Grim Reading

If you want to really make yourself angry ready for a showdown with the boss or to get in the mood for a hard game of rugby, please read the attached description of the Asset Protection Scheme as pertaining to our wonderful investment, RBS.

On the face of it, there is nothing new in there. We have known for some time that as taxpayers we would be underwriting about £280bn of toxic assets accumulated by the bank. In many respects we were led to believe that the grimmest story was contained within ABN AMRO bank, the ill fated and disastrous acquisition made by RBS just prior to its demise. How glad we must be to find that in fact half of the stupid lending at RBS was plain old loans to the UK public, small businesses and property companies - what may be described as banking basics. There are quite a few derivatives in there too but not half as many as you might think.

Now, cast your mind back to when our glorious leader said boldly that it was sub-prime mortgages in the US that precipitated the Credit Crunch. How wrong he indeed was. His good friend, the man he knighted, Fred Goodwin was hard at getting the very basics of banking wrong. Fred 'The Shred' was well known for acquiring companies and then shredding costs and getting supposed 'value' for the assets, but he wasn't actually much good at banking per se, it appears. The risk assessments and controls at RBS must have been pitiful because most of the assets we are now underwriting, frankly, should not be there.

Where, oh where, was the FSA when all this was going on? Where, oh where, was the Government? The problems stemmed from the basic, basic rules of banking, and knowing that RBS was leveraging money on the wholesale money markets to finance his business big time, could we not see that this was a company doomed to fail? Yet even up to the wire, the Government and regulator reckoned RBS was a company with enough capital to survive.

It is a story of incompetence and hubris that runs through the entire credit crunch story. We only needed sub-prime to expose the rottenness underneath - it was merely the bit that was showing at the time. RBS was doing its own 'sub-prime' right here under our noses - the US had very little to do with it as it may as well have started right here.

I read the grim details of what I am insuring this morning and while I got very angry with RBS, I was more angry with the fact that people in senior positions did not know what was going on - like at the FSA and Government. It really reflects how little our most senior and supposedly intelligent people know about how the Credit Crunch actually came about and therefore casts more than my major doubt on the measures they have taken to get us out of it.

To be precise about that - Alistair Darling is now bickering about introducing a windfall tax on bonuses and excess profits at banks. However, the problems that were created were right at the very heart of the banks - the basics. That is where the real flaws exist and the whole ability to trade poorly assessed debt is where the money is made. Any debt was good as it could be traded many, many times for vast profits and no one ever cared about the original debt itself or the assets it financed or the ability of the person or company to service it. It did not matter - the money was in the trading of the debt, not the debt itself. The money to buy more debt was cheap and plentiful and no need to get deposits to pay for it - the world was perfect and still is. This is a basic but subtle difference in semantics but it's where the whole problem originated.

The crisis was about what banks do, not about the money they and their employees make. Taxing them may help purge the soul and win votes, however impractical it will be to implement if at all, but it will not stop it all happening again.

Very Sharp Reminder

Just when we were believing we were free of recession and the financial crisis was all but over, Dubai has shocked the world.

We were busy worrying how to curb bankers' bonuses and when the economy would show growth again - then we had a day of turmoil as stock markets reacted badly to the news that Dubai World, the state owned investment company, delayed payment on its quarterly debt repayments. Almost unnoticed, book store group Borders slipped into administration following the Thresher off licence chain, making a further 1,000+ people unemployed in the UK.

Dubai has enjoyed a six year period of unprecedented growth as it has invested enormously in property, both commercial and private and the market for it has been buoyant. As an Emirate state it is not blessed with a rich supply of oil but its strategic location makes it compete with Hong Kong as one of the great ports in the world for international freight transport. Dubai has been Western-friendly and inward investment has been enormous but Dubai World itself has clocked up astronomic debts of $59bn.

It's another tragic example of a total belief that asset values can only go up and that all debts can be repaid. The mind boggles to try and work out how many times that vast debt has been chopped up, repackaged and sold multiple times around the globe as part of derivative trades and credit default swaps upon which banks and their trading employees have pocketed enormous profits and bonuses.

This is a stark and sharp reminder of the folly of the global banking system. The total belief that any debt is good and that asset values will always rise has been the bedrock of the financial system that has turned into the sands of the Arabian desert. The creation of structured products to trade around these debts is like a terrible cancer ravaging the financial system and this shows how very easily the whole system can get a critical blow. This kind of catastrophic failure in debt servicing threatens to have a domino effect and I am sure there are many bank executives who are nervously watching and hoping that the oil rich Government of Abu Dhabi steps in to bailout Dubai World - Dubai has total debts of over $80bn.

There is a good reason why everyone is nervous. Dubai World is not the only entity in Dubai which owes incredible amounts of money. If the Dubai economy fails, the fallout could be felt all over the world and snag us all just when we believe we are recovering. As an eminent economist, Nouriel Roubini, has asserted, there is more bad news about debts to come and banks have not yet revealed the full picture on this yet.

Dubai is reminder of how bad things can get very quickly.

A Sad Demise

Would you want to be a shareholder in Lloyds Banking Group right now?

Those who own Lloyds shares will wistfully remember the good times of a steady bank which paid good dividends, made some shrewd acquisitions and maintained a good share price. Theirs were a share renowned for a good long term performance and a company for its sensible management.

Just about a year ago, all that changed. From a peak of £8.20 the shares of the bank dropped to a low of 25p. In the face of the credit crunch, the bank made its most disastrous move in its long history when it made a bid for the beleaguered HBOS, who had been guilty of some of the most reckless corporate lending amongst other sins. As the bank suddenly realised the extent of HBOS' woes and the incredible strain on its own finances as the crunch took hold, it frantically tried to renegotiate the deal and even back out, despite the fact that EU competition rules were temporarily waived to allow the new group to own a whacking 28% of the UK mortgage market.

It was a collision of management incompetence and all consuming greed.

Then in stepped the final bunch of meddlers - the Government. It is widely believed that the PM himself personally intervened at the 11th hour to urge this merger to go through. Incredibly, the handshakes had barely stopped when Lloyds saw the folly of what they had done, tried to mess with the price of the deal and then went cap in hand to the Government to shore up the group's finances in order for the deal to go ahead and for the two companies to survive. As the whole mess unravelled, the taxpayer came to the rescue and took a 43% stake in the new group to stop BOTH banks sinking. The shareholders at Lloyds, after years of content, suddenly saw their investments collapse to virtually nothing.

So here we go again. Today, Lloyds launch the biggest rights issue in history. A further £21bn is required to shore up its capital which is only around £22b now, principally so that it does not have to join the Asset Protection Scheme (APS), the euphemistic name for the financial cesspit where toxic debt is to be parked and underwritten, in full, by the taxpayer - the premiums for which, Lloyds deem too expensive.

It's remarkable. They deem the insurance premium for APS too expensive - less than a year ago, they would have paid anything to be saved. As taxpayers, we should be happy, I suppose. Lloyds was always a dedicated stock market performer, so it would make sense to see it steadily rise again so that our 43% can be sold and returned to us. In the short term we will need to pay a further £4bn as our part of the rights issue so our stake rises but we would all believe it is money well placed?

That's if the management know what they are doing. Remember, the same bunch of individuals, which is a truism of all the management of all banks with the exception of RBS, the Lloyds Chairman and Andy Hornby of HBOS, are running the show. The daft investments they all made are being made again across the board as banks feed on the frenzy of a nicely depreciated market courtesy of the taxpayer. Across the globe, banks are accruing nice bonus pots for their good work and in the Sunday Times, the CEO of Goldman Sachs claims that his bank is doing 'God's work'.

Many economists are now coming to the conclusion that it would have been better and cheaper in the long term to have just guaranteed the deposits of savers, created a central mortgage bank and let the rest go down the swanny with the idiots who took them there with it. We would not be talking about bonuses and reforms now, we would have a new look banking system based around sensible criteria and practice.

