The Financial Services Club's Blog

Bankers bonuses in graphics

Money.co.uk just sent me this lovely graphic that puts the banker bonuses in context quite well ...

 

The land of a thousand voices

It seems that I’m having a long whinge and rant all week, but I’m trying not to.

What I’m really trying to do is to get some answers to this crisis of confidence in the banks and, consequently, the banking system. This is nothing to do with the credit crisis, but the response of the banks to the credit crisis, which is to trash all trust and confidence in their ethics and approach.

This is why there is this non-stop bleating about bonuses and interest rates. The banks justify this behaviour on the basis of all the other kids on the block are doing it so, if we didn’t, we would just get beaten up in the banking playground by the bonus bullies. This is what Stephen Hester said today:

Mr Hester warned “that employees are leaving because it was offering lower bonuses than City rivals. He also said that profits at the bank, which is 84 per cent owned by the taxpayer, would have been about £1 billion higher if it had managed to stop staff leaving. The bank said it had ‘paid the minimum necessary to retain and motivate staff who are critical to the recovery of RBS’.”

Trouble is, this doesn’t cut the mustard.

MPs warned that the public would be astonished that the bank was paying £1.3 billion in bonuses given that it today reported a £3.6 billion loss for last year.

“Vince Cable, the Liberal Democrat Treasury spokesman, said: ‘Stephen Hester is trying to justify the unjustifiable. Most bankers owe their jobs to the taxpayer. His comments will just reinforce the view of bankers in many people's minds as greedy and selfish.’

“Shadow chancellor George Osborne echoed the views of Mervyn King, the Governor of the Bank of England, by telling BBC radio: ‘I do think the level of payment in the banking sector has got completely out of kilter with the rest of society. It is totally disproportionate to what doctors are paid, people working in industry are paid, teachers are paid and the like. We need to bring down pay across the sector — not just in one bank, across the sector — and things like a bank tax, internationally agreed, might help do that.’”

Oh yes, and I love the photograph the Evening Standard  chose to run with that report.

Hmmm ... Hester, the fox killing, horse and hound man.

Nice.

Meanwhile, in the same paper, Chris Blackhurst writes about how we've blown our chances to rein in the banks:

“We somehow think that the bankers will take it upon themselves to lie down on the steps of St Paul's and seek forgiveness — and reform their ways and slash their incomes. They won't. They're human. Yes, they're pariahs, but they will carry on taking the money until they're forced to stop, until the authorities say bank licences will be relinquished if bonuses are paid.”

But none of these arguments raging in the media address the real issue here.

The real issue is not bonuses, profits, lending or interest rates.

The real issue is a lack of internal market leadership within the banking industry.

Nothing to do with regulators, politicians or press. The most significant failure has been the inability for the industry to act as a cohesive hole (sic: whole) to respond to the issues arising under their watch.

Instead we act as a fragmented group of a thousand voices.

Individual voices stand up and are counted, and some count more than others such as the Jamie Dimon’s, John Varley’s and Stephen Green’s. But nothing is co-ordinated or arranged in a way that makes sense or alleviates the public anger and distrust in the system.

Take the example of the past week of banker’s bonuses.

Initially, one bank – Barclays – set an example of waiving bonuses payments, as their leaders chose to repeat the actions of a year earlier and declined the multimillion pound pot they were entitled to. Reluctantly the rest then followed with RBS, Lloyds and now HSBC one-by-one agreeing not to award their leader’s bonus.

The result is that they were accused of being lame sheep in doing so, just following the lead of one, and it just looked limp.

It also rang of insincerity anyway, in that several of these leaders are purely deferring bonuses and have taken large swags of cash via other means (e.g. Bob Diamond’s $46 million payout on the sale of Barclays Global Investors last year) or just don’t need it as most are on million-pound plus packages. In fact, one cynic said that there would just be a top-up of their pension pots to compensate, and so no-one sees these token gestures as being anything other than that- ‘token’.

Does this justify the payouts to their investment banking teams by making such sacrifices?

No.

Does it restore faith and trust and displace the anger and mistrust?

No.

So all it’s done is served as some form of internal justification for the continuance of mega-bonus payments to investment banking staff.

The issue still lies with the press, politicians and regulators however: in this land of 1,000 voices, where no-one coordinated single voice resonates, where is the leadership to change the system?

Take the example I’ve just given.

What bankers should have done is worked together to create a co-ordinated plan across the sector pre-emptively and early on.

For example, Stephen Hester (RBS), John Varley and Bob Diamond (Barclays), Eric Daniels (Lloyds) and Michael Geoghegan (HSBC) see each other often enough in front of Treasury Select Committees to be able to co-ordinate their responses.

So why didn’t they all agree upfront to defer leader’s bonus payments, and announce this as a co-ordinated approach pre-results season?

A joint announcement of rationale and reasoning would have been far more powerful than the sheep mentality manner of following the leader.

Equally, Jamie Demon Dimon (JPMC), Vikram Pandit (Citi), Lloyd Blankfein (Goldman Sachs), Brian Moynihan (Bank of America) and John Mack (Morgan Stanley) see each other all the time in front of Federal Committees. So why didn’t these leaders co-ordinate responses to bailouts and bonuses?

You may say they did, but not from an observer’s viewpoint externally.

It looks like maverick individual actions and approaches, with no single voice to rally the industry to a resolution.

Why these ‘leaders’ cannot organise themselves is beyond the ken.

After all, if these global CEO’s of banks had created a co-ordinated and rational campaign to cap bonuses, waive their own, provide charitable donations, show how bank lending and bailouts had been atoned, then the media, public and politicians would not be baying for their blood.

The fact that: (a) there is no single voice of leadership that is co-ordinated across these banks speaking on their behalf; and (b) these leaders have allowed banks to behave without change, as they were before and as if nothing had happened, is going to lead to a showdown.

That showdown is not far away and, according got all my sources, will be far more draconian and vicious than any action that would have been taken if the industry had spoken with one voice, rather than thousand.

But then, this industry’s ability to self-regulate with transparency and integrity historically has been pretty poor so this comes as little surprise.

Meanwhile, you only have to look at the fact that our poor old Queen has been forced onto the tube these days, to realise how hard times are in Britain ...

Banks aren’t charities, so why do we treat them that way?

