Bankers, bonuses, bandwagons, the crisis of capital and the failure of government
Stripping Fred the Shred of his honour and vilifying Stephen Hester shows politicians at their most irrelevant.
An effective banking system is essential for a healthy economy. The free movement of capital in has funded the projects and industries which over the last 200 years have, with some obvious calamities along the way, driven the steady rise of living standards for the great majority of the citizens of the Western World. Until now, when there is a real prospect that for the first time in decades children may well be worse off than their parents, burdened by colossal government debt caused in part by profligate politicians and in part by a banking sector that had to be rescued from near meltdown.
This has been a bad week for bankers. Fred “the Shred” Goodwin has been returned to the status (as one wag had it) of “Fred the Pleb”. And Stephen Hester, the chief executive of the Royal Bank of Scotland hired to try to clear up the mess made by Goodwin and others has “agreed” to fore go his “bonus” of a £963,000, which itself was half the original proposal. He will therefore have to struggle along on his meagre basic salary of £1.2 million a year for now.
What to make of these events?
I see both as symptoms of a banking system which is dangerously out of control and of a political class which is unable to grasp and confront the real issues and settles for grandstanding and posturing instead.
I heard an interesting observation last week from a commentator who pointed out that prior to the so called Big Bang deregulation of the City in 1986 a great deal of lending and speculation was carried on through syndicates of individuals, much as Lloyd’s syndicates are still organised today. That meant that if is all went wrong then the individuals involved paid the ultimate price of financial ruin; no new pony for Maisie, and little Tarquin would be hauled out of Eton and sent to the local “comp.” After Big Bang risk was always managed through corporate vehicles and the individual was thus insulated from the ultimate wreck should greed be matched with incompetence.
Of course the financial crisis which so nearly brought not just recession but deep depression is international, and was just one factor, but you have my point; The tendency to take risk increases.
Perhaps one of the most insightful takes on the crisis I have heard came from an interview with the author Robert Harris.
Harris’ recent book, “The Fear Index” deals with the shadowy world of hedge funds and the greed culture and importantly the technology which drives them.
In the book Harris sets up a plot in which a physicist is employed by a hedge fund to create a computer programme based on algorithms which predicts fear as a motivation for behaviour, and sells stocks “short” on the back of these predictions. Naturally the programme goes very well for a time, and billions are made, until something goes wrong….
Robert Harris is not only an exceptional writer, but an exceptional researcher, and as he explained in his interview, the real world hedge funds of which we hear, and which play such a huge role in the global markets in terms of trading debt, pretty much do this already. In fact they do employ a great number of very highly gifted academic physicists mathematicians and the like to analyse date and trends, create algorithms, and feed information into computers which trade with each other on a 24-7, 352 days a year basis, making trades in volumes and at speeds which human beings simply cannot match.
We are living in an automated worldwide betting exchange.
In the interview Harris explained that one of the many causes of the banking crisis was that the computers doing the trading had in effect been programmed to accept that there could not be a collapse of the property market in the United States. This had never happened before, and therefore logically would never happen. It therefore posed no risk. Until, of course, it did.
Harris was gloomy about the prognosis. It seemed to him, as it seems to me, that a system operating in such a way is sooner or later going to suffer another hiccup of gargantuan proportions.
The real issue which has to be confronted is that the principles of prudent banking balanced by aggressive and flexible lending for investment have been abandoned in favour of an international financial system which bears all the hall marks of being little more than institutionalised spread betting. This, combined with government debt, is the crisis of capitalism. And the two are intimately entwined, because government debt means governments are in thrall to the markets in which these funds operate.
What then of the Goodwin affair or Hester’s bonus in the light of all this?
So Fred Goodwin joins the ranks of luminaries such as Ceausescu, Mugabe, and Anthony Blunt by being stripped of his knighthood. I have no brief at all for Mr Goodwin, and indeed what little I know of him leads me to suspect that I would dislike him very much on a personal level, but what an utterly posturing petty and pointless irrelevant act. Not one penny of the £45 billion pounds of your and my money needed to bail out RBS from Fred’s follies is recovered, and no one is sanctioned for the grossly reckless strategies. His massive and ill justified pension remains untouched.