I find the fact that genteel Lloyds shareholders having to stump up to pay for the whims of a management that nearly bankrupted the company abhorrent. Further, to pay for the suicidal practices that led to this sad demise of a once great bank, 5,000 staff at Lloyds will have to lose their jobs - people who were not involved in the abysmal decision making that got them to this point. That act alone has been described by unions as 'arrogance' and I agree. At all banks, we see low level staff paying the price while people like Stephen Hester at RBS accrue bonuses equivalent to the salary bill saved - in just one year at the helm of a company propped up by the taxpayer so that he could not possibly fail. Even then, he has us all pay more and been let off around £10bn of debt he owes us - for that he accrues £9.6m.

You could not write a script with such a plot as no one would buy the book - it would have been deemed too far fetched. The problem is that within a year, we will have all forgotten what and how it all happened. We will carry on and allow the whole process of rebuilding the house of cards again, ready for the next gust of ill wind to sink the whole lot.

Monumental hubris and arrogance at the most senior level in the banks, the regulators and the Government are at the witch's cauldron stirring up a foul future for the lot us. They will do nicely though, thanks to the taxpayer.

'My Farts Smell Better Than Yours'

I think most people would agree a fart is a fart. I suppose there are those connoisseurs of the subject who would claim that some are more powerful, deadly or obnoxious than others but in reality they are pretty unpleasant generally.

Why do I mention this odd subject? Well, I have just listened to the weekly puerile urinating contest which is euphemistically called Prime Minister's Question Time. It has been a dodgy old week for the PM as the news that the size of our economy has been over taken by Italy's was not ideal but the fact that we have now experienced 6 quarters of successive contraction of our economy denoting the most prolonged recession since records began has taken some precedence. It gets worse for the PM as he has been somehow persuaded to go lobbying in Europe to have Tony Blair elected as the first permanent President of the EU. It could not have got much worse when David Cameron fired a few salvos at him about the economy.

Perhaps the PM has led a sheltered life but he grimly clung onto the notion that despite the obviously dire economical position the country finds itself in, when he has repeatedly claimed that Britain had a superb economy and so would not be badly affected by any recession, he actually argued well at least it was better than if the country had followed the Conservative policies. To round that illogical argument off, he claimed that unemployment was ONLY 2.5m and that he had proved that for every decision he had made on the economy he was right and the conservatives were wrong.

It's the kind of daft thinking that comes from desperate people but sometimes you have to believe your own bull. He basically argued that he had 'farted' but at least it wasn't as smelly as Cameron's.

The fact remains that prior to the whole crash the bill for those claiming benefits for being unable to work was at an all time high while unemployment is now at a higher percentage than when Labour took office. Finally, despite all reassurances to the contrary, our recession continues to dog us despite the enormous amount of 'Stimulus' we had given it and we have not even tried to get rid of wastage on the annual public sector budget, let alone start prioritising spends.

It could be described as monumental hubris as opposed to sound financial acumen, yet that has been the path followed in order to get us into this mess so we should not be surprised that it is the same methodology used to try to rescue us.

The one moment of 'victory' for the PM was the announcement that the EC will not stand in the way of the plan to split up Northern Rock so that the profitable bit can be sold off while the smelly bit with all the dodgy debts in is retained and underwritten by the taxpayer. In doing so, the PM claimed this had saved 3,000 jobs by nationalising the bank and now the public could get some of its money back while underwriting the toxic debts of the 'bad bank' left behind.

For those of us with an iota of intelligence, we will have noticed that the first prospective bidder is none other than Virgin who actually made an offer for the bank when it hit the crisis. At that point, the Government argued that the deal did not inject enough capital in and so rejected it for nationalisation instead. A while down the line, Virgin will bid for the profitable bit and not have to provide any capital for the smelly part. It may be argued that the same deal could have been done at the onset of all this and the same number of jobs been saved as the public would have had to have underwritten the whole thing then and now. So we have paid £90,000 per month for Sandler's fees and much more for the army of consultants used just to get back to the same basic position. Some 'victory'.

It about sums up the whole economic policy of this Government - a whole load of knee jerk reactions costing £1.4 trillion which has not got us anywhere. The whole process of rescue has been one colossal 'fart'. But at least it smelt better than the Conservative's fart, had they indeed been in a position to exercise their muscles.

Small comfort as we view the potential cost of the economic mess we are in.

'Never has so much money been owed by so few to so many'

The words sound like Winston Churchill, but they are in fact those of Mervyn King, Governor of the Bank of England. At last, a senior, credible figure has come out and highlighted that what Governments and regulatory authorities are doing are merely tackling the symptoms of the financial problems. The causes remain undisturbed.

It's of no real surprise that only yesterday, RBS disclosed that they had hired 11 new traders in their Investment Banking division each at guaranteed salaries which will cost them £5m in the next year. Current executives are on track at RBS to pay out millions in bonuses to themselves as the bank wallows in the resurgence of its fortunes while still being 70% owned by us. How can it justify this in the face of what it has gone through?

Simple really, it doesn't have to.

Having being royally bailed out by mugs like us, RBS and all the other banks here and abroad are enjoying the fruits of the same reduction in values of distressed or toxic debt - the very debt that ruined the lot of them. With sleight of hand and a little alchemy, some banks are realising vast profits and making a few people multi-millionaires by just juggling names on paper while in the debt swaps and 'collaterallised this that and the other' derivative markets, the traders are making a killing on the very things that we had to come in and guarantee, write down or prop up. Cheap and free money, through things like Quantitative Easing, is pouring into the system and the banks are loving it - it's a dream come true. Not only were they bailed out when it all went wrong, but they were recapitalised, given a load of free cash and no one stopped them from doing what they were doing.

You get Lord Turner, looking increasingly marginalised as he mutters to himself about 'Tobin Taxes' and products which serve 'no social purpose', trying to draw attention to the fact that banks are conjuring money out of nothing. Then you get Lord Myners wandering around as if he knows something and thinks it is all about institutions who aren't challenging hard enough on fees. But what surpises me, and I dare say most other sane people who look at this from the outside, no one has got anywhere near the root of the problem.

The world of finance is running itself in a market where it can take nothing and make millions out of it. In that environment, no one will challenge each other on fees as there is no need to - vast profits are being made by everyone. There are no losers. There is no zero sum accounting involved - everyone makes money.

Has the penny dropped yet for anyone? Mervyn King seems to finally get part of the problem while Turner has alluded to it. The world of finance is a closed shop where the world of debt takes on a life of its own - it's like a roulette table with a ball for every possible number on every turn. There are no losers - it's only a question of how much you can make and that depends on how much cash you can get your hands on. To an outsider like me, it's obvious. You cannot keep making money out of nothing - not everybody can be winners. But that is precisely what is happening. The whole bonus culture is like sub-prime, it's just a manifestation of the flawed system. So much money is being made that there is so much extra after shareholders have been rewarded, costs met, tax paid that at Goldman Sachs this year $22bn will be divided up amongst staff in bonuses on top of other emoluments.

The penny hasn't dropped yet? Goldmans say this is from fees on mergers and the like but a close look at the whole market would suggest that activity on that front is not fuelling this vast resurgence. What is at the heart of it is exactly what was at the heart of the crash. Trading thin air for profit.

Mervyn King suggests that banks should be split so that riskier business is separated from the stable side of banks. I have argued this on my blog until I am blue in the face it is so damn obvious. When he says it, naturally it has credibility but when these banks fail, it is not their traders who get fired. In fact they are all taking on more traders at higher salaries and golden handshakes in the face of failure. It is the backroom staff and tellers in the branches who get shafted to pay for the losses - they are the short term safety valve.

This time around the losses were on such a scale as to bring the whole system to its knees and not any amounts of cuts would save them. So the world did the one thing that has guaranteed it will all happen again. We simply bailed them all out and did not reform the industry in the process. Not only have they now been propped up, but the reduced toxicity of the debt instruments they trade means the world is cheap and even bigger profits are to be made. And now they have the one thing they missed before - a limitless lack of liability which has been transferred wholly to taxpayers around the globe.

