Bankers and fairies

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The headline in yesterday's Business and Money section of the Sunday Times proclaimed that “City tells Reeves: we can lend you £80bn”. It’s an example of the way that the basic facts aren’t always presented in a neutral fashion, because the headline could equally have read, “City tells Reeves: We have £80bn that we want to save with the government”. In the preferred version, the banks and financial institutions are doing us (through the government) a favour by lending us money; in the alternative version, the banks and financial institutions are asking us (through the government) to do them a favour by accepting large deposits of ‘spare’ cash.

They both represent different aspects of the ‘truth’, underlining the way that what looks like a debt to one person will always look like an investment to another. But which is actually the best representation of the underlying truth? Imagine that ‘the City’ is a single corporation here, and that the Chief Financial Officer is talking to the collective board. Is (s)he going to say, “Look chaps, the government has got itself into a bit of difficulty, but I reckon that we can probably divert around £80bn from other places to lend them in order to help them out”, or is (s)he going to say, “Look chaps, there’s something of a dearth of safe and profitable investment opportunities at the moment, and the best thing that we can do would be to deposit £80bn in government funds”? When deciding how best to manage their money financial institutions are always looking for a balance between risk and reward, placing some of their money in high risk, high reward investments and some into lower risk, lower reward investments, such as government bonds. To put the question another way, when they are deciding on that balance, do we believe that they operate on the basis of a community-friendly altruism, or do we believe that they decide on the basis of what’s best for their shareholders?

Those who believe in altruistic bankers might like to come and meet the fairies at the bottom of my garden.

Bonuses, merchants and Prime Ministers

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In “The Tempest”, William Shakespeare tells us that “What's past is prologue”. For the current PM, that prologue was a period as a banker, or a merchant as a Cockney might have it. It’s a ‘profession’, using the term in its very loosest sense, which managed to wreck the economy on the back of excessive incentives for its practitioners to do what made them rich rather than what served the interests of the population at large. An unkind person might see his subsequent appointments as Chancellor and Prime Minister as being just a case of following the same career goal by a different route. He certainly understands why his fellow merchants can’t do a proper job of economic destruction unless they are properly incentivised, which goes a long way towards explaining the decision to abolish the cap on bankers’ bonuses.

He claims that the decision is not his at all, and is entirely a matter for the ‘independent’ regulators (a majority of whose members are appointed, strangely enough, by the government), although it’s not so long ago that one of his successors as Chancellor made it clear that it was very much a decision for the government to take. It might, of course, simply be a test run for an excuse which he intends to rely upon a great deal between now and the next election – “nothing to do with me, guv”. He’s already written off most of the decisions taken by his four predecessors as PM since the Tories were elected in 2010 in a similar fashion; it’s a small jump from there to include his own. Alternatively, it might be preparation for the prologue to become the epilogue, as he anticipates some sort of return to the banking sector. Career consistency in the economic destruction sector means he’s at least eyeing a job about which he knows something. And, as the saying almost goes: ‘once a merchant, always a merchant’.

The real problem of innumeracy

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Despite deploying his very best efforts, even Rishi Sunak can’t be completely wrong about everything all the time, and this week he managed to get one thing at least half right in identifying that innumeracy among school leavers is a problem. His ‘solution’ (compulsory maths until age 18 for all English pupils), however, tells us rather more about his own tenuous connection with the meaning of numbers than it does about addressing the problem. The curriculum has probably changed since my school days, when taking double maths at A level was a soft option for someone like me who was lucky enough to have a fairly natural grasp of numbers and numerical operations: learning a few principles and formulae and knowing how to apply them was much easier than having to cram a whole load of facts into my head for examination purposes. A level maths was not the same thing as O level maths, however – I remember one maths teacher describing the former as ‘hard sums’ whilst the latter was ‘easy sums’.

It's not entirely clear what Sunak has in mind. I can’t believe that he’s stupid enough to believe it a good idea to put people who haven’t got to grips with ‘easy sums’ through the trauma of trying to learn how to do ‘hard sums’; and Calculus with its differentiation and integration doesn’t immediately strike me as being relevant to the future lives and careers of most pupils. But the alternative is that he’s planning the even stupider approach of forcing those who have failed to master ‘easy sums’ after five years of secondary education through another two years of the same. The logic of adding an extra 40% of input to a process which is clearly failing many pupils is ‘interesting’ to say the least, and demonstrates a lack of understanding of what it is that the low levels of numeracy are actually telling us - as well as a lack of the 'analytical ability' which he claims to be so important.

