The tabloids are in full cry about the wicked bankers outrunning the rest of the world and dragging Britain out of the worst of the recession and providing the sinews to pay back all the horrendous debts which we as a nation have piled up. - But they would, wouldn't they? - The media seem to have forgotten that many of the public were utterly complicit in dodgy dealing as they took their own savings and devalued them by multiple re-mortgagings leaving them now with negative equity and vast over-borrowings on credit cards. That this was allowed to happen was the fault of government - in this case Brown as chancellor - for failing in a prime duty, to keep control of credit
The Telegraph’s leader is not much better - it should read its own Business section occasionally instead of playing to the gallery! I have given up counting the number of times I have heard or read that the two banks’ profits were”huge”. They were in fact very modest for the scale of the operations involved. The two banks (there would have been three had Brown not wrecked Lloyds) fought the recession on their own without state investment.
It should also be noticed that the profits declared were heavily loaded towards the investment arms of Barclays and HSBC . This is where the City of London has been pre-eminent and is precisely the area that the Franco-German axis is trying to stifle through bureaucratic EU regulation.
But to point out the blindness of our press is hardly new. Most of the media aren’t very bright are they?
The second article reviews the whole scene. I am still reserving judgement on Jeremy Warner, the Telegraph’s latest acquistion but he makes some good points
Christina
TELEGRAPH
4.8.09
1. Successful banks are vital to the recovery
Telegraph View: the banks' return to good health is precisely what last year's bail-out was designed to achieve.
Yesterday's first-half results from Barclays and HSBC – each posted profits of nearly £3 billion in spite of depressed results in their high street businesses – will be seen by many as a return to business as usual in the get-rich-quick world of investment banking. It is less than a year since the greed and irresponsibility of bankers helped [note my emphasis! -cs] tip the world into recession, forcing the UK taxpayer to stump up £1.2 trillion to save the sector [the country please -cs] from collapse. News that the banks are bouncing back into profit and that bumper bonuses are once again in the offing will leave a bitter taste in the mouths of millions who have not only seen their savings and pensions pulverised, but also face the prospect of years of higher taxes to pay down our ballooning national debt.
For all the understandable public distaste for the spectacle of bankers once more coining it, in reality the banks' return to good health is precisely what last year's bail-out was designed to achieve. A strong banking sector is required to oil the rest of the economy and fund entrepeneurial ideas and growth. The Exchequer, too, benefits from tax revenues from the financial sector. [Got that right! -cs]
What the bail-out did not intend was for the banks to repeat the mistakes of the past, particularly when it comes to rewarding excessive risk. John Varley, the chief executive of Barclays, was clearly mindful of this when he stressed yesterday that no decisions would be taken about bonuses until the end of the year and that he would ensure that his bank was "sensitised" to the issue. We should hold Mr Varley to his word. While the payment of bonuses is a structural part of investment banking, it is evident from the crash that the system had gone badly wrong. It is for Mr Varley and his colleagues to ensure that bonuses reflect long-term wealth creation, rather than reward gimcrack schemes designed to turn a fast buck with little regard for the consequences. [That’s usually called ‘teaching your grandmother to suck eggs’ -cs]
The other worry is the extent to which banks are lending to business. The banks say they are, business say they are not. [Oh dear! Barclays lent a comparable amount to the previous year - The ones that are not lending at all like the Icelandic Banks and other foreign banks pull the figures down! -cs] It is evident that credit is still too tight, though the banks argue that they are under immense pressure from the Government to clean up their balance sheets and not make unsafe loans. Banks must also build new business models.
Now that the casino is closed, they must increase margins and take more care in some of their traditional business activities. But the evidence suggests there are many viable firms with cash flow problems that are being caught out in this painful adjustment. In terms of building a sustainable recovery, this is a greater cause of immediate concern than the pay packets of investment bankers.
2. To sink bankers' yachts will require more competition
Fred Schwed's Where Are The Customers' Yachts? is one of those classic accounts of Wall Street whose timeless and witty observations on the eccentricities of bankers that remains as valid today as ever.
By Jeremy Warner
The title refers to the possibly apocryphal story of a visitor to New York who, admiring all the yachts lined up in the harbour belonging to bankers and brokers, naively asks where the customers' yachts are. Naturally, there were none, for after the customers had paid the vast fees demanded by the bankers, nobody else could afford them.
The story is drawn from the 1920s, and I quote it to demonstrate that nothing ever really changes in the world of high finance. After each successive crisis, the cry goes up: "Down with the bankers!" Tie them up and incarcerate them so they can never do this to us again. But it never lasts. As the good times return, the desire and momentum for change dissipates, the bankers return from their bolt-holes and the cycle begins again.
Investment banks may fail, but come rain or shine, the people who populate them, the investment bankers, always seem to thrive. Still, even to them, the speed with which the industry has come bouncing back after what on most measures counts as the worst financial crisis in history, must be a surprise. As the economy sinks under a mountain of debt, the bankers are again making hay.