Mervyn King has said it all, 'The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.'

It has to be a fundamental reform of the entire banking system. The decoupling of risky and stable banking business would sideline the 'casino banking' as it is appropriately called and this would no longer have any Government protection. No longer would we have idiots like Brown saying we had to bail out the rich bankers as money would not flow to the ATMs. There would be no reason to do this as the whole system would become disconnected.

The penny hasn't dropped yet? If we follow Mervyn King's thinking, decoupling would end 'casino banking' as it is entirely inter-related to the stable banking business - it depends on that business for its supply of cash and debts to be traded. Without it, there are no real financial products for them to trade - Turner was spot on that count. Investment banking would have to get back to what it was meant to be doing - frankly, most people in the industry will have long forgotten what that was.

King has had an epihany after this crisis. It took a while - only his whole career. He says he finds it hard to see why limitless liability should be the domain of banks alone. He's right - we made banks the 'special industry' in the process of this crash. Meanwhile, businesses all over the world have suffered and crashed without an iota of liability being transferred to anyone other than those who should bear it. Why did Governments not save them?

Simple, they did not understand the nature of the financial system and why the whole crash occurred. Still today, Gordon Brown will tell you it was sub-prime that caused it. He is 100% wrong, sub-prime was only a symptom of the warped financial system. Because he doesn't understand it and he gets advised by the people who caused it, he will never fix it. Bonuses have little to do with it. The clue is in the vast profits the banks make on so little actual revenue. Goldmans' numbers give the clear sign - about a quarter of their revenue is net profit. Barclays keep turning debt designated as 'most toxic' into £billions of profit in a single transaction that makes investors and former staff multi-millionaires overnight. The embers of Lehmans, the largest corporate failure in history, their open derivative positions are being snapped up cheaply in the sure knowledge that the buyers will make billions.

The penny has yet to drop. I can't spell it out enough. You cannot make a profit out of nothing - there has to be a flaw in the system to do so. It is simple to the layperson. Conjuring tricksters, bunko boothmen, spivs and conmen have hijacked the financial system and we are their insurance policy. The crash will happen again - go figure.

It's Just So Unfair

Life can be so unnecessarily hard sometimes. I mean it comes to something when you can't get a few grand of dry cleaning paid for by someone else or a bit of gardening or flat cleaning.

I should imagine there are a few angry people around tonight, feeling let down and cheated. It's not about the humiliation of having to pay money back, it's the principle of it. Heck, the Green Book of expenses codes could not be more clear - claim what you damn well like as it is down to your own idea of what is right. £116,000 is a snip when you think about the value for money we get from politicians. What is so wonderful is that the very people who make the stupid rules by which we have to live, don't like it when they are subjected to it. Try asking the Government to pay your dry cleaning bill or getting tax relief on your handyman. I got a call from HMRC today for being late with just one payment - they threatened legal action if it happened again. I am not kidding - all I did was select the BACS payment to go to the old sort code and account number at HMRC instead of the new one. I am sure Hazel Blears et al have not had similar calls despite their 'oversights'.

Anyway, one thing that has been unanimously applauded up and down the country is that pornography should be tax free. I should think many a lonely sales rep will want to present a few expense claims to HMRC and ask for 'relief'' on what their employer will not reimburse them for. As Jaqui's husband proved, they are essential for doing a good job and stimulating the grey cells.

You have to be some kind of person to be an MP or a Max Mosely. Life occurs to you in a very different slant to normal people. What is abhorrent to most sane, clean living, law abiding, tax paying people is perfectly natural to these people. Then take the Lehmans crew. A mere six European former executives are suing their former employer for £70m of unpaid salaries and bonuses.

The coffee machine is working over time but the aroma is not powerful enough. Hello, the bank is broke thanks to you guys - it was the largest corporate failure in history, thousands unemployed and taxpayers have stepped in to pick up the pieces. And you want money? That takes some front. One of them had only just started work there.

You have to laugh.

Meanwhile in the 'other' world where there are few gardens to charge for keeping, no dry cleaners and precious few meals let alone free ones, there are a few billion people sitting looking on bemused. How can sane people think the way we do? How can we justify going to war to defend this way of life? While millions starve and cry for help, we allow greedy people to take court action to extort money from people - £millions. The last 12 years of false profits and poor governing will be the biggest wasted opportunity in history. All those incredible £trillions could have solved the problems in Africa and the Third World in short order.

You have to cry.

This warped way of life is going too far. One minute banks are broken by their senseless activities, the next they pick up the very things that broke them before and trade them again for vast profits. Toxic debt one minute, perfumed profit the next. Profit from transactions that do nothing for anybody but the people who trade them. In Africa, it would be the same as creating grain from dry sand. They would be that rich if they could do it. They could eat.

One thing that has come out of the last two years is that for all our posturing as a civilised society, we are just a bunch of greedy, moral-less self interested and egotistical jerks - every last one of us. Africa can have what they want so long as we have our 42" inch TV, takeaway curry and a dream of a Porsche. They dream of survival.

For the bemused millions struggling to live, they must look upon us all as gorillas in a zoo. All muscle, hair, wind, chest beating and bullying - we are always right, we always get our own way and we get all the best things. And if we don't, we just fight.

One thing is for sure, we have the monopoly on bananas.

Roll Up, Roll Up - Everything Must Go

Fired on by Arnold Schwarzenegger's garage sale in California which saw old bikes, lawnmowers, sofas and old 8 track tapes raise an approximate 89 dollars and 15 cents to dent the state's budget deficit as much as gnat would the grill of a speeding juggernaut, Gordon Brown is putting out the country's old assets to help reduce the £175bn deficit.

From tomorrow you should be able to bid for the Tote on Ebay and Barclays will probably handle the student loan book as they are experts in taking toxic debt and turning it into £millions of profit for themselves and the alchemists who touch the rubbish with their financial version of the Philosopher's Stone. They are up to their old tricks again as with the Protium gag of last month, this time with £4bn of Collateralised Debt Obligations worth about as much as a knackered push bike in real terms. After those boys have finished with it there will be more capital on their balance sheet, a hefty book profit on a new loan and around 45 new millionaires after a few strokes of a pen and two fingers at the taxpayer and the FSA. The Student Loan book should be a doddle for clever people like that.

There are some who question the prudence of our PM on financial matters, would you believe. This fire sale should raise around £16bn to help reduce our rather desperate position and probably not inspire all the credit agencies curious as to how our Bond sales will go after our Quantitative Easing finishes as any more of it will reduce us to a banana republic with no bananas. Some wistfully remember that there was a time when we had rather a lot of gold in our vaults at the Bank of England - today those vaults are stationery cupboards as some bright spark sold it all close to the bottom of the market. Had we some left at this point it might have been handy as all those smiling chaps on TV might have bought some as those in the know will tell you gold is at record high prices.

Some would say only an idiot would have sold our reserves at a cut price and not kept it back for what it really was meant to be for - a rainy day when we were almost bankrupt. But Gordon knew best then as he does today. Fear not, £16bn is just the start of it. Jacqui Smith has pledged to sell her husband's collection of porn videos, Hazel Blears has said she would sell her second home if she could work out with the taxman which one that is while several MPs want to sell the shirts off their backs as they feel they are underpaid and hard done by on expenses.

Welcome to Britain, where it's the sale of the century. Everything must go.

Problem Solved?

EU leaders have voted on a new bank bonus clawback deal and they are all patting themselves on the back, smiling for the camera and can look to the renewed trust of their electorates that they have solved the issue that caused the crash of our financial system that in turn has cost each and everyone one of us so much money. Hurrah!

As the champagne starts to go flat at the end of a long day's celebrating and the last of the stragglers leave the party with ties askew, lipstick on their collar, silly hats on head and worse for wear, we should just ponder for a moment.