Banks aren’t charities and yet the non-stop bleating about bonuses and interest rates would make you think they should be run as though they were not-for-profits.

But banks aren't not-for-profit; they are proprietary firms with stock listings. They are there to make money, not to exist for the public good.

So what’s gone wrong?

Unfortunately during the past two years, the line between public and private has blurred, as evidenced by the Royal Bank of Scotland and Northern Rock, or by Citi and Bank of America in the USA, or HVB and Commerzbank in Germany, or UBS in Switzerland or ...

The fact that these banks were bailed out by their respective governments, albeit temporarily in most instances, has blurred the media and public’s view of what they are there for.

The media and general masses now think they own the banks or, at least, have some skin in their game. And sure enough, in the case of RBS and Lloyds, the UK taxpayer does have some skin in the game: 84% and 43% respectively.

But that doesn’t mean the taxpayer runs the bank or that they exist for the public good.

In the case of RBS and Lloyds, they actually now exist in a shadowland where they are competing with openly aggressive trading firms like Goldman Sachs and JPMorgan, whilst having to conform with the requirements of the Treasury and UKFI.

This causes this schizophrenia between being openly competitive versus being humbly contrite.

What a pain.

But look at the bottom-line: these banks are still private firms with stock listings who have to serve their shareholder first.

That’s why they are paying bonuses, restricting lending, avoiding risk and being competitive.

Or that’s their thinking.

This is why we find it so hard to determine the right approach to bonuses and remuneration.

But take this a step further and we now have the journalistic and taxpaying community believing that they should somehow determine the interest rate setting policy and fees of the bank.

For example, over the weekend, the Beeb got itself into a tiz over credit card interest rates. The question posed is why, when the Bank of England’s interest rates are at their lowest levels ever, are banks charging the highest rates ever on credit card balances?

The answer is simple. The credit card portfolio runs as its own division with its own P&L. Today, more folks are defaulting than ever before. As the risks are greater and bad debts increasing, the interest rate has to rise accordingly.

The media and public then say: but you’re paying out all these hefty bonuses, what about us? Decrease the bonuses so that you can reduce our credit interest rates.

C’mon now and be serious.

The investment bank doesn’t subsidise the card portfolio. They are separately run businesses with their own P&L and both are tasked with making a profit, so both run their book as competitively and profitably as possible.

That’s why Barclays announced an increase in overdraft fees on deposit accounts just two days after saying that BarCap’s bankers would get an average bonus and pay package of just under £200,000 each for the 23,000 staff in that division.

You see the latter achieved their annual objectives and targets, so that’s why they deserve it.

And all of this is in a competitive battlefield where anyone can walk – both staff and customers.

But it ain’t that easy.

First, Barclays are justified in their actions because they never dipped into the taxpayer’s pocket, unlike RBS and Lloyds. Therefore, are RBS and Lloyds justified in providing bonus packages in the same way as Barclays? If they are privately held, shareholder-owned competitive banks, yes; if they are semi-nationalised, taxpayer-funded state-run banks ...

In addition, the divisional components of the bank may be independently structured by their P&L but that argument doesn’t hold water when the bank would have gone under in the case of RBS, Citi and others, thanks to the failings of that very part of the bank that is now sharing the spoils amongst their staff at the customer’s and taxpayer’s expense.

It is this blurring of the lines between a nationalised business that should operate in the public’s interest versus the privatised industry that operates in the shareholders’ interest that is causing all of the media and general debate today, whether it is about bonuses, remuneration, profits, fees, interest rates or any other aspect of banking.

This half-hearted, schizophrenic shadow of an industry that doesn’t know whether it’s coming or going, and has no idea how to regulate itself or be regulated, needs a strong hand to steer it to an objective and vision for future operation.

That vision appears to be one of an independent industry, run under free market principles with shareholder focus as its central tenet.

If you don’t like it ... lump it.

Ending the never-ending bonus war

Solving the bonus questions

I’m fed up with the argument about bonuses and cannot believe it still rumbles on after a year of debate and G20 meetings. With Barclays announcing record profits last week, and therefore increased bonuses, the media latched onto this angle more than the fact that Barclays, UBS, Goldman Sachs and others demonstrates reviving markets and a recovered financial sector.

Sure, bonuses are irritating ... but only because we don’t get them, the guys who do are as reliable as stockpickers as monkeys, and no-one knows how to break out of this cycle of paying millions for a job that is demanding, but no more so than many.

So here’s my suggestion as to how it could be resolved.

First, set a regulatory limit on the bonus pool and the size of an individual's bonus payment.

For exmple, limit the bonus pool allocation to no more than 33% of the bank’s full year profit after tax across all bank subsidiaries, as shareholders and capital reserves must have an equal recognition.  This means that profit should be apportioned equally - one third - to each constituency.

Then limit individual bonus payments to a cap of 0.1% of full year profits after tax.

For example, Barclays net profit was £9.39 billion in 2009, up from £4.38 billion a year earlier.

£9.39 billion profits would create a maximum bonus to any one trader of £9.39 million. That may seem a lot, but it’s been a good year and is far less than some of the current payouts. Equally, if you take Barclays profits from the year before, it would have been £4.38 million. A mere pittance compared to today’s bonus culture but, if you have a level playing field, far better than today’s excesses. And this is looking at a decent bank result.

Meanwhile, take a bank like Royal Bank of Scotland (RBS).

The rules above would be extremely punitive for them. It doesn’t necessarily outlaw any bonuses within RBS, but it does challenge the bank as to how to create a bonus pool when there is no profit.

But look at the wording. It says the bonus pool ‘cannot exceed’ a third of group profits, not that it must be a third. Therefore, for RBS, they can allocate bonuses.  In fact, they have to in order to retain talent and remain competitive.

Nevertheless, you would want to ensure that a loss-making bank allocated bonuses that were in the best interests of the bank.  As a result, the stipulation should be that the bonus plan and allocations for all banks are approved by an independent panel comprising a cross-section of the shareholders of the bank. Approval of the plan must be agreed by a majority – greater than sixty-six percent – of the panel, and the panel must comprise a minimum of ten investors including at least three retail investors.

The selection and choice of panel members must be approved by the home regulator and, whatever the panel size, a minimum of one third must be retail shareholders rather than institutional.

This should ensure a bonus pool and payout that seems agreeable to all shareholders, and therefore should also keep the regulator and media quiet.