It's far from being the only example. Yesterday, he and other ministers were keen to tell us that the NHS has all the money it needs to solve its capacity problems. There’s some doubt as to whether that’s actually correct even in purely numerical terms, but let’s give him the benefit of the doubt for a moment at least. If the NHS lacks 10,000 doctors, and employing a doctor costs £80,000 a year, then chucking £800 million into NHS coffers does indeed ‘solve’ the problem. It is, though, rather divorced from the real life question of what that 10,000 represents, and assumes (in the manner of basic economic theory) that there are 10,000 doctors sitting on a shelf somewhere, just waiting for someone to offer them a job. In reality, there is a lengthy lead time involved in recruiting doctors with the right specialisations in the right locations – and an even longer lead time if they need to be trained first. That involves understanding that the 10,000 isn’t just a factor in an equation, it’s a symbolic representation of a serious problem. Such a simplistic mathematical response to the needs of the NHS is made worse when another department of the same government is performing its own mathematical computations to conclude that recruiting trained doctors overseas is ‘cheaper’ than training our own, and yet another department performs its own sums and attempts to reduce the number of overseas migrants.

It's an approach for which Sunak’s ‘financial’ background did much to prepare him. Bankers ‘know’ that if you can reduce the cost of production (X) and increase the productivity rate of staff (Y), the amount of profit flowing into their accounts (Z) will increase. But Z is the only factor which they have any ability to relate to the real world. The impact of job cuts for some and longer hours for others on people, lives and wellbeing – which is what X and Y actually represent – is beyond their comprehension. It’s all just mathematics. That really goes to the heart of Sunak’s category error in talking about levels of innumeracy among school leavers. The bigger problem is not that many do not have the ability to handle numbers well, it’s that some of those who can handle numbers well have lost all conception of what those numbers represent. And by some strange process, these are the people who end up in charge of the government and the economy.

There's more to bankers than bonuses

Tweet Bashing bankers is always good fun, and usually something which the victims richly deserve.  The EU proposals to cap their bonuses are hardly likely to prove anything other than popular with the majority of us.  The only surprising reaction to date has been the extent to which senior Conservative politicians have been willing to take the unpopular stance of opposing any cap on bonuses.

I can’t help feeling, though, that merely imposing a cap on bonuses is missing the point.  It’s not that I’m convinced by any of the arguments against a cap – far from it.  

The idea that they will take their banking elsewhere if they don’t get their own way sounds more like an argument in favour than an argument against.  And the suggestion that they are so uniquely talented and able that they need to be paid enormous rewards is surely a joke – these are the same people who thought that sub-prime loans were a jolly good idea, that credit default swaps were a good way out when it went wrong, and that gambling on derivatives with the money we put into our high street banks was perfectly acceptable.

No, none of that does anything to convince me.

Then we have the argument that the banks’ huge profits means that they pay a lot of tax, and we can’t afford to lose that money. That’s bringing us closer to my concern about whether a cap on bonuses is missing the point; because it’s not just the size of the bonuses which concerns me, it’s what they’re being paid for and how that profit is being made.  Capping bonuses doesn’t necessarily do anything to change that underlying activity.

Indeed; there’s a danger that the consequence might be quite the opposite.  If the total bonus available is less, does that mean that they’ll do less to earn it, or does it make them more determined than ever to earn the largest possible amount rather than settle for only half of what might be available?  Might it, in fact, incentivise them to take even more risks?

What few seem to be asking is where these massive profits on which we receive tax income actually come from.  Much of what the ‘investment’ bankers are doing bears as much relationship to the traditional meaning of ‘investment’ as does a fiver on the 3:30 at Newmarket.  It’s more to do with ‘taking a position’, to use their euphemism, on currency movements and ’trading’ in general.  It’s more like gambling than investment.  And if there’s one thing of which I’m certain when it comes to gambling it's that it doesn’t create any money; it merely recycles money.  Every profit is balanced by a loss somewhere else.

