September 23, 2008

Casino Capitalism

Global Business
Label Listen (23mins)
Last Updated: Tuesday, 23 September 2008, 09:06 GMT

No business like money for Peter Day
Find a Programme Global Business steps away from the chaos and confusion in the global financial system to ask whether banks can learn anything from gambling and the way casinos manage their own, considerable, risks.

Place your bets with Peter Day in Global Business.

About this programme by Peter Day

Maybe I’m na├»ve, but for 35 years I have been reporting business on the assumption there was some kind of social and even ethical purpose lying behind it: improving wellbeing, better goods and services, more employment, a (slightly) better world.

This inherent optimism/naivety is currently taking a battering, and maybe the world has changed.

The banks seem to be at the centre of this, as they are in this week’s Global Business examining the connections between risk, casinos and the financial markets.

There have not been that many manifestations of capitalism so far, and the one we are most familiar with is industrial capitalism: banks and stock markets financing other businesses which employed people and made money for shareholders and suppliers etc, and built prosperity for various owners who maybe did good things with their money.

But an important new 21st century form of capitalism is afoot: financial capitalism.

It may make much more money (in the good times) but it is less easy to be happy about its purposes.

Many big banks have diluted their old primary business of lending to enable enterprise, and started investing on their own behalf in anything that moves... in foreign exchange, or warrants or options or packages of debts so arranged that the liability falls off the balance sheet and cannot readily be ascertained by outsiders.

When banks get into difficulties, they still (as in the old days) look for help and rescue to the national authorities, and they are successful in winning support for their disasters because the authorities are still terrified of the idea of a bank failure, or systematic collapse as it is scarily termed.

(Just sometimes this doesn’t work. Maybe the US authorities balked at arranging a bailout for Lehman Brothers because the cry for help came the same September weekend that the Merrill Lynch and AIG insurance were also in deep trouble, and their plight was even more worrying to the powers that be than that of Lehman.)

But these banks seem to have lost a lot of their commercial compass or moral purpose of employment or prosperity.

Their feet are no longer on the ground, in the real world.

They are run by contract employees working for annual bonuses, and profits are the only measuring stick they know.

The relatively new private equity and hedge funds which flourished in the past decade were set up partly to sidestep the more rigorous regulations and borrow far more than would be appropriate for most conventional companies.

These funds buy whole companies but take short term views about them.

Ownership no longer carries the old burden of responsibility.The sole measure of success is the medium term returns.

Functioning companies are loaded with debt by the new buyers, and these liabilities become a horrible distraction when the going gets tough as it has done now.

Businesses are not built any more, but sliced and diced and reassembled in a similar way to the toxic mortgages assembled by the banks during the subprime bubble.

Bubbles burst, and (as we are now learning) real people are hurt. Casinos know what the odds are, but these new international investment banks don’t, despite their complex risk management algorithms.

Unlike the casinos, they are houses of cards.


Professor Chris Brady, Dean of the Business School, Bournemouth University

Roy Ramm, Director of Compliance and Security at London Clubs International,

Professor John Adams

Professor Michael Mainelli, Director, Z/Yen Group

Andrew Hilton, Director of the Centre for the Study of Financial Innovation

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