All of the above may sound reasonable (or not), but then you have the other key question which is: how would you ensure these caps are adhered to?

After all, any government who contemplated the above would just find all of their banks moving to the Cayman Islands or Switzerland to avoid such punitive arrangements.

OK, so let’s stop that one at the same time by declaring that, for a bank to operate in certain markets – especially the G20 nations – the bank must be registered in a country that has signed up to and been recognised as implementing the G20’s taxation agreement.

This taxation agreement is based upon banks regulated under the new Tobin Tax regime (oh yes, if you didn’t think it was going to happen, it will!). From today’s FT:

For years, taxes on capital flows were seen as a barbarous relic of the 70s, on a par with Demis Roussos and Baked Alaska. No friend of free markets dared support the idea of US economist James Tobin, dreamed up to curb currency volatility after Bretton Woods collapsed. That’s changing. Since Lord Turner, chairman of the UK’s Financial Services Authority, started stirring interest in taxing financial transactions last year, politicians in Germany, France and Australia have voiced tentative approval. Now Japan, through the musings of vice-finance minister Naoki Minezaki, might just be falling in line.

So, the first thing is that the bank must be head quartered and file accounts in a recognised G20 Tobin tax location.

Second, the banks’ accounts must be filed in that country and show a detailed breakdown of profits and losses using IFRS accounting, not GAAP (ouch, that might hurt).

Third, and most crucially, the bank must declare any movement of funds or debt to a location that falls outside the G20 Tobin tax coverage, such as the Cayman Islands or Costa Rica. This is to ensure that complex debt equity swaps, such as the Barclays transaction that took place last September, are registered, regulated and monitored to ensure that this is legitimate tax avoidance and not evasion.

All of the above would ensure that banks and their individuals on major bonus deals, could not just upsticks and move to a location outside the grip of the bonus rules as, if they did, they would effectively be removing themselves from the markets where they need to trade – the G20 markets.

Anyways, it may not solve or cover all the ground required – as I’m no lawyer or accountant – but at least this would be a start.

I think what’s bugging everyone right now is that this crisis began in August 2007 – almost two and a half years ago – and blew up into a full blown meltdown almost eighteen months ago in September 2008. So here we are, years after this all began, with bailed out banks, angry taxpayers, a full blown recession and all the news is of investment markets behaviours remaining unchanged.

That’s what’s bugging everyone ... so come on G20, pull yer finger out, get some actions started, and put an end to this never-ending bonus debate.

p.s. the last discussion of this issue at September's G20 summit ended up with a split view between France and Germany, and the US and UK.

"Greed is good ... and now it's legal"

Remember Gordon Gecko from Wall Street?

Well ... he's back:

"Wall Street - Money Never Sleeps", released on April 23rd.

Money never sleeps.

Lunch is for wimps.

Bankers are always winners.

 

Arrogance, Ignorance and Greed (AIG)

Just saw the folk group Show of Hands on the Beeb singing their song Arrogance, Ignorance and Greed (AIG) about ... yes, you guessed it ... bankers!

Here are the lyrics:

All I wanted was a home
And a roof over our heads
Somewhere we could call our own
Feel safer in our beds

There was a storm of money raining down
It only touched the ground
With a loan I took I can’t repay
And the crock of gold you found

At every trough you stopped to feed
With your Arrogance, your Ignorance and Greed.

I never was a cautious man
I spend more than I’m paid
But those with something put aside
Are the ones that you betrayed

With your bonuses and expenses
You shovelled down your throat
Now you bit the hand that fed you
Dear God I hope you choke

At every trough you stopped to feed
With your Arrogance, your Ignorance and Greed.

You're on your yacht, we’re on our knees
Through your Arrogance, your Ignorance and Greed.

Toxics bring you tact and soul
Poisoned every watering hole
Your probity, you exchanged for gold

Working man stands in line
The market sets his price
No feather bed, no golden egg
No one pays him twice

To enter thrift and caution
Your only sound advice
You know you doubt yourself and meaning
And alone at every dice

At every trough you stopped to feed
With your Arrogance, your Ignorance and Greed.

I pray one day we’ll soon be free
From your absolute indifference
Your avarice, incompetence
Your Arrogance, your Ignorance and your Greed.

There's a sublime video, filmed around the City of London, that goes with it too ...

Download available from iTunes.

Robin Hood Tax and naughty Goldman Sachs

If you haven't seen it yet, here's Richard Curtis's (he of Four Weddings and a Funeral and Love Actually fame) short clip with Bill Nighy for the Robin Hood Tax campaign:

... well worth a look. 

The idea of the campaign is to charge 0.05 percent per £1,000 transacted by banks between each other, and that would raise about £250 billion globally per year to help aid global poverty and climate change.  Interesting to see that it has gained more than 16,500 supporters since it launched two days ago.

Oh yes, this was interesting as well (from today's Times):

The [Robin Hood tax] poll had to be suspended shortly after 3.41pm when the "no" vote went from 1,400 to more than 6,000 in five minutes.  Suspicious organisers suspended the ballot while they removed what they saw as fake votes from the record. Their data revealed that the mystery “no” votes came from two IP addresses — one privately-owned and hard to trace, the other, it is claimed, registered to a computer at Goldman Sachs.

Current poll vote is:

YES votes: 29,643
NO votes: 3,539 

 

Hubba-hubba UBS

It’s been fascinating to watch the rollercoaster of the finance industry over the past two years, with one or two banks illustrating the issues in the market well. But no bank can provide a better testament to the market’s ups and downs than the Swiss Bank UBS or, as most media reports talk about them, the ‘troubled Swiss bank’ with the largest losses from the credit crisis of all the banks in Europe.

Sure enough with $57.3 billion of losses declared to date, it’s not a good picture.

And, sure enough, with the loss of two Chief Executives (Peter Wuffli, June 2007 and Marcel Rohner in February 2009) and two Chairmen (Marcel Ospel in April 2008 and Peter Kurer in March 2009), it’s not a good picture.

And, sure enough, with an exodus of key investment banking talent, it’s not a good picture.

And, sure enough, with $171 billion of customer depostis withdrawn between April 2008 and October 2009, and a further $50 bilion in the last quarter alone, it’s not a good picture.

And with $38.7 billion of state aid, in the form of a TARP-style bailout from the Swiss Government, it’s not a good picture. 