But, just like the lottery, the losses are usually spread in such a way as to be almost invisible.  Certainly, there’s an occasional ‘big loser’ to make up for the big winner; but generally speaking, as in most forms of gambling, there are a few big winners and a large number of small losers.  And the small losers from the banks’ casino approach to ‘investment’ are all of us.  That ‘profit’ is merely redistribution, from the many to the few.

It doesn’t even stop there though.  It’s clear that when they win, we lose; but it’s also become clear that when they get it wrong, they still win, and we still lose.  They’re gambling with our money, betting it against us, and doing it all with loaded dice.  And then they want us to be grateful that they give us some of our money back by paying as little tax as they can get away with on their profits and bonuses?  The amazing thing is that so many are falling for it.

The problem with banks isn’t that they’re paying bonuses; it’s what they’re paying them for.  And a cap on bonuses doesn’t even begin to scratch the surface of that issue.

Cleaning the money

Tweet It seems that not a week goes past without the exposure of another scandal by one or other of the banks.  Over the last week, it was HSBC’s turn to come under the spotlight.  I suppose it was inevitable that Labour politicians in London would go for the personal angle and start attacking Tory minister Lord Green.  He certainly has some questions to answer, and they need to be asked; but Labour’s tactics also succeed in diverting attention from the substance.  It’s become more about who did it than about what was done.

But the what deserves more attention.  The accusations are twofold, in essence.

Firstly, it is suggested that the bank went out of its way to find ways around trade embargos and sanctions in order to continue to make profit from certain regimes, notably Iran.  And secondly, that the bank engaged in money-laundering on a massive scale, assisting various drug barons and gangsters to turn dirty money into clean and untraceable money, even if only by turning a blind eye or having weak systems rather than through active collusion.

In reality, how different, in moral terms, are the bankers from the gangsters and drug barons whose money they have been laundering?  They’re all trying to make money for themselves at the expense of others.  What’s the moral difference between simply ignoring the rules and laws on the one hand and trying to find ways of subverting them on the other?

What some of the various e-mails and statements seem to be suggesting is that the bank wanted to be seen to be abiding by the letter of the rules, without allowing the rules to actually achieve their purpose – and that it was doing that in pursuit of profit.  The pursuit of profit, in short, outweighed any moral responsibility to assist the relevant authorities in achieving their clearly-stated aims.

That subjugation of morality to the pursuit of profit is something of a common factor in a number of the recent scandals, and equally common is the defence that what was done was ‘within the rules’.  From duck houses to money-laundering, the defence is the same one.  It raises the question as to whether, and to what extent, we can or should expect companies or individuals to follow any moral imperatives at all.  Or is life really just about following the rules, and not expecting anyone to make any wider judgements?

There’s a problem either way.  The problem with leaving the rules lax and expecting people to exercise a degree of morality is that there isn’t an agreed definition of what is or is not moral.  What, precisely, is the standard of morality to which we wish them to adhere?  And how do we set it?

On the other hand, ever tighter rules merely encourage people to believe that moral behaviour is anything which is permitted within the rules, and that if something isn’t specifically prohibited, then it’s OK.

On top of that, there is of course the knowledge that ‘if we don’t do it someone else will’, and competition of that sort drives people to push the rules to the limit.  In that sense, the whole of our banking system is a bit like a gigantic game of ‘Prisoners’ Dilemma’, with everyone trying to second-guess what everyone else is going to do.

Expecting those whose primary goal is to make money for themselves or their employers at the expense of others to do any more than abide by whatever rules we set for them is probably unrealistic.  If we want to change the way people behave, we need first to change their perception of what it is that they are trying to achieve.  Pursuit of personal advantage simply doesn’t do it.

More than beheading required

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It’s not so very long ago that we were being told that the UK’s top bankers had such ‘scarce and sought-after’ talents that they had to be paid huge salaries and bonuses for fear they might take those talents and abilities somewhere else.  It turns out that the immense talents being rewarded amounted, in some cases, to an ability to win when gambling with dice that they themselves were able to load.  It’s the sort of talent which, in any other walk of life, would be rewarded by a spell as a guest of Her Majesty rather than by a large bonus.

The spectacle of the big cheeses at the top of Barclays trying to hang on to their positions when everyone outside the banking sector can see they have become untenable is unedifying.  Their behaviour is not unusual, however – we’ve seen often enough in the past that people can have difficulty taking a sufficiently objective view of what they’ve done.  And that hasn’t been restricted to bankers - it's not dissimilar to some of the noises that we heard from MPs when the expenses scandal was at its height.

