personal investment blog

Populism explained!!

Populism explained!!

21 Dec 2017

The causes of the financial crisis have not been properly addressed. In particular, the perpetrators are widely and correctly seen as having got away with it. This, in my view, lies behind the populist behaviour that keeps giving us “anti-establishment” election results like Brexit, Trump and Corbyn. That’s the conclusion of this essay. Here are my arguments, looking at what happened in the US, the EU and the UK and the common failures of leadership in all three territories.


I think we all know that the financial crisis involved junk debts being packaged by rogues as AAA and sold to idiots. Faults on both sides, no doubt. US officials are relatively good at hammering those considered dispensable. (Bernie Madoff was sentenced to 150 years at the age of 71. That showed him). But the biggest banks were considered “too big to fail”. They operated with an implicit guarantee that, no matter what, they would be bailed out by the state. This was extended to the claim that they were “too big to jail”. It has been said that it would be destabilizing to the financial system if the senior management of a major institution were taken on the “perp walk”, handcuffed in front of a global TV audience.

At the same time, the alumni of US investment banks seem to penetrate government at the highest levels. The original bailout was presided over by the Treasury secretary Hank Paulson, once of Goldman Sachs. Also from a Goldman career is the current Treasury secretary, Steve Mnuchin (there are limits to President Trump’s populism). You can read plenty about Goldman Sachs here.

US politicians who complain about the big banks tend to stand out because they are unusual. Bernie Saunders and Elizabeth Warren are portrayed as “progressive liberals” (that’s an insult in establishment parlance) and possibly anti-capitalist or un-American. It is estimated that the US banking lobby spends more than $100 million a year fighting attempts to regulate it.   

In 2011 the Occupy Wall Street movement claimed to represent “the 99%” against income inequality and corporate influence. President Obama said perceptively that:

“I think it expresses the frustrations the American people feel, that we had the biggest financial crisis since the Great Depression, huge collateral damage all throughout the country … and yet you’re still seeing some of the same folks who acted irresponsibly trying to fight efforts to crack down on the abusive practices that got us into this in the first place.”

He didn’t identify “the folks who acted irresponsibly” and it would be difficult to say that he did much to correct the issue. Though, to be fair, Obama had spent all his political goodwill passing Obamacare in 2010 and he was never again able to do much of anything about anything without being blocked by Congress.

The probable truth is that QE has intensified wealth (not income) inequality  but this is not often cited as the source of populist discontent. And QE is the result rather than the cause of the financial crisis. The blame is perceived as being attached to greedy bankers and there they are, still swanning around, calling for lower taxes and lobbying against regulatory proposals. It’s enough to make anyone mad.


Much of the story of Europe and the financial crisis begins with what happened in Greece. At the beginning of the 21st century Greece had blown past the EU limit of national gross debt as a percentage of GDP. The maximum ratio was 60% according to the Maastricht treaty but Greece was standing at more than 100%. (Today it is around 175%. Ho Ho Ho). Fifteen years ago this 60% aspiration was taken quite seriously but the terms of the treaty were, of course, fudged with the qualification that it would be OK if a country could demonstrate that its debt ratio was moving in the right direction.

To this end, Greece arranged a cosmetic swap of its euro liabilities which allowed them to disappear transiently from the national accounts. The facilitator of this deal was everybody’s favourite counterparty, Goldman Sachs. Essentially, Greece rolled the debt over to Goldman and agreed to pay future interest at a fixed rate. You might point out that refinancing does not reduce aggregate debt and you would be correct – but if you consume enough fudge your brain might experience a sugar rush that makes everything look fine.

“Tut tut” to Greece and another chorus of caveat emptor for clients of Goldman Sachs but these are really not the culpable parties. That braying of herding donkeys (do donkeys herd?) that you could hear was the sound of the European banks buying Greek government debt. Why would they do that? After all, it was not exactly a secret that Greece was Olympian at spending money and couch potato at raising taxes.  

It seems that it was widely believed that membership of the euro conferred an implicit EU/ECB (European Central Bank) guarantee for debt issued by eurozone governments. In the early years of this century, the debt issued by Greece, Italy, Spain, Portugal and Ireland was priced almost as if it was as safe as debt issued by Germany. If you were foolish enough to believe that, you might have purchased some of that debt in order to pocket the extra yield available over German bonds. For instance, in the first week of the year 2000 there was an extra 0.23% available to owners of Italian 10 year government paper compared to the German equivalent.

