Why bankers aren't worth it
Some of the most arresting analysis of the causes and consequences of the financial crisis is being made by Andrew Haldane, the executive director of what the Bank of England calls - with no hint of irony - "financial stability".
His latest speech, "Small Lessons from a Big Crisis" [pdf link], is grist for those who believe top bankers are being paid far too much (although this is not a conclusion he draws himself).
First, Haldane looks at the returns generated by UK banks and financial institutions since 1900, to see whether shares in the financial sector have performed better than the market in general.
What this shows is that from 1900 to 1985, the financial sector produced an average annual return of around 2% a year, relative to other stocks and shares.
So for 85 years investing in bank shares was "close to a break-even strategy" (his words), nothing special.
But in the subsequent 20 years, from 1986 to 2006, returns went through the roof: the average annual return soared to more than 16%, which was the best performance by financial-sector shares in UK financial history.
And it's no coincidence that the pay of top bankers also zoomed up to the stratosphere. Which at the time upset only a few, because the bankers seemed to be enriching the owners of the banks, their shareholders (millions of us through our pension funds).
That, of course, is not the whole story.
The collapse of banks' share prices in the past two years has wiped out most of those gains: to March this year, when the low point was touched, the fall in UK bank share prices was more than 80%, an all-time record plunge.
What this means is that in the full period from 1900 to the end of 2008, the annual average return on financial shares was less than 3%, almost identical to the market as a whole.
Which is what common sense would predict should have happened, since banks are to a large extent a utility, serving the needs of the wider economy, and its difficult to see how banks in general can therefore grow significantly faster than the wider economy.
What went so right in 1986 to 2006? Had top bankers become much more brilliant than their predecessors, such that they deserved disproportionate rewards?
Haldane answers this question by breaking down banks' return on equity - the return generated on ordinary shareholders' capital - into its two component parts, which are the return on gross assets and the leverage employed by the bank.
This is slightly complicated, but bear with me, because it is absolutely central to assessing whether bankers merited their lavish remuneration.
Now if you want to know whether bankers are particularly skilful, you have to look at the return on gross assets. If one bank earns consistently bigger margins on the loans and investments it makes, that tells you it is probably doing something cleverer than its rivals.
By contrast, leverage - or the ratio between a bank's gross assets and its stock of shareholders' equity - is the Las Vegas part of the return on equity, the contribution made by a punt or a gamble.
Here's the important point: for any rate of return earned per unit of a bank's gross assets, the return on shareholders' equity rises as the assets-to-equity ratio rises - or, to use the jargon, as leverage rises.
Which is easier to grasp by way of a practical illustration.
Suppose a bank has lent £1,000 and earns a 1% net return on this, or £10. If that £1,000 is backed by £50 of shareholders' equity - which is a leverage multiple of 20 - the return on equity is 10 divided by 50, or 20% (which, for what it's worth, is a handsome rate of return).
Now, suppose another bank lends £1,000 on a leverage multiple of 50, or supported by just £20 of shareholders' equity. In this case, the return on equity is 10 divided by 20, or 50%. So the return to shareholders is a stupendous 50%.
Or to put it another way, increasing leverage is a simple and automatic way of increasing returns to shareholders. And as I hope you've noticed, there's nothing terribly clever about it.
But if all you care about is fat returns, and you're not interested in how they're earned, you'd give the boss of the highly leveraged bank a cigar, a bottle of Krug and a £5m bonus.
As I've observed many times in this column, maximising leverage is the equivalent of buying a house with the maximum amount of debt: it looks like an awfully smart thing to do when everything's going up up up, but is the fastest way to lose money when the economy turns.
Just to prove the point: if our banks were to lose £20 on their £1,000 of loans, the bank with just £20 of equity would be wiped out, it would be bust (a big hello to Royal Bank of Scotland, which at the peak of its lending and investing had a balance sheet that was indeed 50 times the size of its core equity).
So what has Haldane discovered about the golden banking years from 1986 to 2006? Were the super-normal returns of banks the consequence of management skill, viz high returns on gross assets? Or were they casino profits, generated because banks in general increased their leverage, their ratio of assets to equity?
This is what Haldane says:
"Since 2000, rising leverage fully accounts for movements in UK banks' ROE [return on equity] - both the rise to around 24% in 2007 and the subsequent fall into negative territory in 2008."
In other words, in the seven years before the crash, British banks' bumper profits were in aggregate generated wholly by a massive increase in leverage by the industry: and in Haldane's view, these would be returns generated by gamblers' luck, the jackpot from the roulette ball landing on black.
What follows?
Well, it's uncontroversial that we all paid something of a price, in the form of the worst global recession since the 1930s, when the bankers' luck ran out, when the wheel spun to red.
Which means that we all have an interest in preventing bankers from repeating these reckless gambles.
These would be a few useful lessons.
1) The overall level of bankers' pay was inflated over the past few years by the rewards they scooped from the leverage gamble. It should be cut to a level commensurate with an industry that's closer to a boring utility than to a wealth-creating, entrepreneurial venture. This has not happened yet. In fact, if anything, bankers are pumping up their pay packages again (the recent remuneration deal made by Royal Bank of Scotland with its chief executive, Stephen Hester, would not have looked mean in the boom-boom era).
2) Regulators should impose a legally binding maximum - and at a relatively modest level - for the ratio of a bank's gross assets to its equity, the leverage multiple, to restrict bankers' freedom to gamble.
3) Owners of banks should be very cautious indeed about rewarding bankers for the returns they generate on equity, and should focus rather more on the returns earned on gross assets.
If you're still with me (wakey, wakey), there's one other important related issue I want to explore, which is how to re-introduce moral hazard into banking, how to persuade bank chief executives that they'll really suffer if they place reckless bets that go wrong.
The problem is that no one can possibly any longer believe that there are any circumstances in which our government will let one of our biggest banks collapse.
Which is an enormous comfort to the chief executive of a bank. It means he or she can do something spectacularly stupid, safe in the knowledge that taxpayers will bail out the bank as and when it all goes wrong.
The best deterrent against greed-fuelled gambling by banks is the threat of being sacked when it all goes pear-shaped. But that's not a particularly scary threat to any banker who's earned enough in the preceding years never to need to work again.
That rather implies that bankers should be paid a decent wage, but should not be able to get their mits on any serious wealth for years and years and years.
Arguably they shouldn't be allowed the big haul till they retire and it's clear beyond a scintilla of doubt that they haven't dangerously over-mortgaged their respective institutions.
And once again we're back to the serious critique of Royal Bank of Scotland's board for sanctioning Sir Fred Goodwin's never-have-to-work-again pension.
But Sir Fred is just one embodiment of how banking became a casino run for the benefit of bank executives: the sucker punters were the shareholders and - little did we know it - taxpayers.
I'm 
© MMX~RS~q~RS~~RS~z~RS~51~RS~)
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This is a good article but I also think we need to look at banks, their leaders and their shareholders in the context of what they achieved for the country.
In the UK's case their activity did huge amounts of damage to manufacturing, slashed the business birth rate, pushed house prices through the roof, created record household debt levels, created a record trade deficit and so on and so forth.
And what's more, this was all pretty unique to the UK because in mainland Europe manufacturing and high tech stuff has survived and in the USA there was and still is plenty of tech innovation going and new companies being formed and properly funded especially in the clean tech sector which of course is supposed to be a UK political priority.
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This is just fraud on a massive scale.
...but who will grow some cajones to go after these banksters and start prosecuting these vermin.
The discussions on regulation reform are shaping up to be a complete whitewash.
We have been soft soaped and shafted by The City...and they are being given carte blanche to do it all over again!
GIVE US A NEW GLASS-STEAGALL (EQUIVALENT) LAW - NOW!
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Great blog Robert. Nice bit of analysis and spot on.
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Robert wrote,
"from 1986 to 2006, returns went through the roof: the average annual return soared to more than 16%"
At the risk of preaching the blindingly obvious: This was the time of the worst excesses of Thatcherism /Reaganomics and Milton Firedman's 'Boys from Chicago' monetarism! The 'fault', we overlooked, was to provide a protectionist environment to existing bankers, by regulating to protect existing bankers by making it very much more difficult to set up a new bank and at the same time the relinquishing of all regulatory control over the international activities of banks by abolishing exchange control. This latter process enabled the hugely protected home markets of banks to provide them with the capital and, at the same time, allow them to act without any control internationally. Banks were exempted from the market!
The other critical element in the explosion of the 'fake' returns of banks was to permit asset price inflation to be seen as a good thing (which of course it is not, and has never been, and if we are to get a recovery this must be fully understood). This was achieved through successful lobbying of the banks and their economic friends educated in institutions which themselves became dependent of the finance sector (See Harvard) to have mortgage costs and house prices removed from all inflation indices (these indices being used to measure the effectiveness of monetary control) This was insane and inevitably led to the collapse in the price of money, which itself let to the 'necessity' to loan this worthless money to less and less creditworthy customers on poorer and poorer security which let the CDSs and CDOs etc. etc. which led to the global collapse.
That is my thumbnail analysis.
Fixing the problem - without killing the global economy is another book. We have the problem that if we wanted to get there we should not be starting here! However it seems obvious to me that 'money needs to have a sensible price' is a prerequisite to any recovery.
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Oh yeah, forgot to add: it's a shame that Darling seems reluctant to do anything about this and that Brown's boys are trying to stop any EU measures to regulate the banksters.
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Robert, you have explained the issue perfectly with regards to the leveraging and share equity backing. But the underlying point has to be that lenders were prepared to extend credit to other lenders based solely on the perception of a no lose world. But up until the time that the wheel stopped turning, no one really knew that the government would step in to support failed banks so is there a more sinister back drop to the willingness of big lenders to extend credit to other lenders that was potentially risky believing that when they went pop, they could be bought up for a fraction of their value
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#2. BankSlickerminustheR wrote:
"GIVE US A NEW GLASS-STEAGALL (EQUIVALENT) LAW - NOW!"
Yes, but without national controls over transnational moneyflows it can't work, can it?
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Oh Labour - What have you done to us while you were making a few pieces of silver in the rising housing market??
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It is naive to impose a leverage cap based on gross assets, and not risk-weighted assets.
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Wholeheartedly agree Mr Peston.
Very well explained.
These bankers are clearly exposed as the disgrace to society that they are.
Now what are we seriously going to do about them? Is hanging to good?
No problem staying awake.
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I am at a loss with Brown/Darling - they say they "won't legislate" to stop excessive bonuses - do they still not get it? We/they own the banks just tell them what to do! This doesn't need legislation just an instruction "or you will be sacked!". The bankers are running the asylum now and until we get some strong honest politicians in number 10 nothing will change.
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good article but could you explain your maths?
"the return on equity is 10 divided by 50, or 20% ".... err 0.2% surely?
"the return on equity is 10 divided by 20, or 50%."....err 0.5%
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Robert, a calm and measured post which is important at this point in time. The issue of regulation to make banking a bit more boring (and, therefore, useful to us in the real economy) is coming up at the Aquila meeting later this month.
I look forward to your comments on this in due course.
There is a feeling among some that UK is dragging its heels a bit on cutting the banks down to size.
Is there any truth in the observation?
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#9 - Oh Labour - What have you done to us while you were making a few pieces of silver in the rising housing market??
And why oh why oh why are you not peddling stories about reasessing everyone council tax bands now??#
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"how to re-introduce moral hazard into banking, how to persuade bank chief executives that they'll really suffer if they place reckless bets that go wrong."
that's easy - jail time and asset forfeiture for the fraudulent b*****ds. if you ban the making of those bets in the first place, anyone who does screw up by making them will be subject to the penalties.
Of course, a better system of regulation by shareholders - perhaps abstentions from voting should count as an abstention rather than an automatic vote in favour of the board. Also, we could try putting some focus on the big shareholders to make sure they work in the interest of themselves. During the boom they had a very hands-off approach, and as they hold the vast majority of shares, no-one else effectively has a say in how the company is managed.
Mind you, like at Shell, even if the board is voted against by shareholders, they just ignore them anyway. The whole system is pretty broken.
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Yet Gordon recently told his puppet chancellor to say that little changes to regulation were needed and that the FSA was a fine tool for reining in the banks. Especially now they know what to look out for. Will Alistair really demand some changes next week? Does he have the will to against the man who cannot be blamed for light touch regulation?
Bill Quango
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Good analysis. Sadly, excessive leverage is only one of the many tricks that were employed by bankers to make profits without any concern for the consequences for the larger society or even their own shareholders. There are many more tricks in the bankers books that need to be exposed.
For example, the four big UK banks have set up 1000 subsidiaries in tax havens around the world to avoid tax for themselves and assist rich individuals to do the same (this insight comes courtesy of the TUC).
There is a moral recklessness in mainstream banking which is truly astonishing. Basically, it is the behaviour of people who believe they are untouchable and that money can buy anything (governments, lawyers to escape the law, etc).
Banks needs to be under the law, not above the law and need to be reigned in. Otherwise societies (and their taxpayers) will be bankrupted again and again. Think about that word: bank-rupted. Apparently it comes from the Italian banca rotta, 'broken counter' (from the practice of breaking the counters of bankrupt bankers).
Societies should be intelligent enough in a global media age to act on
what they have learned over the past year and reign in the self-proclaimed masters of the universe and stop their addiction to picking the pockets of value creating economies.
Please find more relevant facts and details at:
http://globalinsights.wordpress.com/
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#13
"the return on equity is 10 divided by 50, or 20% ".... err 0.2% surely?
"the return on equity is 10 divided by 20, or 50%."....err 0.5%
NO
10/50 = 0.2 which is equivalent to 20% (of 1)
10/20 = 0.5 or 50% (of 1)
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Hi Rob,
Is it any wonder that the country is suffering at the moment. I recently enquired about moving home, only to be told that for the extra £2ok i wanted to put on the mortgage it would more than double my repayments!(And my credit rating is good!)
Charging 5-6-7%APR on mortgages when the base rate is 1/2% is tantamount to theft. Ditto for the credit card industry.
The banks were the root cause of the recession, and it seems to me that the banks are the ones busy prolonging it. They need to be exposed by the media for the greedy bloodsucking parasites they really are!
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Spot on Robert, finally the bleedin obviousis being debated in the media. I certainly hope that THIS is taken up bythe media in a far bigger way than the MP expenses 'scandal' where the collective misdeeds os 1,000 MPs and Lords would stil not add up to a single RBS or Citigroup bonus for a top banker.
I think some of our work will be done for us by the markets. As demographics automatically prevents asset bubbles, the banks will not be able to skim off fees from those bubbles to add to their bonus pots. The UK is on the verge of following Japan, and now Germany into a demographic stagnation/slump in asset prices. There's nothing wrong with this, it is simply the realization that we have reached the limit of ever increasing the debt burdens of future generations through deficits/inflation because we simply haven't bred enough of em.
It is high time we realize that standard of living should be bettered on a per capita basis, not just aggregate growth, and also that improved standard of life is based on prductivity and technology, not alleged 'gains' from asset inflation which is simply robbing our kids blind.
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Who checks the pictures used in the posts?
As they would say in Private Eye "any fule would know" that the building in the picture is actually the Lloyds of London building home of the famous insurance market.
As such the man in the pinstripe suit is almost certainly an insurance broker or underwriter.
Perhaps your editor needs to be shown the difference between EC3 and EC2 on a map!
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An excellent understandable piece of analysis - essentially you can always win more by gambling more, but that ultimately sets you up to lose more when you inevitably get a gamble wrong.
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I think jolo13 epitomises the lack of arithmetical ability common in many of the banks !!
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What no one seems to understand is how expensive our high street banking system is. It is business current accounts, savers and borrowers who pay for the 6 branchs on the high streets, their staff, etc. Surely the transfer of wealth is a matter for an elected govt not the banks.
IMO the current account system is the modern equivalent of cash and should be owned and run by the state through the BoE. It's all computerised. Every shop can take debit cards. Biometrics can resolve any security issues. And it means no more illegal workers, tax dodgers, etc. Imagine the benefit to the tax take, the falling unemployment levels.
Let banks do the lending and saving business, and all that goes with it.
As a nation, we may all despise the bankers for their deliberate negligence, But we need to stay at the front of international finance. Soon a govt somewhere is going to do this to get business capital flowing again. If we did it, the central position of the UK in international finance would be assured for the future. We should go for it now.
Coins were first minted by private business in ancient Lydia. The idea spread and within a relatively short time states became the principal issuers of coins. And it was these state backed standard, reliable gold/silver content coins that enabled the explosion in trade that spread enlightened civillisation across the Med. We need another such explosion.
We have the technology. We have the expertise. We lack the vision and leadership. Our elite are complacent in their extreme wealth. If we continue as we have, our decline is assured.
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Robert,
"Or to put it another way, increasing leverage is a simple and automatic way of increasing returns to shareholders. And as I hope you've noticed, there's nothing terribly clever about it."
Clarity personified!
Leverage is not innovation or competitive advantage - it is instead the achilles heel of any financial investment. Not just for companies, but individuals' debt (you quite rightly mention mortgages) but ALSO Governments!! It only works if the good times roll.