Let us do a thought experiment. You happen to know that your company bought a barrow load of sticking, rotten manure and it is sitting in a cupboard somewhere downstairs - a barrow load of manure they bought for $12.3bn when the market for manure was very good. So you think, 'I can deal with this'. The barrow load of manure is not only smelling the place out but, of course, it is sitting as a nasty debt on the company's books as the manure is now worthless. So you offer your company exactly what they paid for it - you would then transport it to a place where they don't mind what manure you want to store just as long as you pay good money to do so. In order to pay for the manure, you take a 10 year loan out from your company for $12.6bn.

You set up a nice company in the place you want to store the manure - the sort of place where no questions will be asked and no nasty hidden taxes are paid and where prying eyes are sightless. In return for the doing this, you resign, along with several colleagues who know as well as you that where there is manure there is money, from your company and they pay you an annual fee of $40m in order to 'manage' the manure.

The loan is a nice one - it is set at 2.75% above the US interbank rate which your company hopes will attract $3.9bn in profit over the course of the loan agreement. Only the interest is paid net of interest paid to the 'investors' in the storage company you have set up - let's call it Protium Finance for argument's sake. This investor income is at 7% of the $450m they have invested in Protium and their interest ranks higher than your company's.

Your company rubs its hands - it has cleared the debt off its accounts and on paper it will receive $16.6bn in 10 years time - it has been able to prove to the world that it no longer has the filth on its books and by doing this deal it appears it has bettered its capital ratio by getting its most toxic manure off its books. Meanwhile, you and your friends at Protium will be returning a sizeable profit to your investors who might be a US bank and a hedge fund, while your company will be paid from the manure's cashflow.

You see the manure could be replaced by toxic debt in this experiment and suddenly it does not look so ridiculous, pointless and downright stupid. Toxic debt has a 'cashflow' based on the assets supposedly. The 'Your Company' involved here is Barclays and Protium has indeed been set up by 45 of their employees who have now resigned to populate Protium Finance.

It does not matter how you account for this, the toxic debt remains a toxic debt and is highly risky. Barclays' CFO, Chris Lucas, stands and tells everyone that this is a good deal as it is producing a 'stable return profile for shareholders' as they rely on cashflows on such debts, so why not restructure them to rely on them and maximise shareholder value?

Protium has a recipe for the future - this will not be the only deal of this nature they will undertake. They will be the manure storage company of the future, state of the art facilities and discretion guaranteed as they operate out of the Cayman Islands.

This deal is nothing but straight forward, rotten manure. You can put your Palin-lipstick on the pig but it is still a pig. This is a deal that is at the very heart of a rotten and deeply flawed banking system. On the one hand, Barclays have 'cheated' the Government and regulators' capital ratio requirement by no longer appearing to have this toxic debt while the new Protium company is making money out of toxic manure fumes.

Have no doubt that this pile of manure/toxic debt will be worth its weight in gold after 9.99 years and by the 10th anniversary of the loan being taken out to pay for, it will be spread over the faces of plenty of people seated close to fans. The cleaning bill for their expensive suits and fast cars splattered by the mess will be picked up by yours truly.

This deal is the template for the next financial disaster and it illustrates why my blog of yesterday is true. Bonuses, and their culture, are not the problem per se, it is the flawed banking system that allows money to be made out of worthless piles of manure we euphemistically call toxic debt. It is the apparent intelligent thinking behind such a deal that defers the bad news to a point far in the future, long after many people will have made an absolute fortune out of the obvious - the obvious being that these toxic debts are nothing more than a pile of worthless manure. And manure is nothing more than manure, yet we will pay a princely sum to underwrite deals of this nature and that is what the whole financial industry now depends on - our enduring and bottomless pockets of money to pay for their profits and losses they make with total impunity.

This is the process of making money out of thin air and it is why bankers are a more aggressive, more risk taking then ever as they can make money out of losses. Does that sound stupid? It is because it is stupid. The massive losses that companies have made, the kinds that bust Lehmans Bros, are being openly traded again in order to make money from them - big money.

We haven't yet got a handle on how much this financial disaster will cost the world going forward but the bankers can tell you exactly how much profit they will make out of it. The response to this by the Treasury Select Committee Chairman, John McFall, merely claims this is 'sleight of hand' - Maradonna would have called it the financial equivalent of the 'hand of God'. Where are Hector Sants and Adair Turner of the FSA, Pinky and the Brain, as this goes on in full public view? Probably taking it easy talking up their futures with other agencies all around the world on large expense accounts and guaranteed bonuses.

Where are the politicians? They are still at the party congratulating themselves that they have stopped the financial world in its tracks - bonuses are curbed, problem solved.

Come again, what was the problem then, chaps?

Denial - A Powerful Beast

I don't know how many times I have blogged on the subject of denial but it seems the theme just won't go away.

I have argued it can be a powerful mechanism used by successful business people to block out the negative issues and to focus on the positives which often is a trait of highly successful individuals. It is also, at the other extreme, the powerful force that allows psyochopaths to marginalise their crimes and live a normal life. It is the force that allows those who commit adultery under the noses of their spouses to act as if nothing is happening and even to turn the situation around and make out they are the victim not the cheated-on spouse. It is the power force that allows dictators like Col Gadaffi to welcome home convicted bombers as if they are national heroes while denying a shred of remorse for the victims of the crime. It is that powerful.

So here is a classic example of denial. In the wake of the credit crunch, the Government has urged banks to lend a great deal more to small businesses. There have been various intiatives to facilitate this, not least vast amounts of cheap loan support, Quantitative Easing (QE), underwriting of Toxic Debt, the Enterprise Loan Guarantee Scheme (ELG) and much more. Banks, meanwhile have consistently missed their lending targets, even those who are actually partially or mostly owned by us, the taxpayer. In fact, in the last quarter banks actually took back more than they lent out from businesses to the tune of over £4.5bn.

In the face of such actions, the banks claim that they are fearful of more bad debts, which may be natural. But when the ELG Scheme offers up to 75% of a loan to be guaranteed by the Government, why is so little credit being offered to small businesses?

In a classic case of denial (on many counts), Barbara Knight of the British Bankers' Association (BBA), which is a name to be played with if ever there was one, asserts with a straight face that 'demand for credit has dropped off'. It makes you wonder which planet she arrived from. She further supports the lack of regulation on bank compensation - in all aspects from salaries to guarantees, to golden hanshakes, to wholesale headhunting and extravagent bonuses linked to whatever they wish - for fear that the City will become uncompetitive and we will see top talent drain away to other centres with a more liberal view on earnings of such creatures.

This is denial at its worst or best, depending on which way you look at it. From a taxpayers point of view, the fact we have shelled out around £1.3trillion in capital, loans, guarantees and whatnot seems to have gone unnoticed. Further, our incredibly generous sums of money at rock bottom prices that we have lent to banks seems to be remaining in their strongholds when the precise purpose of our lavish philanthropy was to stimulate the economy by having all that glittering dosh used as credit to mainly small businesses.

Instead, we have banks who are not just holding onto our cheap cash but they are actually taking back more money from business - even consumers actually repaid some of the vast £1.5 trillion of collective debt for the first time since records began. In reality, banks have acted in exactly the opposite way we asked them to (and note I say asked them as there were no strings attached to the money we gave them, even for those banks we have a stake in - forward planning is not a strength of this Government, especially in a crisis).

Further, the banks have waved two fingers at us all and used most of the cash we gave them to actually invest more in the markets that failed us so badly last time around. And the bonus schemes are being tinkered with, the salaries are rising, the land-grab for 'talent' is occurring right in front of our faces at a pace that would make Usain Bolt cry.

In less than two weeks time we will have the anniversary of the fateful crash of Lehman Bros - which I read recently is what tipped us all into recession. Denial is a powerful beast because this did not trigger the recession just as sub-prime did not trigger the credit crunch - these were inevitable consequences of a fundamentally flawed financial system and they were merely manifestations of the underlying issues that everyone was systematically ignoring or denying.

