Tough on bankers, tough on the causes of bankers

I posted before about a great financial crisis, industry collapse and bailouts. Not the banks of today, but the railways of the Victorian age .

When the Directors of these gigantic enterprises that dominated the economy went to see the Prime Minister in 1867 to ask for the nationalisation of the railway companies to stop them from collapsing (with dread consequences for the whole British economy) because they couldn’t pay back their loans or attract new capital, they didn’t get the Gordon Brown, investment banker advisers, suspension of competition law and the tea and sympathy of today. Benjamin Disraeli told them to get stuffed: he didn’t see why the public should bail out badly run businesses.

[From Bailing out | 15Mb: yet another blog from Dave Birch]

Good man. And there’s another lesson worth learning from that crisis. Last year I read a paper from Andrew Odlyzko called “The Collapse of Railway Mania, the development of capital markets, and Robert Lucas Nash, a forgotten pioneer of accounting and financial analysis”. It talks about how many of the modern accounting methods that take for granted arose during that period.

The moral of the tale, such as it is, is that letting the railways collapse not only led to a stronger railway industry but it also helped other industries as well, because it meant that new standards for accounting and reporting were put into place. The banking crisis has followed an entirely different trajectory, where public money has been used to put things back exactly as they were before. Somehow, we were persuaded that the banks are a special case, not subject to the same rules of business, a point echoed by the noted economist John Kay.

We need to stop thinking of financial services as a unique business whose problems are sui generis, and whose economic role is one of special privilege. The historic deal, which limited competition in banking in return for an expectation of prudent behaviour, has been abrogated by the actions of banks and bankers. Today, both consumer protection and macroeconomic stability will be best served by the policies to promote competition which are rightly favoured in other sectors of the economy.

[From John Kay – Should We Have ‘Narrow Banking’?]

Hear hear. And surely one of the central policies to promote competition should be that people who make catastrophically bad decisions should go out of business. Another one might be to adopt a more robust approach to banking activities that turn out not be to strictly congruent with the letter (or spirit) of the law.

A $2.6 billion financial fraud that has shaken the government of Iranian President Mahmoud Ahmadinejad saw the heads of three of the country’s banks ousted on Tuesday as lawmakers threaten to impeach the economy minister. The biggest fraud in the 32-year history of the Islamic Republic could result in the death penalty for anyone found guilty of it and has become part of an increasingly ugly split in the conservative elite that runs Iran.

[From UPDATE 1-Iran bank chiefs ousted in $2.6 bln fraud fallout | Reuters]

Tough on bankers, tough on the causes of bankers. It’s the only language they understand.

 

In the future, everyone will be famous for fifteen megabytes

Adult story

I have an unusual story to relate. I obtained it first hand, from a contact I believe to be reliable, and I couldn’t resist posting it. Please don’t bother asking who I got it from, I will not tell even if waterboarded (well, maybe if London Pride-boarded) and I have changed a single fact in the tale (which doesn’t affect the narrative or the point) that makes it, I’m think, untraceable. It concerns the adult entertainment industry: if that bothers you, please turn away now (although I should say that I don’t think any of this is not suitable for work). It’s a tale of entrepreneurship, technology and, of course, money.

Apparently, years ago, the adult entertainment business in New York was controlled by the Irish. When adult video stores, peep shows and strip joints were roaring in the 1970s, much of the proceeds went to Irish gangs and was used to fund various kinds of organised crime. Although the Irish gangs controlled the business, they hired Jews to run the shops because they thought the Jews were good businessmen. This provided employment, often for young Israelis coming to the US for college or to look for more respectable jobs.

In time, the business began to clean up and become legitimate, and the Jews bought the businesses from the Irish and ran them as “proper” retail and entertainment enterprises. Legitimacy and efficiency saw incomes soar. My source tells me that he personally worked in one of these outlets in New York and it took $40,000 per night, running an adult store and peep show on one level and strippers on another level. For some reason that wasn’t explained to me, the Jews often employed Sri Lankans to work in these outlets.

Today, there are fewer outlets and they make only $5,000 per night. They get the occasional big spender (my friend tells me he saw an American Express Black Card used to purchase several thousand dollars’ worth of “new releases” recently) but generally speaking the basket size is falling and the margins are low. The Jews sold to the Sri Lankans. My contact told me that his former Jewish boss had taken the money and invested it in a shopping mall and some apartment buildings. (In fact, and I paraphrase, he told me that Jews were good at retail and property businesses — I report this faithfully, and I apologise if anyone is offended by the ethnic content, but I thought it was interesting to pass on what I told.)

So now the Sri Lankans are in charge. Young guys, with new ideas. And this is how the story reached me: one of these young Sri Lankan guys raised some capital and bought an outlet in Detroit. An adult store, with a peep show, and an adjoining strip club. He invested $4,000 in 42 CCTV cameras throughout the complex and connected them to the internet (my contact was part of the team that did the installation – that’s how I know the story). Then he hired people back in Sri Lanka (for only $300 per month, much less than employing physical security personnel in the US) to monitor the cameras. He first hired his sister (!) and then some other extended family.

His revenues are up, and he is making good money again.

Why? Because the adult business is a cash business. When my contact was telling me about this, I thought he was going to say that the CCTV was to watch for shoplifters, robbers, extortionists. But it was to watch the staff. Apparently some of the staff in the business (the cashiers, the strippers, the bouncers, the bar staff) are less than completely honest. Although the business takes cards, very few people pay with anything other than cash, and keeping track of that cash is a major expense for the business. From strippers doing private shows to cashiers giving special deals, everyone in the business is doing what they can to get hold of the cash floating around the premises.

By installing CCTV throughout the enterprise, and then offshoring the monitoring, this particular adult enterprise has seen revenues rise and the increase in profits has meant an excellent return on investment. You can have half a dozen people in Sri Lanka monitoring the cameras 24/7 at a fraction of the cost of a couple of physical security staff in the USA: the combination of money saved on staff plus money saved from dishonest staff adds up to a significant sum.

I thought this was a lovely parable of cards and cash, new technology and investment, globalisation and security so I hope none of you minded me posting it.

 

In the future, everyone will be famous for fifteen megabytes