In my Money Week column this week, I've been looking at how you can make money from other people's bank bonuses. Here's a taster.
Warren Buffett once famously remarked that the airline industry, whilst making it far easier for people to get around the world, had burned just about all the capital investors had ever put into it. “As of 1992, in fact—though the picture would have improved since then—the money that had been made since the dawn of aviation by all of this country's airline companies was zero. Absolutely zero,” he wrote in one of his letters to his shareholders in the 1990s.
Buffett probably doesn’t feel quite the same way about investment banking – he did, after all, help out Goldman Sachs when it was short of cash during the credit crunch and made a lot of money on the deal. But his observation about airlines is just as true of the traders and dealmakers of London, New York and Zurich. The industry has made a fortune for the people working in it. The executives and traders have walked away with fortunes. But, as a general rule, the outside shareholders have been stuffed.
Now, however, that might be about to change. Under political pressure, banks such as Barclays Capital and Credit Suisse are abandoning big cash bonuses in favour of paying their staff in deferred shares, or in bonds linked to the share prices. Whether that makes the banks any safer remains to be seen. But it should be a great opportunity for investors. The one thing we know bankers are really good at is manipulating the price of financial assets. All you need to do is invest in the same piece of paper that bankers bonuses are being paid in, and you can be sure it will soar in price.
Barclays has been making the most noise about changing its bonus scheme. Chief executive Bob Diamond is said to be about to unveil a scheme that would pay his most senior staff in convertible bonds, known as cocos, rather than just giving them wheelbarrows full of cash. The bonds would be freely traded, but would automatically convert into equity if the bank’s capital ratios fell below a required level. The idea is a simple one. If the bank gets into trouble, and runs out of equity the way many banks did during the credit crunch, all those bonuses would be converted into shares.
Credit Suisse has also been forcing its bankers to have more of a stake in the bank. The bank has started paying a far higher proportion of its bonuses in shares, and staff will have to keep them locked up for four years before they can sell them. Other banks are reported to be considering similar schemes, paying bonuses either in shares or else in convertible bonds.
It’s not hard to see the sense in the idea. Whether big bonuses played the part in the financial crisis of 2008 that is popularly supposed is open to question. It’s possible that lax monetary policy and global trade imbalances played just as big a role. What is certainly true is that bonuses have made investment banking a rotten industry for outside investors. The banks may at times make obscene amounts of money for doing very little – but, rather like football clubs, it was the players who walked away with all the cash rather than the shareholders.
The long-term performance of most of the big banks has been terrible. UBS shares are no higher now than they were back in 1993. Morgan Stanley shares are no higher than they were in 1998. The star of the industry Goldman Sachs has been a money machine for its staff, but not nearly so lucrative for its owners. The shares are still down on the 2006 price, and the yield is less than 1%. As a general rule, the people who actually own the businesses have missed out on all the money the industry makes.
No great surprise about that. There was no real need to share the spoils with the shareholders. For much of the last decade, investment banks didn’t need to raise much fresh capital.
The new bonus schemes will change all that. One useful rule in economics is that if you provide people with a big incentive to hit a target, they will do so regardless of whether it makes much sense. A classic example was in Soviet Russia. The Kremlin leadership decided too many people were dying in Moscow’s hospitals. The doctors were told to cut deaths by 50%. So they chucked all the old people out into the streets. Naturally, they quickly died of cold, but deaths in hospitals fell by the required amount. The target was met.
Banks aren’t going to chuck out old people – apart from anything else, they don’t employ any. But they will, just like those Moscow doctors, do whatever they need to do to meet their target. The one thing that we know for sure bankers are very good at is manipulating the price of financial assets. If actually getting their hands on their bonus requires that the share price or its convertible bonds hit at a certain price in two, three, or four years times, then you can be certain that the entire energies of the bank will be dedicated to making sure it happens.
Whether that will actually make the bank stronger or more stable in the medium-term is open to question. The long-term performance of Barclays doesn’t really depend on its capital ratios. The Credit Suisse share prices may or may not be a good indicator of its underlying performance. But none of that will matter. If it is what needs to be done, it will be done.