Even intelligent economists as well as ministers were deluding themselves, and us, that we had never been better off and propects were at their best. The fuse was already burning, sub prime and Lehmans were merely the first of the firecracker-style explosions. They were not triggers in my analogies, they were the crisis exploding in our faces. The credit crunch was the next part of the explosion. Recession, in my mind, was going to happen anyway - it had to as the economies of the US and Britain were built on mortgage equity releases more than actual household incomes. For the first time in history, it was the perfect financial storm brewing and it was all there for everyone to see.

People like Barbara Knight, to my mind, are very dangerous. In her world, and those of the people she represents, it is perfectly acceptable to have a financial crash instigated by her members which helps drive unemployment toward 3m and to exacerbate the problem by not doing the core operation of any banking system which is lending to help stop it. In her world, it is far better to deny that her members had anything to do with it, make sure they are better looked after than before and deny that anyone is asking for credit.

In this case, along with the regulators and many of her members, many of whom advise our Government on a startegy that is patently failing, Barbara Knight needs to be replaced by people who have a sense of reality. The problems in our finacial system will not be recognised, let alone rectified, if people like Knight stay in her job. I am sure she is a very nice lady but in the grim reality of civvy street where the world looks very different, she would have lost her job for dramatic failure not as a consequence of dwindling profits - the same for the regulators and most of those whizz kid traders.

Many have written that there now exists two worlds - the real world in which we all actually live and try and survive in and that seen by a thin minority of financial people who are incredibly wealthy and believe that they are owed their extravagant living because of the essential work they do for the economy. They failed spectacularly - you cannot put it in any other terms as the scale of failure was so high that rich countries may be borrowing up to and beyond their GDP in order to pay for it in the near future, some countries went to the brink of bankruptcy. It means that all those profits that these people thought they were making were in fact made up - all of them and more were lost because they were never real.

All links to the fundamentals were lost and they violated the basic principles of a calculator let alone a financial system - the profits were only in their minds. Out there, in the real world, anyone with a modicum of intelligence could see that it was fundamentally and catastrophically flawed.

And now the remedy is failing by the actions of the same people who brought us down. We gave them more money than they lost and they cannot do the simple things we ask of them to help rescue the economy because they are too busy feathering their own nests again and justifying why the pursuit of incredibly high risk investments to produce imaginary profits to fuel their incredible bonuses is in fact the right thing to do for the good of us all - because if we didn't have such heroes, such Masters of the Univere (as Vince Cable calls them), we would be a sorry lot.

Well hello! The coffee's on and is smelling strongly, Ms. Knight. Some of the best talent in Britain, a whole generation of youth is languishing on the dole queue and we gave you every penny which saved your sorry skins. Now it's time to get a dose of reality - the world is very different to the one you see. The problem is, only when the Government drives those investment banker advisers out of their ears, stops pandering to the whims of incredibly wealthy people and stops appointing failed businessmen to key positons in the Lords and influential bodies, will we see some change.

But denial is a very powerful beast.

Market Indicators

It's a weird situation when on the one hand we are all starting to get very uppity about banks awarding their slim numbers of superstars obscene levels of bonus again after clocking up such massive losses and toxic debt and, on the other, we are talking of a second wave of the economic slump.

But that's how the financial system works. There is no doubt that banks took the brunt of the Credit Crunch effects and at least 6 high street names had to be rescued from bankruptcy while many have had to ring-fence toxic debt so that the taxpayers can take the liability off their hands to get on with the important business of paying a small percentage of their staff enormous money after culling many people from their customer-facing ranks who did not lose a penny in profit or bad debt. That's modern banking for you. It is also true, that as the financial system recovers, plenty of vast profits will be made out of thin air as the banks and institutions start playing their silly, high risk games again.

Meanwhile, back in the 'real' world, the slump continues. Quantitative Easing (QE) has been surprisingly extended by the Bank of England and its Governor, Mervyn King, has warned that Britain could suffer a 'debt deflation trap' which sounds about as appetising as trapped wind. There are also fears from other clever economists that Britain may suffer a 'lost decade' much as Japan did as we continue to try to revive our staggering economy. It is perhaps worth noting that Japan was one of the few developed nations to have used QE in recent years along with an extended period of 0% interest rates and their economy stagnated for a decade.

The members of our Monetary Policy Committee which meets to consider such matters and sets the Bank of England's interest rates amongst other things, are the pillars of the financial world. Hedge Fund managers, economists, bank board members we get them all. However, there seems a growing body of concern that the apparent green shoots of recovery are a mirage and that they are a false dawn of a wider recovery. There is opinion that we may well get three successive quarters of economic upturn indicating the technical end to the recession. But in the 1990s, Japan also experienced the same.

Such a recovery could be caused by short term effects only, such as more cars being bought due to the scrappage scheme or perhaps we get a restocking effect after destocking so temporarily boosting output. But there are concerns that the second half of 2010 could be more difficult than the period we are now in and so it brings into sharp focus the gravy train in the banking industry - as always the banks pay on short term gains and do not consider the long term, and there is a real danger that they will pay for merely an economic bounce that was inevitable rather than a long term revival of the system. It's like a salesman getting paid for sales which come in on their own every month and so not having to make a single call to get new ones.

Some of the reasoning behind the gloomy outlook revolves around things like VAT. The temporary farce of lower VAT will have ended next year and indeed the Conservatives, who are looking increasingly likely to be in power after next May, are planning a hike to potentially 20% which is equally stupid, if not more so, as it a form of tax which disproportionately hits poorer people.

But, in my opinion, it will be the tax burden in general, the increase in the jobless, and so the drain on the Welfare State, and the cuts in spending on Public Services - none of which have really bitten us hard yet - that will slow the economy more emphatically. As the state magnet is set to 'high' to remove more tax money from our pockets, the unemployment figures should have peaked at over 3m in the UK by the end of 2010 and so the burden on the State will be huge in terms of benefits, plus the number of people able to pay tax will have been reduced. All in all, it could be a 'Perfect Storm' to depress spending generally and while the banks whoop it up right now, they too will feel some of that pressure so paying bonuses right now for anything is seriously misguided if inappropriate anyway.

Sants in His Pants

If you want a giggle on bank bonuses, listen to the BBC interview with Hector Sants, CEO of the FSA, who tries to make out that he knows what he is talking about when it comes to regulation of bank bonuses. He says the question of bonuses is, in fact 3 questions. 1) Are banks disproportionately skewing rewards for more high risk transactions, 2) are banks paying too much of their profits to too few people and 3) are the size of the individual bonuses too much? He is right on one thing - that is 3 questions. The answers have always been 'YES' to all 3 - so it is a case of 'No sh*t, Sherlock' as that is exactly what happened before and is happening again.

He looked very excited as he thought the FSA could intervene in answer to the first two questions but question 3 was one for the banks themselves and the public to resolve. I am sorry, I don't get that.

You see, the FSA is on the one hand destroying the whole Independent Financial Services industry by imposing incredible regulation on the army of small businesses that give independent investment advice to small businesses and consumers, reducing commissions and restricting what they can and cannot say without immense bureaucracy. In the last year, it is estimated that 30% of small mortgage brokers and IFAs have either left the industry or gone broke. Meanwhile, accountants and lawyers who get involved in the giving of such advice for fees and are not regulated by the FSA so do not have to tell people, for example, that taxation has changed after a Will has been written, are protected from the consequences of their lack of or bad advice, yet are paid for it - and the fee size is unregulated. It is also pushing more of the financial advice back towards those institutions who have a vested interest in selling only their own products, like banks, building societies or insurance companies. Pretty soon, only large mortgage brokers and firms who focus on the corporate market will be left.

The army of local, independent financial advisers who are more ethical than ever, will soon be destroyed because the FSA has ruled exactly how little they should earn. Then we get Hector Sants saying the exact opposite for the bunch of former colleagues he worked with in the City.

That is why we should not pay him the £1m per year salary and bonus that he earned even though he sat by and watched the biggest financial disaster since the Great Depression. He does nothing to curb it as he is one of them. It is one rule for one industry that is public facing and one rule for the other that lives in its own dreamworld of high finance and it is the crux of the reason why banks and their bonus culture will not change.