Regrettably, if an individual or a company overstretches itself - it will collapse.
If a bank overstretches and gets bailed out by a Gvt, then society takes on the risk. As banks can't collapse, then our economy is put at much higher risk of collapse. Therefore, as banks are the only type of company that can bring down the whole economy then not only were bankers overpaid, but they nigh on conducted treason to our country.
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One thought that keeps crossing my mind is whether we should consider making some legal distinction between current accounts and savings accounts? The two have got very blurred in recent years. If we said that savings accounts could be invested by the banks as they saw fit but would not be backed by any Government guarantees, whereas current accounts would be guaranteed by the Government but could only be used by the banks to buy Gilts, wouldn't that remove most of the risk in the system?
We as customers could decide whether we wanted our money safe, or whether we wanted to take some risk for higher return.
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Robert, you should get your colleague Mark Easton to explain to you about misleading statistics. Andrew Haldane's figures which you approvingly quote are very suspect.
Actually, bank shareholders made out like gangbusters and will continue to do so if allowed - the losers are elsewhere in the system:
http://www.knowingandmaking.com/2009/07/bad-mathematics-and-dodgy-economics.html
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There is a missing link here, in that the government clearly were not aware of the banks level of threat to our nation, even after the Northern Rock wake-up call. I do not buy the ludicrous arguement that it was something obscure called American subprime loans that can possibly be resposible. No, I rather think it was human nature, in this case greed, that caused the collapse, and the real guilty party are those charged with steering the nation during their watch, that failed utterly, in that task. What has now emerged, is an unholy alliance between the poacher and the gamekeeper, which in no way will keep the herd safe in the future, but certainly suits the both of them. The power to inflict further damage must be removed from the pair of them immediatly, if not sooner.
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I know Labour can't spell it let alone live it but what we need is some social justice. Stories abound of civil action being taken by government against bankers in the US. Why not here, why not Goodwin et al? Some of the offenders are being re-employed in quangos by this government?!!
It won't hurt Labour in the year running up to the election if they allow the gambling to start again. If if provides some false green shoots of recovery then they might just get in again on the back of the same illusion that supported them the last two times (the first time was genuine hatred of the previous incumbent).
Even if they lose the next election, somebody is going to have to reign the banks in again and so this is just another example of scorched earth policy by this treacherous government. They don't care who gets hurt so long as they stay in power. If they get back in then the joke may then be on them, but I think they feel there is precious little chance and so this will be a gamble to limit the Tories to a minority government, blamed for the tough medicine required, with a Labour government returning in 3-5 years when the electorate can't take the pain any more and think that change will once again affect their fortunes.
Does nobody in Labour have any love at all for our country any more? I feel sick.
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All of which begs the question: Why is there no political will to truly sort this out?
"But if all you care about is fat returns, and you're not interested in how they're earned, you'd give the boss of the highly leveraged bank a cigar, a bottle of Krug and a £5m bonus." Indeed what has happened and is happening...
So let's introduce bonuses into the education system. Teachers provide the pupils with the answers before the exams and hey presto! Suddenly we have all these great amazing high returns. Teachers are just so amazingly clever...
There is nothing remotely clever about being corrupt or incompetent. So the next question is which politician is going to stand up and come clean about this.
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This is more than just a good article. It is a key article which - though I'm afraid I nodded even more than usual through the maths - should be disseminated widely before any more of our dozy government representatives on bank boards wave through pay packages from a past era.
The Reith Lectures this year were pushing in broadly the same direction
http://www.bbc.co.uk/programmes/b00729d9
It's not the revolution some were predicting months ago, but the pace of evolution sure needs to speed up.
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I assume that the business journalists at the BBC are aware that Lloyds of London isn't part of Lloyds Banking Group?
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One point your analysis does not mention is that on the way up the leverage ladder, the spiral was largely self-fulfilling. More leverage-->more money-->more demand for assets-->higher asset prices-->more equity-->more leverage, and so on. The removal of moral hazard, and the political encouragement of the ever-growing spiral made the bank behaviour inevitable. It's not as though the bankers of 1990s through to 2007 had any real option. They either used their ingenuity to prosper in the spiral, or they found another job. Simple as that.
So your reluctance to veer away from the politician-saving constructed public mood of bankers' venality does you no credit. When all the outlets for moral behaviour are removed, people will act immorally rather than starve. It's like blaming the Germans for electing Hitler, when in reality it was the victors' justice of 1918 that caused Germany to be ungovernable in a rational way.
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Maybe bankers "aren't worth it".
However, considering their "performance", then politicians and journalists are worth even less.
The only thing a politician sells is his mouth - can we trust him to keep his word and behave honestly. Recent incidents have shown us that very few politicians are worth, to use a very apt US phrase, "a wooden nickel".
The only thing a journalist sells is reporting facts - does he provide the public with reliable information for them to make decisions. The same recent incidents have shown, beyond doubt, that journalists were, for decades, complicit in a conspiracy of silence with the politicians, not only remiss in their duty of providing the public with the facts, but also (and far worse) spreading lies from individuals like McPoison.
So, bankers were not worth their remuneration. But then, neither were politicians or journalists.
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Comment 13 : jolo13
There's a place for you in Brown's cabinet. I should make some enquiries.
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Mr Peston,
Overall a good article, but one serious mistake.
Moral hazard arises when an individual or institution does not take the full consequences and responsibilities of its doings, and therefore has a tendency to act less carefully than it alternately would, leaving another party to hold (at least) some responsibility for the consequences of those actions.
Therefore you probably mean that moral hazard needs to be taken out of the system, rather than re-introduced?
Please try to understand things in full before posting.
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What is it about these bankers that need both large salaries and even larger bonuses? Most people work conscientiously for a salary. Some small and some large.
If a banker is paid £1m or £2m to do a job why can they not do it properly without the incentive to earn even more? Are they not prepared to do a job fully and diligently for such a salary? Are they only really interested in obscene sums of money for themselves?
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We all know about leverage........and because the marginal productivity of debt was negative, the economy crashed.
In other words, the total debt outweighs the total productivity increases which arose from borrowing the money.
It's not rocket science; just basic common sense.
Just a shame so many consumers and businesses and governments forgot to engage their brains and their will power...........
Consumer junk culture and a junk economy.
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Splitting investments into "safe" returns on equity and "casino" returns on leverage doesn't work as an analogy - the investments that banks make carry the same risk wherever the money has come from. The problem isn't that returns built on leverage are all risky, but that leverage makes any losses on your investments more damaging, as you say, so too much leverages leaves you badly exposed to a downturn. Using an appropriate amount of leverage is fine and pretty well every successful business borrows money, and rightly so - the problem comes when you are 50x leveraged, rather than, say, 20x leverage (which is fine for a bank).
This is also not to be confused with the dodgy mortgage-backed derivatives which banks created - you can invest equity capital in dodgy derivatives just the same as you can invest debt capital into them.
I also totally agree with #21 about measuring wealth by overall GDP, and factoring in house prices - totally meaningless!
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Good report. However, those fancy profits were also supposed to be backed by assets (security on property) If a company wants a loan against stock and debtors the BANKS will probably reduce the value by 30% to 50% (In cse all is not what it seems) Its a crime that they didnt use the same measures when valuing their of debtor books ?
#16 Better system of regulation by shareholders ! The institutions are run by the same breed, nod, wink have another brandy after the expensive lunch together ?
#20 Parasites. Good description, not only the banks though. The couldnt care less attitude to customers and investors is rife in every institution and large company in Britain, bad customer service, no real people to answer and sort out problems. Many simply having NO address on their websites or mail, they only want you to sit in a 2hour wait at £1 per minute. That goes for the government run "Agencies" too. Anyone who saw the debacle TV regarding the DVLA cannot have failed to see that these people are a law to themselves and the service users are simple revenue sources and other than that, just a B*****y pest.
Lets get back to local managers , contactable, concerned and who CARE enough to get things right
Britain is broken alright and its fast becoming beyond repair.
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From each according to their ability. To each according to their needs. Or something like that. Am I getting close to the movement for something called less-pay ?
Out of all this is that the whole raft of regulatory enforcement measures have not been deployed. Who has been banned from financial services using the extensive powers granted by the Financial Services and Markets Act? Which directors have been banned under the Company Directors Disqualification Act? Who has been penalised under the Companies Act? What about penalties under the Insolvency Act? Which Directors are being asked to make good the losses? Who committed wrongful - if not fraudulent - trading?
Greed encouraged this crisis, encouraged by an enforcement regime that was half blind and legless, aided by a Government that was equally so disadvantaged, that needed the growth it provided to shore up the public finances.
Capping pay is a typical half-blind champagne socialist view of control. Getting an effective enforcement regime is key. The FSA and other enforcement agencies have messed up.
Where's the court cases? Where's the prohibitions? That's what I want to know.
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I've said all of this before, but I'll say it again.
The alleged 'skill' of the bank CEO often comes down to the exact same skill as is displayed by the reasonably competent punter on the horses or the dogs.
Like these, the bank CEO's sometimes believe that as they pull off the more risky punts (i.e. get away with them), the more this underscores their immagined skills and abilities and the more immune they are to things eventually going belly up.
For real managers and directors, the issues are risk management and due dilligence. For the cowboy or maverick ones, it's the buzz of the gamble. Investors and dealers can get truly hooked on the adrenalin and their exagerated assessment of their own skills and abilities.
Even right back when Emile Zola wrote L'Argent (the English translation 'Money' is a good read) - 'twas ever the case.
Secondly, the moral hazard could be rectified by shareholders, especially institutional ones, demanding a different arrangement for recruitment and selection of directors, CEOs, CFOs and the like.
That would be, quite simply, that Directors put up front a bond or security of a substantial amount to insure the company against harm done by their incompetence in office.
YES - instead of just bragging about how wonderful they are, they put THEIR money where their mouths are. If they are as good as they claim, then they get the handsome rewards and get their security back (perhaps in a phased way, say 20 per cent per year) once their performance proves their claimed abilities.
This would also encourage a more mid-term and long-term approach to managing and directing a company, e.g. sustainable business models, longer term skills investment, etc., and would discourage quick-buck asset stripping.
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Leverage itself is not a bad thing - who amongst us (apart from the top bankers, obviously!) can afford to buy a house without borrowing debt against our equity (that is, our deposit). The problem arises when a company or person over-leverages and borrows more than they can afford in the case of a downturn. Banks were meant to have fancy statistical systems that prevented this, but the opaqueness of the market and the instruments being traded meant that they had no real understanding of their true exposure - that is, how much money they stood to lose.
Yes, let's tie bankers bonuses to long term performance weighted against the risks they are taking - but before we can do that we need a better model to measure exactly what these risks are. After all, given the length of economic cycles, can we ever be sure that the returns a bank makes are sustainable after 1 year? 5 years? 20 years? The key should be the risk the banker exposes his employer to - that, after all, is what they are being paid to manage.
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This is totally inept! In the whole article I did not see once the word risk!
Robert "no clue" Preston wrote:
"Now if you want to know whether bankers are particularly skilful, you have to look at the return on gross assets. If one bank earns consistently bigger margins on the loans and investments it makes, that tells you it is probably doing something cleverer than its rivals."
Any idiot can achieve this, invest in high risk assets, simple as that! The only issue is , and we saw it recently, it is not a very sustainable strategy if you do not understand your risk properly.
Why not looking at banks who had risk at the core of their business and the ones which did not? Then maybe compare their performance? This should not be too difficult even for Robert and will give us more information than most of these pointless blogs!
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Excellent article Robert.
Now what you need to do is expose those running our pension funds. They effectively gave the green light to the banks and their bonuses. Why?
Either they couldn't comprehend the sleight of hand that was taking place, or they did understand what was going on, but kept quiet and pocketed their own bonuses.
Until this is investigated and exposed, there is little chance of the pension funds stopping the banks in repeating the mistakes of the past.
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It's Modigliani and Miller we have to blame - and all those finance theorists that have followed them in various business schools and universities. They came up with the idea that (subject to taxation effects) gearing of institutions does not matter since the potential shareholder can vary his own gearing levels to synthesise his desired "risk" level by blending his gearing with the corporation's. (i.e. he can borrow to buy shares in a corporation that he perceives to be "under-risked" and use un-leveraged funds to buy one that is "over-risked"). So the investing community does not have to worry if the managers of their investment vehicles go nuts on the borrowing front. They just de-gear themselves when they buy the shares. Of course there is a problem if a large majority of the available investments and the investors themselves become dangerously overgeared as we have just experienced.
This is just one example of how the axioms of modern finance theory that have emerged since Harry Marlowitz's work of the 1950's are deeply flawed in terms of how they model the real world. The finance community was given a clear warning of these flaws with the collapse of LTCM when two of the fathers of finance theory - Scholes and Merton - took a beating in a market that did not conform to their theoretical constructs. But the fundamental problem has never really been addressed to the extent that their theories and - in particular - the Black and Scholes model of option valuation are still enshrined in the methods used to value assets and liabilities in Generally Accepted Accounting Practice around the world.
The finance theorists who taught the bankers (or at least their back-room maths wizards) have got off relatively lightly in carrying their share of the blame for this crisis. It's a point that Soros keeps alluding to, but nobody seems to be picking it up.
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Very interesting research.
I guess it's always been surprising how banks were able to generate such high profits in such a competitive market (retail banking in the UK excepted). The other method was to create spectacularly complicated derivatives and structured products, and use the information disparities to capture other people's profits (normally non financials I guess).
With the clearing up of securitisation and the standardisation of products previously traded over the counter this latter route should be closed off. But the leverage will remain, albeit constrained by regulation.
Until I read this article I had never really understood how the great Glass-Steagalling was meant to take place. The whole "casino element" seemed ill defined and if anything misleading; after all Northern Rock were the first to go under, and they were pure retail, not a hint of investment activity (which aside from propietary trading, is actually relatively stable in revenue terms [note the relatively]).
But defining "casino" in terms of leverage (and to make it more nuanced, I'm sure you can drag in various specifications of funding requirements) seems to do the trick, if not perfectly then at least getting towards adequately. Banks can be divided as retail, which have to conform to certain leverage requirements, and investment which do not. If done properly this could allow retail banks acccess to the cleaned-up securitisation markets to spread their risks, and even a bit of trading if their bent ran that way. Of course this would make banks less profitable, but I'm not sure that's any bad thing.
Unless of course we get nationalistic, and realise that a lot of bank profits come from extracting rents from overseas. So Britain may in fact be poorer for this move, unless we can create a healthy framework for investment banks to operate and continue to cream money off our less financially sophisticated friends.
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Looking at the average growth from 1900 to 2009 isn't exactly a good comparison to the rest of the stock market. You aught to look at the average growth from 1986 to 2009, when they changed their tactics.
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#13
10/50 = 0.2 The decimal 0.2 as a proportion of 1 is the same ratio as 20 out of 100, i.e. 20%
Ditto for 0.5
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There are 50 million people out here in "ordinaryland" who just don't understand why the banking industry pays itself in millions, while everyone else works on 10k to 50k.
What on earth is so special about bank workers?
They've been working for sensible money for centuries, but in the last 10 years have decided that they are worthy of lavish riches, all coinciding with the biggest bank-bust in history.
And now they want to do it all again.
Massive pay equals massive ego equals massive recklessness.
Wake up HMG.
Wake up BOE.
Wake up Britain.
Bankers enriched themselves on one of those waves of "asset price inflation" that we occasionally get in the UK.
But "asset price inflation" always has the same outcome....bust.
It becomes unstoppable and has nowhere else to go but down the drain.
There was no "boom"...many of us could see that.
Listen HMG....you cannot run an economy on these "lame-duck" booms.
Stability is vital.
And if you don't control the greed and ego of bankers....we will all go into poverty (except the bankers, who thanks to their riches, couldn't care less.)
If you pay someone a lifetimes' earnings in one year, why should he care about future stability?
Robert Peston is absolutely right....all big rewards should be available only on a long-term basis.(And even then should NOT be lottery jackpots.)
THE PUBLIC ARE NOW REGARDING THE CITYS' EXCESSES AS FRAUDULENT, PARTICULARILY AS THE TAXPAYER IS PROPPING THEM ALL UP.
Signed...stevewo... just another member of Britains' defrauded public.
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The banking crisis isn't over yet. All the rubbish in off-balance-sheet vehicles is still there. The bankers are hoping people have forgotten about it and that by alchemy (QE, inflation etc) it can be transformed into gold. As an astronomical metaphor, this 'dark matter' continues to gravitate money and resources.
The characters responsible for setting-up systems that created this mess are still around: Bernanke, Greenspan, Geithner, Paulson, Brown and the rest of the Harvard/Goldman snake-oil salesman. 'Originate & Distribute creates global stability and growth' - hehe. Do they really believe that anymore?