It is a great opportunity for investors. Just wait until the bonus scheme is unveiled. When it is, look at what piece of paper needs to soar in price for the bankers to collect their bonus. Then fill your boots. The bank may well go bust a few years later – but you can be sure that your investment will pay off handsomely before that happens.
Showing posts with label banks. Show all posts
Showing posts with label banks. Show all posts
Tuesday, 8 February 2011
Friday, 12 November 2010
Why we shouldn't bail-out the banks....
In the Spectator this week, I've been looking at Iceland. The lesson of its experience, I think, is that we probably never needed to bail-out the banks. The piece is here.
Wednesday, 7 July 2010
Still Time To Break Up The Banks
In My Money Week column this week, I've been arguing there is still time to break up the banks. Here's a taster....
Nearly two years on from the collapse of Lehman Brothers, and there is still little sign of fundamental reform in the way the global banking industry works. In the US, President Obama has allowed the regulation of Wall Street to be watered down so much that it won’t make much difference. The Europeans have lost interest. And the banks have gone back to behaving pretty much exactly the same way they did before the crisis struck.
Despite that, the British should ignore the rest of the world. Even if no one else is prepared to attempt it, the UK should press on with splitting up its biggest banks. Britain is a relatively small economy. It simply can’t afford to shoulder the risk of another calamitous banking collapse – and should get on with doing something about it, even if no one else wants to.
In the immediate aftermath of the credit crunch there were plenty of calls for a radical break-up of the banks. We were constantly told that there would be no return to the wild risk-taking, the bonus culture, and the short-termism, that characterised the financial markets for much of the past decade.
But, two years on, there is plenty of evidence that everything has gone right back to the way it was. The banks are paying out big bonuses. They are trading in high-risk sovereign debt, even when it is obvious many of the countries whose paper they are buying are bust. They are expanding enthusiastically.
In the US, President Obama, last week ducked the challenge of serious change. The financial reform bill that emerged from Congress was watered down so much by the big banks and their lobbyists that it is not going to make any real difference to the way the industry works. Instead of prohibiting the big banks from trading derivative on their own account, and investing in hedge funds, it merely limited their ability to do so, and not very effectively either. The big Wall Street banks - Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley – have emerged two years after the credit crunch with an even tighter lock on the American capital markets.
Neither has the European Union done any better. It has proposed new legislation on the hedge funds and private equity funds, its two favourite targets. But since the hedge funds didn’t create the crisis, that is about as relevant as blaming our cricket team for the failure of our footballers to perform better at the World Cup. It simply misses the point. The Swiss central bank has talked about splitting up its two giant banking groups – UBS and Credit Suisse – but has so far failed to actually follow up its words with actions.
It would be easy for the UK to give up. If the rest of the world isn’t getting serious about financial reform, then it is hard for the one, smallish country to do it by itself. Easy, but wrong. In fact, the UK should press on with splitting up retail and investment banking.
The Chancellor George Osborne has already established a commission to study precisely that issue. We don’t yet know what it will conclude. But whatever the outcome, it is too risky for the UK to allow the City to carry on as before.
There is no reason to worry about the foreign banks. If JP Morgan, Deutsche Bank, or Credit Suisse want to have big offices in London that is fine. It doesn’t matter in the least to British taxpayers if they take wild and crazy risks. If they make money, they will have to pay taxes on the profits, either in corporation tax, or as income tax on the bonuses they pay to their staff. If they lose money, then it is American or German or Swiss taxpayers who will have to bail them out. For the British, that is a heads-we-win-tail-you-lose deal. There is nothing to complain about in that.
But the British banks are a different matter. As the Governor of the Bank of England Mervyn King put it in a speech: “If a bank is too big to fail then it is simply too big.”
True enough. The UK is a medium-sized economy, with an out-sized financial sector. RBS grew to be one of the biggest banks in the world, trading in every corner of the globe, but when it ran into trouble, it was the British government that had to pick up the bill.
It was affordable once – it won’t be affordable a second-time around.