Let us leap forward to September 2008. Lehman brothers had just failed. Even the most dozy banking dunderhead must have noticed that summink was up. That 0.23% premium of Italian paper over German had climbed to 0.87%. At this point stupidity and greed pledged to conjoin for eternity and some of the European banks piled into what looked to people with no eyes and no ears like a certain licence to print money.

They decided that when this temporary difficulty had passed it was obvious that the premium would revert to what they thought of as the norm. Therefore, if you sold German paper and bought Italian to the same value (effectively shorting the premium) you could just sit back and wait for the premium to contract again and book a nearly risk-free profit.

As the months went by the trade refused to work. In fact it was costing money because the positions had to be marked to market. By January 2009 the premium was 1.3%. By January 2011 it was 1.5%. But this was no worse than uncomfortable. A year later the premium was 5%. For the banks (mainly German and French I believe) the situation was now life threatening.

Those less careful banks (and there were some) who had tried the same trade with Greek paper were running in fresh air over the edge of the cliff. Greek 10 year bonds in January 2012 offered a yield of 34%, a 32% premium to 10 year German Bunds. We now know that there were a few heroes on the other side of this trade, notably Kyle Bass of Hayman Capital. Bass has popularised the term “asymmetric bet” to describe an opportunity when one side of a trade is taking a risk that is out of all proportion to the potential return and the other side (in this case Kyle Bass shorting Greek government paper) is risking little for a potential vast pay out.

I warmly recommend the interview with Kyle Bass to be found here on this website – if you can battle past the interruptions by the rather clueless interviewer.  

By 2009, the euro area was faced with the possibility that the most vulnerable countries (tastefully nicknamed the PIIGS – Portugal, Italy, Ireland, Greece, Spain) would have to default on their national debt. If one was allowed to go they could fall like dominoes. This prospect was more than messy for the particular reason that much of that debt was owned by the biggest European banks which are mostly to be found in France and Germany.

Greek government bonds were widely downgraded to junk by rating agencies in 2010. The deficit was heading for 150% of GDP and without help the country would inevitably default and, de facto, exit the euro (remember “Grexit?”). Ever since, the country has endured a series of bailouts which have included harsh austerity terms dictated by the leading powers of the EU and the IMF.

Populism in Greece produced in 2015 a government led by Syriza, a left-wing, anti-capitalist party that might have been expected to tell the Eurozone where to stick its austerity and to default with alacrity. For reasons that are beyond my understanding it instead chose to cave and the pain continues more or less unabated.

Populist anti-establishment parties have stirred in other countries – Five Star in Italy, Podemos in Spain and the Austrian Freedom Party, for example. In Europe the establishment is dominated by the nations of the North and embodied by the EU, based in Brussels, and particularly the ECB, based in Frankfurt. The French and German banks mostly live on, albeit wounded and trading at stock market valuations well below their pre-crisis peak. But if you are a citizen of Greece it must look as if the banks have won and you have lost.


Harold Wilson, the former Labour PM, once said that “a dog with a bone in its mouth can’t bark”. It turns out that a politician hoping for a job with a major US financial institution is somewhat muted too.

Northern Rock was rescued by the state in February 2008; then a £500 billion package was made available to Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered. The UK taxpayer then took substantial equity stakes in RBS and Lloyds. It looked as if the whole sector was at the mercy of Parliament, elected to serve the interests of UK citizens and taxpayers.

But the government has spoken softly and armed itself with a combination of carrots and comfy chairs.

Shortly after the collapse of Northern Rock (September 2007) Tony Blair, who had resigned as PM in June 2007, accepted a position as a senior advisor to JP Morgan. Blair’s government had been known for its “light-touch” approach to regulation of the financial industry. At JP Morgan he might have been said to have been among friends.

The two Labour politicians who carried the burden of the 2009 emergency were the new PM Gordon Brown and the new Chancellor Alistair Darling. The electorate dispensed with them in May 2010 and there are no points for guessing what happened next. In 2015, Brown joined Pimco, about which you can read here, and Darling joined Morgan Stanley.

Their successor as Chancellor, George Osborne, has now joined Blackrock. JP Morgan, Pimco, Morgan Stanley and Blackrock are all large US financial institutions which, we can be sure, continue to lobby for light-touch regulation. There is no suggestion that any of these politicians arranged their next career while they were in office but there is no denying the possibility that it could have been at the back of their minds.