It is because there is an in-built belief that small people are not important and there should be no curb on the fabulously wealthy, as 'wealth creation' is seen as good while servicing the public is second rate - it is a sentiment shared at the highest level in Government by former PM, Tony Blair, and current Business Secretary, Peter Mandelson. That is why, when banks fail they chop staff at the public end of their businesses while keeping the high-flying traders in place to get more bonuses.

Until we change that culture fundamentally, we will never rid ourselves of the problem in the world of finance. That will mean changing all the past bankers on Monetary Committees, Boards and Regulators as they are all part of the problem - they are not of the 'real' world.

On The 'Ead, Son!

What do brilliant footballers have in common with star investment bankers? I will leave you to decide.

However, in the opinion of John Varley, CEO of Barclays, that is how we should regard investment bankers. No, forget permed hair and screaming girlies when touched by the opposition, what he means is that if we want serious profits then you have to pay obscene bonuses in order to retain the best. His erstwhile and also stupid colleague at Barclays Capital, Stuart Gulliver, likens these faceless superstars to Hollywood filmstars. Again, I have the image of limos, lapdogs and throwing phones - maybe I am not far wrong.

It really shows how far from reality banking really is. Are we to be believe our long-term tax bill is actually like the entrance fee at a football ground to watch these banking stars perform? Is it the same as dedicated followers buying their season tickets? Or are long-term tax bills to pay off the cost of bailing out bankers simply what they are - us paying for their appalling mistakes?

It is the reason why the banking system should be over-hauled and many executives should be removed from their posts because they have no idea of the responsibility they have. It is like the whole gravy train of investment banking is there purely for some sort of entertainment of a small number of clever, greedy people who invented it and that we, the taxpayer, underwrite the whole thing. And it is ever more chilling that the very people Brown and Darling are paying to advise them of how to solve the banking crisis are investment bankers - it's like paying the Taliban to buy more guns to shoot at us to kill more soldiers.

Even incredibly failed banks that we now majority own like RBS will pay their stars bonuses this year. The bonus pool is growing as the whole show is back on the road in earnest and profits are back in the bag. The very same sorts of profits which were made before - the unreal kind which are conjured up out of nothing in the elaborate world of inter-banking musical chairs known as trading.

I have said it before and will say it again, these bankers have too higher opinion of themselves and what they do. They are out of touch with reality, have no contrition or remorse for the untold financial damage they have caused and they think they have carte blanche to live in a false world where we should pay them homage to their 'skills' rather than hold them accountable for the losses and hardships they cause.

In each case, they do not give two figs for the masses of low level staff they have fired because of the mistakes of a few greedy people and not one of them looks at the mess in the toxic debt situation or economy and feels any kind of connection.

Well, they can have their vast bonuses if they like as long as they pay back what they owe us. Not like football or Hollywood, is it, boys? No, that's make believe entertainment, this is reality. You owe us and we believe you should not a get a penny more until you have paid your dues. Try that for size.

The principle of what they do, we are told, underpins our economy - we would have no credit if this did not occur. Indeed, all the banks missed their lending targets and so they need to make more money to get the whole credit engine working again, so the argument is that we should allow them more latitude in bonuses to 'stimulate' the economy.

But am I the only one who sees the flaw in the plan? We have ring fenced £584bn of 'Toxic Debt' that we, the taxpayer not the banks, are personally liable for. We have paid out some £100bn in capital, more in loans and guarantees - we are in for a potential £1.3 trillion in total and we sit here sucking it all in and believing this is a good thing and that our economy depends on this. We must be stupid.

The reality is that the banking system is flawed and that it has a fundamental, in-built weakness of logic that people assume can be ignored because the likelihood of a 'perfect storm' occurring to cause a credit crunch to cause £billions in losses could not occur.

Well, like a black swan, it did. It can happen again and surely I am not the only schmuck who sees it?

Toxic Flaw

Oh, it was so obvious that I just wanted to scream it at someone. I even pointed the damn thing out on this blog - and believe me, that is not a good thing.

You see, it was obvious that the banks, in the turmoil of the credit crunch, had no idea how much their exposure to toxic debt was - and neither did the Government. So when invited into the Asset Protection Scheme(APS), banks just dumped whatever they could in there, irrespective of its true status. In fact they chucked whatever they could and probably with about as much attention to the whole process as when they signed the debts up. So, in applying for cover of £584bn of toxic debt insurance, they paid scant regard to whether any of the instigators of the debts wanted to restructure or repay them - they just assumed it was toxic and that was that.

They probably didn't even tell the companies affected by their actions. And so, when some of the companies whose debts were ring-fenced as toxic wanted to restructure their finances, they found that their debts were in a toxic quagmire and if they wanted to do anything about it then they had to negotiate with both the banks and the Treasury. It means that many companies affected by this are in 'limbo'. It's claimed that Private Equity houses (what? cast as the good guys) have been contacted by companies who want to write down or repay some of the debts only to find they are in the complete khazi known as APS and so they are just part of the confused mass of steaming toxicity that no one wants or is incentivised to deal with.

I parodied this before but how sad that satire mimics real life as the guardian of the APS is paid a mere £140,000 a year while his fat friends in the FSA, who have increased their borrowings by £200m no doubt to cover the vast salary base and bonuses for staff, who sat by and let all this calamity happen are in fact incentivised to cause financial disaster.

You really could not make this up - the owner of the APS process is not on any kind of incentive to reduce the public's exposure to the toxic debt by renegotiating with those who WANT to restructure or repay. The guardian is merely there to watch over it - I actually joked about this and feel sick in the stomach to find out my joke was in fact reality.

The seagulls in Private Equity are circling the ship as the crap is being thrown overboard as Eric Cantona might have put it. These chaps actually like all this delay and confusion as it means that those within the ring-fence are now seriously devalued and represent an easy target for a fast profit if they can pick them off cheap.

With the executives at Barclays and RBS about to stick their snouts seriously back into the bonus troughs, it is really heart warming to know that the whole toxic debt/bad bank catastrophe has played right back into the hands of the greedy swines who drove us into this mess.

For those private equity pirates, ring-fenced indebted companies represent vast fast bucks at the expense of the biggest bank rolling bunch of mugs in the country - we, the taxpayers.

Where do you look for answers on this or to blame? The Government has clocked up £millions in fees to investment bankers and lawyers to get us into this stupid state where the public bail out banks and then are shafted as fat private equity houses shaft us at our cost by picking off the ripest cherries from the Bad Bank. Brown, Darling, Mandelson and Myners burnt the midnight oil and must have sipped absinthe to have fallen for the slimy tricks of the very bankers who got us into this mess. It is just stupid, ill-thought through mistake after mistake and this one was so obvious that even I thought of it.

That's not the sort of thing Alistair Darling wants on his CV, honestly.

Rock Unsolid

Here's a conundrum. The Government stepped in to save Northern Rock in February 2008 by nationalising it. When they did so, they assumed the bank was no longer a going concern and so severely wrote down its value.

By doing so, they offered to pay far lower compensation to shareholders than they should have done. Those shareholders have now run the matter through court and their appeal against the Government's actions and for higher compensation has been defeated.

The Government's argument is that the bank had been loaned £45bn prior to the nationalisation, without which the bank would have failed and therefore the shareholders would have seen their investment reduced to nothing. The Government, therefore argues that they were doing the shareholders a favour.

It is a difficult situation. The Government did indeed rescue Northern Rock but at the time there were other avenues that could have been explored. When nationalised, the entire liabilities of the bank were assumed by the taxpayer, some £100bn and we are by no means clear of danger although the Rock has been paying back considerable amounts of its loan. Danger was unjustifiably increased when the interim CEO, Ron Sandler, somehow allowed the Rock to continue to hand out 125% mortgages, the very product that nearly killed the bank, for a good 6 months after nationalisation. Then Sandler and is team almost unilaterally renegotiated the terms of its loan facilities from the taxpayer in order to offer around £14bn of new mortgages.