And with the US authorities beating up the Swiss government over UBS being used as a tax haven and asking for details of all of their American customers accounts and dealings, it’s not a good picture.

And with a share price that has bottomed out about the level of Paris Hilton’s underwear, it’s not a good picture. 

The stock has fallen 6.5 percent in Swiss trading since the end of 2008 and traded at 1.24 times book value at the close on Feb. 5, about half the average of 2.56 times since 1997. Credit Suisse stock rose 55 percent in the same period and traded at 1.35 times book value, compared with an average of 1.74 times since 1990, Bloomberg data show.

I could go on, but with 18,500 jobs cut and eleven new management members on the board, the bank is trying to look forward rather than backwards.

And so they should as the new CEO, Oswald “Ossie” Gruebel, seems eminently sensible.

A mature 66-years of age, Herr Gruebel joined this sick dog of a bank a year ago and reported their first profit in seven quarters this morning:

UBS made a pre-tax profit of 1.2bn Swiss francs ($1.1bn; £722.9m) in the three months to 31 December.  This compares with a loss of 9.58bn francs in the same period in 2008.  The turnaround in the final three months of the year helped the bank to cut its annual net loss to 2.7bn Swiss francs last year (compared to 21.3 billion a year before). The bank's profit in the final quarter of 2009, which was much bigger than analysts had expected, was partly down to a tax credit worth 480m francs.

This is good news and perhaps signals there is life in the old dog yet (both of them!).

In a candid interview with Euromoney this month, Ossie makes some interesting statements.

Here’s a few of them:

"When I was at Credit Suisse, outsiders were forever telling me what a great bank UBS was and what a rotten bank Credit Suisse was. Now I am at UBS, they are telling me the reverse."

Oswald was at Credit Suisse for 37 years and took over as sole CEO in 2004. In the three years after he took over, Gruebel doubled Credit Suisse’s profit and share price. He ordered the bank to reduce its holdings in US subprime mortgage bonds in 2006 (UBS was still buying them) and told his clients to pull out of Bernie Madoff's funds after meeting him in 2000.

No wonder UBS wanted him, although they may not appreciate some of his comments:

"What happened here had nothing to do with risk management. It was down to sheer stupidity."

"If you ask me what most surprised me when I came here, it was how little integrated UBS was. It had the image of being integrated around the one brand, but internally everyone pretty much did their own thing."

"I talk to a lot of clients who want to know what is going on at the bank and always one of their key concerns is that they want to see us turning profitable again. No one likes a bank that’s losing money."

Now it’s profitable, that’s different then (even though the US tax investigations aren’t helping).

All in all, well worth the price of this month’s issue of Euromoney, particularly when you get little nuggets like this one:

"We are now giving private clients technology so that they can almost construct their own products. In equity or FX, for example, they can look at where markets and instruments are, then at where the forwards and other related derivatives are, the strike prices, the implied yields and then customize their own exposures. A few years ago, the technology to do all that simply didn’t exist."

Meanwhile, the turnaround king’s story appears to be working with Eric Bendahan, who manages Banque Syz’s €1.8 billion Oyster European Opportunities Fund, saying to Business Week: “UBS was a catastrophe but if things get back to normal, the potential is colossal, while Credit Suisse did its job so well that its potential in the future is much smaller”; and Matthew Clark, a London- based analyst at Keefe Bruyette & Woods Ltd, stating that: “there is a much greater scope for UBS to positively surprise than for Credit Suisse,” rating UBS “outperform” and Credit Suisse “market perform.”

So well done Herr Gruebel ... although one quarter does not make a turnaround, at least the sick bank of Europe is starting to show signs of life and hope.

That must be a good indicator for the whole banking sector.

 

You might miss this regulation, but don't

With so much hullabaloo about banker's bonus taxes, taxes on liabilities, a return to narrow banking, the closure of leveraged prop trading, bankers versus Obama, Sarkozy and Davos, you might miss a few key changes in emphasis.

For example, the bankers view as demonstrated by Bob Diamond's comments yesterday:

'World leaders may find it increasingly difficult to source finance in the capital markets if they insist on splitting up banks that are "too big to fail", Barclays president Bob Diamond has warned.'

Or Lord Adair Turner's, Chairman of the FSA:

'Regulators needed more than the ability to set interest rates to stop asset price boom-bust cycles. He urged the creation of a "macro-prudential body" to cut down on lending or borrowing at times when it thought a bubble was being created.'

But the one I bet you miss completely, unless you're looking, is the speech of the Executive Director for Financial Stability of the Bank of England.

This speech took place in Liverpool last night (20 page pdf).  It's not Davos and he's not Obama, Sarkozy, Brown or even a King or a Darling.  No, he's Haldane.  Andrew Haldane.  And when you've got all attention diverted elsewhere, it's a good time to release news to test the waters of the industry, but not the media who might not appreciate the intent.  So he did, in my humble opinion.

Why is his speech important?

Because he makes it quite clear that the economy has stabilised but the root cause - debt - is still there.  Like the McKinsey report of the other day about deleveraging, he makes it quite clear that we have to deleverage.

What does that mean in reality?

First, that banks should reserve in the good times to over the bad - the procyclicality reserving of profits in other words.  That's nothing new.

Second, the conversion of debt to equity that is state contingent.  Now that one is new.  And by 'state', we don't mean the country as state, but the borrower - whether that borrower be an individual, company or sovereign state.

Here's the section of Andrew's speech that puts this into context:

"Take a typical mortgage contract. A rise in the value of a property relative to the loan gives the borrower equity against which they can borrow. This provides an incentive to tradeup, raising house prices and generating further equity. This amplifier operates symmetrically, as falling collateral values reduce refinancing options and drive down prices. Economists call this effect the financial accelerator. It adds to cyclicality in credit provision and asset prices.

"US economist Robert Shiller has suggested it might be possible to devise mortgage contracts that slow, or even reverse, this financial accelerator. Instead of being fixed in money terms, imagine a mortgage whose value rose with house prices. So the repayment burden would rise automatically with asset prices to slow a credit boom and fall in a recession to reduce the chances of mortgage default. Mortgages would operate like a contractually pre-committed debt-equity swap between households and banks. They would automatically stabilise household loan-to-value ratios. By reducing the amplitude of the credit cycle, they ought to benefit both borrower and lender."