Banks such as Barclays, mainly through its Barclays Capital division, and HSBC, are simply too big to be under-written by the British taxpayer.
The solution? Force them to split out their UK retail arms from their investment banking and global operations. When a bank fails, the risk to the UK economy comes from ordinary depositors losing their money. If an investment banking division, mainly trading derivatives on Wall Street or in Singapore, collapses, it doesn’t matter very much to the economy in Woking or Wigan.
Of course, the banks will fight it. The business model of collecting money from millions of ordinary depositors, then deploying all that capital in the world markets has worked very well. It has paid for a lot of bonuses. But the risks ultimately gets transferred to the taxpayer – and they are no longer sustainable.
The rest of the world may be ducking the challenge. It will be hard to be the only country demanding serious change. But the UK should stick to its guns. If the don’t like it, allow them to re-locate elsewhere. It would be better to allow one or two of the big UK banks to switch their headquarters to the US, or an offshore centre, than run the risk of another calamitous collapse.
Nearly two years on from the collapse of Lehman Brothers, and there is still little sign of fundamental reform in the way the global banking industry works. In the US, President Obama has allowed the regulation of Wall Street to be watered down so much that it won’t make much difference. The Europeans have lost interest. And the banks have gone back to behaving pretty much exactly the same way they did before the crisis struck.
Despite that, the British should ignore the rest of the world. Even if no one else is prepared to attempt it, the UK should press on with splitting up its biggest banks. Britain is a relatively small economy. It simply can’t afford to shoulder the risk of another calamitous banking collapse – and should get on with doing something about it, even if no one else wants to.
In the immediate aftermath of the credit crunch there were plenty of calls for a radical break-up of the banks. We were constantly told that there would be no return to the wild risk-taking, the bonus culture, and the short-termism, that characterised the financial markets for much of the past decade.
But, two years on, there is plenty of evidence that everything has gone right back to the way it was. The banks are paying out big bonuses. They are trading in high-risk sovereign debt, even when it is obvious many of the countries whose paper they are buying are bust. They are expanding enthusiastically.
In the US, President Obama, last week ducked the challenge of serious change. The financial reform bill that emerged from Congress was watered down so much by the big banks and their lobbyists that it is not going to make any real difference to the way the industry works. Instead of prohibiting the big banks from trading derivative on their own account, and investing in hedge funds, it merely limited their ability to do so, and not very effectively either. The big Wall Street banks - Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley – have emerged two years after the credit crunch with an even tighter lock on the American capital markets.
Neither has the European Union done any better. It has proposed new legislation on the hedge funds and private equity funds, its two favourite targets. But since the hedge funds didn’t create the crisis, that is about as relevant as blaming our cricket team for the failure of our footballers to perform better at the World Cup. It simply misses the point. The Swiss central bank has talked about splitting up its two giant banking groups – UBS and Credit Suisse – but has so far failed to actually follow up its words with actions.
It would be easy for the UK to give up. If the rest of the world isn’t getting serious about financial reform, then it is hard for the one, smallish country to do it by itself. Easy, but wrong. In fact, the UK should press on with splitting up retail and investment banking.
The Chancellor George Osborne has already established a commission to study precisely that issue. We don’t yet know what it will conclude. But whatever the outcome, it is too risky for the UK to allow the City to carry on as before.
There is no reason to worry about the foreign banks. If JP Morgan, Deutsche Bank, or Credit Suisse want to have big offices in London that is fine. It doesn’t matter in the least to British taxpayers if they take wild and crazy risks. If they make money, they will have to pay taxes on the profits, either in corporation tax, or as income tax on the bonuses they pay to their staff. If they lose money, then it is American or German or Swiss taxpayers who will have to bail them out. For the British, that is a heads-we-win-tail-you-lose deal. There is nothing to complain about in that.
But the British banks are a different matter. As the Governor of the Bank of England Mervyn King put it in a speech: “If a bank is too big to fail then it is simply too big.”
True enough. The UK is a medium-sized economy, with an out-sized financial sector. RBS grew to be one of the biggest banks in the world, trading in every corner of the globe, but when it ran into trouble, it was the British government that had to pick up the bill.