There were two alternatives at the time. One was that Northern Rock was sold as a 'going concern' albeit with its liabilities effectively underwritten by the taxpayer for a period to someone like Virgin One who argued that the Rock brand was defunct and that Virgin would revive it by offering their own branded products. The Government argued that the Virgin plan did not inject enough capital into the Rock and therefore it was not viable. The second option was to let it go bust in the same manner as the Fed did with Lehmans and let others pick over the parts of the business which were viable.

In many respects what happened gave the worst of both worlds. The taxpayer ended up covering the entire liability anyway, we gave the loans, we were exposed to the stupid extra 125% loans, we paid the bonuses to the Rock staff just for repaying some of the debt, we pay the vast bills for Sandler and his army of consultants, we allowed the Rock to renegotiate the deal to save itself and the juicy assets of really nice mortgages were tied up in a vehicle called 'Granite' which we do not own. Meanwhile, the shareholders got shafted whereas, arguably, with Virgin's management and skills they could have shared in some future profit as part of the Virgin brand and you can bet your life Sandler, the daft mortgages and bonuses for loan repayments would not have featured in the equation.

There is another aspect to this case, though. As the Credit Crunch unfolded and major bank after major bank revealed their stupidity, the Government actions veered markedly from its action on the Rock. Almost as if they realised they were stupid to have nationalised the Rock, they tried a variety of other methods to save the other banks such as HBOS, Lloyds, and RBS.

Two major cases are very prominent. First, events triggered the Government to virtually force Lloyds to buy HBOS against all anti-competition rules and all good advice. Immediately, both banks came cap in hand to the Treasury and we had to save the entire new group to the extent that we now own nearly 50% of the new Lloyds Group. What the Government did was to fund an anti-competitive takeover that now gives the new Group an unhealthy 28% of the UK mortgage market. The shareholders of both HBOS and Lloyds, in the wake of one of the most ill advised takeovers you could imagine as Lloyds discovered the extent of the HBOS situation as it was not allowed to do full due diligence and pay the right price thanks to Government intervention at the highest level, they also stepped in to save the skins of Lloyds shareholders so that they may benefit in the future from any rise in the market. The Rock shareholders were afforded no such luxury.

Secondly, as Bradford & Bingley sank, the Government allowed Santander, a Spanish bank, to increase its share in the UK market after already buying Abbey and Alliance & Leicester by letting it buy only the bits it wanted - the juicy ones of course. On top of this, the Government later proposed the Asset Protection Scheme which allowed banks to ring-fence their toxic debt and have the taxpayer 'insure it' by paying a premium.

If any or all of the above options had been allowed for Northern Rock, it is arguable that while the shareholders would have lost out in the short term they would have reaped some benefit as the markets recovered as the shareholders of all other banks will. The argument here is that the nationalisation of the Rock was a knee-jerk reaction that cost us all a great deal of money, it was mismanaged and there were alternatives, particularly after the Government sat down and thought about it.

Personally, I was in favour of the Rock going under and then bought for a song by some other bank who would have done a better job than Sandler, who for all his excessive fees has only done the obvious. I do not have a great deal of sympathy for the shareholders in the Rock, even now as it was a bank that had traded on a substantially flawed model that was cruising for a disaster. However, in the light of the actions to save other banks, the shareholders have a very good point. All other banks offered loans, guarantees and capital were effectively saved by the Government and respected the interests of shareholders. The Rock was a fiasco that benefited no one - least of all the British taxpayer.

I dare say, the 'rescue' of the Rock will feature in future Economics lectures, although hopefully long after they have rewritten their text books and fired the lecturers. They got it all so horribly wrong, after all.

Again, Why Did We Bail Out The Banks?

Alistair Darling is on the war path. Watch out, as he is a mean, hard and dirty SOB. And the banks are in his sights.

I am sure the CEOs of the banks are quaking in their Italian-made suits and shoes. As they gear themselves up to start doling out massive bonuses again, the Chancellor is about to start hauling them over the coals about their lending policy to small businesses which he reckons is too low and too expensive. They really couldn't give a flying Frisbee what he thinks as they are making serious money again by playing the old games we wanted them to stop and they have their pockets ready to fill.

The banks will claim that they have lent approximately treble the amount of money they did in May last month at around £366m. Given they have received over £100bn of our money in terms of new capital, it doesn't sound a great deal.

Well, what did Darling expect? The panic button was hit and money was handed out to banks at a furious rate. The Treasury is already estimating that we will lose at minimum £25bn via the Asset Protection Scheme which is the insurance policy for toxic debts we all underwrite on behalf of the banks who lent stupidly. The Enterprise Guarantee Scheme for small businesses means that we also underwrite 75% of all new loans to companies so, theoretically, there should have been a great deal more lending to small businesses who have been very badly affected by the recession and credit crunch. And it should be based on the 0.5% interest rates we have - but perish the thought, according to banks, as they get that money from the wholesale money markets at double the price.

So what happened to the money we gave them?

The problem really is that the Government did not think all this through in their panic to save the financial world. There was the stupidity of Goodwin's pension, presided over two NXDs and a Minister, all of whom still have their jobs; there was the fact Northern Rock not only carried on lending out 125% mortgages 6 months after going into public ownership, they then handed out bonuses just for paying back part of the debt and then unilaterally re-wrote the terms of the deal; bonuses will be paid in the City this year after thousands lost their jobs in the back room and branches while the big-hitting, overpaid traders and their colleagues kept their jobs. Oh, and the banks were allowed to continue playing their games with potentially toxic assets in the forms of derivatives, exotics and whatnot plus shorting goes on unabated. In the midst of all this, the FSA is still 'drafting' its policy on Macroprudential Regulation (a euphemism for the same again) as the same donkeys man the senior positions who cost us billions.

It's a script you would have been hard to have imagined because you would have been guffawed at for being unrealistic, but the magnitude of our collective stupidity is pretty incalculable. And it goes on.

Darling will be hard pushed to get any change out of the banks. They are back on the gravy train thanks to his largesse with our money, for which we will pay the price for another 20 years in tax and much more in terms of jobs and cuts in Public Services. If he thinks the banks will pay much more than Mandelson-style lip service, then he is badly mistaken as he has been for some time about the whole situation. They will pluck out statistics and use the same joke on him that the Government use on us - big numbers. By mentioning large numbers it sounds as if something is being done. But let's face facts - small businesses collectively make up over 97% of the UK's businesses, they employ over 70% of the workforce, and they pay a disproportionate share of the Tax in terms of the revenue they create compared to large corporations like, say, banks who have the ability to offshore some profits, and pay big accountants to find plenty of loopholes.

Small businesses are the backbone of British industry and the largest pool of the workforce. £366m in June in terms of loans was nothing when a private Equity Firm can get £9bn of loans from banks to take over a single company and reap the profit. When it comes to lending to businesses, there is no profit for banks in lending to small ones as the BIG MONEY is in lending to like idiots to the likes of Private Equity firms or Philip Greene.

We had a chance to reform the banking industry and stop these top levels games which gamble with our money. But we have done nothing but saved the necks of a bunch of greedy people who could not wait to get their hands on our tax receipts and pledges to go kick start the gravy train again.

Next stop will be a further credit crunch and recession and small businesses and the likes of you and I will foot the bill once again. Darling had a chance to do this properly, but that would have kissed goodbye his anticipated knighthood and Non Executive Director jobs for the future. Everyone wants to follow Tony Blair's lead of after-Government earnings that's for sure.

One step Darling could have done was to break up banks so that no retail banks could have an investment bank business so that our money never ever gets preyed upon again and that we do not pay excessive costs on fees and loans to subsidise investment bank risk and pay. Simple thought - and it would have got retail banking focused on its core business of issuing credit to businesses and consumers. It would have also stopped banks culling staff in the retail business to subsidise jobs in their failed investment arms.