In other words, the idea is that your debt is an 'equity' in the things you borrow against.  Therefore, if you take a mortgage, you are not borrowing £100,000 on a £200,000 house, but you are offering a 50% investment in the house for the bank.  If the house is worth £400,000 five years later, you owe the bank £200,000 or, if it's now £100,000, you only owe £50,000.

Of course, you still have interest payments, but now the asset is shared rather than owned by you once interest and the initial amount borrowed is paid down.

That's quite a big change in how we all think about debt.  It's also a big investment by banks in our assets, that will now be bank owned rather than borrowings, especially if this extends to sovereign debt and corporate capital.

In fact, it could fundamentally restructure the way we think about finance.

Bearing in mind how rapidly ideas like procyclicaility reserving and narrow banking have taken off with the regulators in the last year, it wouldn't suprise me if this idea became mainstream in a matter of days or months.

Hmmm ... a good day to slip that one under the radar wasn't it?

Davos trials, investigations and procrastinations

Like everyone, I’m amazed by how much pure madness there is in the markets right now. Not the madness of crowds, the madness of bankers or the madness of investors. No, it’s the madness of politicians and regulators.

First we had Alastair Darling’s tax on bonuses. Then Sarkozy followed suit. Finally Barack Obama announces not only a tax on bank liabilities, but measures to reign in the banking system by restricting trading on one’s own account - prop trading - using language and rhetoric rather different to the language we expect from him.

Obviously, Obama did this as a pre-emptive strike before Davos, where a whole raft of other regulatory reforms are being discussed and proposed via the G20 and individual world leaders.

After two years, you would imagine that these guys could get their act together wouldn’t you? Instead, we appear to have a muddle of confusion. Robert Peston, who is enjoying his Davos experience obviously, writes his blog over on the BBC today with the title that bankers are ‘dazed and confused’, saying that bankers are commenting that Barack Obama’s scheme is:

1) “vague, confused and we don't know what he's on about;

2) “it won't achieve its stated aim of reducing the risks of another meltdown in the banking system (although quite how they know that if they don't understand what he's saying is beyond me);

3) “if President Obama's aim is to savagely reduce banks' direct holdings of tradeable securities, it will lead to a second devastating wave of banks dumping assets - and will risk a return of the credit crunch;

4) “the confidence of bankers - which the bankers themselves say is so important to any serious revival of lending (so aim off) - has been knocked by the perception that the US and Europe are divided on the future structure of their industry;

5) “bankers' confidence has been knocked further by confusion over who in the US administration has the ear of the president on financial policy-making (the scheme to shrink the banks was the brainchild of Paul Volcker rather than the supposedly banker-friendly Treasury Secretary, Tim Geithner).”

George Soros says that “this development came too soon because the banks are not out of the woods”, although he continues by stating that he is “very supportive of it, but I don't think it goes far enough.”

Hmmm ... accusing bankers of being “tone deaf”, Mr. Soros obviously hasn’t been listening to them, as Bob Diamond, the golf-mad President of Barclays, who says that “there is no evidence that shrinking banks is the answer” and that this will have a devastating effect. The impact “on jobs and the economy will be very negative.”

What is obvious is that the Paul Volcker inspired Obama plan is a core focus of discussion and attention. Probably because most of the politico’s, bankers and corporate leaders are rather worried about their investment portfolios as the stock markets take a further battering for the seventh day in a row.

Shocker.

Halifax's marketing is the worst I've ever seen ...

Every time the new Halifax ad comes on the box, I cringe ...

Now I’ve blogged about their awful advertising before and how insensitive it seems post-crisis, but this one really gets me down.

Not only is it cheesy, poorly executed and raw, but it actually makes most of the folks I talk to feel sick to see a bank that has cost billions in bailouts advertising as though nothing has changed.

And I’m not alone as the Telegraph decided to run a page last week asking what readers thought about a bank that offered a reward of £5 as long as you depsoti a minium £1,000 per motnth.

This advertising seems a bit rich, the Telegraph claims, when this particular bank has cost each and every family in Britain £5,500 to bailout in the last two years.

Steve Griffiths, director of brand and customer marketing for Halifax, says that their new advertising campaign focuses on "the core message that Halifax rewards its customers for their business and shows that our colleagues are enthusiastic, friendly and approachable".

The Telegraph’s readers say:

“Never mind the advert, I want my £5,500 back. I need it more than they do.”
Polly

“Who ever authorised this at Halifax needs stringing up for crimes against society!”
Paul

“Look closely and it really does show them up as a bank that cant be trusted.”
Simon Hawking

“Rather than coming across as "friendly and approachable" they come across as a load of immature bumbling morons.”
Dave

"If they changed the tune to 'sorry seems to be the hardest word' then maybe, just maybe, there might be some mileage in this. Talk about misreading the mood of the country."
Jeremy

There's a few amusements in there too, such as (excuse grammar):

"With lyrics like 'you're indestructible' (HBOS was considered 'too big to fail') and 'you've got the power to return' (thanks to a government bail-out), was the advertising agency having a sneaky dig at its clients by any chance?"
Ian

“At least it answers one question - what banker do to deserve such large bonuses. They have to work with the inane idiots that feature in the advert.”
Mike

“Stop knocking these ads. It gives me valuable exercise reaching for the mute button. Let's have more ads like it and I could achieve fitness and a Zen like calm during commercial breaks.”
Tim

Most worryingly for Steve Griffiths, director of brand and customer marketing for Halifax, should be the comments that read:

“I bank with the Halifax and this advert makes me want to leave them. It is that annoying!”
Phil

“Absolutely atrocious! Maked me want to change my bank!”
Jonny

“I am embarrassingly a Halifax customer, but not for long, I couldn't handle people knowing I bank with such morons, & that's not counting the £39, they charge you for an email for a £2.50 failed payment.”
Caz

“What the advert doesn't mention is the £12.50 per month which they charge you just for having the account, which of course does include the overdraft charges of £1 per day, the £1.50 per month 'debit card fee', and anything else they can think of to sting you with.”
Peter

“If you already bank with Halifax, and don't have a reward account, open one and just transfer £1,000 straight in and back out each month to get your fiver, you don't even have to do it in one lump sum, just £200 backwards and forwards 5 times, still counts, it's easy if you bank online.”
Ian

Message to Halifax: start advertising with honesty and sensitivity, and stop advertising as though the great British public are numbskulls believing that nothing has happened.