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Nationwide are having their AGM soon. They sent around the usual reports including Director's remuneration reports outlining how much they get stuffed with (benefit of savers money). They have 'medium performance pay' which basicaly is a average of the previous 3 or 4 years performance, and of course they will always be guaranteed this aprt of their pay despite this years figures being 'down'. It appears they have carried out the 'MPs coup' by accepting pay set by a committee formed by themselves (oh yes it is properly audited (and what does that say?)) and leveraged to ensured they never 'suffer' despite savers getting 0% on their savings, in other words receiving negative growth related to either an average inflation in real terms. Once again, savers who provide the wherewithal for these 'custodians' lose out, and the DIector's will probably get their annual increase at the coming AGM by default because everybody thought they were working for the benefit of the savers. Robert, please do a programme to encourage those who have votes to use them to rein in the power of Directors.
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Can't diagree with this, clearly there should be some limits on gambling with other peoples money! Not rockets science, but still.
Given Robert broke the Northern Wreck story I am surprised he has not followed up [Unsuitable/Broken URL removed by Moderator]
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Excellent article.
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Call the bankers bluff. We're always told that they need to be paid big salaries otherwise they'll all swan off and work overseas - well why not try it? It would certainly be a case of 'addition by subtraction' in temrs of what they actually bring to UK society. (And don't mention us missing out on the tax they pay, because most of them have 'tax advisers' who ensure that they'll pay very little)
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What I continue to find galling is the claim of the bankers that they have to continue to pay huge salaries otherwise if they do not they will lose their talent. What talent? The same talent that has made the banks bankrupt no doubt. There are an awful lot of very smart unemployed non bankers around who would love a job with a salary probably half what the banks pay. Such new blood would almost certainly change the culture that is now so necessary to change.
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#13
"the return on equity is 10 divided by 50, or 20% ".... err 0.2% surely?
"the return on equity is 10 divided by 20, or 50%."....err 0.5%
NO
10/50 = 0.2 which is equivalent to 20% (of 1)
10/20 = 0.5 or 50% (of 1)
OR
10/50 = 0.2 x 100 = 20%
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Excellent article..if its so simple why are they paid so muchand why does OUR government let them get away with it.
Problem could be based on The old school tie meets Corporate America.
Its seems strange that most have Europe have escaped most of the financial bad debts and bad investments.
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Good post, Robert - in the interests of ALL of the people in the UK, we absolutely must not let things go back to where they were and have another one of these disasters.
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Robert
If the owners of a business want to take a bigger risk to achieve higher returns then why not? If they want to incentivise the CEO to do what they want it is up to them.
However, if the regulator/government want to reduce the risk of a bank collapse (because of the chaos caused) then it is for the regulator to set more appropriate capital ratios and liquidity rules. It is nothing to do with the CEO's salary and bonus.
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How depressing to learn that returns on gross assets have not been used by boards in determining the largesse distributed to bank employees. Its as if the banking sector have decided to invent commercial success models which suit their employees but not the owners. But, as you say, more fool the institutional investors ( and UKFI appear not to have been tasked to change this) for being sucked in. How many times have we heard these pension funds say to us that share ownership is for the long term, not for a quick buck!
What we have learned from you and others is that bank funding models, liquidity risk and leverage is the real threat of our economic national interest. For UK plc to maintain its credibility its government has been forced to stand guarantor for huge balance sheets, lest a UK banking default to its international creditors causes a run on UK plc. Leverage must be curtailed or alternatively big banks should answer to a supra national lender of last resort.
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Spot on ! This piece should be given much wider exposure. A very good script for a 10.00 o'clock news piece perhaps.
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I think Germany's Finance Minister Peer Steinbrueck knows the real reason why our useless Government won't implement any effective regulations...
"He told a meeting of the Confederation of German Trade Unions that the British government was 'on the side of the City of London and its interests and holding back from implementing regulations'."
Germans accuse Brown of dragging his feet over the economy
http://www.dailymail.co.uk/news/article-1196913/Germans-accuse-Brown-dragging-feet-economy.html
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10 and 41 - 2 posters only who understand.
According to Robert's analysis there was no difference between Northern Rocks 125% mortgages and those issued by other banks with 50% equity backing.
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@SH8960 post #59: Rest of Europe has escaped? Tell that to the Germans that are having to bail out both their regional state banks and their international investment banks. Or Spain, that have had to set up a fund to support their regional banks due to the collapse of their property markets. Or Iceland (remember them?) or the French (who weren't exactly in a great place employment wise to begin with).
This is not just a UK problem!
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will hutton last night touched on a similar issue - the banks are now part of the public sector and expect to be bailed out by the government if insolvency is a reality. He also stated that this is such a scandal he does not understand why the public ( and their representatives ) are not asking for some form of retribution from executives or board memebers - Sweden was cited as an example where civil action was taken
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Who is it precisely who is saying that 'bonuses are back'?
http://moralorder.mediumisthemess.com/blog/
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Best article for a while Robert, but I would have liked you to clearly differentiate retail from investment banks. I firmly agree that retail banks are 'utilities' and should be tightly regulated to protect 'joe public' and the taxpayer. One thing I would like to see are measures to prevent 'toxic instruments' finding there way onto retail bank balance sheets e.g a list of regulator 'approved' financial instuments.
Investment banks are a different kettle of fish. They are set up with the express remit to participate in new and/or riskier investment opportunities and indeed to 'invent' the financial instruments that have lead to the current crisis. This is why they should be firmly segregated from retail banking - I have said from the word go that this is was very unwise. Andrew Haldane's analysis shows that retail banking's increased profitability is a short-term mirage.
I would also like to make the point that credit rating companies performace has been appalling. I wonder if there is a way of independent regulators taking over this sort of function?
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Bankers!give them enough rope and ....they'll hang the taxpayers who have yet to be born using a viscous proxy governmrent as tax collectors till Sparatacus arrives. The present generation is financed from vast borrowings from various sources ,the commissions from which prevent the vast vampire banking/political system from disintegrating in the light of day .
Robert Peston PLEASE be brave ,and use the magical words FRACTIONAL RESERVE BANKING and YOU TUBE
Even the tier one capital that Banks must hold ,is no more than promices promices it being based on calculations of future profits now no longer possible ,unless of course THOSE people saving in pension funds are only allowed to retire "after" they die,which would enable the stocking fillers THAT BANKS sold the ponzi pension funds to carry on alluring the next generation of punters into believing that they were saving for a rainy day whilst the recipients of their largesse carried on floating arround the med indulging in wine woe men and song.
To understand what is going on one does not need a degree in anything that passed for the thought of the enlightenment, since it ammounted to no more than a posturing subterfuge to hide the real meaning behind the following childrens tales.
THE EMPERORS CLOTHES
BRER RABIT AND THE TAR BABY
THE GOLDEN GOOSE
THE FOX AND THE THREE PIGGYS
JACK AND THE BEAN STALK
ETC etc etc and etc
Childrens stories make one think ,the thinking of the enlightenment[converted to the thinking of the entitlement by bankers] persuaded its captive secular audience of dung eating fools that they were thinking.
Paper "wealth" created by banks ammounts to no more than the beads given to the indians reputedly in exchange for manhatten island [Although the indians did not realise it at the time ,they having no concept of ownership].
Banks should not be in charge of capital origination as Soddy pointed out many decades ago,yet any attempt to remove their power of creating capital from thin air based only on the promice of a recipient to repay backed by dutch tulip bulbs , will lead to them merging with trotskyist and other such organisations to call those proposing change fascists and kick them about the streets while the pseudo police stand aside and watch.
The Grimm reppo has arrived!
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Maybe we need a little social activism in order to make throughly clear the extent of the contempt in which bankers are held by the public at large.
Boycotting bankers' business might be a start. If you own or are influential in a business, stop doing business with bankers. If you know your customer is a banker, show them the door.
I'm not suggesting stopping doing business with the banks themselves - as has been pointed out, the country needs the institutions to work. Rather stop doing business with the individuals until the industry gets the message.
Once they start being treated by the public as the pariahs they truly are, they might get it.
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Interesting to see historical analysis is begining to creep into the equation.
1986, eh? No wonder they called it the Big Bang. The trouble is the house didn't finally fall down unitl some 21 years were passed.
In the light of what you describe one can only ask what were the regulators doing whilst all this was going on? It was not as if there weren't enough of them under the new Tripartite system introduced in 1997 by you-know-who. Was there a sub-text at that time nobody noticed as looking at current circumstances I doubt very much if you-know-who had the ability to think it through on his own?
So we have bankers cutting and shutting debt instrument thanks to deregulation, massive development in computing power, mathematical modelling and a perception of a new paradigm. Talk about The Bubble as it was once known.
More significantly we also have governments using this explosion in presumed wealth to expand the base of the state into all parts of the economy and society on an assumption that the government cares. Inevitably government will not regulate the bankers too hard as they too became dependent upon the money. So we now had a Double-Bubble.
Both of these events at the time pushed the remainder of society into a cul-de-sac where we were left to live of the remains of the feast. It became very difficult to create commercial value in real terms because the rate of return on investment was vastly inferior to what could be got from The Bubble. So we lost a million manufacturing jobs.
Now that the Bubble has burst we remain still at only the start of the new times. The state is a bloated shell that needs to shrink in size. The banks want life to continue as before: well they would wouldn't they? And the political will to move on is just not there.
The real economy once discarded as too cheap and too poor is now underpinning the lot. The balance of power in the economy has changed; but nobody has noticed yet.
At least the bankers got their new paradigm: it is not the one they expected but then they never are. Time to change and change big because (old cliche coming round the bend) those who refuse to learn the lessons of history are doomed to relive it.
The public are in a hanging mood because they understand times have changed but those who say they are our betters have not and probably cannot. Time to encourage the others, methinks.
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Post 66 specialist_fielder - The volumes that have been made avaialable to the German state and land banks is a fraction of the amount pumped into our banks. The German investment bamks took a big hit....but not as much as our banks... and the German economy is much larger and stronger than ours. Spain... a fund to support.... a little different to taking over some of our institutions. Iceland....isn't really in Europe is it (Isreal in the Eruovision song contest??) French...similar position to the German land banks but without the massive international investment issues. Our banking is in a mess...I doubt it will ever recover unless there is a major overhaul very soon. I know my money won't be there much longer because I don't trust them.....
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As a start, perhaps salary and bonus levels for banking executives should be tied to the leverage, the bigger the leverage, the smaller the salary. Make it exponential, so a small rise in leverage is a big decrease in salary.
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I've never heard of anyone on minimium page causing damages greater than their renumerations.
"banking became a casino run for the benefit of bank executives: the sucker punters were the shareholders and - little did we know it - taxpayers."
Try telling that to the generations which are and will be born into debt. And to tell them that some of those responsible are enjoying themselve in tax havens, away from the wreckage of plunders.
What will happen if the world has no more genuine trust, respect and honour?
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Robert,
On a separate topic, ie, the pay down of mortgage debt (http://news.bbc.co.uk/1/hi/business/8132081.stm), one thing missing from the analysis is the effect of the drop in interest rates.
My mortgage interest element has dropped like a stone but the money payment has stayed the same. Thus it is being paid down much faster than before. This could over-egg the amount people are deliberately reducing debt.
I don't know if this is also happening with other variable rate debts eg loans and credit cards but it would be worth checking. It may help determine if people are consciously or unconsciously paying debt down, ie, has there been a real change in consumer behaviour?
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As many posters have said in many ways...
We have to move away from a banking systems that is based upon asset inflation. But how, without total collapse?
My guess is that what we need to do is to re-price money so that asset inflation is suppressed - I see no other mechanism. This, like other inflations, can only be achieved by making money cost a sensible price - That is by putting interest rates up to the 4-6 percent range. (and stop printing money [quantitative easing]!)
Unless and until the cowardly central bankers (yes, Mervyn King cowardly - this means you!) take this on board we will just get deeper into the hole that the last 20 year have dug! [As we have already nationalised most of the banking system,we can rescue the depositors fairly easily.] But we MUST start NOW!
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If you look who on the board of UK Financial Investments,
the arm of the Treasury.
who agreed Royal Bank of Scotland's chief executive pay deal 9.6 with the bank
http://www.ukfi.gov.uk/about-us/
As long as we have regulators that have a vested interest in the industry that they are regulating then the regulator is all ways going to fall on the side of the industry
As the regulator would not want to do anything to upset the industry as members of the regulator broads would want to go back in to the industry at a later date
This is why the banks are just laughing at us as tax payers and costumers
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Mr Curzon applied for a banking licence, any update on that? Was he successful?
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I read that UK has 280,000 accountants, more than the rest of Europe put together. Why?
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What is obvious is that whilst the bankers thought they were clever, they forgot the golden rule of getting out whilst the going's good. My own feelings are that once the genie was out of the bottle they weren't smart enough to stuff it back or even retire on their ill gotten gains before the bubble burst. It is also obvious that due to the paper trail of such accountancy practices been complex in who agreed or said what that litigation would never touch them. It is important for the future that some notable scalps are taken now and Sir Fred losing £200K a year off his inflated pension does not deliver that scalp!
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#67 xaviergalore
Will Hutton also started the piece by saying that he was absolutely amazed that there have been no mass riots in the streets over this scandal.
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Banks have their tier one capital wiped out if the assets on which their loans are based become insolvent and the debtor walks away
It is irrelevant how much leverage a bank uses if the underlying assets become insolvent
The only differance between highly leveraged and lowly leveraged banks is in the quantity of counterfeit fiat money that they loaned out and can no longer recover, since their tier one capital covers little and probably nothing if it derived from future profits using accountancy fictions.
The perfect synthesis between bankers and politicians has produced the greatest counterfieting scaaam on a world level in history.
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Very interesting artcile, pointing out the obvious that given more money to lend banks will lend it - ie far eastern short term cash loaned as long term debt.
Surely something a government should regulate as being highly dangerous ?
Surely something the "market" should highlight as dangerous and therefore reduce the share price of such companies.
Of course the opposite has happened, as it has ALWAYS happened in every boom and bust.
The market doesnt work - as can be seen by the oil price and commodity prices, the market is actually ruining businesses on a daily basis. Scrap all financial markets now. Replace them with only markets where pensions companies and invest for the long term with regulated balance sheets with no financial wizardry.
The Obvious question is what is going to happen to house prices ? The loans that have been made over the last 10 years are clearly outside of what the public can afford, partly due to a fall in food prices. This short term trend will reverse as other countries like China get richer.
I see a fall of between 30-50%, it's just a matter of time before the UK's hand is forced on this issue as either our currency falls or other countries buy what we cannot afford.
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Robert,
Firstly, a great article..thanks, its like a weight being lifted from many of our shoulders on here I suspect.
Many normal folk with an interest in finance have been saying the same thing since the collapse of Northern rock without the benefit of being big wigs in finacial circles, merely being 'people who can see the bleedin obvious'.
There is an important concept you miss though.
That is the concept of justice.
They were greedy and nothing special and trashed the world economy and we should be more careful in future is the conclusion from your article.
If anybody else in society had been so socially and economically wreckless it would have severe implications on their lives in the time honoured tradition of not rewarding practises that go against broader society for the enrichment of a few and as an example to discourage others from so doing.
The people who perpetrated this white collar crime against humanity get to slink off to their country clubs and wonder how they are going to spend the millions they have accumulated now in safe offshore tax havens in the next 40 years.. a few of them may even say sorry before doing that (through gritted teeth). That is hardly going to put off the next generation of spiv bankers is it?
There appears to be no will within the media or politics to properly tackle the injustice issues which the people clearly want addresed, they sew fear into our minds by suggesting 'we need these people to steady the ship and get us out of the mess so we cant attack them''...Do we need them to steady the ship?
Your article establishes clearly that what they did is not exactly remarkable....actually I think I could do the job just as well with a bit of re-training and I would be happy to do that for the 55k a year I get now in the knowledge I would be doing a service to society.
So Robert you have sucessfully, finaly reported on what happened, can you now deal with the justice issue please...but for our sakes try not to be 2 years late and after the fact this time.
I am not sure that we have that long to sort it out.
Jericoa...offers of employment on the lines as above welcome...
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Modern banking is based on "the big bung"collective barrel theory, which allows the bankers to suck on eachothers little redundant corks as they drain off the real vintage in the form of bonuses into their private offshored cellars.
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Interesting stuff but a couple of points for consideration:
directors salary set by the individual banks remunerations committee which ususally consist of non exec directors who are usually directors of other big firms who get massive salaries set by their remuneration committee. ie. jobs and money for the boys as long as you are in the gang.
Regulators - are supposed to carry out stress testing of banks balance sheets etc. - obviously didn't see this one coming so what was the point.
Auditors - auditors of a company are supposed to report to the shareholders. don't see any auditing companies being kicked out for failing miserably to notice (a) the excess bonus culture and (b) the casino gaming by the board - why because if they did they would lose nice juicy contracts in other words they would appear to be working for their own interests not the share holders.
Risk - banks have massive risk divisions surely they are responsible for highlighting the gaming issues.. oops forgot those that did got sacked.
FSA - all banks directors need to be approved by the FSA perhaps they should look to see whether their expertise is banking rather than gaming???