It was affordable once – it won’t be affordable a second-time around.
Banks such as Barclays, mainly through its Barclays Capital division, and HSBC, are simply too big to be under-written by the British taxpayer.
The solution? Force them to split out their UK retail arms from their investment banking and global operations. When a bank fails, the risk to the UK economy comes from ordinary depositors losing their money. If an investment banking division, mainly trading derivatives on Wall Street or in Singapore, collapses, it doesn’t matter very much to the economy in Woking or Wigan.
Of course, the banks will fight it. The business model of collecting money from millions of ordinary depositors, then deploying all that capital in the world markets has worked very well. It has paid for a lot of bonuses. But the risks ultimately gets transferred to the taxpayer – and they are no longer sustainable.
The rest of the world may be ducking the challenge. It will be hard to be the only country demanding serious change. But the UK should stick to its guns. If the don’t like it, allow them to re-locate elsewhere. It would be better to allow one or two of the big UK banks to switch their headquarters to the US, or an offshore centre, than run the risk of another calamitous collapse.
Monday, 16 November 2009
When Will RBS Be Put Out of It's Misery.....
I wonder how long it will be before people start wondering how long it is worth propping up RBS with state-spending. In my Money Week column this week, I've been addressing that.
In 1977, the Labour Government of James Callaghan created a new state-owned company, which, even by the unfortunate standards of Britain’s nationalised companies was to prove grimly useless. British Shipbuilder grouped together the old Scottish shipyards of the Govan, some of the mightiest in the world in their heyday, put them together with the equally historic yards of the North-East, and embarked on a doomed attempt to salvage an industry in terminal decline through state control and massive subsidy.
Fast-forward thirty years and another once great Scottish industry has just been taken into state-ownership. Royal Bank of Scotland launches bond issues rather than ocean liners. But its ultimate fate is unlikely to be any happier.
In truth, the extra £25 billion the British taxpayer has just pumped into RBS is no more likely to revive the company than the millions poured into those Govan shipyards a generation ago. It would be better for everyone – and cheaper as well – to place the bank into administration today.
Better that than turning RBS into the Govan shipyards of the 2010s, a fate that looks inevitable if it stays on its current path.
Under the management of its little-lamented chief executive, Sir Fred Goodwin, RBS expanded furiously, becoming the fifth largest bank in the world. It was an impressive achievement for what, less than a generation ago, was little more than a regional British bank. But the credit crunch exposed the expansion as largely illusory. Puffed up by cheap money, RBS rode the credit boom with gusto, paying little attention to basic banking good-sense – such as whether its funding was secure, or whether it’s customers were ever likely to pay back the money they had borrowed. The credit crunch found the bank cruelly exposed: of the world’s top ten banks, it was, without question, the one that was always most likely to fail.
A year ago, in the midst of the financial panic created by the collapse of Lehman Brothers, it made sense to rescue RBS. If the government hadn’t stepped in, the bank might have closed within hours. Accounts would have been frozen, and ATMs stopped working. That would have created pandemonium. The risk wasn’t worth taking.
Yet last week, the government rescued RBS all over again, giving the bank another £25 billion, and taking its stake up to 84%. There is a big difference between rescuing a bank in the middle of a panic, and investing vast sums of money once the immediate crisis has passed. RBS has now received more bail-out cash than any other bank in the world. It is now a business beyond salvation.
Just take a look at its latest set of figures. Other banks have seen a sharp recovery in their profitability: both HSBC and Barclays reported decent figures this week. But RBS is still bleeding red ink. It lost £3.3 billion in the third quarter after making huge provisions for bad loans and credit-market write-downs. That might not be so bad if the bank was making an operating profit – after all, all banks suffer from bad loans in a recession. But RBS reported an operating loss of £1.5 billion for the quarter.
Another £282 billion in risky assets are currently insured by the government. How much more bad news is there still to come? No one really knows. But at its peak, RBS had a balance sheet of £2.2 trillion, or around one and half times the U.K.’s entire GDP. The potential losses are still horrifying.
