Tonight:
4°c
The anniversary of any death is a sobering moment, in the case of institutions as well as individuals.
A year from the collapse of Lehman Brothers is an opportunity for banks to consider their own mortality. The event was banking's 9/11; a calamity no one thought possible. In our interview with Baroness Vadera, Gordon Brown's adviser and the minister who participated in negotiations with the banks, she recalls the momentous consequences of the crash here. Today, as it appears it could take a decade to wind up Lehman Brothers Europe, the interconnectedness of global finance is self-apparent.
The circumstances of Lehman's collapse are in some respects unique, having a great deal to do with the personality of its head, Dick Fuld, but the lessons hold good for others in the sector and still bear repeating. The first and plainest of them is that banks need to know what they are doing and the risks they are taking — and we should not be dazzled by the reputations of even the most prestigious institutions into thinking that they do. Bankers need to know their limitations, the level of risk or exposure beyond which they cannot go. We are moving to a consensus that risky activity or lending needs to be underpinned by a commensurately solid capital base, and that moral holds good across the board.
The other lesson is that financial institutions should not trade in things they do not understand. Wrapping up bad, ill-advised debt in the guise of fancy securities deceived people who should have known better about the nature of what they were dealing in. Plain, non-obfuscatory language in finance would serve everyone well.
Then there is the role of regulators: they plainly need to know what a bank is doing, what its business model is, in order to do their job properly. In connection with this, the Chancellor's insistence on living wills for banks is entirely sensible. In other words, banks must run their businesses in such a way that they can be wound up far more easily and quickly than Lehman.
But Lehman does not bear out the commonest moral of the banking crisis. Its bankers were rewarded with bonuses in shares not cash — which is something the G20 leaders will be considering in their meeting in Pittsburgh. Accordingly, the Institute for Public Policy Research misses the point when it says that a return to the bonus culture risks instability. That was not the problem here.
Lehman provides sobering lessons for our bankers and regulators: how well they learn them remains to be seen.
The c-word
It says much about the nature of the Prime Minister's approach to the recession that there is excited speculation that he may use the word “cut” in his speech to trades unions today, as opposed to his favoured circumlocution “tough choices”. But the Prime Minister underrates the capacities of his audience and the electorate; we are not children. We have a state deficit amounting to £175 billion. The question is not whether we cut but where.
And the truth is that, though it would play very badly with trades unions, the most effective cut would be a freeze on public sector pay. The sheer size of this sector has grown enormously under Labour; containing pay increases could save an estimated £6 billion a year. For the Prime Minister actually to mention the c-word may liberate him and his ministers to think about just how they are going to reduce a deficit largely of their making.
New York Standard
Today, the Mayor, Boris Johnson, will be handing out copies of this paper in New York's Times Square, as others will be doing elsewhere in NY as part of the Visit London initiative to encourage American tourism. He has addressed cultural and fashion gatherings to promote London's intellectual life and its fashion week. London and New York have much in common — a vibrant, multicultural urban life. We should meet more often.