After the record revenues and bonus pool announced by Goldman Sachs a couple of weeks ago comes Britain's very own version of the same thing – a profits bonanza from Barclays. In the first half of this year, growth in revenues, particularly those from investment banking, greatly outstripped the rise in impairment charges that springs from the economic contraction.
On one level, this is something we should celebrate. It is plainly a good thing to have profitable banks that can play their proper role in supporting the economy. What's more, Barclays has managed itself well and boldly through the crisis, and deserves its success. But to indulge this success so publicly in excessive pay may not be entirely wise. Average pay at Barclays Capital, the bank's investment banking arm, is on course for an astonishing £200,000 per head this year.
For many, what sticks in the gullet is not so much the contrast between City excess and Main Street misery, as the perception that it is all somehow being funded by the taxpayer. [This pefception has been fed - somewhat erroneously - by bthe media -cs]
John Varley, Barclays' chief executive, likes to make the distinction between systemic support, which Barclays [along with the rest of us -cs] has plainly benefited from, and individual support, which it has not. There was no direct bail-out of Barclays with taxpayers' money. Instead, Mr Varley and his board fell back on Gulf investors and asset sales.
Yet it is also the case that without the systemic, lender of last resort, support offered by the Bank of England and the Treasury through special liquidity and asset purchase schemes [otherwise known as Quantitative Easing (QE) or colloquially “printing money” which have staved off bankruptcy of the national econom y for now. Nothing very special about Barclays there -cs] . , as well as the implicit guarantee from the Government that no major bank will be allowed to fail, Barclays would no longer be in business.
It is true that nor would the rest of the economy, but that doesn't defuse the sense of injustice felt about the apparently fabulous returns once more being enjoyed by those who but for the taxpayer would no longer be in a job at all.
Banks are different, it is often said. They cannot be allowed to fail in the normal way because of their central position in the payments system and the process of credit creation. So when the system gets sick, the authorities have no choice but to step in and treat the banks until the fever goes away.
But is it really appropriate that taxpayers be forced to stand behind the likes of Bob Diamond and his troops at BarCap? [Barclays Capital -cs] The ordinary banking activity of deposit taking and lending is one thing. What are sometimes referred to as the "casino" type trading activities of investment banks are quite another, even if, as BarCap points out, much of the current growth in revenue is customer-driven and of tangible benefit to the real economy. There is fury in the UK Treasury at the way BarCap has used the sovereign "put" of implied Government support to indulge in an aggressive recruitment spree which has had the effect of bidding up salaries all round.
It doesn't really matter that BarCap has axed 1,000 more bankers than it has recruited over the past year. Selective recruitment has inflated the going rate. Even the part-nationalised banks have had to pay big retention fees to prevent top talent and teams being poached.
Is there anything that can be done about it, or like death and taxes, is excessive pay in banking just one of those things that we have to reconcile ourselves to? Whatever else they are, bankers are not stupid, and they can see as well as any the risk run by indulging in another period of excess so soon after bringing the world to the brink of ruin.
Even so, the commercial realities of their world force them to pay what it takes to recruit the top people. Mr Varley makes the point that we seem to want to have our cake and eat it too. We want the benefits of a free-wheeling market economy but without its risks. Well perhaps, but the issue is not so much about throttling risk-taking as whether such a disproportionate part of its benefits should go to the bankers. That it does is in itself a form of market failure.
Solutions that don't risk pulling the whole house down are hard to identify. Bankers are bound to find ways – either on or offshore – around attempts to regulate pay directly. A Glass-Steagall type separation of investment banking from plain vanilla deposit-taking might seem to have something to commend it. It can surely be no coincidence that while this separation was in force in the US, there was no systemic banking failure of more than passing significance. But it may be impractical to impose it on today's banks, and in any case virtually impossible without international agreement. Much modern banking is borderless, not just in geographical terms, but in products too. Many of the benefits of modern finance would be lost if the clock were turned back.
On the other hand, there is plainly a case for a larger number of smaller banks. It's impossible to generalise here, and I certainly don't want to dump on all large banks. Apart from the misadventure in US sub-prime lending, HSBC is an example of a whopper whose size, diversity and culture has enabled it to withstand the credit crunch better than most. All banks are now trying to emulate HSBC's traditionally strong capital ratios, its conservatively based funding model, and its outsized liquidity pool. Despite its size, or perhaps because of it, HSBC looks a lot less risky than many smaller banks.
Even so, the root cause of excessive charges, profits and pay in commerce is nearly always lack of competition and/or state subsidy. Banking is no exception. Reductions in capacity during the crunch has enabled a further widening of spreads, or appropriate charging for risk, as bankers would prefer to call the phenomenon.
One of the ironies of the present rush to regulate is that in banking it is regulation which is the biggest single barrier to entry. The capital and other regulatory requirements are prohibitive for much entrepreneurial endeavour and becoming steadily more so. If you want to know why there are so few customers' yachts, the absence of decent levels of competition in banking provides a large part of the explanation. We have no choice but to pay their charges, or indeed to rescue them when they get themselves into trouble.
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