I’m sure that heads will be rolling before too long, and no doubt some will take pleasure in seeing them roll.  It’s not enough though – and there’s a danger that seeing off a few miscreants will be enough to remove the matter from the front pages.  Part of the problem is that the heads that roll will be replaced by other heads, and the probability is that the new heads will be drawn from the same small pool.  (After all, all those involved believe that the necessary talents are ‘scarce and sought-after’, don’t they?)

Does anyone really believe that the practices exposed last week were confined to one bank?  I, for one, don’t - and the news today that RBS had sacked some staff involved in similar activities confirms that it's more widespread than a single bank.  Staff in the banking sector move effortlessly between employers – at its worst, this means that those who screw up for one institution simply get appointed by another.  And the language in which some of the published e-mails were couched makes it clear that those involved thought that what they were doing was perfectly normal, and could see nothing wrong with it.

The Governor of the Bank of England has called for a culture change in banking.  That’s a bit better than merely removing a few heads, but I doubt it will be enough either.  Chris Dillow suggested last week that banking, by the nature of the beast, attracts precisely the sort of people who are likely to chase the money, regardless of morality.  Even were there to be an influx of new people coming in, it's more likely that they'll be swept up by the existing culture than that the culture will change.

In an editorial on the subject last week, the Western Mail suggested that it is ‘human nature’ to exploit weaknesses in the system for personal benefit.  I’m not convinced about it being the nature of all of us; but certainly for those driven first and foremost by personal greed, it’s a fair comment.

In any event, neither chopping off a few heads nor standing on the sidelines demanding culture change is likely to have anything other than a very short term effect.  The sector needs tighter and stronger regulation to ensure that it behaves in the interests of the economy and society as a whole. After all, if 'we didn't break any rules' is part of the line of defence, then changing those rules has to be part of the response.

We’re unlikely to get that, though.  It was notable that Cameron claimed a huge victory last week when he kept the UK out of the proposed new EU banking regime; a regime which might actually have helped by setting some common standards across the EU.  He'd sooner keep the UK out of tighter regulation in order for the bankers to make money at the expense of those who impose tighter regulation.  He, and his friends and donors, have more to gain by a bit of moral condemnation now followed by a swift return to business as usual.

The unknighted

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I’m not a fan of the British Honours system.  The awarding of honours, often related to a long-defunct empire, to ‘ordinary’ people acts as a veneer for an archaic system of power and patronage.

I’m not a fan of Fred Goodwin either.  He was one of the greedy bankers whose poor decision-making caused the collapse of some institutions, made the financial crisis worse, and caused misery for millions.

Add the two together, and I’m hardly likely to shed a tear for him over the removal of his knighthood.  There are, though, some aspects of what happened which leave me with an uneasy feeling.

The first is the pretence that the decision was made by the monarch on the recommendation of some independent committee of senior civil servants who assessed his case and found it to be so severe that he, and he alone, should be unknighted (or perhaps deknighted?).  If there was ever a political decision, this was it.  Politics was of the essence here, with the need to respond to the outrage whipped up by the tabloid media.  The idea that this decision was made in an entirely unbiased way by civil servants is simply not credible.

The second is the arbitrariness of the decision.  There seems to be no sense of careful weighing of the pros and cons, considering precedent, or looking at other, equally – if not more – undeserving cases.  Even rich and greedy individuals are surely entitled to some sort of due process which doesn’t single them out on an arbitrary basis in response to the baying of the mob.

The third is the feeling that he’s been scapegoated; sacrificed on the altar of public opinion to atone for the sins not only of himself but of others too.  It’s as if the Establishment somehow believe that by throwing one of their own to the wolves, the wolves will be sated and will not come after the rest of them.

And the worst aspect of all is that I have a horrible suspicion that  the Establishment will be right to think that, they’ll get away with the sacrifice, and the cosy little system will then carry on as if nothing had happened.

Top salaries

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There have been two main arguments advanced by those who support the payment of massive bonuses to bankers.  The first is that such bonuses represent payment for results, and the second is that the banks are in competition with each other for their top management and therefore have to pay competitive packages.