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72, Stanillic,
The real economy once discarded as too cheap and too poor is now underpinning the lot. The balance of power in the economy has changed; but nobody has noticed yet.
Interesting comment, would you care to expand on that please?
Thanks
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Instead of creating a system to regulate pirates why not make them walk the plank instead.
Its a perkuliar thing that Peter Pan [Alias tony blair ]seems to have done a deal with the captains of[f] the Hook types whereby politicians who walk the plank end up working for hooky types ,thus forming backscratchars anonymous.
And what are we left with but a prime minister who would not look amiss in a jolly rodger hat ,a wooden leg, an aye patch and a parrot that repeats"hello my darling how about a quick bonus"when a banker arrives.
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87 - quick comment re: auditors. That isn't the role of the auditors, their remit is effectively to state whether the accounts are basically true and fair and put together in accordance with applicable accounting standards. The excess bonus culture is not in their remit - if bonus' were contractually due and stated correctly in the accounts then that is where their responsibility ends (and the exec's remuneration is reported in the financial statements).
With regards to the pricing of the assets - again, the auditors are supposed to challenge the assumptions behind asset pricing and valuation but, again, as long as they are priced in accordance within accepted accounting standards and correctly disclosed then they are ok (the complete collapse of the credit system and the subsequent destruction in asset pricing wasn't apparent until it happened and then the pricing was changed (for example RBS huge write down)). As long as all the activities were adequately disclosed (you will see pages and pages on risk in the financial statements) then effectively the auditors have fulfilled what their responsibilities were. You may question that these responsibilities should be different but at present that is what they are.
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How many people commenting on here previously held bank shares at several pounds each and have lost huge amounts of money?
The benefit of the banking crash is that it has allowed people who could never have afforded to invest in large UK institutions to do so if they so wish. I did and made a fair few quid out of Barclays I still hold Lloyds and dabble a bit with RBS. As far as I can see this is fantastic redistribution of wealth from the people previously wealthy enough to invest in shares worth several pounds each to people like me who could never have held several thousand shares in major UK companies.
Go Nuts Gordon, I'm getting quite into this Socialism lark!
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Ok - I think we all appreciate things need changing and we can't get into the situation of the last few years over again. We need to change the view on risk and the reward structure to reflect a more long term basis (not just economically but environmentally and socially as well). I think we should leave the witch hunt and mob mentality and focus on the key issue of where do we go from here. I don't believe anything illegal was done by anyone so lets leave off all the calls of prosecution and fraud and all other "burn them" cries and get onto the more constructive discourse of fixing things. Hanging/imprisoning/burning/lynching all bankers isn't going to get us anywhere now is it!
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Lots of good points being made here, by RP and fellow bloggers. So, it seems to me the summary is the fractional reserve banking brought the house down. And note, the assets upon which money were lent were assigned inflated values too, so double the trouble when the poop hit the fan. Our government, and that of the US, lacked the will or wit to properly control the domestic activities of banks. I am sure they didn't dare contemplate that the lending in the West was uncontrolled recycling of Far Eastern trade surplus (being our own trade deficit).
As far as the UK is concerned, Crash Gordon rode a wave of apparent prosperity off the back off all this, happy to take the credit to the extent it got him the PM job when Blair went. But now Mandy is pulling his strings, and one result is that the EU has been given an oversight over our FSA, beloved of Crash. No wonder Crash and Darling want the FSA to remain as is - all the while it is useless, the EU has no chance of exerting any restrictive influence which may hinder the re-emergence of the old system. After all, for all the hand-wringing the chance of real change in the US is limited given who Obama's backers are, and our financial sector is obliged for it's own sake to follow their path to compete and to generate anything like the returns (legit or casino) needed to pay for the collapse. Crash and Darling can't afford Euro style restrictions. Sub-plot - divergence of interest between them and the ambitions of TB/Mandy.
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bmviking in post 20.
Think you should learn the workings of the Mortgage Market before accusing anyone of theft.
If you're being quoted a rate of 5 to 6% apr, this would be based on the term of the mortgage( You don't mention if this is fixed or floating).
The money to supply your mortgage is provided from the money markets through the issuance of commercial paper, for a term aligned to your type of mortgage - e.g. 2 yr CP to cover a 2 yr fixed mortgage.
The Money Market Rates have little to do with current BoE Base Rate and more an expectation of Libor rates for the term concerned.
So in summary the money markets are expecting Base Rates to soon be up to 5%, that's why the mortgage is priced as it is.
Theft is a strong word, and no bank is obliged to lend to you, regardless of what rate they wish to charge you.
It is exactly your hypocritical attitude that makes this blog a complete waste of time.
You blame bankers for the mess we're in for lending recklessly, then you accuse them of theft for charging a market rate for a product you are not obliged to by from them.
If banks are so terrible why don't you repay your mortgage, and not have to deal with banks for this product anymore. Probably because you don't have the money to repy your mortgage, and yet these EVIL Banks are providing you with a product that allows you to live in your home.
Get Real and Grow Up.
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Message 88 JavaMan1984
What I mean is that without the willing compliance of the little people who pay their taxes, save their money, know who they are and love what they know the whole superstructure will collapse.
There is a simple choice before the financial industry and its client state:
Either, become like us; moderate in our needs and sensible in our lives.
Or carry on as you are but watch out for heads stuck on pikes.
I would much prefer that the sinner comes to true repentance but if he does not then he will be brought to judgement. As I said the public are in a hanging mood so minds need to concentrate.
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If banking and politics were analorgiesed as a sexual romp what would they be up to with their inflated digits and who would be the suckers and who would be the succoured
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22 Ian The Chopper - You are spot on there.
To add to your comment, doesn't it make you wonder if the pictures used in the blog are so inaccuarate or irrelevant to the content, just how accurate the content of the blog really is...................
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#58 and other mathematicians......
thank you for highlighting my lack of mathematical expertise but i was only asking for an explanation which you have given and robert did not.......If you dont ask you dont learn.....
Back on topic i note that Goldman are continuing the gravy train with $20 billion in bonuses...and I also note the AD whilst complaining about the banks has done little to curb the excesses of the banks he owns in our name...
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I was interested in Robert's analogy with the gambling industry.As someone who worked in a Casino (in his younger days)I know something about gambling.
There is one mantra everyone knows before placing a bet:
'Never gamble more than you are prepared to lose'
In a Casino there is only one winner.....the Casino. The odds are stacked in favour of the house. I saw many punters come into the Casino, have a lucky night, and walk away from floor with a stash of cash. Often they would leave with a big grin on their faces. Easy money! Suckers!
The following night they would be back. The same self-satisfied grin on their faces.
But this time the roulette ball didn't fall where they expected; the cards didn't come out of the shoe in the right order. Gradually their money slipped away.
Then there was nothing left. Gone!
The moral of this tale for the City of London is this: if you are going to gamble with other people's money, be prepared to lose!
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I seem to recall that merchant banks (remember them) used to be partnerships. That ensures that the executives are betting their own money. Another structure which may be more relevant today is that used by Michelin, in which the most senior executive has unlimited liability but other executives do not.
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Very interesting blog Robert.
And for once I do not have much arguement with your view, and it doesn't appear to include any hidden messages relating to defence of Prudence and NuLabour. Well Done.
However I have one question, if the content of the blog is so 'bleedin obvious' then why didn't Brown as Chancellor and PM introduce effective regulation to prevent this. Brown has been in direct control of City Regulation for over 12 years now, where is the conclusion that this Govt are responsible for this mess we are in. For watching from a distance while this happened, and doing nothing.
Then choosing to blame anyone than himself - Watch out the Downing St Cat, it will be all your fault next!
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Regarding the political aspects and lack of action others are laying at the feet of Mr Brown. As I see it (with finacial services accounting for around 10% of GDP) banker bully boys wearing size ten boots were willing have a go at government via the media (or move operations overseas) if it got in the way, the financial sector had too much leverage on our government. If the economy appeared to be working do not try and fix it. The markets know best.........
Governments now can take some action(action that would have been very unpopular to take whilst snouts were still feeding prior to the credit crunch) and adjust the checks and balances, perhaps reducing the size of banks too will help, too big to fail banks ought to be downsized and put in the position of taking more care with other peoples money or they will fail.
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#97. islider55 wrote:
"doesn't it make you wonder if the pictures used in the blog are so inaccuarate or irrelevant to the content, just how accurate the content of the blog really is..."
The picture used at the top of this blog is neither inaccurate nor irrelevant. Its caption is simply "Workers in the City", which is exactly what the piece is about. The Lloyds building is an iconic city landmark, undoubtedly used to set the scene, and the chap in the pin stripe suit walking past it is as likely to be a banker as an insurance broker or underwriter.
It's time the moderators got tough and removed the posting rights of those contributors who write only to disrupt.
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How about a new criminal law of "Corporate Financial Negligence"? If a banker (or other CEO of a pubic company) exposes the country to grave risk, should this not be seen as a criminal act - a form of treason?
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Yes everybody or nobody ,I know that if my sugestion in 89 to encourage at swordpoint the pirates of pennance in the banking assystem to walk the walk along the plank they made for debt junkies , having been remunerrated for talking the talk for decades would only leave the mary celeste financial world appearing rudderless adrift
But does anyone seriassly think that The one and only captain Birdsaye who has been at the helm with all hands on his swinging deck[deck]for twelve years steering to the left and right a stage prop wheel with no linkages provided by the bankers to keep him off their pirate decks was in control, simply because he always turned it in the direction that the ship was already going going gone to the lowest crocodile bidder at the bottom of the atlantic/toc .
Apeolitician is somene who runs in front of charging lemmings and shouts authoritatively "follow me i'll get you to the Rocks on time".
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rbs temp
Bankers with any dress sense do not wear pinstripe suits only insurance brokers do. If you had worked in the city you might know this. And the Lloyds Building is located in the Insurance district of the city between Fencurch St and Leadenhall St, as mentioned by the original poster. So a picture of an 'Iconic' Insurance Building is not relevant to a story on Banking.
I stand by my comments, these were not disruptive but an observation of the misuse of terms in the mass blame culture against 'bankers'.
Do you actually know what a banker does, the term is far too general for the use Robert applies to it. Do you know the difference between the following terms which seem to be interchangeable on this blog:
Private Banker
Retail Banker
Investment Banker
Corporate Banker
Fund Manager
Hedge Fund Manager
Institutional Fund Manager
Investment Manager
Private Wealth Manager
Private Equity
Didn't think so, now get back in your box.
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Fully understood Robert.
We all knew bankers were not worth it. Now you have done the sums to prove it.
I'm amazed the commercially savvy haven't already come up with the "Moral Bank" who make firm commitments on executives salaries and bonus. They'd be overwhelmed with customers banging down their doors to give them money.
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rbs temp - if you are so offended by my posts, as they are so disruptive.
Why don't you complain by using the appropriate link.
I assume you have read all of my posts before making such an accusation???
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Robert Peston has a significant talent. It is his ability to explain to people who are not experts, in terms they can understand, concepts and facts which are intrinsically difficult. An excellent artitcle from this perspective.
Equally clearly, it was written quickly enough as a response to the Haldane speech bearing in mind that RP has a very great deal on his journalistic and broadcasting plate.
Congratulations, Robert, and well done.
As to the contents of the article, I have long said on this blog that the so-called geniuses who run our financial system and banks are idiots cubed, who deserve no better salary than that of a modest clerk.
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As usual the original posting is somewhat erroneous and misleading. It also contains some questionable assumptions/definitions.
What Haldane reports is nothing new for anybody who studies/has studied markets and banking. In fact the question that should be asked is why so few know this?
Leverage is as old as time. People need to understand that any business can be leveraged (borrowing) to advantage if you believe the business model will make an adequate return on the funding whether through debt or equity (and the most appropriate mix decided by taxation) the only issue being risk.
The essential difference between share capital and borrowing (as leverage) is that one expects a level of dividend return based on the risk of the business model and the other (the borrower) expects an annual return of interest based on the risk of the business model.
M&M's approach (as referenced in #47 but wrongly blamed) showed there was no difference other than for taxation purposes and when the level of borrowing was excessive such that the risk of bankruptcy becomes prominent (in simple terms).
There is nothing wrong with leverage if the business model holds. But banking and everybody involved (from government through analysts through investors) did not take account of the increasing risk of return (despite plenty of warning - see Buffet/Soros etc for example).
As the Lex column in the FT commented recently, taxation is the real issue because debt, bizarrely, receives far better treatment than equity. One suspects that the use of leverage (see,for example, hedge funds) is really just a tax arbitrage (with taxation set by Government policy).
Are CEOs of banks overpaid? YES
Is the CEO/senior management/celebrities of the BBC overpaid? YES and the point is what?
Whatever the merits of CEO pay, the Government was quite ok to accept lots of tax receipts from an industry that was getting a higher reward from higher risk and ended exactly as M&M's proposition suggests. Not only that but we now know that the Government was aware of these risks way back...........
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jolo13 #13 b
Your response is a credit to you......The country would be far better if it adopted your tone.......
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#102.
You point could be worthy if it wasn't for the fact that whilst in opposition New Labour focused their ire on so-called fat cats. Anyone remember Cedric the Pig? The irony is that his salary wasn't so horrendous when compared to what some in public service are now paid - including most recently the Government appointed senior management of Northern Rock.
It also ignores the fact that they are, after all, the Government. And the Financial Services and Markets Act 2000 (which created the FSA) was, to most obsevers at the time, one of the most draconian pieces of legislation to have hit the statute books. The trouble is, the FSA's Principles have not, for some reason, been applied to those who have ruined the economy.
I think I may now, in fact, have found the answer to large pay packets.
Tell the investment banks to make less money.
This could mean them charging less to French, German and US clients; it'll give a whole new meaning to International Development Aid. It might mean that taxable profits and incomes in the banking sector will drop, but I imagine that'll be a nose-spite-face by-product of limiting pay and incentives.
The funny thing is that back in 2000 and 2001, the idea of linking remuneration structures and regulatory compliance was a big thing in the FSA's focus on the training and competence of those authorised to do investment business in the UK. Somehow, the regulatory focus on that got lost - along with risk to the financial system at the way some banks were behaving.
I have to say, that although I too can get annoyed by the ostentatious behaviour of some people - red Porches, rather than the less obvious grey ones - they receive what they have earned. Provided this is not through fraud or excessive risk taking then fair enough.
If an M&A banker earns a multi-million fee on a multi-million transaction then who am I to be concerned - there's a willing buyer and the seller is no doubt pleased with himself. The banker is unlikely to have complicated tax affairs and will pay tax on this income in the UK - that's why they are bankers, and not accountants or tax advisers. They're not clever enough. The body corporate may have clever tax devices, but HMRC's anti-avoidance unit is not daft. Under-manned perhaps. But not necessarily daft.
We don't need new rules. We have too many already.
Enforcement - backed up by the imposition of penalties - in the key.
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As ever - back to good old British lack of accountability, our leitmotif since the Official Secrets Act.
Who will do anything? Why would politicians do anything? Huge reasons not to bring bankers to book, not least the extremely parlous Labour Party financial situation and COnservatives must need a fair bit of support to.
Again and again we see either a) mute and forgettable apologies or b) (more common) a total disregard of the problem.
This is a particularly malevolent cancer when it spreads from the 'brain centre'
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103. At 2:13pm on 03 Jul 2009, rbs_temp wrote:
#97. islider55 wrote:
It's time the moderators got tough and removed the posting rights of those contributors who write only to disrupt.
-------------------------------------------------------------------------Good idea we do not need your type on the boards trying to interupt our entertainment
What we need on these boards are the equivalent of the orchestra that played "abide with me" as the titanic went down as water lapped about others canutian ankles whilst it slipped effortlessly up up and away to the bottom and permanent place of stability .
As the chinese philosopher quoted recently by Bill Bonners "Fleet street daily" said "money does not change where anyone is going ,it merely makes the journey seem mor comfortable"
He may of couse been wrong ,in that money might insure a ticket to hell for many!
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"jdsholdencaulfield wrote:
I am at a loss with Brown/Darling - they say they "won't legislate" to stop excessive bonuses"
And will the Tories be any better? Hardly. Orwell had it right in Animal Farm.
Moreover all that's different about bankers from many PLCs is the scale - both in breadth and depth - of the trough. There are plenty of people out there getting ridiculous sums of money for destroying wealth.
The underlying problem is Corporate Governance. While 'Directors' decide their own remuneration (in practise) and appoint the Auditors then there is no hope that their pay will accurately reflect their value. And how many MPs are Directors? Now ask yourself if these Turkeys are going to vote for Xmas.
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Thank you Robert, for a well-presented article.
One related story which comes to my mind is the Ronnie Biggs saga. Like most of the bankers, he has "shown no remorse". But their treatment has been rather different from his.
I see Hornby has landed another top job. In my view the only job he should be able to get now would be as a flower seller outside Waterloo Station, like another Great Train Robber, the late Buster Edwards. (Mind you, he gave good value with a cheery smile!)