But it is not the immediate results that are worrying so much as the five to ten year outlook. It is impossible to feel confident about the future of RBS.
It is a financial conglomerate that was assembled with little rhyme or reason. RBS went around buying up banks that, right now, you’d rather not own. It is strong, of course, in Scotland, and Northern Ireland, via its Ulster Bank subsidiary. But both economies are dependent on government spending and are going to suffer terribly once the taps get turned off. Indeed, Ulster Bank has already consumed vast amounts of extra capital: more than two billion euros have been pumped into the unit this year alone. Its Citizens Bank unit in the US has been making heavy losses. The ABN Amro business acquired with Fortis and Santander looks to have been a turkey. In short, RBS has paid a lot of money for subsidiaries that are now going to cost even more to keep afloat.
Nor do the prospects for its investment bank look good. It made money in the boom leveraging up RBS’s massive balance sheet. It can’t do that anymore. With the government insisting on tight controls on bonuses, it is hard to see how it can hang onto the traders and deal-makers needed to make that business work. It will be left with the people the rival banks don’t want, a certain recipe for decline.
Even worse, RBS now looks set to fall under political control. It will be guided not by commercial decisions about what suits its skills and its shareholder. Only tomorrow’s sound-bites will matter. Don’t be surprised in the next few years to find RBS propping up companies in marginal constituencies – regardless of whether the loans will ever be paid back.
The lesson of the Govan shipyards, along with a whole raft of failing companies that were nationalised in the 1970s, is that once a business is taken over by the government, it usually goes downhill fast. Rolls-Royce, the aero-engine manufacturer, was rescued by the government, and prospered in the long-term. But that is just about the only example. It is possible – although not likely – that Lloyds will repeat the trick. RBS certainly won’t.
It would be far better to place the bank into administration this week. Let the administrators sell off each part for the best possible price, then slowly wind down the rest. There need be no panic, and no crisis. The parts of the business that have a future could be found a better home. The rest could be quietly put to rest. Instead, the British taxpayer has just stepped blindly into an open-ended commitment to a failing financial conglomerate. It is hard to see that ending happily.
In 1977, the Labour Government of James Callaghan created a new state-owned company, which, even by the unfortunate standards of Britain’s nationalised companies was to prove grimly useless. British Shipbuilder grouped together the old Scottish shipyards of the Govan, some of the mightiest in the world in their heyday, put them together with the equally historic yards of the North-East, and embarked on a doomed attempt to salvage an industry in terminal decline through state control and massive subsidy.
Fast-forward thirty years and another once great Scottish industry has just been taken into state-ownership. Royal Bank of Scotland launches bond issues rather than ocean liners. But its ultimate fate is unlikely to be any happier.
In truth, the extra £25 billion the British taxpayer has just pumped into RBS is no more likely to revive the company than the millions poured into those Govan shipyards a generation ago. It would be better for everyone – and cheaper as well – to place the bank into administration today.
Better that than turning RBS into the Govan shipyards of the 2010s, a fate that looks inevitable if it stays on its current path.
Under the management of its little-lamented chief executive, Sir Fred Goodwin, RBS expanded furiously, becoming the fifth largest bank in the world. It was an impressive achievement for what, less than a generation ago, was little more than a regional British bank. But the credit crunch exposed the expansion as largely illusory. Puffed up by cheap money, RBS rode the credit boom with gusto, paying little attention to basic banking good-sense – such as whether its funding was secure, or whether it’s customers were ever likely to pay back the money they had borrowed. The credit crunch found the bank cruelly exposed: of the world’s top ten banks, it was, without question, the one that was always most likely to fail.
A year ago, in the midst of the financial panic created by the collapse of Lehman Brothers, it made sense to rescue RBS. If the government hadn’t stepped in, the bank might have closed within hours. Accounts would have been frozen, and ATMs stopped working. That would have created pandemonium. The risk wasn’t worth taking.