As contributor Matt Wardman has pointed out, there are plenty of others in politics who have dirtier linen to wash, and nothing is done.
What point was there in lumping Fred Goodwin in with the various other dictators, tyrants and traitors who have fallen out with the nation?
This act is simply a gesture by the political classes who so loved the City Casino and have so flagrantly let it run out of control. The same political classes that have been cosy-ing up to the banks for some time, and who granted “Sir” Fred his knighthood in the first place.
Far better to have let Fred keep his title as a lasting mocking irony, a bitter reminder that our Lords and Masters who actually hand out these titles are for the most part, short sighted, and greedy.
And what of Hester’s bonus? Should he have been pressured to give up?
Your writer’s view on this is that Hester is entitled to be paid what he was told he would get, not a penny more or less. If he was entitled to his “bonus” he should be paid it. If he was not it should not have been offered.
Whilst Ed Milliband may think he has scored a triumph by jumping on the nearest bandwagon in an outstanding piece of political hypocrisy, this may yet come back to bite him. If it was wrong for Hester to claim his “bonus” in the circumstances in which he did, then there must have been something wrong with the contract that was drawn up. Step forward Lord Myners, former Labour Treasury Minister. Myners claimed there was nothing mandatory about the bonus; it was a matter for the board, and it was for the government to block it.
Not good enough. No one, I think, would complain if a top man was hired, and a heavy salary paid to turn it around. £1.2 million a year is a heavy salary. I am tempted to say that if one is being paid a million pounds a year, then the issue of “incentivisation” should not really be on the table. And sources suggest that there is in fact a £500 million “bonus pool” due for distribution in the near future, with dozens of executives expected to receive more than £1 million each. And the true scale of Mr Hester’s potential bonuses remains entirely unclear; estimates of the various options and vary from £8 million and rising.
If Mr Hester is worth a huge pay packet, all well and good. I have no problem with him being paid £1.2 million a year on a flat rolling contract, with the right to leave if he wishes and the right to sack him if he makes a mess, but I think that should be enough. Frankly, I suspect that I could find a reasonably prudent and financially astute person to do it for that. The governor of the bank of England Mervyn King has a salary of £302,000 per year for example and has had his pay frozen.
I rather hope he is competent.
In the great scheme of things the Goodwin Knighthood and the Hester bonus are barely worth the title side shows. The real scandal is that the political classes are still subjugated to what they perceive as the magical money making power of the City.
Granting Goodwin a knighthood was akin to granting a loan shark an award for services to household budgets on council estates. Granting Hester such an open ended pay scheme was just unnecessary, stupid, criminally insane and immoral. It also highlights that there is an intense moral issue which the government is not addressing.
We are not “all in this together”. There is a political and financial elite which is immune from the tribulations of the ordinary people; tribulations which this very elite has so often engineered with recklessness in the first place.
Fundamentally the Goodwin and Hester debacle tell us only this; politicians have been hypnotized by the glamour and apparent wealth of the international financial markets, but they still fail to grasp the real problems or take a balanced view. They seem to be taking no action to address real concerns about the structure and practices of the international financial market. They do not perceive that there are wider moral issues about the way some tiny sections of society prosper to obscene levels, seemingly without merit. They occasionally flail haplessly at the leaves of evil, but the roots are untouched.
Gildas the Monk
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February 5, 2012 at 10:17 -
Not sure I agree with your conclusion, Brother Gildas.
Leaving aside that the “City of London” (or more accurately the UK’s financial serivces industry) is our single biggest export income earner, the truth is that Fred Goodwin ran a retail bank – current accounts, mortgages, loans and the like. His errors were two-fold – firstly to believe the hubris of ever rising asset values and to allow his bank to lend on that basis and secondly to bet the income from this hubris on making his bank the world’s biggest and most profitable.
This is nothing at all to do with hedge funds, complex financial instruments or masters of the universe moving money round the globe. In the case of asset-value inflation – the ultimate triumph of hope of reality – the biggest culprits alongside the bankers are us politicians who urged the populace to “borrrow, borrow, borrow” on the back of those rising asset values.
