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Brown and banks

• Robert Peston
• 30 Apr 08, 09:11 AM

I was puzzled by the prime minister's remarks on the Today programme this morning about what has gone wrong at our banks.

He said it was all about their "off-balance-sheet" activities - or transactions for which they are liable but were kept off their books.

Some may pipe up something about pots and kettles: when he was chancellor, Gordon Brown wasn't exactly shy about using clever accounting techniques to keep liabilities associated with major public sector projects out of the national debt (the relevant initials are "P" and "F" and "I").

But he does have a point. Some of what ails our banks is those off-balance-sheet chickens - called conduits and SIVs - coming home to roost.

They were a ruse used by banks to accumulate putatively profitable assets while putting little strain on capital. But they ended up putting quite a lot of strain on banks' capital, when outside sources of funding for these financial vehicles dried up.

That said, in the case of Britain's banks - and Gordon Brown was asked by about Britain's banks - SIVs and conduits are a relatively small contributor to their current woes.

Much more important was their na茂ve and reckless lending and investing, most of which was on their balance sheets, not off it. What's mullered their capital is markdowns and losses on , subprime, , , monoline exposure and loans to private-equity deals (if that's impenetrable gobbledegook, just think "investments which were too clever by half").

Yesterday, the governor, , put the blame for this mess squarely on the remuneration incentives for bankers to do as many deals as possible, and never mind the long-term consequences.

You might think I would concur with the governor's assessment, since the thesis of my recent 主播大秀 Two documentary - - was that the remuneration system of bankers, private-equity partners and hedge fund superstars provides excessive rewards to those who take big financial risks, without penalising them in a commensurate way when their deals go wrong.

I wonder why the prime minister felt unable to criticise the rewards that accrued to those bankers who bear some responsibility for the current financial mess we're in. Perhaps you have an explanation.

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