Those arguments are, however, based on two assumptions.  Those assumptions are self-evidently true to those making them; but I’m not convinced that they stand up to more objective scrutiny.  The first assumption is that the actions of the individuals concerned make such a significant difference to the performance of the organisation as a whole that it is essential to retain them, and the second is that there is a vanishingly small pool of talented people who can undertake such roles.

The question about the extent to which the performance of an organisation is affected by the performance of an individual is far from straightforward.  It’s probably true that poor decisions by individuals can wreck an organisation – and the banking industry has seen the effects of that probably more than any other sector.  It’s far less obvious that the actions of top management can make an organisation succeed. 

That doesn’t stop them claiming the credit for success when it happens – but there’s often a huge amount of luck.  They just happen to be in the right place at the right time.  And if things go wrong, there’s usually someone else to blame.  So when things are going badly it’s down to the problems of the Eurozone; when they are going well it’s due to the brilliance of the top bankers.  (And it’s hard for politicians to criticise bankers for pulling this trick when they do it so often themselves.)

Competent management teams at banks will generally do better than incompetent ones, but I suspect that a huge proportion of the factors which affect overall success will always be outside their control.  If that’s true, then the pool of people who could manage a bank competently is much larger than we are led to believe.  And if that pool is much larger, then the need to compete by paying huge salaries is correspondingly reduced.

To look at things another way, do we really believe that we couldn’t find competent people to run our banks at salaries very much lower than those being paid currently?  After all, it’s not so very long ago that the banks were indeed run by people whose salaries, in both absolute and comparative terms, were very much lower than today.  And the banks were, I recall, rather more successful too.

Just moving it around

Tweet Bonuses are a part of the remuneration package of a lot of people in a lot of jobs; it isn't just bankers that benefit. And in principle, rewarding those who achieve targets can help to improve the effectiveness of organisations. There are, however, legitimate questions to be asked about the size of bonuses, and the basis on which they are paid.

It's a mistake to lump all 'bankers' together as though they were all the same – they are not. But they're not all in line for big bonuses either. The bankers who do the more mundane day to day stuff which we all depend upon to manage our money are performing a useful function - but they're not the ones in line for the big payouts. No, it's the gamblers and speculators; the ones who take all the risks with other people's money - they're the ones lining up to claim their rewards.

What some of the people in the financial services sector seem to be unable to understand is that it isn't the mere fact that they want to pay themselves bonuses which raises hackles; it's a combination of the size of those bonuses and the relationship (or lack of) with their contribution to the success of the organisations for which they work.

There is a great deal of difference between making people wealthy, and creating wealth. There is no doubt that the gamblers and speculators achieve the first; some people (and not just the bankers themselves) have become very wealthy as a result of their activities. But it isn't because they have actually created any wealth; all they've done is to move it around a bit.

Like Robin Hood in reverse, they actually take a little from the many to give a lot to the few. In that sense, their activities have not only been socially useless; they have actually been detrimental to the interests of most of us. The fact that some of them have threatened to take their 'skills' elsewhere unless they are allowed to be paid that to which they think they are entitled shows only how far removed they are from reality. I'm tempted to say 'let them go'; my problem is that I wouldn't wish them on anyone else either.

In it together?

Tweet I've not been convinced to date about the Labour tactic of trying to portray the Tory leadership as 'toffs' because of their privileged background. I'm more interested in what they say and what they plan to do than in their own personal circumstances.

Sometimes, however, by their own statements, they invite more scrutiny of their personal position. Last week, one of the key phrases in the speech by the Shadow Chancellor, George Osborne, was that 'we're all in it together'. The implication was that we are all going to have to suffer for the economic situation in which we find ourselves; but coming from a man who is, shall we say, not exactly short of a bob or two, it hardly sounds sincere.

And, of course, it isn't really true either. What he means is not that he and people like him will suffer the cost of narrowing the budget gap, but that the burden will be borne primarily by those who work in, or depend on, public services. The bankers and financiers who caused the crisis - and who fund the Tory party - will continue to live the high life, and the Tories' longer term plans involve using savings in public expenditure to cut the taxes of the most well-off.

The spin put on his speech has been that he is being 'honest' with people - it would have been far more honest to have said 'My friends and backers have fouled up big time, and you're going to have to pay the cost'. I won't hold my breath, though.