Rather than attacking the City, our government should be support our most successful industry – the thing we’re good at, the thing that will make us rich. And while everywhere else is punishing bankers, regulating financial companies to the point of penuary (while moaning about them not lending to small businesses) and claiming – against all the facts – that the solution lies in manufacturing – Britain can gather to itself all the tertiary genius of financial services plus all the expertise that lives with it such as law, actuaries, accountancy and marketing services.
Three Cheers for Bankers!
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February 5, 2012 at 10:35 -
I see your point, and these are well informed views, but I suppose I might counter that the price of propping up various banks damn near bankrupted the country; I am all for banks making money but not at the reckless disregard of all the rest of us! Let the debate continue!
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February 5, 2012 at 18:48 -
I should be clearer – retail banking is a long way from our most successful industry, it isn’t the selling of mortgages, the granting of loans and the keeping of consumer cash in bank accounts (for a fee) that earns us the dollars – it’s the thing you call a “casino”.
The big crash was a thing of retail banking not a thing of hedge funds, share-deals, commodity broking, money markets or indeed any of the jolly things that the “City” does. It was – at its bottom – lending money to people who probably wouldn’t be able to pay you back and then hiding it in a barrel filled with loads of other dodgy loans topped with a few good ones.
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February 5, 2012 at 11:18 -
“Our most successful industry” very nearly sunk the country. There is a precedent – the Darien Scheme that led to the financial ruin of Scotland, and the subsequent formation of the Union of the nations. This time, it didn’t get quite so bad for the UK. Ireland, Greece and others may think otherwise.
Anybody who thinks manufacturing is dead in this country has their head rammed firmly up their fundament. Manufacturing has changed, and labours under many burdens (having to compete with low labour cost economies, the heavy burden of gummint and EU regulation, the short-sighted requirement of the City for a fast return on capital), but the fact that it survives, and in some areas thrives, despite these burdens is proof of it’s lasting vitality.
Gildas is right about the greed and hubris of the financial services industry. There has been concern for years about hidden charges levied by pension funds and investment companies on their clients, for example. Until such practices are history, and financial services companies genuinely serve their customers, they will be despised and distrusted.
We need a balanced economy, not reliance on one, rather dodgy and self-serving, sector.
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February 5, 2012 at 16:16 -
There is a precedent – the Darien Scheme that led to the financial ruin of Scotland. ?????????
Not quite, the only people in Scotland who faced financial ruin were the landowners, it was they who invested in the Darien scheme, unfortunately for Scotland they were the only ones with a vote in the Scottish parliament, westminster offered to repay the monies that they had lost providing that they sold Scotland down the swanny, hey presto the union. Accordingly English spies in Scotland at the time found the at least 80% of the Scottish population were against the union. At this time the burghs of Scotland were awash with money and according to tax receipts of the day Scotland economy was growing at around 5%
Looks like the union is at an end now anyway-
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February 5, 2012 at 21:03 -
Professor Smout I think it was, pointed out that interest rates in Scotland at the time of Darien did not rise. If much of the nation’s capital had indeed been destroyed then the shortage would have caused higher rates. He hypothesised that a lot of the money came from expat Scots and even from the then City of London.
Many of those landowners in Scotland also held extensive estates in England and in France.
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February 5, 2012 at 10:48 -
Why not reverse the “honour” and make him Ris Fred? Or Give him a new title of dishonour such as “That”? In my experience many, if not all, politicos have been so dubbed already; That Blair, That Brown, That Mandiebum, etc.
A solution would be to make all trading houses and investment banks etc partnerships instead of limited liability companies. If they go belly up the partners lose their houses and savings. The risk of the partners finding themselves on the streets was a very effective risk management tool pre-Big Bang. -
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February 5, 2012 at 11:17 -
As you rightly wrote, we now have “computers which trade with each other on a 24-7, 352 days a year basis, making trades in volumes and at speeds which human beings simply cannot match”. But however “clever” those programmes are, if one of them makes a “profit” by short-selling a stock, them somewhere in the world some-one has made the equivalent loss. In addition, both the seller and the buyer will have paid commission on the transactions, so both the banks make a profit! So, a profit, a profit and a profit are to be made and a loss is to be recovered. Who pays for that – we do, from our pension funds, from the additional costs of goods and services and so on.
