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