However, the corporate sector doesn't seem to learn does it? Fail at one job, and you will probably get the chance to fail at another, as happened with Mr Corbett at Railtrack and then Woolworths.
Looking at the political world, it seems to be even worse.
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107 makerofsense
The nearest we have to your proposal is the Cooperative Bank.
If people feel so strongly on this subject it might be worth transferring their banking business to them. The influx of funds to the Coop would certainly allow them to expand their ethical banking policies. And this might just be the impetus, to move the market over to a more responsible banking industry.
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#90 You seem to have forgotten the most significant part of an Auditor's job: Is the Company a Going Concern?
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106 Your banker definitions are all "derivatives" of the ponzi banking system, they may be HIGHLY skilled but so are the crew on pirate ships ,lets not all get touchy feely .LOL
Skill factor hardly mitigates belonging to crimanal enterprizes
The main purpose of bankers is now helping buisinesses to reamortize their fractional reserve banking bonus producing scaaam so that they can carry on swanning around the med looking for crooks to do pirate buisiness with who wish to offshore assets stolen from other financial juristictions .
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Post 103 to answer your points.
1) There is no caption attached to the picture. The piece isn't about City Workers it is titled "Why bankers arten't worth it". If you read the piece you will see the words banks and bankers used a lot. The word insurance is not used in the article and the piece constantly refers to banks and bankers.
2) The picture would appear to have been taken on Lime Street outside of the new Willis Building looking at the paved road in the foreground. Willis by the way are one of the three largest insurance brokers in the World.
As to the person being a banker I think that is highly unlikely as anyone who works in the City will tell you that the square mile is very clearly demarked with the Insurance market generally within a triangle bounded by Leadenhall Street and Fenchurch Street joining at a point at Algate and being based on the eastern side of Bishopsgate in London EC3.
Most of the traditional banking is undertaken across the other side of the road in EC2 around the Bank, Cornhill, Lombard Street and Moorgate areas.
Having said that most of the money lost would have been lost around Canary Wharf or in Mayfair where many of the bankers traders and hedge funda are based.
Poor quality control or laziness in one part of a piece does question the qaulity control in the rest of the piece.
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A very cogent and well-argued article Robert, this is clear and incisive thinking which I hope will be read, digested and understood by financiers and politicians alike.
Quoting your article -
"What this means is that in the full period from 1900 to the end of 2008, the annual average return on financial shares was less than 3%, almost identical to the market as a whole."
Perhaps I'm naive but it seems obvious to me that financial shares cannot outperform the market as a whole over a long period of time, otherwise they would be creating money out of thin air - to me this is analogous to "conservation of energy" or "conservation of momentum" type theorems in physics - any scientists here care to weigh in on that?
It seems to me that the financial sector devoted a tremendous amount of energy to convincing people that the laws of physics/common sense could be defied - and maybe we were naive enough to believe them for too long.
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you alluded to this in your book, so in effect the rules were changed, the big boys who were the only ones able to do this did it and then went running home to mummy when it went belly up, and we get to pay for it magic, its not big its not clever and the only way to solve this in future is the threat of 30 years min in the clink
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61. At 12:04pm on 03 Jul 2009, Pensfold wrote:
"However, if the regulator/government want to reduce the risk of a bank collapse (because of the chaos caused) then it is for the regulator to set more appropriate capital ratios and liquidity rules. It is nothing to do with the CEO's salary and bonus."
The relationship between the shareholders/investors of a company and its CHIEF Executive OFFICER (as well as with other Directors) is vital to the operational culture of that company.
The real problem is not just that some cowboy and maverick CEOs, CFOs adn the like are out of control of the regulator, it's that they are out of control of the people whose money is paying for the company.
As we've seen, many shareholders of some organisations have been powerless to reign in maverick CEOs and CFOs .... until it was too late.
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#106. islider55 wrote:
"Bankers with any dress sense do not wear pinstripe suits only insurance brokers do..."
So you are prepared to make a ludicrous generalisation like this but not prepared to accept that an image of the lloyds building is appropriate to illustrate a story about the City? :-)
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There was me thinking that just a little bit of reality was seeping into the public consciousness, and that maybe, just maybe, we were getting towards the stage where we could start to put our intellects together and devise an appropriate way out of this mess which is of our own making - all of us.
And then I read the comments to this post, and with the notable exception of stanilic, everyone's come to the conclusion that the independent decisions of banks and bankers are wholly to blame for the situation we are in. It will never cease to amaze me the power of the establishment to mould the thinking of people into whatever shape it wants. Absolutely unbelievable.
So the reality is that we still can't make any progress in sorting ourselves out, because, other than a handful of people, everyone is heading off on a mental wild-goose-chase. At the end of which we will end up with reams and reams of "action" none of which is remotely close to addressing the issues that need to be addressed.
O brave new world that has such people in it.
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Thanks Robert, this really cuts to the heart of whether bankers deserve it or not, and the definitive answer is NO.
It is now down to us as a society to decide what to do with it - to let them continue to keep gambling with our money on a one way bet, or to make them servants to the real economy again.
It hinges on whether we as a society want to hang on to all that money we all thought we had was a result of the leverage...money which in large part has gone but which can rise again if we go back to the bad old days, or we go through a painful period of accepting our 'loss' but move towards a more stable and fairer place where bankers can't shaft us on a daily basis, get on a road to one way riches and retire in wealth and luxury at our expense.
I say it hinges on us, because none of the politicians will have the balls to lose that tax revenue. If it is to be decided, it will be us, telling our politicians that is what we want.
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71. At 12:42pm on 03 Jul 2009, wunch_of_bankers wrote:
"I'm not suggesting stopping doing business with the banks themselves.."
WHY NOT? There ARE alternatives to the big banks. The Co-operative, the mutuals, credit unions, NSandI.
With careful planning, you can probably have a lot less to do with these banks than you currently do.
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Sasha, post 116, perhaps we could add Richard Bowker to your list.
From being the man who devised the leasing scheme for the Northern Line trains at LU to Chairman of Virgin Trains to Chairman of the Strategic Rail Authority and then from there to being Chief Exec of National Express Group who have just had to hand the East Coast Mainline service back to the government. Do you see the trend?
Interestingly he was given his CBE by New Labour in the same honours list in 2004 as Sir Derek Wanless got his knightood. Yes he of Nat West / RBS / Northern Rock fame.
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117. At 3:01pm on 03 Jul 2009, islider55 wrote:
"The influx of funds to the Coop would certainly allow them to expand their ethical banking policies. And this might just be the impetus, to move the market over to a more responsible banking industry."
And its more likely to bring a more responsible banking industry about than waiting for regulators or government to do anything that will make a difference!
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have any safeguards actually been put in place...i see only this week one man was able to send the oil price soaring to $73....Futures contracts for 16million barrels of oil reportedly changed hands in one hour, compared with a typical volume of 500,000 barrels. The trades pushed the price of Brent crude futures up by more than two dollars to its highest level this year above $73 dollars (£44.50) a barrel.
Traders can use ICE Futures Europe, part of the Intercontinental Exchange, to buy or sell crude oil for delivery in several months time, effectively betting on whether prices will go up or down.....just when are we going to curb this "casino" mentality..?
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119 Think a trip to opticians is on the cards for you mateyboy!
Or have you been at the Rum?
I didn't mention any element of skill involved in the execution of the roles, or that some may need more than others.
My point was that they are all very different roles, and yet Peston and some bloggers group them together for collective blame, when some of these roles would never engage together in a business sense.
It's like calling for all Domestic Pets, including Cats, Hamsters and Guinea Pigs, to be put down because a number of Rottweillers, kept as pets have attacked their owners children.
Wholly inaccurate, and shows Peston is as bad as the Bankers(Whoever this term applies to this week). And yet you lot just lap it up.
YAWN!
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95,
Thank you.
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The purpose of fractional reserve banking was to gather together all the supressed canibal participants into one room with an empty hot pot ,lock the door throw away the key and say "guess whos coming to dinner"
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A decent article, making a good attempt at clarifying the complex.
I must say, however, that a great number of the comments appear to come from politically motivated(i.e. anti Labour) people with little serious to say about the problem. Have Central Office started to encourage bloggers now? My arn't they are getting with it.
We won't properly analyse the crisis, let alone put in place effective preventive measures, until we get away from all this party parochial nonsense.
The article addreseses UK banking but almost every bank in every country was very badly hit in 2007/8.... It is plainly about much more than remuneration and local (i.e. national) regulatory systems.
I, like most people, don't see why bankers (or hedge fund managers or derivative traders) should be paid much more than the average desk worker but I can't honestly say I think their pay had much to do with the crash. A contributory factor, maybe, but the cause?
To get to the bottom of it you need to look at the potential of leverage to do good (generate long-term investment goods)or bad (inflate asset prices). You need to take into account the great expansion in investment potential generated by the merchantilist states, particulary China before you blame bankers for 'investing' in personal mortgage based products (historically among the safest) rather than, say, new UK shipyards (which I, as a good citizen, would prefer).
By all means seek to limit leverage but I think we also need to look much more closely at the mechanics of the bust. Why, one Thurday afternoon, did a the panic start and why did the system allow negative feedback to such an extent that it spiralled down and down until governments, our own Mr. Brown notable among them, had to jump in to refinance the system. In a rational world things adjust to changed perceptions but house prices, for example, have dropped maybe a maximum of 15%. The value of financial assetts at least 60%. Explain the difference (I think due to low transaction cost, uncontrolled trading and unchecked credit for financial assets) and you might find a better way of reducing future risk.
The trouble is, National regulation won't do it. This really is the first truly global crisis, whatever the commentariat might want us to think.
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Great post and the first time I cannot criticise what Robert has written.
For me, it feels like the spirit of the people has been broken because of the way that big bonuses have been spread across the news over the past months.
Honest hard working people are losing their jobs, getting squeezed by banks and yet the bonus culture continues.
We look to our leaders (both elected government and opposition) with hope that this imbalance will be redressed and what do we get? Nothing has changed, apart from the fact that the taxpayer now owns a chunk of this mess.
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"What went so right in 1986 to 2006?"
To ask that question reveals an utter lack of understanding, that you seem to share with the government, i.e. that the banking system was good and working well and has only just gone wrong, instead of seeing that it has been steadily going wrong for twenty five years.
The inflating of a bubble is not "so right".. The question you should ask is why things were allowed to develop wrongly in 1986 to 2006
A series of small peripheral tremors like the house price carsh of 1991, the dotcom crash and black wednesday gave all the warning signs that were ignored by those in finance and those in power.
To think that 1986 to 2006 was "right" is probably the reason the powers are trying to rebuild that exact scenario instead of starting afresh with new ideas. "Getting the banks lending again" is the current target, rather than a situation to be avoided at all costs.
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124 RBS Temp
Having worked in the city for many years, and I won't say what role it is but we don't wear suits. But yes what sounds to you like a 'ludicrous generalisation' is pretty much the truth, the whole Insurance Industry is in a timewarp - bit like Life on Mars.
And I agree that the use of the Lloyds Building to illustrate a story about the City would be appropriate. However this story is not about the City, it's about 'Bankers'. The City is more than just Bankers.
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#125 Excellencefirst
So what is your suggestion? Putting heads on spikes?
(I hasten to add I do indeed enjoy reading Stalinic's posts and learn much from them)
I have read all the posts and do not arrive at the same conclusion as you.
And you will perhaps explain why I am to blame? No debt, no mortgage, rented all my life, never bought shares in banks, just another wee person doing their small job for society and taking responsibility for my own decisions. And asking for more transparency in politics.
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interesting take on how this mess was created here
http://www.rollingstone.com/politics/story/28816321/the_great_american_bubble_machine
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Post 124 & 137. I have worked in the City for many years and every male London Market Broker I see wears a suit often it is pinstripe or plain grey or navy blue. Also white shirts are still the colour of choice in the traditional insurance and reinsurance markets for both brokers and underwriters.
The London Insurance Market may be seen by some as archaic but that may be no bad thing when you see what some of the trendy bankers get up to.
I regularly meet with old college friends for a few drinks after work and generally the only ones in suits are myself and the other insurance professional. For the bankers, especially those working for American banks chinos and shirts seem to be the order of the day especially in the summer.
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Future generations will recognize only one honest bankSTer from our contemprary ponzitopian hang out ,and that will be none other than the postumoUsly annointed ST Bernard Madoff merchant of palm beach purrveyor of toxic waste barrels to the leaders of themasses and PATRON SAINT OF THOSE THAT BELIEVE THAT WALKING ON WATER AFTER TURNING IT TO WINE IS POSSIBLE
After all he is the only one who sincerely said that " it was one big lie" and was ACCORDINGLY locked up so that the financial autharitis particularly the ferralderal reserve which has 100 times as much worthless TOXIC assets sitting on its books ,would look as though they were hard on ponzis.
Guy Fawkes will also be postumously annointed STuy Fawkes for his unmatchable sincerity in that house of ill repute.
This present generation is destined to be seen by all of eternity as the biggest assemblage of "evolutionary " dope heads ever to gather in the history of bankind,it having built a financial system for no other purpose than to draw lots in advance for the Cloak of the coming Christ ,having preplanned how to nail him to a cross again for turning over their tables and saying Fractional Reserve Banking is NOT THE WAY THE TRUTH AND THE LIFE.
While Jesus hung upon the cross saying "forgive them lord" lots were being cast for his "wrapping paper"it being seen as the valuable thing from the standpoint of the inverted value system that controlled the world then and still does.
God forgive us!
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We obviously need a team of inspectors to go into companies and inspect them, the way that Ofsted does in Educational Institutions. Executives should be tested every five years and if they are incompetent should be prevented from working in the Financial Industry. The Government Inspection Department would look into Business and be named Busted.
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The bankers screwed the system in the UK and the US because they knew they could get away with it - because the Anglo-Saxon mentality is slow to anger and, with the exception of the threat of invasion, we have a history of doing nothing. In short, we bend over.
So the bankers screwed us on house prices - still ridiculously expensive here in the UK with the bubble yet to go POP! - and other credit debt, pensions, etc, etc. Worse, they know they have got away with it and are all about to carry on as beforehand.
My pension is non-existent, I am self-employed and am taxed to the hilt, do not have the luxury of a fat-cat MP, Public Sector or Banker pension and simply am aware that my day to day working life, my future life and my retirement is being screwed by people who know what they have done is morally wrong, who know they have got away with it and who now know that they can carry on regardless. There has been no punishment.
It is interesting to note that the one country that has mostly escaped the banking crisis is France - we all know how angry the French Public can become and what they end up doing in public squares to those they feel have exploited them! Oh to live in France!
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Comment 138 : nottoonear
Well I think we should start by reacquainting ourselves with reality. And top of the list would be the criminalisation of using deception for advantage. So goodbye most advertising, promotions, public relations, marketing and spin. Communication becomes genuine and honest. Making progress as individuals requires us to do things better - and not to waste time and effort to work out more and more convoluted ways of describing what we actually do as being better than that which it replaced.
The point is that we will have to do this sometime, and sometime soon. There will come a time when so many people refuse to believe a word they're told about anything, that government of the country becomes impossible. We're moving ever closer.
And you, personally, probably can't walk away from involvement for where we are. If you've voted for a party which has not seen fit to question the wisdom of the catastrophic jungle into which finance was forced by the unutterable stupidity of politicians, then you are partly to blame. So any Labour, Conservative or Liberal Democrat vote in the UK, or Republican or Democrat vote in the USA would count in this category.
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Robert---You have just shown why the Government were wrong to bail out Northern Rock. They did it because of the "core" of Labour supporters in that area. Ever since then the Government have been trying to buck the market...............it won't work.
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When the future's architected
by a carnival of idiots on show
you'd better lie low
Was a long and dark December
when the banks became cathedrals
and the fog
became God
Coldplay, "Violet Hill"
how poignant a lyric ...
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145 Not only did the government bail out Northern Rock with its assets transferred to the "bank" that the great Tony now works for ,they also tolerated its huge insolvent leverage[125% mortgages] that precipitated its colapse because it was "their bank"despite reservations expressed by the FSA which they set up in the first place,effectively using and risking public money to protect their political interests.
In short, they can resist everything except temptation
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The only thing our cross in the box democracy can now effectively deliver is shadenfreude by voting BNP, they have interesting things to say about banksters,which explains why the UAF are being funded at taxpayers expence to really protect bankster/politician fractional reserve banking interests.
Watch the plot thicken
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The banking system can be dressed up in any number of ways in order to show that we need the bankers and their ilk.
But. One only has to think just a little bit to realise that the bankers are living off the real economy.
No real economy. No bankers.
Night follows day of course.
But there is a lag.
The bankers are relying on the real economy dragging on whilst they carry on flogging it.
Oh how clever those bankers must think they are. Creating wealth from nothing whilst receiving plaudits from the red party about how good they are.
The situation now is that just as big banks cannot be allowed to fail the city cannot be allowed to fail. The city is the economy.
That is why our Robert goes on about it.
There is nothing else that we do.
The city IS business.
