Bonuses Are Nonsense

Some years ago, I had the misfortune to work for a complete imbecile. He proposed that my department be paid a bonus based on its profit. I objected to this on several grounds, the primary one being, 'To offer us bonuses is insulting. It suggests that we are not working as hard or as well as we could.'

There are many other objections to bonuses, but this is, I believe, the principal one. It doesn't worry high-flying bankers because, while they may be working as hard as they can, they can always find a new way to swindle their customers or the government. By offering them bonuses in such circumstances is to encourage them to do so.

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Is David Walker the Right Chairman for Barclays?

Sadly, the answer must be an emphatic no. Sir David has shown himself to be completely divorced from reality by suggesting that misselling of interest rate swaps and payment protection insurance is 'the consequence of not charging for bank accounts'.

This assertion is a nonsense on several levels: (1) everyone is charged for their bank accounts, by the vast spread between interest paid and interest charged and by charges on transactions; (2) before the credit crunch the banks were making vast profits (largely unseen by their shareholders as they were creamed off in bonuses) without, for the most part, having transparent monthly charges for accounts; and (3) Lloyds, which has charged many of its customers a monthly fee for its current accounts was also one of the worst offenders in the PPI misselling. Misselling was driven not by necessity but greed.

Sir David suggested to the Labour government that banks should have to disclose how many of their employees earned over £1 million. However, he warned that naming them could drive 'talent' abroad. This is complete nonsense. Banks are allowed to lend about 10 times as much as their combined Tier 1 and Tier 2 capital. You could pick the most stupid person off the street (even a politician) and let him loose as a senior decision-maker at a bank and (s)he would be hard put to lose money. The 'talented' individuals who ran, and for the most part still run, our banks, however, managed to lose billions and had to be bailed out by the government. Barclays, of course, tapped Qatar's sovereign wealth fund instead, but at a massive cost to its existing investors (including the pension funds).

Marcus Agius, the outgoing Chairman, says that Walker's appointment will scotch any lingering expectations that the bank will be split into separate investment  and retail companies. This is to be regretted, as is the government's failure to force a split of this nature in all banks. The idea that bankers can be trusted to enforce a split between the two arms of the banking operations would be risible if it were not so frightening in its naivety. Without a complete split, it is only a matter of time before one or more of the high street banks will have to be rescued again.

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Banking Scandals and Disaster

With its high reliance on financial services, can the UK economy survive the apparently never-ending series of banking scandals? I sometimes doubt it.

In the last few weeks alone we have seen: Barclays admitting to manipulating the Libor (London Interbank Offered Rate), both to disguise its true cost of borrowing and, apparently, to overcharge customers; investigations into inappropriate selling of interest rate swaps to small businesses; and the revelation that HBOS prevented the directors of Farepak from segregating customers' funds, as a direct result of which the customers lost most of their money. Incidentally, some American shareholders have veen suing Lloyds TSB for their reckless takeover of HBOS.

All of these actions were immoral and some of them were possibly illegal. The fact that some of them were possibly nt illegal reflects badly on our present legislation. This sort of behaviour must stop!

The implications for the UK economy (and quite possibly for many other economies) are potentially disastrous. The manipulation of the Libor could expose Barclays and many other banks to litigation on a vast scale. It could possibly destroy some of the world's largest banks - and this time no government could afford to prop them up.

The other two matters do not in themselves pose a systemic risk to the banking system but they do re-emphasise the rotenness of the system and, by creating distrust, could make it even more difficult for banks to recapitalise in future.

What can we do about it? We should (and the government has recognised this) reduce the country's reliance on financial services, but this will not shield us from a melt-down of the banking sector. We must also do all we can to stop this misbehaviour by bankers by disincentivising immoral, illegal and reckless behaviour. For too long bankers ans others in financial services have held the UK to ransome, saying that if we try to curb their pay and bonuses or regulate their behaviour more closely, they'll simply go elsewhere. We must call their bluff - no-one in future is going to wish to deposit their money in these crooked banks, nor will they want to invest in them. The bankers at Barclays have done very well over the last few years but their shareholders haven't.

If the UK can introduce legislation which makes banks safer for customers and shareholders, we'll have a banking sector which has no difficulty raising funds. So what if the crooked and greedy bankers go elsewhere? We're better off without them and there will be plenty of honest and less greedy people willing to take their places.

 

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Bank Failures in Europe

I commented back in December 2011 about the failure of proper stress-testing of banks in the Eurozone. I was making a specific point about France and Germany but the failure was systemic and is well demonstrated by the trouble in Spain which has suddenly discovered that its (supposedly stress-tested) banks may need 100 billion Euros of support. If only the authorities had carried out proper stress tests six months (or, much better, 2 years) ago the Eurozone would not be in this catastrophic position now.

It is questionable whether Germany and the other strong Eurozone countries (there aren't many, especially if the rumors about the amount of Greek government debt held by French banks is correct) can do anything to save the Euro. Even if they can, should they? How can Greece ever survive years of austerity and recession while it is saddled with an over-priced currency? Only by Germany giving them billions of Euros, which they aren't going to do (and who can blame them?). Even if the Germans pumped, say 250 billion Euros into Greece, it would undoubtedly be squandered.

 

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