Useless bankers

Tweet Lord Turner's criticism of "much of the City's activities" as being "socially useless" is something with which I can disagree only in the sense that it is too mild. "Socially useless" suggests only that it doesn't achieve anything of value to the wider society; I think that it is positively damaging to the wider society, and the phrase which I have used repeatedly is that the activities are the high finance equivalent of anti-social behaviour - except it typically gets rewarded rather than punished.

Still, given the background and role of Lord Turner, it's a pretty stinging criticism, even if he doesn't go as far as I would.

Even if the activities themselves are 'merely' "useless", the fact that so many people are involved in activities which contribute nothing of any social value is in itself damaging. But it's actually much worse than that, for those activities have contributed to undermining, and eventually came close to destroying, the whole economic system. Whilst a few have enriched themselves through gambling and irresponsible risk-taking, they have done so at the direct expense of those who depend on pension funds and stability.

The response of some of those involved was pretty predictable. But I don't understand why they expect us to be frightened by their threat to go and destroy someone else's economy if we don't let them destroy ours. It sounds to me like the most socially useful idea that they've come up with to date. My biggest problem with it as a solution is that I wouldn't wish them on anyone else either.

Is it right?

Tweet At Nuremburg, the defence offered by some of the accused was that they 'were only following orders'. It's on nothing like the same scale – and I certainly wouldn't want anyone to think that I'm really comparing either the individuals or the situations - but the recent penchant for saying that 'I was following the rules' does seem to suggest a broadly similar mindset.

The mindset that I'm referring to is one that allows us to abrogate all responsibility for deciding for ourselves whether something is wrong or right. Whoever wrote 'the rule book' has already decided that for us. But at what point did our own personal or collective sense of what is right and wrong get replaced by a set of rigid rules? How and when did the idea take hold that anything goes as long as it isn't specifically banned?

The most recent example, perhaps, is the furore over the massive early pension given to a man who presided over the collapse of one of our biggest banks. It's a 'contractual obligation', it seems. But 'Is it right?' is the question that everyone seems to be asking.

The government, from the prime minister down, seems to be asking the same question – but there is an element of double standards here. It seems to be OK for the politicians – Labour and Tory alike – to say that there is a moral dimension as well as a legal dimension when it comes to the claimed misdemeanours of someone else (such as the rich banker, for instance). But when it comes to their own actions, they're just as quick to hide behind 'the rules'.

The Home Secretary's absurd claim that the back room of her sister's house is her main residence, whilst the family home in Redditch is a second home was 'checked with the officials' and 'within the rules of what's allowed'. Yes – but is it right?

Nick Bourne's purchase of an i-Pod was 'cleared by the officials', and 'within the rules'. Yes – but is it right?

The Tories have accepted vast sums of money from the speculators and gamblers who have done so much to wreck the economy. They've 'done nothing illegal'. Agreed – but is it right?

The gamblers and speculators themselves, the people who've been betting against the interests of ordinary people, have 'done nothing wrong'. They claim that 'the regulators didn't tell them that they couldn't'. Agreed - but is it right?

Certainly, there's a moral dimension to the huge pension being paid to Sir Fred. But that same moral dimension applies in a whole host of other areas as well. Politicians can't really expect to get away with saying that what they've done is alright because it's within the rules and then expect a higher standard of morality from others.

I'm old-fashioned enough to believe that we all have a responsibility to satisfy ourselves that what we are doing is right and proper, as well as simply being legal. Hiding behind a set of rules simply can't absolve people from the responsibility to use a little bit of judgement as well. No more than following orders.

Shooting the messenger

Tweet I suppose nobody knows, yet, what the whole truth is in the case of the story about Paul Moore. He claims to have been warning HBOS bosses that they were taking too much risk with their lending – and that he was sacked as a result.

It appears that he was then replaced by someone with, putting the best possible gloss on it, significantly less expertise and experience in the field of risk management. One can only presume that the replacement then gave his bosses the answer that they wanted to hear, rather than one which they did not want.

It's an astonishing example of shooting the messenger – and of the way in which the herd mentality took control at the top level of our banks. 'Everyone else was making these investments, so they must be OK, and we must do it too' – even when clear evidence to the contrary was presented to them.

Very few people have been sacked (or resigned) over this debacle – and there is increasing evidence that those heads which did roll are simply being re-employed by their former competitors or as 'consultants'. Those still in post want to receive their bonuses anyway – rewards for failure. Does anyone really believe that any lessons have been learned?