Except of course it is not.
But in order to keep going the real economy has to be run further and further into the ground.
Once there is nothing else to be squeezed out then rampant inflation will run wild until our standard of living equates to that of the third world.
Then we will reopen our sweat shops, coal mines, steelworks, ship building etc.
Oh yeah. And the bankers will be able to make money all over again.
Good innit?
Something for us all to look forward to.
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after reading your article all i could think of was those old photos of bodies dangling from lampposts with the sign round their necks Looters
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"the bankers seemed to be enriching the owners of the banks, their shareholders (millions of us through our pension funds)"
Does that mean when people are baying for blood they are happy to return the contributions that dividends made to their pension funds?
Plus, one reason the banks became more and more leveraged is that consumers wanted to borrow more and more for they could not survive with a 2 year old TV, 5 year old car, a foreign holiday once or twice a year.
The banks served a demand, with government encouragement of 'inclusiveness'.
So what/whom is really at fault here? Banks, governments or the public? I think they all have to take a share of the blame as do the media coming out with clap-trap such as "property is always a winner"
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Excellent common sense analysis - of course no doubt politicians will decide to ignore the obvious lessons that are shown as they;re too inconvenient.
Banks could always grow by retaining profits rather than being known for paying out high dividends, but then pension companies have tended to rely heavily on that cash stream. In many ways its a case of banks not investing in their own future growth and basically looking to do what the economy in general has been encouraged to do - increase size / standard of living by creating money via increasing leverage.
It isn't true growth, its fictitious in so many ways as the analysis shows, and as such it shows the lie of the previous "economic miracle".
The moral hazard argument is a god one; although in many ways, directors putting the stability of the company at risk for the personal gain of themselves and their colleagues could with a more appropriate interpretation of the law be discouraged anyway.
Surely in many ways it could be seen as negligent and indeed approaching fraudulent, profiting from not living up to a proper duty of care in a position of trust.
This may in many ways be why bankers claim they didn't see the risks in such policies; claiming stupidity / naivety is a much better option than wilful neglect.
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Why is it taking people so long to understand this scam by the bankers. The gambling part of banking is a zero-sum game, except the bonuses are paid if you win but not taken away when you lose.
Just follow the money. The bankers have indirectly stolen all our savings and pensions.
I am so disgusted that the government are allowing us to get ripped off like this.
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A provocative article, some good insight and some great comments - my joined up highlights (and a few of my own comments) include:
1. Wee-Scamp wrote:
"This is a good article but I also think we need to look at banks, their leaders and their shareholders in the context of what they achieved for the country ... In the UK's case their activity did huge amounts of damage to manufacturing, slashed the business birth rate, pushed house prices through the roof, created record household debt levels, created a record trade deficit and so on and so forth ... "
2. BankSlickerminustheR wrote:
"This is just fraud on a massive scale...but who will grow some cajones to go after these banksters and start prosecuting these vermin ... The discussions on regulation reform are shaping up to be a complete whitewash ... We have been soft soaped and shafted by The City ... and they are being given carte blanche to do it all over again! GIVE US A NEW GLASS-STEAGALL (EQUIVALENT) LAW - NOW!"
5. John_from_Hendon wrote:
"The other critical element in the explosion of the 'fake' returns of banks was to permit asset price inflation to be seen as a good thing (which of course it is not, and has never been, and if we are to get a recovery this must be fully understood). This was achieved through successful lobbying of the banks and their economic friends educated in institutions which themselves became dependent of the finance sector (See Harvard) to have mortgage costs and house prices removed from all inflation indices (these indices being used to measure the effectiveness of monetary control) This was insane and inevitably led to the collapse in the price of money, which itself let to the 'necessity' to loan this worthless money to less and less creditworthy customers on poorer and poorer security which let the CDSs and CDOs etc. etc. which led to the global collapse ..."
72. At 12:42pm on 03 Jul 2009, stanilic wrote:
"...In the light of what you describe one can only ask what were the regulators doing whilst all this was going on? It was not as if there weren't enough of them under the new Tripartite system introduced in 1997 by you-know-who. Was there a sub-text at that time nobody noticed as looking at current circumstances I doubt very much if you-know-who had the ability to think it through on his own?
So we have bankers cutting and shutting debt instrument thanks to deregulation, massive development in computing power, mathematical modelling and a perception of a new paradigm. Talk about The Bubble as it was once known.
More significantly we also have governments using this explosion in presumed wealth to expand the base of the state into all parts of the economy and society on an assumption that the government cares. Inevitably government will not regulate the bankers too hard as they too became dependent upon the money. So we now had a Double-Bubble.
Both of these events at the time pushed the remainder of society into a cul-de-sac where we were left to live of the remains of the feast. It became very difficult to create commercial value in real terms because the rate of return on investment was vastly inferior to what could be got from The Bubble. So we lost a million manufacturing jobs.
Now that the Bubble has burst we remain still at only the start of the new times. The state is a bloated shell that needs to shrink in size. The banks want life to continue as before: well they would wouldn't they? And the political will to move on is just not there.
The real economy once discarded as too cheap and too poor is now underpinning the lot. The balance of power in the economy has changed; but nobody has noticed yet.
At least the bankers got their new paradigm: it is not the one they expected but then they never are. Time to change and change big because (old cliche coming round the bend) those who refuse to learn the lessons of history are doomed to relive it.
The public are in a hanging mood because they understand times have changed but those who say they are our betters have not and probably cannot. Time to encourage the others, methinks..."
125. ExcellenceFirst wrote:
There was me thinking that just a little bit of reality was seeping into the public consciousness, and that maybe, just maybe, we were getting towards the stage where we could start to put our intellects together and devise an appropriate way out of this mess which is of our own making - all of us ... And then I read the comments to this post, and with the notable exception of stanilic (above), everyone's come to the conclusion that the independent decisions of banks and bankers are wholly to blame for the situation we are in. It will never cease to amaze me the power of the establishment to mould the thinking of people into whatever shape it wants. Absolutely unbelievable ... So the reality is that we still can't make any progress in sorting ourselves out, because, other than a handful of people, everyone is heading off on a mental wild-goose-chase. At the end of which we will end up with reams and reams of "action" none of which is remotely close to addressing the issues that need to be addressed ... O brave new world that has such people in it..."
144. ExcellenceFirst wrote:
"I think we should start by reacquainting ourselves with reality. And top of the list would be the criminalisation of using deception for advantage. So goodbye most advertising, promotions, public relations, marketing and spin. Communication becomes genuine and honest. Making progress as individuals requires us to do things better - and not to waste time and effort to work out more and more convoluted ways of describing what we actually do as being better than that which it replaced.
The point is that we will have to do this sometime, and sometime soon. There will come a time when so many people refuse to believe a word they're told about anything, that government of the country becomes impossible. We're moving ever closer..."
==========================
And my observations:
It is amazing to see the Government (Gordon Brown and his Darling) focus on blaming the banks, when it is they that introduced the flawed/ineffective tripartite system of regulation, which allowed lax regulation to prosper so they could build up the economy (and hence public services) based on the 'short term economic bubble of profit" that resulted - and all at the expense of the real economy! Shame on them - and all who allowed them. Given Gordon is supposed to be a religious man - perhaps he should re-read the ten commandments and scriptures related to money lenders.
David Clift, a Future 500 Leader
PS Contrary to popular belief, Brown and Darling are not dealing with the crisis - They want to maintain the tripartite system and Darling is now having to 'plead with the bankers' not to start the bonus culture all over again e.g. take a look at http://news.bbc.co.uk/1/hi/business/8131898.stm (and http://poweromics.blogspot.com for a wider perspective too ). They created the problem, refuse to acknowledge this, and are failing to fix it too (and people allow them to).
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As I understand it Directors of public companies have a legal duty to act in the best interests of their shareholders. If this is true why have the directors of RBS, HBOS, Northern Rock etc not been sued by their shareholders? I would have thought that in the circumstances a choice of charges could be considered starting with mis, mal & nonfeasance. A successful action hitting directors in their own pockets would be the most effective deterrent against future reckless gambling.
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A key article, as voiced here by others.
Although Robert summarises the points made succinctly, what is worth looking back at is Who wrote the original and did the research. Oh yes, an employee of....The Bank of England. Nothing wrong with that, in fact quite the opposite, especially so, given the content.
More importantly the reseach shows how The BofE are well placed TO DO the regulating!!! The issues are understood, there was no "rocket science" in generating a 16% return on capital!
What shareholder institutions always want, (when times are good,) is less regulation - and don't they lobby for it. And if they don't get it, notice how their friends in the Tabloid press are rev'ved up to pour heaps of scathing criticism at their chosen target.
There was nothing clever about the levels of profits generated, all it was, was leverage. The clever thing to have done would have been to use less of it. The Northern Rock's of this world, and RBS and HalifaxBoS, were the dunces of the piece and pumped the leverage primers to the hilt and blew themselves apart. The one thing bankers were too blinkered to see (or imagine) was, that they might need saving from themselves!?! Well, pride, arrogance and denial limited the imagination of bankers, always has, always will. That's why it will happen again.
So what do we need? Well if banks want to leverage (gamble) they do it ONLY with shareholders money, not Auntie Betty's deposit savings balance! I mean how obvious is this? It is only bank lobbyists "trying it on" with the lawmakers that led to this legal relaxation in the 1990's. Now we know what happens when regulation is turned off, bring back Glass-Steagall and throw away the key.
Secondly, where the house buying and just as importantly housing developers are concerned, re-introducing credit control should be implemented. Only the rich, who could afford to over-borrow, (over-leverage?)demanded credit control relaxation because of their appetite for risk, given their wealth cushion. This is fine if it were only the rich that suffered in a downturn. Well there's 10% of them and 90% of us. It's the 90% (majority)that need the protecting. As far as I'm concerned the 10% should create their own separate market to borrow from. (And some have, Through Wealth Management operations.)But, intentionally, at quite a distance from the ordinary person, who has no desire to suffer from any fallout. So, if you want to "bet the farm," that's fine, just make sure it's your own farm that you're betting with!
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The comments by #53 on the Nationwide AGM material reminded me of some ideas that crossed my mind whilst reading the Nationwide Annual report and accounts. Ill use them as an example but Im pretty sure its typical.
The majority of the financial report presents numerical facts that have been subject to independent audit.
On the other hand the section on Executive Remuneration was quite opaque focussing on the process, generic goals, and the people on the remuneration committee. Unlike the evidence presented elsewhere in the report what was missing was:
The set of detailed Key Performance Indicators used to measure Directors
How are these measuremtn are made?
What was the achievement against the historically set targets?
What are the targets for the next year/ 3 years?
i.e. evidence based judgements based on open information
Why is this important?
----------------------
Without this open published numerical evidence how can anyone judge the goals, performance and motiveaton of the Directors? And hence whether bonuses are appropriate.
Given that these performance techniques are widely used throughout all levels of major corporation is seems bizarre that these are not presented in the Annual Report and accounts.
The creation of an open transparent approach would help both shareholders and depositors to decide with which companies to do business.
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You forget that the former Chancellor / and current-PM that allowed all this to get out of hand, now relies on the self-same banks to take up all this money he is printing. The foreigners don't want any of it.
I read somewhere earlier today that the printing presses (sic) are running at the rate of a billion pounds a day .... ?!
He is back to being a slave to the banks, and will give them all they want.
Goodnight Gordon, and quickly please.
Regards,
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Banks like RBS are run by scrums now (same as Sir Goodwin before). Now they are paying themselves even more salary/bonus. I can't understand why Brown/Darling allowing my money (taxes) being abused by this bank. They also get cheap money from BOE and charge 29% on credit card for customers. Why do we allow this? Close these greedy banks now.
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In 1997 three men set out with great purpose. Despite their fine cloth they had a goal that was contrary to their finery. Together they would bring the system to its knees.
From that chaos would spread a better world. Like the terrorist thought: there would be collateral as innocents perished but they would only serve the greater good.
Self referential thought was beyond them. They would only realise their hypocrisy when the International Court of Human justice had them sectioned in 2023.
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Congratulations for a summary with considerable insight. Until the rewards for short time expediency are replaced by benefit for long term good we will continue to suffer the consequences of greed.
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But Sir Fred is just one embodiment of how banking became a casino run for the benefit of bank executives: the sucker punters were the shareholders and - little did we know it - taxpayers.
I agree with this Robert - Also savers have been exploited by the banks with low interest rates to repair the balance sheets of the banks, and others have got into excessive debt because the banks have made bad loans. I have a friend on benefits with no job and no assets who has managed to run up £50,000 of credit card debt, so who is more at fault, him for borrowing the money, or the banks who lent it to him ? The system has collapsed because we have run out of debtors and their ability to repay debt at such high levels. Back to the good old days of only lending 2 or 3 times salary to buy a house would get asset prices back to realistic levels, and even better introduce a system of sound money where all money lent by the banking system is backed 100% by a deposit. This removes the power of banks to create huge amounts of new debt money. Extra money for new business and population can be created in a controlled way by the government / Bank of England. All existing deposits, and new money created by the Bank of England would be electronically registered to stop the bankers doing forgery as they do now by creating yet more debt money. This is unlikely to happen because the politicians and bankers work so closely together to profit themselves, by reducing the value of existing money to the detriment of society.
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Fine, but why does the economics and business media class including your BBC colleagues constantly try to talk up house prices.
You talk of 'hopes for a house price recovery' and 'getting house prices moving again' in the daily language of BBC reporting.
Well, prices are 'moving', they are moving downwards where they need to be though the average house price/average wage ratio is still far higher than trend.
Gross irresponsibility of the British media in this and so many areas is hugely damaging; as ever playing the populist, patronising and lazy narrative with the occasional outbreak of sanity in articles such as this. Any chance of rephrasing 'house price recovery' as 're-inflation of the asset price bubble?'. No? I thought not.
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#144 Excellencefirst
Thank you for your 1st two paragraphs.
There are many people who already live with reality. Communication becomes genuine and honest when the two parties are genuine and honest with each other (and indeed starts with being honest with yourself). There is already advertising legislation. I believe that adults should use their brains. A small dose of common sense goes a long way.
I previously stated:
"There is nothing remotely clever about being corrupt or incompetent. So the next question is which politician is going to stand up and come clean about this." - with regard to the whole banking fiasco and lack of responsibility for the same.
I have long called for transparency, clarity, responsibility and acted with the same. And indeed fought for those same things within my own profession. If I don't like the service I get I change companies, bank etc. I hang up on machines phoning me. I don't beleive the guy who's offering me 20 pounds for a fiver.
"There will come a time when so many people refuse to believe a word they're told about anything, that government of the country becomes impossible."
There are already people who are very sceptical about most of what they are told. They take charge of their own lives. As the numbers grow it will break or change the system. But it is necessary they act like responsible adults not irresponsible children. And therein lies much of the UK's problem. People who want someone else to pick up the tab, whether they are overpaid, failing bankers; politicians; those with no intention to ever work; or just toe-the-line journalists.
I don't have any magic answers and I don't know enough about banking to suggest appropriate legislation although I would like all the highly-paid and bonused risk takers and top dogs to put their personal assets on the line or alternately take an appropriate reasonable salary.
The last time I voted for a major party was 30 years ago. Absolutely no politician from the major parties since then has deserved my vote. If that makes me guilty in your eyes, so be it.
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It's hardly a conversation.... There will very likely be civil actions against bankers brought by shareholders...it's sort of totally blindingly obvious. When they start they will be a reproach against the government.
The Government should take the lead and start putting things right...they aren't some sort of player in a multi-player game, they are THE player,embodying the power of the people in the country.
Contrary to what seems to be the opinion of the Govt (If they can be said to have a collective opinion)--- The people are not in a vindictive mood and exhibiting a narrow lynch mob mentality.
Applegarth, Goodwin, Hornsby et al will have a decent life when the dust settles--- but they won't have the ludicrously gilded lifestyles bought through turning a blind eye to consequences.
The Americans didn't stand by examining the arcane detail over Enron and neither should we over what is an absolute cataclysm.
Arraigning some of the major characters would have unclear outcomes in some ways as the legal system grinds away---but it would have sent a clear message to all bankers that the gilded age is over.... were one or two subject to ongoing court cases I am certain Stephen Hester would not have been offered the contract he has.
Just get rid of him and offer the job at £much less and bonus much less--he can reapply if he wants it and will get awarded it if he re-applies within 6 hours of the offer...otherwise we will find someone else.
Nobody EXCEPT this government believes they must offer the 'going rate' or the talent will go elsewhere---- they won't because 1/10thof the remuneration is better than what they'll get anywhere else.... once the lesson is learned.
We all know they didn't mean to bust the system... and cause the real damage that is hitting 3 or 4 hundred families every day now---people get into cars every day not meaning to run down a pedestrian but that in itself isn't sufficent argument against a dangerous driving charge, should they do so....
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"If you're still with me (wakey, wakey), there's one other important related issue I want to explore, which is how to re-introduce moral hazard into banking, how to persuade bank chief executives that they'll really suffer if they place reckless bets that go wrong.