Simon Cooke’s assertion that Fred ran only a retail bank is wrong. “Royal Bank of Scotland (RBS), which is 83pc taxpayer owned, is considering shutting down more than half of its once-dominant Global Banking and Markets (GBM) division, including offloading renowned stockbroking business Hoare Govett as a result of the potential complete closure of RBS’s equity business.” (Daily Telegraph, 18th December 2011)
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February 5, 2012 at 11:24 -
Gildas, I am reminded of an old saying in the engineering construction industry, concerning the Six Stages of a Major Project;
1) Enthusiasm.
2) Disillusionment.
3) Blind Panic.
4) Hunt for the Guilty.
5) Punishment of the Innocent.
6) Promotion for those not involved.I think with regard to the financial sector, we’re on Stage 4 at the moment.
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February 5, 2012 at 11:33 -
IMHO Hester should have kept the bonus he’d earned & to which was perfectly entitled.
Retrospectively de-knighting Fred for a subjective ‘non-criminal’ offence has now set a precedent which I hope will limit the retention of civil honours to politicians for generations to come.
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February 5, 2012 at 11:50 -
Poor Fred can no longer go to bed with a Lady.
Seems to me the awful truth is that there is nothing government can do – our situation is not a failure of government but the result of the natural flow of capital to those who can make the best use of it. The UK and USA kept the party going on the back of finance and house price inflation and the bubble naturally popped. The banking regulators dared not stop the party because there was no ‘plan B’ because no-one can think of a viable ‘plan B’.
The scientists have failed to come up with any world-beating new ideas that are not better exploited overseas. The financiers will be lucky not to see new business migrate eastwards. Worse still is the idea we can rise up on some intellectual power peculiar to a handful of countries – it is obvious that intellectual power is evenly spread across the globe. Invention and ingenuity thrive on necessity and a vibrant economy. A vibrant economy means opportunity for the young – which means cheap houses – ie not here.
I am sorry to say Europeans will have to go hungry for 100 years. Think of those dusty, sleepy towns in 1960s Spain and that is the future for most of us – without the sunshine. Think of the wealthy neigbourhoods of Rio and the barrios and favelas, that is the future for our suburbs. Eventually the economic wheel will turn and we can start making things again – by which time house prices will have plummeted and the baby boomers will be long dead. Until then Europe becomes a retirement home.
This cheery scenario may come to pass or maybe the sea levels will rise and rise with all the problems that brings – who knows. Alternatively Cameron may authorise the scrapping of the Green Belt and the concreting over of the entire South East. Either way, I see no reason to be cheerful. until about 2112.
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February 5, 2012 at 12:44 -
First the mistakes of the RBS were 3 fold. a: Purchasing Natwest using borrowing when Natwest was 4 times the size of RBS and at the time was the largest player in UK Self Certification Mortgage products, Purchasing US banks deep in Subprime Market (NINJA Loans, 100% Loans to people with No Income, No Job, no Assets) and CDO (Collateralised Debt Obligations). The final straw was ABN AMRO which was Fred’s pride. The completed this deal after Northern Rock collapsed.
The Royal bank of Scotland until 2001 when Fred took over was 100% funded by deposits. A prudent bank with strict lending criteria. The RBS retail bank continued to be such an institution but the Investment Arm and rapid expansion through acquisitions left them in a perfect storm.
The people at the pension funds and investment funds who owned RBS shares did a poor job of analysis and continued to allow Fred to drive further and further into dangerous territory without a raising any objections as share holders.
My final point is about the commissions on trades that investment banks, stockbrokers and city types make. They can make short term profits by trading shares in a manner that is detrimental for the owner of the shares and the company and the country. They get paid even though the economy collapses.
We should live in a meritocracy but nobody needs more money than they could ever spend in order provide an incentive to work and stability for their family and future generations.