The Government could have got simple advice like that from any citizen in Britain but instead they paid some £50m in fees to investment bankers and lawyers to sort out the bank bail outs so it was obvious where the emphasis was going. The bankers even charged us for giving advice on how to sort out the mess they created - the joke was seriously on us, and not a scrap of that advice went on sorting out small businesses but how to kick start the financial world to make sure they all made obscene profits again.

It would have been like asking Hitler to help Jewish families after the War or for that matter asking Tony Blair to be a Middle East Peace Envoy.

But Darling will go with his wilting stick to the banks and they will serve him tea and buns, feign concern, show some remarkable big numbers and then clear him out making him feel he owes them something. Just like we all feel when we have left a bank even though they live on our money.

Welcome to the world he has sustained.

Have We Started The Banking Bubble Again?

The biggest issue with bank bail outs is that there has been little or no reform of the banking and financial system to stop the whole bubble happening again. While it is good to see some recovery in bank performance, the danger is that all the new money is ploughed into exactly the same products as before and we just start the carousel again.

Barclays have just announced a great set of figures with income up 42% and profits at £1.37bn, 15% up on the same period last year. Total income almost doubled, thanks to a strong performance at their investment banking arm, Barclays Capital.

Alarm bells go off.

You do mean that in the last year, the bank has doubled income despite a decrease in the world markets? Ok, so that means they either go lucky or they were investing in something else like share shorting or these lovely products that just produce profit from nothing.

Barclays are not one of the banks we bailed out but that should not make us any the less concerned. The FSA should be all over these results like a bad rash. How can such profits be generated in such conditions? Barclays has not taken part in the Government's Assets Protection Scheme which allows banks to sideline toxic debt and have the taxpayer underwrite it, so where is the bad debt provision at Barclays?

It appears Barclays is one of the few banks in the world that has been run exactly as it should according to these numbers although they have had around £7bn of new capital injected into them from private investors. So now what happens to this profit?

Yes, you guessed it, it will go into the bonus pool and be shared amongst the executives for vast payslips. The carousel has started again and we just stand back and watch. Brown heaves a sigh of relief that the City will love him again and bank executives across the globe see that normal greedy service has resumed.

Meanwhile, we taxpayers sit here and watch in awe as all the bad debt resides with us, freeing up these greedy bankers to earn profits out of nothing again and their bonuses. How nice of us to be such grateful mugs and we have an awfully short memory too.

Of course, people will argue that Lord Adair Turner's report on regulation is the pinnacle of deep thought on the subject but it appears no lessons have been learnt. Billions will be earned again until the next time the markets freeze and we will have another set of recessions, deeper, harder and more profound each time we stagger, knowingly into it.

As much as I applaud Barclays for not exposing its debt to taxpayers, I am appalled that such profits can again be generated, bonuses paid and we haven't even finished sorting out the last mess. It angers me that the people of this country have yet to get answers to their last questions on how did this happen before we allow it all to start again.

History will prove that while propping up the financial system was necessary, setting it back on the same course will prove to be a cataclysmic mistake.

Symptoms Of A Wider Problem

President Obama is angry. Gordon Brown was angry and probably still is. Why all this angst? Because Financial Institutions are paying out bonuses despite clocking up losses which in the case of AIG are more than the Gross Domestic Product of many a developing nation.

In the great scheme of things the amount is trivial, just $165m although that is part of a total of over $400m of bonus being paid by AIG - it's just that this bit went to derivative traders, the people at the very heart of the cause of the financial mess the world is in. When measured against just the latest tranche of bail out money at $40bn from the Fed, this is no more than chicken feed, but it is the symbol and message it sends to a nation in a deep recession where nearly half a million people per month are losing their jobs, that President Obama is so enraged about.

Attaining The Status Quo

Any banking executive will tell you that if you want the financial system to work as before and get lending going again at similar levels, there has to be the incentives for earnings in place. The fact that the financial system had devised a way to keep trading a basic commodity such as debt so many times and take a commission each time was pretty hilarious as scams go, but that's the nature of finance - you don't get seemingly unlimited amounts of money to lend without a way of it paying incredible amounts of money back, far beyond the value of the assets it was being used to finance.

There has to be more to be had than that.

The status quo in the banking world is getting the show back on the road again and these executives would tell you that if you don't pay the bonuses then you will not get staff good enough to do the job. There is a perverse logic here. These are the very staff who actually caused the mess and these executives are proposing that rather than sack or even possibly jail them, we should in fact pay them bonuses even though their companies have lost billions using their gambles.

It is this loop of illogical ideas that fuel the finance system. At the heart of it though, it has to be understood by people like Obama and Brown, that if they really want to get the system back to the amazing cash making engine of before and give the consumers the cash they need to kick start the economies again to get people back to work, then there is an awesome price to pay and the bitterest of pills to swallow. You would have to agree to do what the banks say - which is precisely what these Politicians are doing as they are surrounded by advisers from the world of Investment banking and these fellows know a great deal about making more money per year than the rest of us will make in a single lifetime.

It goes with the territory.

Changing The System Will Mean Tackling The Underlying Problem

There are few banks who did not play the game. Everyone looks at Goldman Sachs as some kind of paragon of virtue but the reality was they often bet the right way but they are one of the largest beneficiaries of the AIG payouts made via the Fed. If Goldmans had not received the bail out on their derivative positions, they would have been in just as bigger mess as they rest of the sector.

So you have to agree there is a fundamental flaw in the system. The ability to pass on debt and insure it is fair enough but the derivatives, 'exotics' and other forms of clustering debt and assets and passing them onto a financial conveyor belt around the system like a never ending, lucrative game of 'pass the parcel' has to stop.

Warren Buffett always predicted that such financial instruments would be the downfall of the financial system and how right he was.

To stop this happening again, financial institutions have to fundamentally change their way of working, the money that can be made by themselves and their staff. It is as simple as that. In order to do that, Governments are going to have to step in and use legal powers to change what banks can do to make money. It will mean they will have to change the regulatory system and they it will mean that staff will have to change.

The days of the City Rocket Scientists should be over and finally, the safety net of Government bail outs should be removed.

The biggest mistake so far has been to bail out the current system - it is the problem. However angry Obama and Brown get, if you push more money in to save it you have to accept the consequences as it how the present system works. They should have changed the system and restructured it before they bailed it out and made sure they had not just the symptoms of the problem treated but the problem itself.

Out Of Work Bankers

This would mean, I suppose, that many of the current clever bankers would stamp their feet, shout out about how clever they are, how much money they 'created' and then threaten to leave their jobs. And yes, that would be the preferred outcome. Rather than cut bank tellers and back room staff or deny such people their bonuses for their hard work in producing the only real profits banks make, the whizz kids should be turned out on the streets to see if they can find jobs to create such fabulous wealth in the real world.

We should curb the way Hedge Funds work - we should stop the sale of any share that the seller does not legally own at the time of the bargain - we should change the staff at regulatory bodies to be accountants and non-industry professionals who have the financial forensic skills and no connections to the institutions past or present so that they are objective and have the integrity and skills to do the job properly.

We should fundamentally change the laws on Non Executive Directors and how they can easily evade such financial collapses. They say that NXDs have more onerous liabilities now - that's complete rubbish and it is still the most lucrative club in the world. There should be curbs on how money can be spent to influence others like doling out multi-million 'adviser' roles to former Prime Ministers for doing absolutely nothing - NXDs should be the mechanism that stops such idiot largess and actually be guardians of the remuneration policy with the public conscience in mind rather than their own deep pockets.

It would mean a very different banking system than today which would mean that economies are going to have to shrink back before they can move forward into growth in a more orderly and conservative fashion. And that's what Politicians do not like - as that does not win votes.

So they will pay out vast sums like $100bn plus to bail out AIG and then get really angry about a bonus payment of just 0.004% of the amount. The bankers would tell you it's trivial in order to keep their best people.

Obama and Brown have to have the fortitude and moral fibre to tell these banks, the bonanza days are over - if those staff want to leave, the door is open as they should never, ever get that kind of opportunity to earn such money again under a new system.