Like sullen union leaders, all bankers do is jeer at solutions

Anthony Hilton
29 Jan 2010

One of the most inexplicable things about the banking crisis is that though the industry claims to employ the cleverest people in the world and pays them accordingly at no point in the 15 months since the collapse of Lehman have its leaders taken any responsibility for reform.

One would have thought that, having had to endure the humiliation of being rescued by the taxpayer from complete financial ruin, those running the banks would have realised things had to change and that business as usual was not an option. One might also have expected more than just a passing interest in getting it right next time. But apparently not. They make no effort to fill the policy vacuum themselves but have the gall to slag off anyone else who tries.

They have had long enough to think about this and live and work near enough each other — not to mention rubbing shoulders at gatherings such as this week's egofest in Davos — to swap opinions, so it beggars belief that not one of them thought they should work out an acceptable, collective package of reforms to offer up as a solution to politicians and regulators. They, after all, are the people on the inside. They claim to be intelligent. They are paid to understand what is happening. They ought to be best positioned to give a candid diagnosis of the problems and pressure points which caused the melt-down and spell out the changes which would stop it happening again.

Instead they rubbish everyone else's ideas while contributing nothing to the debate themselves. Like the truculent trade union leaders of the Seventies they greet every suggestion of reform with veiled threats that any change which would be awkward for them risks bringing the nation to its knees. They were at it again in Davos this week with Bob Diamond of Barclays Capital, Joseph Ackerman of Deutsche and Peter Sands of Standard Chartered taking it in turn not just to rubbish President Obama's proposals — drafted remember by Paul Volcker who has had more experience of banking and how it works than any of them.

Rather than whinge about regulation, bankers would be better employed thinking up an answer to points made in a speech on Wednesday by the Bank of England's Andy Haldane. In it he pointed out that banks could quickly restore themselves to health if they used their current huge levels of profitability derived from artificially low interest rates to support lending to the real economy and to repair their balance sheets. However, they show no sign of such responsibility and prudence because they prefer to dish the windfall profit out as bonuses and dividends.

Haldane demonstrates that had the bankers not been thus obsessed, they might not have needed the taxpayers' bailout. He says that if British banks had reduced their dividends by a third between 2000 and 2007 it would have generated £20 billion of extra capital. If they had trimmed payments to staff by only 10% it would have saved £50 billion in capital. If they had refrained from paying dividends in those years when they lost money it would have added £15 billion to the pot. Thus three simple measures — which normal management would regard as prudent — would have generated £85 billion of extra capital, which is more than the entire amount supplied by the government during the crisis.

Painful effects of the income gap

It is now understood that the rewards of globalisation have gone to a relatively small proportion of the population in this country. While the incomes of those running large corporations or working at almost any senior level in financial services have soared, the incomes for the majority of people have been squeezed.

Until recently those being squeezed put up with it, or rather did not realise how much it was happening because it coincided with the credit boom. They were in fact victims of a double deception, they felt wealthier because house prices were rising, and they could afford to take on more debt to maintain their spending because interest rates were so low.

This week a report from the National Equality Panel confirmed the gap between rich and poor and indeed between the rich and everyone else will continue to widen and tackling it ought to figure on the agenda of whichever political party forms the next government. This is not just for moral reasons, though these are powerful, nor even for economic reasons because social mobility is a key ingredient in making the best use of our resources and maintaining international competitiveness.

There is, however, a third reason. Income inequality played an insufficiently appreciated part in the global financial crisis. According to Professor Robert Wade of the London School of Economics, more money pouring into the hands of the already rich prompted them to unleash a waterfall of financial speculation at one end of the scale, while the stagnant incomes of two thirds of the population led them to double their indebtedness. Excessive speculation coupled with excessive leverage is guaranteed to bring instability.

There is a further disruptive side-effect. The spending fuelled by debt and speculative profits led many industries to overestimate how much long-term demand there was out there for their products and they overinvested accordingly to meet it. It was a false signal and is a powerful reason why there is today such chronic overcapacity in cars, hotels, airlines, shipping, the steel industry and much much more and why there still has to be much painful readjustment in those sectors.