lose billions and be bought out of their jobs and average types who understand what's going on but are powerless to stop it, is expanding.
It's one thing to foist an inequitable system on people, it's another to run it incompetently. Given the former, people may secretly respect you for being clever. Blow yourself up with it, as the large money center banks have done, and people will begin to doubt there's any merit to it at all. It begins to look like a rip – and fraud – and of course it is.
Where is the financial sophistication? Were the degrees for show? The people who get them in some cases may be seen as technocrats, more comfortable with numbers than the real world. The chances of them questioning the system are little to none. In fact, one could venture that most Big Business and Big Banking is being run by these types now. They are great with a balance sheet, but their biggest advantage is that not in a million years will they ever question the fundamentals of the system, even though it blows up in their faces once every decade or so.
The homogeneity of the financial world is startling. It takes a really big crisis to show it off fully. But the days when Scottish, Swiss, American and British banks had fundamental differences are apparently gone. Once even the biggest Swiss banks had an identity that had to do with soundness and asset-backed finance. The British were more profligate and expansive – after all, they'd virtually invented central banking. The Americans had their big New York banks, but also wildcat banking for spice. The Scottish, for a long time had free-banking, a form of private fractional reserve banking that worked fairly well. No more. Everyone is stupid today. (Look, we're not being rude: It really does take a certain amount of stupidity to lose billions in a single quarter!)
One supposes the system will try to rebound. The losses will be shoved under the rug. The bankers will spread out again, along with their laptop mounted spread sheets; their risk analysis; their clever accounting; their "opportunities."
But really, what does it all amount to if every decade or so, they're going to drop tens of billions? What's the argument – that all the sophisticated best-practices and the cleverest financial technology works nine years out of ten? That capitalism is fatally flawed and we have to live with it? Who are these people?
At some point, the system really does come into question. But the idea that people will gladly trust more and more regulatory authority to shore up the many bad pennies that have washed ashore may be wishful thinking as well. When the best and the brightest turn out to have feet of clay, the credibility becomes doubtful all around. What may come out of this mess is not a restructured financial and regulatory environment but a fundamental questioning of how it gets to this place. The whole concept of central banking, private banking and honest money may surge to the fore again. It is not a financial "crisis" that generates this sort of generational questioning but a crisis in confidence.