Bankers and Bonuses

Tweet About 25 years ago, I attended a briefing session about the then government's plans to privatise the organisation for which I worked, or rather on the opportunity to buy shares on special terms. The person doing the presentation had explained it all, including the role of the merchant bankers involved.

When it came to questions, a bluff plain-speaking engineer who originally hailed from London prefaced his remarks with the comment that he'd always thought that merchant, as an abbreviation for merchant banker, was cockney rhyming slang. He wasn't being complimentary, of course.

In those days, before the Tories had deregulated financial services, merchant banking was kept very much separate from retail banking, largely so that retail banking was not exposed to the higher level of risk which merchant bankers were able to take. It was a wise and sensible separation. Had it still been in place today, I suspect that the government could have allowed some of the risk-takers in the merchant banks to bring their businesses tumbling down - and the retail banks on the high street would have needed no consequential bail out.

One of the other differences between merchant banks and retail banks was that there was a culture of high levels of performance bonuses in the merchant sector, but this was uncommon, to say the least, in the retail sector. That's another distinction which has been blurred, and now it seems that the bankers (I suppose I'd better not call them merchants) who have done so much to destroy the banking system expect to receive their bonuses anyway.

Now, it may well be that there are a lot of people, at all levels, working in some divisions of the companies who actually have performed well, and their divisions have met their targets. But there can be no justification for paying large bonuses to the people who made the reckless gambles and lost.

It's interesting that the best justification that some have come up with for paying the bonuses is that these people are experts in their field, and are easily able to go and use their skills in other financial centres if they don't get the rewards they want here. Am I alone in wondering whether them taking their 'skill' and 'expertise' elsewhere might not be an entirely bad thing?

He who pays the piper

Tweet Peter Black draws attention to a story in the Observer yesterday, "How short-selling profited the Tories". The Observer is not always the biggest friend of the Tory Party, of course. However, the Sunday Times, which is much more well-disposed towards them, also carried much the same story, under the heading "Short-sellers bankroll Conservatives". They both list a number of managers of hedge funds who have donated handsomely to the Conservatives, although they both appear to have missed our friends Christofferson, Robb from the list, despite their kind contribution of £181,000.

I suspect that that is because the stories were based on the information about the membership of the "Leader's Group", which is for personal rather than corporate donors. Most of the other hedge fund donors appear to have donated from their own personal share of the profits from their 'work', rather than that of their companies, it seems. The Observer claims that the information about membership of the Leader's Group has been placed on the Conservative Party's website, "in an attempt to quell a mounting row over the party's finances". I have to say that if it has, then I can't find it.

On Saturday, Tomos Livingstone in the Western Mail said that Cameron faced a difficult choice in his address to his party's conference about how far he should go in responding to what Gordon Brown said last week. Amongst his comments, he suggested that Cameron might want to try and distance himself from the 'share-dealing bogeyman'. He reports today that Cameron has duly obliged by stating clearly that bankers and financiers had "no influence over my policy at all".

So, that's alright then? Not exactly, no.

While his party is being bankrolled by these people, stating that their financial support has no effect on his policies is about as convincing as Labour's first reaction some years ago when they received £1million from the boss of Formula 1, and claimed that it had had no effect on their decisions. It didn't wash – and they eventually had to give the money back.

The precedent is a clear one; if the Tories want us to believe that they are not in hock to the bankers and hedge funds who have come so close to bringing down the entire financial markets, there is an obvious step that they can take - count up all the donations from those concerned, and return them, with a polite note. I won't hold my breath waiting.

It's interesting that it's a Spanish bank which is buying some of the assets of B&B, following the collapse of B&B. Spain seems to have been largely unaffected by the effects of the 'global' crisis in the markets. So too does France, and Canada, and a number of other countries. That raises an interesting question. If this is a 'global' crisis, outside the control of any particular government, how come it only affects part of the 'globe' so badly?

The answer is in the regulatory regimes applying to banks in different countries. In Spain (and other countries) much of the activity which has caused the financial crisis would be illegal, so that they are largely insulated from the worst effects. So why are UK banks so exposed? Because the Tories (who claim not to be in any way influenced by the donors who benefitted from their decision) de-regulated the financial markets, and Labour have done little or nothing to re-regulate them.