A shipping reality to take on board

This is partly masked by instructing captains to sail at half speed, which has the advantage of using less fuel and makes it appear that more ships are being used, but it obviously does not solve the real problems. The recent upturn has also helped a bit and a few more iron-ore cargoes are moving round the world. But reality reasserts itself in harbours such as Singapore, which are clogged with hundreds of laid-up ships, and in the financial bailouts among "too big to sink" operators such as Hapag Lloyd, and bankruptcies among the less fortunate.

This overcapacity would be challenge enough for the industry, but many owners lost all sense of caution in the golden years before the crash, and went on a buying spree the likes of which no one had seen before. They did it because world trade seemed always to rise, global growth appeared set to continue, and the world banking system seemed to have unlimited funds it was willing to lend. So they ordered newer, bigger and faster ships to cater for the continuing world boom.

Now, of course, we have the bust but the ships are still being built. There are arguments about just how much new capacity is in the yards and on the slipways of Korea and China but many people say additional tonnage of between 30% and 40% will be launched in the next three years. Then there will be two ships for every one cargo.

Unfortunately, this is your money. Two of the leading banks in financing all this build were Commerzbank in Germany and dear old RBS in the UK. Both have a massive exposure, and because RBS is four fifths-owned by the taxpayer, that is your exposure.

Normally in such circumstances, one would expect the value of these new ships to be written down to reflect the fact they will cost rather than make money. But recognising such losses would destroy the balance sheets of the shipowners and bring further losses to the banks, so the industry has come up with a novel solution — a new accounting treatment that looks through today's financial hurricane to some distant sea of tranquillity where everything will be all right again, and where miraculously all the ships will be worth what is being paid for them.

On one level it's quite funny, but on another it is deadly serious. History says that recessions that coincide with a banking crisis last longer and are more severe. The only way out of the mire is for banks to be open about what they have lost, deal with it, recapitalise and move on. The more they prevaricate or obfuscate, the longer the process takes and the longer the rest of the economy struggles. Shipping, unfortunately, is just one of several areas where the banks still have to face up to reality.

Precedents the banks ignore

I don't know how many speeches Lloyd's of London chairman Lord Levene makes in a year — probably getting on for 100 — but however many it is, he maintains an enviably high standard.

Yesterday, he was at a conference that combined accounting and insurance (which must have made it a tough ticket to sell, let alone speech to write) but he took the opportunity to point out that while currently the banking industry was in the doghouse, insurance and accountancy had recently been there.

Lloyd's came near to meltdown in the early 1990s on the back of the LMX spiral, bad underwriting and the odd bit of fraud; the accounting professions traumas came in 2002 with Enron and WorldCom, the collapse of Arthur Andersen and the passing of the Sarbanes-Oxley legislation.

The similarity with banking is marked. In all three cases, risk was either mispriced or misjudged, losses were catastrophic and the public began asking very hard questions indeed about what was going on and what people thought they were doing. The difference is that insurance and accounting changed in response to these disasters, not because they were made to by regulators or governments but because they could not have survived without it. Banking seems determined not to change, and is trying to convince the world it does not need to.

There was another point in Levene's speech which, though unconnected with the above, was startling enough to pass on. He said that in 2006 only about 10% of FTSE 250 companies bothered to take out insurance to protect the personal assets of their directors against litigation from disgruntled shareholders and others.

In 2008, the figure was nearing 50%, and the increase in demand for cover has subsequently been matched by a surge in the number of claims. We have avoided it for decades, but his conclusion is that we are now rapidly embracing the US litigious culture.

How depressing is that?