And the Risk-Takers Shall Inherit the Earth

One of the themes running through this blog for the past year has been a howl of protest at the transfer of value to a tiny, over-indulgent section of the world's population. The asset bubble enabled those controlling the world economy to acquire a vast share of the planet's value. Now those who failed to make a killing from some of their risky financial dealings are turning to the prudent and thrifty to make good their losses.

This is the essence of the heartfelt complaint from Graham Beale, chief executive of the Nationwide, at the size of his company's contribution to the financial compensation fund that the FSA require all financial organisations to belong to. Savers who chose the mutual, low-return, low-risk form of financial investment are being required to pay £250m. The FSA regulated building societies tightly, preventing them from joining in the asset bonanza, but now the losses have come home to roost they are expected to compensate those who did.

The Nationwide is required to pay more into the compensation pot than the London-based insurer-of-last-resort Lloyds. The unfairness stems from the fact that the amount levied relates to the amount of retail deposits an institution holds. So, in effect, the mutuals are being punished for being prudent and for having the confidence of small investors. The dealers in footloose venture capital are correspondingly favoured by the scheme, although their chances of needing compensation when risky investments turn sour are higher.

More iniquitous even than the plight of the Nationwide is that of the credit unions, whose members are some of the poorest in our society and whose mission is to encourage thrift and wise management of money amongst those who have least. Each credit union, with its hard-saved and comparatively tiny asset base, is being forced to pay a levy to the fund that insured the gambling of the super-rich.

Despite the temptation to join in the financial frenzy that lured some of the mutuals off their path of virtue, co-operative financial institutions have always operated with prudence and high ethical standards. But, like the credit unions trying to proselytise the catechism of thrift in a world that rewards greed, they must hope that their members have faith that they will get their rewards in heaven since here on earth Mammon seems to have the ear of the regulator. Tweet

Establishing a Mood

Last week two of the credit rating agencies - Moody's and Fitches - downgraded the rating they award to a slew of mutual financial instutions in the UK - the old-style building societies which have survived the current turmoil well and are taking in massive levels of new lending from members.

The building societies are actually in a strong position, since they own real assets - houses - rather than the phoney assets owned by banks. The agencies explain this downgrading on the basis that these assets are less valuable because of falling house prices. Yet the stress-testing of the Britannia that preceded its recent merger with Co-operative Financial Services indicated that even a house-price fall of 60% would not threaten the solvency of the business.

So is this a genuine concern about the solvency and viability of these businesses or a political move by the capitalist businesses that are seeing their credibility shattered and money move into the co-operative financial sector?

The official version is that the credit rating agencies take an objective look at the market and then provide a neutral assessment of the financial health of various companies. The reality is that they are making the market. If they downgrade a company it finds it harder to borrow money and must pay a higher price. They are actually manipulating the value of companies - and even countries - and in a time of such uncertainty this gives them anti-democratic power. Questions are being raised about their role, which now appears more political than forensic.

We can begin to see how they are using this power. They downgrade the UK, which is creating money to pay back our national debt, but not the US, which is following the same policy. Back in January the French financial regulator called for political regulation of the activities of credit rating agencies. At that stage concern was that they were too optimistic about the money-generating activities of the companies that created the boom. Their attempt to undermine viable and democratic institutions and governments should raise even greater concern. Tweet