The elephant in the room

 I love that phrase: “the elephant in the room”.

It just conjures up this image of everyone sitting and not realising there’s a great big grey beast with a trunk sitting behind their chair.

Photo source: Venture Beat

Of course, that’s the image it’s meant to conjure but what is the elephant in the room in banking?

Hmmm ... what could it be I wonder?

The fact that SEPA isn’t working?

Yes, that’s proven by our surveys in 2009 and 2010.

But that can and will be overcome when an end-date forces migration, so no, that’s not the elephant in the room.

Maybe the elephant is the fact that high frequency trading is creating unpredictable spikes in liquidity.

Sure. This was evidenced by the flash crash, but it’s not a result of high frequency trading so much as the way in which the systems are programmed. And that is being dealt with, although it’s not easy.

So that’s not the elephant in the room.

No, the elephant in the room is this: banks haven’t changed behaviours since the crisis hit.

There is so much evidence that banks are returning to business as usual that it is almost shocking no-one has noticed.

For me, it was evidenced by this year’s SIBOS, the SWIFT tradeshow, where so much of the exhibitors and their parties were back to the ways of 2007. The only difference between then and now was the final night party, which lacked the pizzazz of days of old. But don’t worry. It’ll be back again there next year.

It is evidenced by the bonus pool of Goldman Sachs which has swelled to $13 billion already this year after three quarters, following on from last year’s record $16 billion pay out.

It is evidenced by the loss of the £200 billion of quantitative easing that the UK government introduced during 2008 and 2009. Most of this cash went to the banks and brokers as the government issued it through them only to buy it back again in terms of funding government securities. What does that mean? It means the UK government used quantitative easing to fund their debt, and banks and brokers made commissions on the issuing and purchasing of this debt.

No cash has been seen in the wider economy.

It is evidenced by the margins and profits banks are making on credit, with lending conditions drier than the Kalahari Desert and, where lending is offered, at rates that make the average Joe cry.

Same with saving rates.

It is evidenced by the growth of FX markets to trading over $5 trillion a day in OTC derivatives, hedges and speculative investing. An area that all the regulators said would be cracked down upon, but it is yet to be seen.

In fact, there is so much evidence that banking is returning to the halcyon days of old that you have to ask: what are the regulators doing?

Well, they are walking a fine line.

If they crack down on the banks, they potentially crack down upon their economies.

In the UK, George Osborne and Mervyn King are trying as hard as they can to appear tough on the outside whilst allowing the banks to continue their ways.

This is because any move to stamp out bad behaviour may result in banks moving to other countries and damaging the benefits they bring to the economy.

Like a badly behaved child that you cannot spank, banks can scream, shout, sulk and stomp just as much as they want, and all George and Mervyn can do is stand, stare, suggest and smile.

They then claim that it will take time to resolve this situation, that nothing should be done in haste, that they are creating an environment where banks will pay back, and so on and so forth.

But it’s not the case.

Governments and regulators are trying to make sure the banks appear to be punished whilst providing them with the most favourable conditions.

Don’t believe me?

Well, just take a look at this piece from Prospect this month:

“A few weeks before the government U-turn on the Caymans (allowing tax avoidance for offshore funds), a number of British hedge-fund owners handed over large sums of money to the Conservative party, in the run-up to the general election. Some had also given up to six-figure sums to George Osborne to pay for his office in opposition. No laws have been broken. But would it be getting a little carried away to wonder if they were all in it together?”

So if anyone wants to see the elephant in the room, there it is.

It’s called the status quo, ceterus parabus or nothing changes if you would rather.

Fair enough.

Now live with it and move on.