Bob Diamond appeared before the Treasury Select Committee of the British Parliament today. While some MPs had more than a reasonable banking knowledge and asked some good questions, both sides came up short. Here is why along with some general observations.
Where MPs Came Up Short
MPs still suffer from derivatives derangement syndrome and a total misunderstanding of investment banking. Diamond had to remind MP Pat McFadden that Halifax, HBOS, Alliance & Leicester and Northern Rock all collapsed and they had nothing to do with derivatives and the riskiness of investment banking.
Following on from the above, it appears that MPs, along with the rest of the population do not realize that loans involve risk taking and that losses do not only come from derivatives or “casino” banking—a most unbelievable notion. Until MPs and regulators fully understand the dimensions of risk they should forego any decision to change the structure of the industry. Continue reading