What the Halifax should have done ...

Thinking about the Halifax’s ads a bit more, some may say: “they are so bad, they’re good”, in a Shake & Vac sort of way (one of Britain’s most memorable and iconic ads – see end of blog entry if you want to see it).

I disagree.

The Halifax ads are just plain bad and have been well past their sell-by date for a long time.

For example, Delaney Lund Knox Warren & Partners (DLKW) won the Halifax account ten years ago and has run the "cast of characters" campaign – the one with staff members such as Howard – ever since.

Ten years is a long time for any campaign, particularly a cheesy one that has seen the bank bankrupted two years ago and now trading under new ownership, 43% of which is taxpayer funded.

So what should the bank have done?

How about a bit of honesty?

Run a campaign called: “we’re sorry”.

Get a serious but consumer liked presenter, such as Martin Lewis the consumer champion, to front it.

We may not like him, but the public do and they trust him.

So pay Martin a big chunk of money, or someone like him, and get him to be a talking head.

Then I would script him to say something like:

“The credit crisis has affected everyone, and the Halifax has been a part of that. They are sorry about this and, to recognise their gratitude to their customers they are rewarding every customer with a £5 payment for making a deposit of £1,000 each month. This is to reflect the fact that they have changed. They thank you for your continued support and guess what? I think they are OK, so give them a try.”

Something far more genuflective, like this, would be received so much better than using a ten year old, tired campaign that demonstrates that Steve Griffiths, director of brand and customer marketing for the Halifax, just isn’t doing his job properly imho.

Postnote #1: here’s that Shake & Vac ad. It ran from the late 1970s and is still remembered by most UK adults word-for-word. Enjoy!

Postnote #2: if you want to know the Top 10 most annoying UK finance ads ever according to the Times, here they are

Postnote #3: if you're interested in the ads we liked a lot, then here's our top five from 2009.

What is this f****r fee?

So yesterday’s big news is the new Financial Crisis Responsibility Fee, the FCR fee or f****r fee as the bankers are calling it. This is Obama’s big idea to get back lost TARP funds, by introducing a tax of $1.5 million per billion dollars of liabilities on a bank’s balance sheet.

The aim is to raise $117 billion to make up for the losses during the financial crisis. The way it will work is that the banks pay this 0.15% on liabilities and, according to Goldman Sachs, there are around $5.5 trillion of liabilities on American banks’ balance sheets so that’s around $8 billion per year. The tax will apply for ten years, until 2020, or until the TARP fund losses are repaid.

The fee will be applied to only the largest banks, those with more than $50 billion worth of assets, and 60% of the tax will be paid for by the largest banks: JPMorgan, Citi, Bank of America, Wells Fargo, Goldman and co. In fact, the biggest banks will be paying about $2 billion a year for this tax.

There’s also about $1 billion a year that will be paid by UK banks Royal Bank of Scotland (who own Citizens and Charter One Banks), HSBC (who own Household) and Barclays (who bought the US operations of Lehmans).

Sounds bad, but it’s not so bad.

US banks made $250 billion in earnings last year, so paying back up to $10 billion a year in tax ain’t so bad. In fact, I was amazed to find a figure that states that Goldman Sachs made $100 million a day in earnings last year every day for over 200 trading days. So a billion here or there in taxes ain’t so bad, especially if you’re paying billions in bonuses and annoying everyone.

The FCR fee is stirring stuff therefore, and very populist as it ensures that Barack Obama “recovers every single dime the American people are owed”, and hits at the heart of the anger everyone has with bankers making “massive profits and obscene bonuses”.

In some ways, it’s a good idea. It targets leverage and borrowings that banks tap into in the wholesale markets, which is where Lehmans and Northern Rock got scuppered and where Goldman Sachs and Morgan Stanley plough their trough.

The FCR fee also positions itself as the insurance fee which the banks should have paid to get themselves bailed out. They didn’t pay any insurance but then found they were too big to fail so the Fed insured them. This is now payback time.

But it won’t work.

First, it hits at the banks but the banks have paid back TARP. $165 billion of TARP funds were repaid by US banks last year, with an average return to the US taxpayer of an 8% yield. That’s why the Fed made a $45 billion profit last year, through bond purchases and interest on the emergency loans made to financial institutions. It was General Motors, Chrysler and AIG that lost the $120 billion of funds that Obama wants to recoup.

Second, the banks will just pass on the cost of the tax to their customers and investors. Jamie Dimon, CEO of JPMorgan, made the comment straight off that “all businesses pass costs on to customers”, and it is highly likely that the banks will find some way to hide this tax in the costs of doing business. The result is that the proposed tax will be rejected by Congress, who see any tax on the taxpayer as being untenable. The tax has to be directly on the bank.

Third, Geithner ruled out a Tobin Tax on bank transactions at the G20 Finance Ministers summit in Gleneagles last November for the reasons outlined in point two above. The trouble is that the FCR fee is a variation of a Tobin Tax and needs to be better thought out. Obama had and has until 2013 to find a way to get the lost TARP funds repaid, and so he doesn’t need to do something this fast or ill conceived.

Finally, this does not address the two biggest issues: bankers’ bonuses and being too big to fail.

Obama claims it gets at "massive profits and obscene bonuses" ... how?  I don't see it.

If these are the major issues that lie at the heart of the post-crisis bubble of media and public bile, then these need to be addressed and the FCR fee doesn't do it.  The FCR fee purely repays TARP.

In fact, if bonuses and too big to fail are the core issues then, as mentioned the other day, these issues need to be addressed through a G20 agenda, not a unilateralist position whether it be in the UK, USA, France or elsewhere.

Therefore, it is far more likely that the FCR fee will be rejected by Congress and Geithner and Obama end up working with Barnier, Darling, Brown, Sarkozy and company on clawbacks and taxes on banker’s bonuses, along with a variation of Glass-Steagall to bring back a return to ‘narrow banking’. In other words, split the risky investment markets from the retail depositors.

This last point is the key act forecast to happen over the next year or so, and is far more likely to be operable and implementable than a FCR fee.

Survival of the richest

It’s been a difficult time for City bankers, what with all the flak over bonuses and easy money after almost bankrupting the world.

The longest lasting row relates to bonuses and remunerations packages.