Imagine a world where money was replaced with food or water. Where the bankers insisted on stock piling all the worlds food and water resources in their own vaults because they were the people who were in charge of transferring the food and water around the world on behalf of the people. That is all banking is. They have just dipped a bigger and bigger bucket into other peoples money year after year convinced they have earned the right.
While they stock pile these resources they are out of circulation and away from the public and the economy. This ultimately kills the economy. Give a 1000 to the public they will spend the lot. Give it to a banker and he will save it with his other millions. People starve and die while they sit on vast resources they will never need nor use. If we call this sensible they we are truly stupid.
I am not some commie wanting equal distribution idealised nivanna.. Simply more equitable scale of meritocracy. The french revolution should be a warning to the elite class. Eventually a spark lights the fire that ends in mob anger falling on those who have created a system to benefit themselves.
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February 5, 2012 at 21:20 -
While I can agree with much of your analsis it should be noted that RBS was a stockmarket listed company. A defence used to ward off predators is the kill or be killed approach RBS took. They would certainly have been taken over if they had not themselves taken over others. Perhaps an independent Scotland could have delayed the takeover but the EU made Italian banks subject to foreign ownership despite their resistance.
The ABN takeover was an Achilles blow, but Barclays were going to buy that iceberg. If they had, then only RBS of the British owned banks ( HSBC being regarded as an HKG bank ) may have been kept out of the taxpayers hands.
Northern Rock should have been allowed to go bust. For solely Labour party advantage it was not, and its that blink which cost us all dearly. Labour are the real fly in this ointment. Why have they got away with it? How on earth can anyone with any modicum of intelligence not see that their anger should be directed to Zanu, not Goodwin or Hester.
A friend of mines has lost a lot of money lately on the collapse of a local construction company which owed him a lot of loot. He is not going to be taken over by the government, nor paid a big bonus. He is bust. That is how capitalism is supposed to work.
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February 5, 2012 at 13:04 -
I do profoundly hope that the withholding/withdrawl of honours to people who have utterly failed means that Gordon Brown doesn’t get knighted / a peerage….
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February 5, 2012 at 13:42 -
Perhaps Gordon should be crowned !
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February 5, 2012 at 13:58 -
At least Gordon was right, it did start in America with their sub prime lending being bundled for sale world wide backed by an AAA rating from their rating agencies.
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February 5, 2012 at 14:51 -
The 2008 crisis started in America, but the underlying problems of too much debt were not just an American phenomenon. The UK’s current woes are mostly of our own making, though not helped by political arrogance within the EU ‘elites’.
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February 5, 2012 at 15:28 -
I agree it was a crash in waiting, fuelled by too much credit and boosted by the labour government.
The problem is that no one is prepared to bite the bullet and make the necessary cuts to the government over expenditure. The fact that anyone entering the UK appears to be given money from the government without any qualifying period does not help. Nor does the government paying vast sums to prop up green initiatives, windmills etc.
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February 6, 2012 at 16:56 -
When it comes to rewards, one gets what one pays for. £1 million is not a lot for top talent, even Championship footballers can hope to attain that. There are NHS dentists and GPs earning similar sums. And talent is mobile – if Manchester United cannot or will not pay the going rate for a Rooney or a Rolaldo it’s a fair bet City or Real Madrid will.
Put an artificial and political cap on UK bankers’ rewards and we will end up with a nationalised banking industry run by mediocrities in competition with superior-staffed non-nationalised and foreign banks. How will that play in the long run for those reluctant shareholders, the taxpayers? (And their as yet unborn great-greats).
£1 million today is a lot, lot less than the £1 million a year that first James Callaghan and then Mrs Thatcher paid for the services of Ian MacGregor to sort out the dreadful messes that were British Leyland and British Steel. He was considered a bargain for his success in cutting losses in these state-owned companies from billions to mere hundreds of millions in only five years.
Stephen Hester deserves no less recognition and financial reward for cutting losses and reducing risk exposure at RBS today than Ian Macgregor justified for doing likewise with the nationalised Brits a quarter of a century earlier.
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February 6, 2012 at 17:03
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