The problem is that no one can possibly any longer believe that there are any circumstances in which our government will let one of our biggest banks collapse.
Which is an enormous comfort to the chief executive of a bank. It means he or she can do something spectacularly stupid, safe in the knowledge that taxpayers will bail out the bank as and when it all goes wrong."
Robert, I'm still awake late as it is, and have read your latest blog and the interesting comments people have posted. We've covered this subject over and over again, grinding to a halt once more on the ugly reef known as "moral hazard". It really should be renamed "blackmail" shouldn't it?
I don't think there are any circumstances that justify what this government has done, bailing out the banks without setting strict and enforceable conditions. If there were any conditions, and I'm sure they'll claim there were, they were meaningless.
One point I'd like to make is your mention of a chief executive of a bank as "he or she". Not very likely to be a she! The financial crisis has been conspicuously a problem created by men in a man's world. Not that I believe women wouldn't be just as stupid given the chance, as we can see from the behaviour of women in politics.
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Comment 166 : nottoonear
Thanks for your reply.
My third paragraph - I did qualify with "probably". I only go back 22 years since I've felt a political party stands for something for which I'm willing to vote. I'm pleased to find someone going back even further.
I suspect that our thoughts on a good society are not too far apart. What about the means of getting there though? I think, reading your posts, that you believe that there is a suppressed adulthood and responsibility in us into which we will graduate naturally if the main drift of society becomes less apologetic to those opting to remain as children. So that the switch to a better way is constrained only by will and not by capability.
I'm not as hopeful as this. I'm no so pessimistic as to think that it's a lost cause - that too much of humanity has limitations that prevent the proper assumption of adulthood. I do believe that enough of us have the ability in us, but I fear that the transformation will need a stronger catalyst than a mere alarm call. Even in the good old days, the acquisition of mental maturity did not just happen automatically. Not like physical maturity. The ingredients were there in most people, but to coalesce successfully required much mentoring from those who had already been through the process. I worry that much of this mentoring has been faulty or lacking in recent years, and that consequently we have a bunch of young adults who have never adequately been guided out of childhood. Yes, it's not too late, and yes, the process can still take place, but they won't be able to do it on their own.
If I don't continue this discussion immediately, it's because I'm going to be away from the blogosphere for a few weeks. I'll look forward to reading your further comments when I return.
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Great article,right on the money.Robert for chancellor!
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Absolutely right. How do we do it? These guys don;t normally volunteer to cut their salaries.
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I do wish people would not generalize about 'bankers'. Many ordinary people work for the banks and the vast majority of them do not get huge salaries. It is only the directors and the whiz-kid dealers and deal makers who get/got the huge payments.
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absolutely ... glad to see people are finally catching on - the core problem is stoopid personal remuneration driving stoopid behaviour - it's a scam and we have to LEGISLATE against it - if we don't, nothing much is going to change - all the other stuff ... size of banks, business mix, BoE or FSA as Regulator ... is for the birds
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"The best deterrent against greed-fuelled gambling by banks is the threat of being sacked when it all goes pear-shaped. But that's not a particularly scary threat to any banker who's earned enough in the preceding years never to need to work again."
The solution is simple, make the directors, past and present personally responsible for the debts of the Bank similar to what used to happen to Names at Lloyds.
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I want to be a bannker, currently i am an unemployed Biochemistry graduate with no future prospects, i am sure i can do a better job. Goldman Sachs get in touch with me.
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I really enjoyed reading this piece.
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Re 165 Davidclash.
Interesting comment.
Many of us have noticed that much of the media insists on "talking up" house prices.
The problem for the UK is that our economy has become "house price dependent".
When house prices fall, the economy collapses.
Of course house prices are generally still too high, but HMG and the banks and building societies are trying to limit reposession damage.
To sensible folks, the best way to limit reposession damage is not to create lunatic prices in the first place, but that principle was lost in the last 10 years.
Without taxpayer intervention, the true average house price would be about 20k, because of financial collapse and lack of mortgaging.
Unemployment, short time working and other factors may force down prices further yet, but 1% interest rates could be seen as dangerous, and desperate.
These days industrial output, innovation, and manufacturing and all other reasons for wealth have gone out of the window.
The "house price trick" is now used to great effect for several years, before the inevitable disaster strikes.
The USA is also finding this out.
"Buy to let" has also badly distorted and de-stabilised the market.
Stability is the only real way forward, with property prices staying roughly in line with salaries, or another sorry mess will end up on your tax bill.
Re 172 LordVetinari.
None of us have aproblem with bank branch staff, and all those on normal incomes, or even sensible incentive schemes.
The "bankers" we refer to are the City and head-office folk who believe that money grows on trees....but who have discovered that it comes out of taxpayers pockets.
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107. At 2:36pm on 03 Jul 2009, makerofsense wrote:
"I'm amazed the commercially savvy haven't already come up with the "Moral Bank" who make firm commitments on executives salaries and bonus. They'd be overwhelmed with customers banging down their doors to give them money."
117. At 3:01pm on 03 Jul 2009, islider55 wrote:
"The nearest we have to your proposal is the Cooperative Bank."
Perhaps this hasn't happened because those at the top put their own interests before those of the organisation they work for? Sounds like a good idea though.
I don't think the Co-op's the answer however. They apparently feel it's ethical to pay their Chief Exec seven figures, so they're no different to any other bank.
I wonder if there are any financial organisations out there that don't overpay their top brass?
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180
My post was 'the nearest we have' is the Coop, not the actual answer. Although the article focuses on Directors salary and bonuses levels relative to return. A lot of comments on here are about the 'Banks' motivations of profit disguised as leverage.
If everyone really beleives that Banking has and is now 'morally corrupt', then the 'Fair Trade' Bank that the Coop purports to be should be the obvious choice for all with this view.
Through it's ethical policies, it should reassure people that the Bank is focussing on the correct path. Returns may not be as high, but may be more consistent and socially responsible.
Please Note these are not necessarily my views, but more my take on a solution for those who are so disenfranchised.
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It all boils down to proper checks and balances being implemented in the financial sector, bit like how we protect our teenagers from themselves in a world they have little experience of.
In a bull market/credit boom/housing boom a chimp could make profits for doing lttle or nothing other than borrow and buy with the crowd, and they did. It was the responsibilty of Banks, Governments to take the heat out of parts of the economy but they did not for whatever reason. The damage is done. I would rather like to see housing fall a great deal further than it has but it is more likely just to fall a lttle further and then stand still for years to come or at least to a point where it becomes affordable and people start to buy one to live in rather than speculate with. It was mass hypnosis and most most went along with it.
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180 one further point to my post, you quote the Coop CEO being paid seven figures, I don't know their actual pay figure.
'I wonder if there are any financial organisations out there that don't overpay their top brass?'
Maybe there isn't.
But I don't think this is only confined to Fin orgs. Most FTSE CEOs would be earning similiar packages, and they haven't delivered better returns, including over leveraging business models, and decimated share prices. (And the only reason certain banks have been bailed out and non fin cos not, is that it fits Brown's policies)
I await being shot down in flames for that comparison, whoops!
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It seems we are still going on with the same pile of rubbish, bitter people rambling on because they were not able to get a job in bank. But you cannot hide the sad truth, you are greedy and it is why we are in this mess. Even here people are crying because they cannot get a mortgage. Guess what if you cannot get a mortgage it is because you cannot afford it and you should not buy a house, simple as that. And for the poor shareholders. I do remember at the timeb of the bid for ABM Amro shareholders went to court because Barclays was not paying enough and they wanted RBS who was paying significantly more and in cash...well you got RBS be happy!
You are geedy and ignorant...have a great time!
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Excellent and most thoughtful essay, Mr. Peston. In a strange way, it brings me a sense of comfort. For most of the past two decades, I have carried a strange feeling with me saying, 'Something is wrong here in the economy. I see massively overbuilt houses selling for overblown prices--houses built to last ten years, with thirty-year mortgages attached. I see the roads crowded with overpriced cars, carrying six-year loans and three-year depreciation schedules. There aren't that many people making the high six-figure incomes necessary to support these lifestyles! It's a statistical impossibility.'
This essay explains how it happened, and that I haven't been some out-of-touch neurotic in trying to avoid the casino mentality around me.
Until the rest of the air is let out of the bubble, we won't be able to move forward.
The efforts to 're-inflate the bubble' in both London and Washington/New York cannot succeed, and only delay recovery from this debacle.
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How can anyone consider themselves to be bankers as a role in life.
I mean it is just a lousy stinking job and not a real sense of purpose.
I used to work for bank(s) but never fitted in and prescribed it as my
life characteristic, I like to think of myself as a rebel on another level.
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So where were the regulators......
They had a role to play.
Did the FSA have no concerns about Northern Rock growing at the rate it did, dependent on wholesale markets for funding?
Did no part of the three headed hydra have no concerns about capitalisation?
If it was possible to stress test after the fall, why wasn't it done regularly beforehand?
Did they do anything?
Why have regulators at all, if they do not act for the greater good. Surely that is their purpose.
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I do not justify any given remuneration but.....
How many people earning 30,000 a year do you need to pay for Robert Peston, his employers NI and pension contributions, other overheads, expenses and admin team?
If their contribution is used to pay for Robert Peston, it isn't being used to help pay for the National Health Service or education.
How many high paid bankers?
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Could some one tell me precisely why the wholesale money markets dried up.
Could it be that the returns on oil looked better than anything else
Could it be that T-bills looked like a safe attractive option at 5%?
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And lets face it the tax take was far too good for politicians to do anything
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An enhanced bonus ought to be paid to those that sail storms, a ringed bonus for those who sail in calm safe waters. It ought to be earned not given on a plate just because one happens to be in the right place at the right time when the markets are bullish. Bear Market conditions sort out the spotty faced chancers from the real grown up business savvy doers who deserve to be paid well.
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well laid out, Robert. can anyone tell me where all this 'leverage' money comes from? (ie a bank lends £1000, £20 from it's own resources) as I feel that has been the long term problem.....banks dealing in money that did not exist, that is purely numbers on a computer that only grew because a bank would revise an assets value upwards to suit itself. When no value has been created, how can anyone justify the extra money to cover this rise. It might explain where all the money has gone now we are into the Credit Crunch. Perhaps the banks are still using the formula created by LTAM, or whatever they were called.
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A few years ago I spent the day with a retired bank managers son and a student (from Kenya) who had just finished university and was completing his accountancy exam.
The retired bank managers son had his money deposited in a few banks and was poised to sell a good amount of shares he had with BA as soon as the share price got to something above £4 per share, he had been suffering the volatility of BA shares for some time.
The Student had nothing but was totaly convinced that property was a no brainer. "Everybody knows you can only profit with property here in the UK" was his conviction/mantra. As for self I just could not believe that people could afford such propert prices, I knew that they could not.
I conclude that rather than the banks taking a hit some years before the crunch they decided to continue being over optimistic with future projections thus upgrading the leverage they had, either because they thought that the markets would correct itself or perhaps just because they were unwilling to take on board the reality of being over exposed. Anyway, the current global crisis has brought it all out and unfortunate as it is, a lot of honest hard working and the less able will utimatley pay for it. Top up fees for students are already being rationed, it is enough that they have to pay top up fees at all for many.
Of course things are just not as simple as this, there are many aspects, political, real wealth owned/controlled by a tiny minority, the arrogance we put up with from PLC company directors and all that tribe, the manipulation of people/things for the few.
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Preston, you silly boy - don't you know this is not a subject that lends itself easily to simple headlines.
Don't you know that banks are 'too big to fail'?
In fact, you can't avoid the fact that banks sit in a different position in the economy to other industries.
And they are too big to fail in the sense of applying the normal processes of bankruptcy and administration you can't do that.
You're dealing with an industry which is, of its essense, so important that you need to take a different approach
And who told me?
Well it was Stephen Green, Chairman of HSBC, don't you know, don't you know?
See http://news.bbc.co.uk/1/hi/business/8131682.stm
But then again he would say that wouldn't he? After all he's a complete and total banker - or so it seems.
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Actually, isn't it all really rather simple? If the banks are growing faster than the rest of the economy it almost certainly means that they are doing something stupid again. All the regulators have to do is find out what it is and stop them.
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surfer @ 184
the same pile of rubbish, bitter people rambling on because they were not able to get a job in a bank
let's not be too judgemental - it's understandable, I guess, when people are denied life's ultimate thrill ... working in a bank ... that their critical faculties get well and truly scrambled
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As with most things, there are tradeoffs and checks & balances. All of which have been shockingly lacking in the past decade. The economy has been stretched too thin in far too a dramatic fashion. The wars in Iraq and Afghanistan, and the credit crisis has all contributed to revealing the lack of resilience in our economy.
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Simply this is why Markets to be true levellers and give equal opportunity have to rise and fall without hindrance and intervention
Or
Have a limit top and bottom
Or
A control mechanism in the pivot
Go into any childrens play ground to see how a see saw works
You will also see a notice prohibiting big boys from using them because they will break.
Also another notice saying to get all the fun and the benefit you have to leave it to rise and fall fully.
Markets go round and come round they rise they fall some get rich some get poor it all equals out unless someone interferes man advances abit mankind goes nowhere
Markets have been and remain the best of a bad bunch of economic systems but maybe its time we had a re-think about he whole socio economic model for the next half of this millennium we need something different, not tinkering.
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In reponse to the posting from Islider regarding Banks and mortgages. Banks are certainly not whiter than white so please don't try and make out that they are. I can give you examples of how bent they really are regarding mortgages. Self certification is a particulary good example. Not how much do you want to borrow, more how much can we lend you? that much? "fine well you need to restate your earnings." That is not only theft, it is also fraud, if you don't understand what fraud involves you shouldn't be employed in the financial sector. Then of course the topping up mortgage
wheeze. You want 20K to build a conservatory? I wonder how many "conservatories or cars or furniture was just coding for a nice foreign holiday. But of course the banks didn't care think of profits, bonuses etc. I could on and on but please don't insult our intelligence with the idea that bankers are honest, they are basically over paid under employed, greedy vultures and deserve any insults and retribution that soon may be visited upon them.
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In China they execute dodgy bankers. Now that's something worth considering>
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Just athough on bankers excessive remuneration, and I think most reasonable thinking people would probably ask a simialr question.
How does paying a banker huge bonuses for risking other peoples money without any financial risk to himself equate with the rather old fashioned idea of natural justice? Some one like to anwser/comment?
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Robert, I think you are arguing for a return to conservative and staid bank executives with much lower pay. However, the rot is already built into the system. The chairman, board and remuneration committees were all likely to have been appointed during the bull run. They will perpetuate the excessive executive pay packages. They all have to be replaced. I'll apply, as I am a stingy tax payer and like value for money. Where do I sign?
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I think in summary MR P:
BANKS SHOULD BE SAFE & BORING and THE PAY STRUCTURE AT THE TOP SIMILAR
TO THE CIVIL SERVICE.
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utility ... like the Gas and the Leccy
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I think what is needed is a simple way to prevent a group of people controlling their own pay structures. The method could apply to all sorts of industries and businesses, even public bodies. As it exists now a group of buddies get together to decide how much money they are worth, a real old boys set up if there ever was one. I'm sure the people of this blog could devise such a system fairly quickly.
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199 BobMattfran
Another badly aimed shot across the Bow!
My post on Mortgages refereed to their pricing not the eligibility of the Applicant. Everyone knows how the Self Cert process works, and I think you'll find the practice you accuse the Banks of is actually carried out by unscrupulous IFAs.
The main point your missing is that a Mortgage is not a birthright, you are not entitled to one. If you choose to to have a Mortgage then you accept who you will be dealing with, Banks & BS. If Banks are so terrible don't deal with them, rent instead of being a homeowner if you can't afford to buy outright.
Please stop complaining about personal choices that people are not forced to take.
Sounds like the Hungover Drunk blaming the Landlord of the Pub for selling him the alcohol.
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Anyway what happened to the Caveat Buyer Beware?
You can't keep blaming everyone else if you don't make reasonable efforts to know and assess the risk you are taking, whether you are buying Property, Shares, Pensions, Financial Products.
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#30
"Does nobody in Labour have any love at all for our country any more?"
Have they ever?
After all they both sing and wave The Red Flag!! What does that tell you?
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mrsbloggs13c2 wrote:
Could some one tell me precisely why the wholesale money markets dried up.
The main reason for the market drying up was the fall in US House Prices, particurlay the size of the sub prime rate of default. This lead to a reassessment of risk of Providers of Mortgage Products(HBOS & Northern Rock) based on their exposure to the Uk Housing Market and how they would be affected by a fall in value of UK Housing.
This meant that providers like NR & HBOS were deemed a much higher risk and many providers of funding chose not to deal with them, hence turning off their flow of funds.
The broader impact was that facing losses of their own, many lenders in the money markets decided to hold as much cash as possible to cover potential losses and reduce their lending. Anyone who was still lending became much more risk averse and would only lend to better rated risks, essentially causing the money markets to cease to function.