Despite all the bad publicity about expenses and subsidised mortgages for second homes, Westminster politicians are not particularly well paid. When they resign or are voted out they are free agents and they have every right to sell their skills, such as they are, in the private market. That’s the position in theory and in practice but in terms of public perception it looks bad when those tasked with dealing with the damage attributed to the behaviour of financial institutions subsequently accept handsomely remunerated posts with global investment banks or money managers.

Not all UK leading politicians are quietly dreaming of these jobs for the boys.

“Bankers like Morgan Stanley should not run our country but they think they do. So when they say we’re a threat, they’re right: we’re a threat to a damaging and failed system that is rigged for the few.”

Jeremy Corbyn, leader of the Labour Party, 30 November 2017.

Here is populism in action. So we can’t say we haven’t been warned.

By failing to deal with the banking system, politicians and other establishment institutions in the US, the EU and the UK have effectively allied themselves with “the folks who acted irresponsibly”. Spineless inaction has consequences.


Politicians and regulators have turned their cowardly fire against the shareholders of banks. This avoids confrontations with rich and powerful people who might fight back. Following years of asset write-downs the banks are now being drained of capital by more years of fines for crimes such as miss-selling financial products, abetting money laundering and fixing prices. Are the courts and jails full of bank executives? No.

Instead, the banks tick over in regulatory purgatory, with enough capital to survive but rarely able to earn extra capital to grow. Shareholders must rightly suffer the consequences of the mistakes made by the managements of any companies in which they invest. But fines for investors, which reportedly total £75 billion for the big UK banks, look as if are being levied in lieu of management prosecutions.

Banking shares are presumably still held by pension funds and in the case of RBS 73% directly by the electorate via the government. So most of us lose when the banks are fined on our behalf. My implicit stake in RBS is more than enough and I do not and will not invest in bank shares.

Beyond this endless debacle of hindsight regulation and more fines I do not think that banks are suitable to be listed at all. Behaviour that is to the benefit of employees is often at odds with the interests of equity holders. If a bank wants to raise capital it can issue a bond paying a fixed coupon and, if it is a decent bank, I might buy that bond.

For obvious reasons, banks are not popular with the public and there is a pervasive impression that our leaders have ducked the issue. And this takes me back to where we started: populism.


Decent, liberal people are horrified by the success of Donald Trump but appear to be in denial. The people who voted for him are often written off as stupid and racist or victims of lies. Conspiracy theorists cite Russian sabotage of the election. And since he became president, Trump has not come over all presidential. Reportedly his days still revolve around watching news channels and Twitter. According to the New York Times, Trump has told 103 lies in the first ten months of his presidency.

We all need to get over the fact, however distasteful, that people voted for Trump and Trump is what they have got. There were seventeen Republican candidates in the 2016 primaries and sixteen variously respected people, some with long political resumés, lost to the anti-establishment outsider. Once his candidacy was confirmed, his democratic opponent could not have offered a more contrasting alternative.

Instead of bemoaning the embarrassing crassness of their president, Americans who are convinced of their own moral and intellectual superiority should stop whining and analyse the reasons for his victory. The American people elected the man who said this:

“One of the key problems today is that politics is such a disgrace. Good people don’t go into government.”

 If your reaction to that is outraged denial my answer is that the response to the financial crisis makes a plausible case for that view.


Nigel Farage is Britain’s answer to Donald Trump (or is it the other way round?). The Brexit vote came after many years of campaigning from this man whose debating style was forged in the pub.   

The people who voted to leave the EU are often written off as stupid and racist or victims of lies. Conspiracy theorists cite Russian sabotage of the campaign. (Where have you read this before?)

Farage said:

“When people stand up and talk about the great success that the EU has been, I’m not sure anybody saying it really believes it themselves anymore.”

Once again, this point or similar ones are rarely addressed by those who wanted to remain. The possibility that a majority of voters wanted to leave because they thought that the EU was dysfunctional never seems to be included in the analysis. But as already discussed, the reaction to the financial crisis demonstrated that the interests of elite EU countries were prioritised. Rather than fix the banks and the bankers, the EU establishment chose to impose austerity on the people of Greece and is apparently happy to do so indefinitely.


Politicians love to talk about “change” as if it is the property of “forward looking” enlightened people rather than an inevitable fact of life. The banking crisis offered a once in a lifetime opportunity to change the way that the financial services industry behaves and the political establishment didn’t want to know. Worse, it fell over itself in its eagerness to protect the perpetrators from the consequences of their actions.

The result is populism. And populism says that a change is gonna come.    

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