This hit the headlines a year ago, and was debated here with the arguments for and against.

A year later, and the argument still rumbles away.

Put “bank bonuses” into Google for example, and over TEN MILLION results are returned.

That’s 10,000,000.

That's almost a quarterly bonus for an investment bank's senior executive and obviously is something that causes a lot of emotion.

Most of the emotion is the resentment that someone is getting paid squillions for doing diddlysquat.

After all, it has been shown on many occasion that a monkey could get as good a result as most stockpickers, but that’s not the point.

The point is that the City traders who return the most profit to the bank get paid the most.

And everyone who is part of a team that returns any profit will get something.

Just a million maybe.

But something.

And if you don't pay it, then the team leaves lock, stock and two smoking cigars.

This culture is so ingrained that there are books about it, with my favourite being David Charters: “At bonus time, no-one can hear you scream”.

It’s a short book about “one man's quest for his annual bonus - in a world where ambition, terror, insecurity and desperate deeds are as natural as organic bread.”

Yep, that describes it pretty well.

The City is a cut-throat, testosterone driven world, which has been well documented in this blog, and elsewhere.

But let’s just look specifically at the UK issue.

The banks are paying bonuses that seem excessive.

The government is unpopular as they are blamed for the bankers’ excesses.

The government wants to therefore clamp down on any excess bonus payments.

But they can’t.

There’s the rub.

The UK cannot clamp down on bank bonuses, even with Alistair Darling’s damp squib of a bonus tax, because one country cannot act on its own on this issue. Not unless they want to lose their banking industry and see it all go overseas.

Apparently no-one believes that will happen, although Boris Johnson thinks it will.

Boris, the Mayor of London, claims that 9,000 bankers are likely to move out of London if there is a punitive singular UK tax regime in this space.

Equally, the Financial Times has discovered that many City banks and bankers are thinking about upping sticks:

"A couple of years ago colleagues of mine would say to me how much they loved London, what a great place it was to live," says a US-born banker at a European investment bank. "Now they're tired of being here. They feel under attack."

Trading is the most mobile investment bank business that could be shifted abroad. And while many banks have show-off, state-of-the-art trading floors in London - such as Bank of America Merrill Lynch's at their European headquarters behind Saint Paul's Cathedral - few would have any compunction about pragmatically shifting a portion of staff to more attractive financial centres.

"A quarter of staff could be easily relocated," says one European investment bank boss. He estimates that within six months, 5,000 to 10,000 City bankers could be shifted to another European centre such as Frankfurt or Zurich.

So what does this mean in reality?

The reality is that the UK cannot unilaterally restrict bank bonuses without losing significant tax and income across the UK.

First, if 9,000 bankers leave then that is 9,000 x (salary + bonus). In reality therefore, if each banker earns an average of £2 million or so all up, it’s a loss of about £20 billion to the UK economy and taxation of around £5 billion or more.

That’s a serious amount of income to the Treasury and commerce across Britain, and London in particular, that disappears up the spout.

No wonder the Evening Standard’s recent poll of Londoners found that 68% of readers feel that bumper City bonuses is good for London’s economy.

But it’s more fundamental than this.

If 9,000 bankers leave London, then it is also 9,000 x 4 jobs.

Each banker supports an infrastructure across London of accountants, lawyers, cleaning staff, receptionists, security guards, catering, bars, restaurants and more.  All of the support and infrastructure that services their offices and complex negotiations in other words.

So it’s more like 36,000 job losses rather than 9,000.

OK, the other 27,000 aren’t necessarily earning £2 million a year, but let’s say they average £20,000 per year, the UK’s average median salary (not London, UK).

This would mean a loss of a further £540 million in income, £100 million plus in taxation and a further 27,000 or more on the unemployed and social security benefit numbers.

Following on from this, wherever the bankers move to will also become a major financial centre and hence other firms might follow paving the way for a mass exodus, in worst case scenario.

In best case scenario, it would just mean that London loses its shine as a Financial Centre, which is threatened already. For example, HSBC has made moves for their CEO to relocate to Hong Kong and is listing on the Shanghai Exchange over the past few months, and many report that Shanghai will outshine London by 2019.

So all in all, the Treasury and Gordon Brown have a big challenge, and it’s not a simple one of cracking down on bonuses with a stupid media-pleasing bonus tax that, in reality, means nothing (the banks just changed ‘bonus’ to ‘salary’, and gave everyone a temporary three month £1m pay rise).

No, this needs co-ordinated global action which is why London is working very closely with Brussels, Washington and other economic centres to try to create a joint agreement on this thorny issue.

Without a joint agreement, one by the whole G20 (not just France and the UK), any action taken in London to limit bankers’ bonuses will be detrimental to the Treasury, the economy and the country as a whole.

The UK banking sector contributes significantly to the UK and its economy:

• Employing almost half a million people with the wider financial industry employing over 1.1 million
• Together with related activities (accountancy, business, computer and legal services, etc), some three million people rely on the financial industry for their jobs.
• Banks and financial services contribute £70 billion to the UK's national output (6.8% of GDP)
• Banks and financial services provide 25% of total corporation tax (£8 billion) to the UK Government
• The value of foreign exchange business passed through London every day is £560bn ($1 trillion)

 

The twelve economic days of Christmas

Pictorial representation of this year versus last year's Christmas, economically speaking (double click to enlarge):

 

Thanks to Go Banking Rates.

Hank Paulson's new job ...

I've just heard that Hank Paulson, he who many blame for turning the financial drama into a crisis ...

... oh yes, and Tim Geithner's predecessor at the Treasury, has been appointed into a key new role in co-ordinating the world's resources.

Here's a clip of him at work in his new job ...

... apparently, it's all that was offered post the meltdown.

Should I sell my house to a banker?

The Guardian asks readers to give advice on a dilemma each week. This week's dilemma is: "should I sell my house to the nice people or the banker?"  I'm fascinated by the reader's views.  Here's a selection, as well as the question in full:

After several lean financial years we are selling our £330,000 family home. A very nice young family has offered the asking price, but a banker has outbid them by £20,000. We need the money desperately, but are loath to hand the keys to a fat cat we don't like. Do we take the cash or help the couple?