So for NR & HBOS The Goose that laide their Golden Eggs(Wholesale Money Markets)turned around and bit their arms off!
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205 thatmcgrath - Think the answer goes back to a lack of Corporate Governance.
Peston has recently raised this as an issue, but isn't hindisght a wonderful thing?
Certain people in the Investment Management Industry(As large holders of PLC stock through Pension Fund Clients), like the Late Sir Alastair Ross Goobey, have been trying to raise the issue of Corporate Governance for the last fifteen years. With little response from Regulators, the Treasury or Govt.
So it would be a good time to relook at this issue, but without the lynchmob attitude, as the information has been out there for years and no one acted on it whilst everthing in the garden was rosy!
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203. At 09:50am on 05 Jul 2009, alexander-curzon wrote:
"I think in summary MR P:
BANKS SHOULD BE SAFE & BORING and THE PAY STRUCTURE AT THE TOP SIMILAR
TO THE CIVIL SERVICE."
Well, I think 'in summary' Mr P:
Banks should be within the control of the UK Government which, given what Stephen Green says, they are clearly not. ("They are too big to fail in the sense of applying the normal processes of bankruptcy and administration")
And much worse than that, the banks know damn well they are not within the control of the UK government.
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Very good article, but the comments apply to many plc's as most have boards which are ripping shareholders (i.e. our pension savings) off.
Sadly the people who could stop this are fund managers who are also on the gravy train and therfore have no incentive to defend the interests of the real shareholders i.e. us who supply the money through our pension savings.
The major political parties do not want to upset the apple cart because of the contriubutions and jobs MP's get from City institutions and major plc's.
All very cosy, and largely unnoitced by the general popoulation who wonder on approaching retirement age what's happened to their pension.
Talking of pensions I see King has been enjoying himself in the Royal Box at Wimbledon on several occasions including today's men's finals.
I know the taxpayer has paid for his £5.7 m pension pot, but are we paying for his trips to Wimbledon? If so it's money well spent, as at least he should do less damage to the economy and our pensions whilst distracted elsewhere.
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old habits #208
you poor misguided fellow you actually think there are socialists in this goverment.
But since you know the tune of the read flag may I suggest following words
The peoples flag is deepest pink Its not as red as you may think.
City bosses stand and cheer,the labour goverment is here
We will change the country just a bit, you won't even notice it.
But just to prove we are sincere we'll sing the red flag once a year.
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Why don't the directors of banks (and Plc's) get told to personally guarantee the bank's safety? Get the top dogs of all these arrogant institutions to sign their houses up as security-then see how many risks these people will take!
Directors of lesser companies have to do this-there should be a way of making a law for this pretty swiftly-add in investigations and prosecutions and I suspect it would be an election winner!
Why are we still massaging egos and bending over backwards to avoid ruffling their feathers?
And when are we going to see the off balance sheet debts in the public domain?
Guess we all know the answer to that question!
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This article makes quite interesting reading, but misses several key points. Leveraging is not purely a way to increase shareholder ROE.
Forget banks for a second, and consider a manufacturing business. Imagine they are doing well, and their market is growing - they are selling overseas as well, and although profit per unit is not increasing (they are already as efficient as they can be), their overall profit is increasing, due to increasing volumes.
Now to service this increasing customer demand, they have 2 options - stay the size they are and say no thanks to the new customers, or grow. Clearly you don't turn away customers - that way lies other problems such as shortages, and loss of business to overseas companies.
So they need to expand - buy more manufacturing capacity, more premises etc. Which means they need to raise finance. So now they have a choice - issue more equity or borrow.
Now apart from the tax advantages of borrowing (which have existed for some time, but are solely the responsibility of government to allow or remove), there is another reason to borrow. Issuing equity dilutes shareholder returns, which depresses the share price, putting the company at risk of a takeover and job losses, as well as probably hurting your sales (customers are worried by a falling share price and buy elsewhere),
So the smart move is for the company to borrow to fund its expansion thus safeguarding the business, and saving tax into the bargain.
Banks are no different - the last thing we wanted was for banks not to expand (yes sir, madam, you certainly qualify for a mortgage, I'll put you on our waiting list, funds should be available in 2-3 years). So given that banks had growing customers' needs they needed to service, how to finance that expansion.
The article says they should have used equity, as they were simply expanding and not becoming more efficient, and it was the use of debt instead of equity that was responsible for the subsequent crash.
But thanks to the government's tax regime, debt finance is cheaper (interest is tax deductible, dividends are not).
And on top of that, equity finance carries a significant risk - the markets may not like the dilution of earnings, which may leave the bank open to job-threatening takeovers, loss of bank ownership overseas, credit rating dowgrades, or loss of customers worried about the future of the bank.
So when your competitors use debt finance, no responsible director is going to say, no no we'll issue equity, and take our chances with the markets. Of course not. They had a responsibility to their shareholders to protect their share price among other things.
So you can't blame the leveraging of banks on bad decision-making. In fact it's good decision-making. It's the non-risky option to protect the very people the directors are responsible for looking after - shareholders and employees (and indeed customers). And having made that correct-at-the-time decision it's only right they were rewarded for it.
Now with hindsight, we can see that the result was banks became over-leveraged and this led to the problems when it went bad.
But, and this is crucial, it's not that the decision was incorrect at the time for the bank concerned. Indeed you could argue that it wasn't the leveraging at all that was the mistake, it was chasing more business, and taking a punt on what turned out to be some rather unreliable customers - but a bank is a business, and this is what businesses do - they try to gain more customers than their competitors, and take a risk that their customers will be good ones.
So if for each individual bank, increasing leverage was the right decision at the time, who was responsible for the problems which arose when they turned out to be over-leveraged?
Well I've already hinted at it where I said that debt finance has been made more attractive from a tax point of view. The blame for making the wrong decision can be pinned solely at the door of the one institution whose job it is to look at the overall picture, and impose rules to prevent individual banks making decisions that, while right for the bank at the time, are wrong for the overall good of the economy - that's right, it's the government and its regulators.
It seems very much to me like this speech by Andrew Haldane is a little bit more propaganda intended to try and point the finger of blame away from the government, the FSA and the bank of england, and onto the bankers - easy targets at the moment, with their historically high pay levels, while many of us are losing their jobs.
But don't be misled - this is like the director of a company, when things go wrong and everyone has to take a pay cut, saying: it's all gone wrong, and it's all the fault of my assistant - and look he's been paid a huge amount, and now you're all taking pay cuts - don't you feel jealous? So I want you all to work doubly hard while I am on holiday in the Bahamas.
Not what most people would describe as good management, but that is exactly what we are seeing here - the people with overall responsibility trying to pin the blame on the very organisations they were responsible for supervising.
So yes, it's galling to see well-paid bankers getting millions while ordinary people are getting pay cuts and losing their jobs, but remember - their decision-making allowed millions to get mortgages through the last 10 or 20 years, and we praised them for it. They generated wealth for pensioners for the last 10 or 20 years and we praised them for it.
It's easy to stoke up public anger, resentment and jealousy at well-paid bankers at a time when things are hard for people across the country, but it's just that - propaganda being used to channel people's anger away from the people in charge and towards scapegoats, such as bankers. Don't fall for it - least of all you journalists!
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# 213
How can I be misguided? What I said was factually correct.
The trouble is once your friends get into Parliament they concentrate on looking after No.1. " The working class can kiss my ....." was never more apt.
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#215 - Not sure if this is tounge in cheek, but it summarizes very effectively the mind-set which drove the system over the edge. Nearly every nostrum on which the banking house-of-cards was built is covered here.
One would not be surprised if it were written by an ex-executive from a failed bank blogging away on his laptop to justify what was done while he watches the world from the verandah of his country residence.
Regrets? there are a few - but we weren't THAT wrong - were we?
But why need he worry? After he has watched the light in the garden blaze and then slowly darken with the passing of another summer day, all he has to do is turn-off the laptop and ClassicFM on the radio, toddle upstairs and lay his head on a freshly-laundered pillow. There his sleep will be deep and restful: secure in the knowledge that he was not really to blame and, more importantly, that he will be saved from any more financial woes by his nice big pension pot.
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What many readers seem to fail to understand is that its all very well saying glibly "bring in legislation" but its impossible to do so in practice. Its too easy to once again slag off the government when the roots of the problem go back to Thatcher and Reagan.
Much easier to simply tax the greedy so-and-sos at 90 or even 100% all bonuses earned in the financial sector beyond a certain amount (say £500,000). As long as the rest of the world did the same it would be fine. This government won't do it though, nor will creepy Dave whose toff buddies have all no doubt had there noses in the trough.
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Dear Robert,
On the whole I agree with your article.
Except the phrase "there's one other important related issue I want to explore, which is how to re-introduce moral hazard into banking".
Moral hazard is the problem! The larger banks know they are too big to fail or more accurately too big to adequately discipline because those responsible for monitoring them quite frankly are incapable of doing so. This motivates bankers to pursue risky strategies in search of higher returns and higher personal utility safe in the knowledge that the bank will be saved by the taxpayer if anything goes wrong.
So we need to eradicate the moral hazard dilemma NOT reintroduce it. Also one cant reintroduce a motivation only remove or provide that which motivates i.e.: too big to fail.
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#217 RaulMagister
No in fact it was not remotely tongue in cheek. I'm not an ex-exec of a bank (and not sure I'd want to be) - just a cynical member of the public, trying to see through the statements made by the government and their various organisations, and wondering why people in general are so easily led around by the nose.
So, let me ask you two things:
1. Why do you think a director of a bank should only be paid a low salary, say around £80k, whereas a director of a non-financial company - say a failing car manufacturer - is ok to be paid over a million?
and
2. Why do you think responsibility for the financial crisis should stop with the bank directors and does not go on up to the top with the bodies responsible for supervising the banks, and safguarding the economy - namely the regulators and the government?
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#218
I wouldn't blame the Romans for road deaths on the basis they introduced a more efficient road system to the UK. Not would I blame the inventor of the knife and fork, if such implements were used in a manner which broke the law. In the same vein, the reference to Reagan and Thatcher in the current context is misleading, and probably a bit dishonest.
The present Government has been in power since 1997 and formed an effective opposition for some years prior to that. It's attitude to financial services saw IMRO, the SFA and other specialist regulatory bodies being dismantled and the banking supervisory responsibilities taken away from the Bank of England. The FSA super-regulator took their place. The whole system of financial regulation changed, but not, it would seem, for the better.
The limiting of remuneration has wider implications for the UK economy. Even now, the effective rate of taxation for high earners is to grow quite markedly. The key issue is what penalty should a person face if they have behaved irresponsibly. At the moment, it's hard to see what penalty the Government has imposed, except that a few banking directors have resigned with large pension and other benefits.
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#221 TerryNo2
"The present Government has been in power since 1997...The whole system of financial regulation changed, but not, it would seem, for the better"
"At the moment, it's hard to see what penalty the Government has imposed"
Presumably here you mean it's hard to see what penalty the government has imposed on itself for its poor management of the entire fiasco?
Or do you subscribe to the view that only Gordon Brown could have steered the country as he has away from recession and crisis and forward to future prosperity and growth, with his policy of investment :P
I doubt if the millions out of work across the UK would see it that way.
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#220
1 I don't have specific numbers in mind for remuneration. But there are fundamental difficulties with the "payment-by-results" concept for very large corporations:
- When a major corporate does very well one year, it would often take a PhD study to prove whether it was because of the decisions and efforts put in by the current CEO and his team or the long-term vision and a legacy of groundwork by predecessors who have long since moved-on. So there is a diffculty in determining how to measure what should be "deserved". It would be like us paying Gordon Brown a massive bonus in say, 2000 for the good performance of UK plc that year when it could be cogently argued that it was John Major's ground-work and the performance of all the UK's private firms that was the real casue of his apparent success (and who knows?).
- The obvious alternative is just paying top execs. a flat "going rate" and hiring the best value/ability package available in the market according to classical economic theory (i.e. pay as little as possible for as much ability you can get - what they do with premiership footballers and film stars). However, this is generally seen as sub-optimal for the shareholders since the management teams of widely-owned corporations have consistently proved to be relatively free from effective shareholder accountability (disgruntled owners just sell-up in the market) and thus able to work in their own particular interests rather than the corporations owners'.
So what has evolved in the last 20-30 years is a theory that seeks to align the interests of the top managers with the shareholders'. Don't offer a flat salary for a steady job, but short-term tenure and large rewards based on the returns to shareholders (profits, dividends and share price). This relieves the disparate and numerous shareholders of having to somehow monitor the activities of their boards and make difficult judgements as to whether this one or that is getting the best out of the assets. You just let the incentive package work as an unseen hand and the problem is solved - what's best for the managers is also best for the shareholders. This is the fundamental mechanism of the bonus culture in banks and elsewhere. Sadly, the theory has not worked out:
a) The rewards tend to become very large in terms of the life-benefits they confer on an individual and there is therefore an incentive to "take the money and run" once an executive has achieved a certain level of personal wealth. It used to be called the "backward bending supply curve of labour" (First perceived when well-paid, self-employed, cottage-based weavers actually worked less when wages went up - they chose to enjoy life and work less. It spurred on the development of textile factories to keep their noses to the grindstone). So once I have become CEO and have secured a tidy forture - say £30m, I am not too concerned if I am sacked tomorrow - even if this would cut out the possibility of earning another £60m in the remaining years of my contract. If it turns out that I have been reckless and the shareholders banish me in ignominy, I always can "downshift" and catch up on all that trout fishing(or whatever) I missed out on getting to the top and still live comfortably for the rest of my days.
b) Most of the schemes are up-side related without sufficient downside penalties when things go badly for the shareholders. It is very rare, if not unheard of for the CEO of a major corporate to be required to pay the company he works for if it makes a loss. He may lose a bonus or get the sack - but after a certain time the effect set out in a) above will kick in.
Until these issues are addressed, which might require a radical revision of the current corporate model, then problems will persist.
2 I don't think responsibility should stop with them - but if I tried to claim that it was lack of police diligence in my town that caused me to end up in court over a speeding offence, that defence would not hold much water, would it?
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Raul magister 223
A bit of an aside but labours Recent NHS reforms seem to fall victim to the "Backward bending supply curve of labour" .Faced with an aging population of GP's they raised their salaries significantly to attract young recruits. But since GP's are in a final salary pension scheme many older GP's found their potential pension rose close to their former salary and so took early retirement. Worsening the shortage.
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Britian is now a Corporation full of carpet-baggers, robber barons, media moguls, sycophants by the shed load and no one really rules it is chaos and Brown is a control freak the real Walter Mitty never lies always tells the truth his den is full of unelected narcissistic people whose total aim in life is to fill their boots rules are made for those who have nothing we now have another layer off poor to live off as that is how capitalism works fear and lies there is no credit crunch just banks now ruling the world and Governments having no control over them The BBC paying huge wages to the chosen ones this money is off the poor as I would say the PMs get their licenses paid for them off the taxpayer, so we pay money for what to stop us going to prison??? and we talk about bankers the BBC is not a bank but what is the difference? it all comes from the same breed SCUM.
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Why FSA arent worth it
The people who were given the job of regulating banks and the like financial institutions, namely the Financial Services Authority, did not do their job of regulating. The regulator that is not regulating is superfluous. If the FS Authority has no authority over the banks, they are redundant. By putting in place the FSA did Labour allow for another empty job creation exercise to transfer money from the taxpayers pockets to their cronies?
Parallel from private sector: would any business keep employing their Financial Controller if s/he would bring the company into the red and significantly increase the risk of it collapsing?
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Who Runs Britain?: and Who's to Blame for the Economic Mess We're in (Paperback)
Read this on holiday in the South of France, I had to read a number of pages twice to take it onboard (Thick Me), great book great article. I thought you were a plonker till I read your book.
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Dear Mr Peston,interesting book..."who runs..". Seemed as if you were praising the Greens of this world for their 'intelligence', however. Also, your conclusions and opinion comprised a rather paltry 2 sides of paperback, which I also found rather derisory. Of course, we need to 'know' what is going on. But I think that we all generally know what is 'going on'. What I was hoping for was a more courageous stand. THe root of the business worlds' disease, because it IS an dis-ease, lies in the way we raise our children, for they do become these very intelligent business people whom grow to believe that their worth in life is measured by the extent to which they can manipulate others and extract extreme wealth from their fellow folk. In short and not wanting to sound like a psycho analyst, we are programming-in far too many childlike, small-minded qualities into our children. Paradoxically it seems, the wealthier the parents, the better the school, the sadder the mis-use as outcome. ALL of the problems, which you and thousands of colleagues flood the information spiral with, are directly related to micro-intelligent human-beings making these decisions. I RARELY read of anyone who demonstrates much 'intelligence'. You may be clever, educated etc, of that I am in no doubt, but real intelligence is surely demonstrated by the positive impact we have on each other. The route we are meandering down at present smacks of one thing only; dishonest manipulation. This stems from the child not understanding/being offered a fuller wisdom/picture of life. We undervalue our own lives so tragically. How clever is that?
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