Simian
18 Dec 2009, 11:50AM
Wont sell to a banker?! purely because they're a banker.....seriously!? is that not discrimination?
why would you even raise a question like this, have you met the banker and dont like him or are you purely basing your response on the fact that he's a banker and therefore must be a tw@t.
bankers need homes as well, i work as a banker if you hadn't guessed, and i feel that the amount of hate thrown around towards my chosen profession is hugely unfair. if i meet new people it has reached the point where i say i'm a statistician not a banker because i cant stand the comments that i'm a money grabbing barsteward who has stolen from all the honest tax payers in this country. all of which aren't true!

antonyob
18 Dec 2009, 11:59AM
yeh sell to them but put fishfingers behind every radiator.

garethsgate
18 Dec 2009, 12:10PM
Jesus no. It's all his fault personally. This man is entirely responsible for the global meltdown. I would get some local anti capitalist protestors around to drown him in his own tears, I mean, how dare he, HOW DARE HE have the nerve to work in the financial industry. I bet he strangles puppies at the weekend. I bet he personally structured sub prime deals. I bet all the money the government paid out to banks went straight to him, directly, and if he doesn't work for a British bank that has been bailed out, like say Deutsche Bank or Barcap that hasn't been bailed out by anybody then he's still guilty somehow. It's just greed. Unlike the rest of us that work purely for the love of our jobs and aren't in any way materialistic or interested in profit. He makes me sick. SICK. Do your hear me?

xThadd
18 Dec 2009, 12:32PM
This is a business deal. You need the money. I just don't get the dilemma. You can have no idea of the content of the banker's character, and it's silly even to speculate.

Scarlett6
18 Dec 2009, 12:35PM
Sell to the highest bidder - whatever their profession - it's a no brainer
Oh and hang on a bloody minute - the bankers who get those huge bonuses are a TINY proportion of bankers in general. Most people who work in banks earn a very average salary and MAY get "profit sharing" which will be less than 5% of their very average salary. You do the math - the majority of people who work in banks e.g. bankers are the same as the rest of us - sloggin their guts out for very little reward.  And for the record, I am NOT a banker

yonsok
18 Dec 2009, 1:05PM
Not unless you've primed it with six pounds of semtex.

giahosinn
18 Dec 2009, 6:47PM
perhaps the banker is not a genuine buyer and the family are, you are reacting with an unconscious feeling about this and it's not really a moral dilemma about what he does for a living..or actually it's your own guilt about wanting to accept more money and gazumping the family.. but what's the problem about accepting sale from a banker. What if he's a good banker a revolutionary, radical banker, or maybe just a neutral banker.

IvanaTinkle
18 Dec 2009, 7:38PM
It's probably a fair assumption that bankers getting million-pound bonuses don't live in £330,000 houses.

18 Dec 2009, 7:48PM
@antonyob: fishfingers? Nothing fat cats like more than fish and plenty of it.

JayZed
18 Dec 2009, 11:38PM
Is this a genuine question or is it some kind of Guardian Yuletide self-parody? If this "fat cat" banker is buying a £330,000 house he can't be that tubby a feline. You owe it to yourselves to get the best price you can for your home. Taking a dislike to someone because they're a banker is just infantile. For the record, I'm not a banker.

Santa's in trouble, please help

Come on, banks have been bailed out. 

Car manufacturers and all sorts of others have been bailed out. 

Now Santa needs help. 

Come on, have a heart. 

Give generously ...

I think Santa summed it up well when he said: "I personally would feel awkward asking for $26 billion.  That would be ridiculous.  But $25 billion really is quite reasonable."

And Ottowa?  How could you?

Spank the Banker

After the Fat Cat Cash Back internet game comes Bailout Wars, the iPhone App.

Here's a brief review:

The basic idea is you're defending the white house from five different types of bankers all intent on stuffing their pockets full of the bailout money which is somehow bursting out of the windows of the White House.

The game is controlled the same way as other castle defense games, you defend the White House using various flicking and swiping gestures. Different bankers require different tactics, while the standard banker can simply be flicked in the air, the stock broker will open his briefcase and use it to glide to the ground. To kill them, you'll need to slam them in to the ground with a swiping motion.

There's a banker with a vacuum that explodes when you tap him, high risk investors in helicopters that you need to make crash, and a giant CEO that can only be damaged utilizing the White House's weaponry and by flinging other bankers in to him.

As you progress through waves of bankers, you'll earn coins that can be used to buy upgrades to your defenses.

The ad is seriously worrying ...

It reminds me of the new game on Southwold Pier in Suffolk, UK.

This idea is based upon the Whack the Mole game, but it's Whack the Banker.

The idea came to inventor Tim Hunkin to use a mallet to hit as many bald pop-up figures as customers can in a limited time.

''You pay 40p to hit as many bankers as you can in 30 seconds as their heads pop up,'' said Mr Hunkin.  ''It's proving very popular. I keep having to replace worn-out mallets.''

What he has actually created is lots of pop-up bankers with the main advertising slogans of Britain's mainstream banks against each one.  You then whack them away with your mallet and score points.

You can see this idea in reality in many YouTube clips.  Here's one of the better ones:

...  it all reminds me of the test the teacher carried out at my local school the other day.

The teacher asked the kids what their dad did for a living.

Mary's was a fireman, Davy's was a call centre manager, Mohammed's worked in an office and then they got to Johnny.

Johnny piped up: "my dad's a stripper in a gay and lesbian pole-dancing club which got busted the other day for drug dealing".

The teacher was visibly shocked and asked: "can this be true, Johnny?"

"Nah", Johnny replies and decides to fez up with the truth, "he's actually a banker but I get beaten up if I tell the kids the truth, so this sounded a lot better".

Ah well.  At least he's not Tiger Woods ...

WaMu and MPs expenses

In the UK, we've been talking for a while about the issues with our politician's expenses being blanked out. 

See:

 

It's downright disgraceful.  Hiding secret purchases including porn movies and duck houses, how are we ever to trust our leadership again?

It's so refreshing to see how America does things so differently with the release this week of the  internal communications between Washington Mutual's (WaMu) regulators, the Office of Thrift Supervision (OTS), that led to the closure of WaMu.

Of particular interest were the communications that might explain why regulators seized the bank in September 2008, even though WaMu appeared to meet regulatory standards for operating a bank, notwithstanding its burden of bad loans.

Here is an example of a few of those emails:

 

 

 

Thanks to the Puget Sound for championing the cause.
 

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