Yet last week, the government rescued RBS all over again, giving the bank another £25 billion, and taking its stake up to 84%. There is a big difference between rescuing a bank in the middle of a panic, and investing vast sums of money once the immediate crisis has passed. RBS has now received more bail-out cash than any other bank in the world. It is now a business beyond salvation.
Just take a look at its latest set of figures. Other banks have seen a sharp recovery in their profitability: both HSBC and Barclays reported decent figures this week. But RBS is still bleeding red ink. It lost £3.3 billion in the third quarter after making huge provisions for bad loans and credit-market write-downs. That might not be so bad if the bank was making an operating profit – after all, all banks suffer from bad loans in a recession. But RBS reported an operating loss of £1.5 billion for the quarter.
Another £282 billion in risky assets are currently insured by the government. How much more bad news is there still to come? No one really knows. But at its peak, RBS had a balance sheet of £2.2 trillion, or around one and half times the U.K.’s entire GDP. The potential losses are still horrifying.
But it is not the immediate results that are worrying so much as the five to ten year outlook. It is impossible to feel confident about the future of RBS.
It is a financial conglomerate that was assembled with little rhyme or reason. RBS went around buying up banks that, right now, you’d rather not own. It is strong, of course, in Scotland, and Northern Ireland, via its Ulster Bank subsidiary. But both economies are dependent on government spending and are going to suffer terribly once the taps get turned off. Indeed, Ulster Bank has already consumed vast amounts of extra capital: more than two billion euros have been pumped into the unit this year alone. Its Citizens Bank unit in the US has been making heavy losses. The ABN Amro business acquired with Fortis and Santander looks to have been a turkey. In short, RBS has paid a lot of money for subsidiaries that are now going to cost even more to keep afloat.
Nor do the prospects for its investment bank look good. It made money in the boom leveraging up RBS’s massive balance sheet. It can’t do that anymore. With the government insisting on tight controls on bonuses, it is hard to see how it can hang onto the traders and deal-makers needed to make that business work. It will be left with the people the rival banks don’t want, a certain recipe for decline.
Even worse, RBS now looks set to fall under political control. It will be guided not by commercial decisions about what suits its skills and its shareholder. Only tomorrow’s sound-bites will matter. Don’t be surprised in the next few years to find RBS propping up companies in marginal constituencies – regardless of whether the loans will ever be paid back.
The lesson of the Govan shipyards, along with a whole raft of failing companies that were nationalised in the 1970s, is that once a business is taken over by the government, it usually goes downhill fast. Rolls-Royce, the aero-engine manufacturer, was rescued by the government, and prospered in the long-term. But that is just about the only example. It is possible – although not likely – that Lloyds will repeat the trick. RBS certainly won’t.
It would be far better to place the bank into administration this week. Let the administrators sell off each part for the best possible price, then slowly wind down the rest. There need be no panic, and no crisis. The parts of the business that have a future could be found a better home. The rest could be quietly put to rest. Instead, the British taxpayer has just stepped blindly into an open-ended commitment to a failing financial conglomerate. It is hard to see that ending happily.
Sunday, 1 November 2009
How To Break Up The British Banks...
In my Money Week column this week, I've been looking at how to break-up the British banks. Here's a taster....
Perhaps in preparation for the way they will have to work together after the general election, the Governor of the Bank of England Mervyn King and the Shadow Chancellor George Osborne have already formed quite a double act.
Like a pair of street fighters delivering blows to their chosen prey in quick succession, in the last week they have delivered blistering attacks on the way the British banks have been bailed out by the taxpayer – without, it seems, any kind of reform of the way they work in exchange. Both in different ways are looking towards some kind of separation of retail from investment banking.
That is a big improvement on the current Government. Despite the Prime Ministers Gordon Brown’s boats of leading the world on financial reform, he hasn’t proposed a single significant change in the way the system works. After the biggest run of banking collapses in a century or more, that is, to say the least, eccentric. After all, if the implosion of Royal Bank of Scotland, Lloyds-HBOS, Northern Rock, and the rest of them, didn’t suggest to you the system might need a bit of a tweak, it is hard to imagine what might.
A year after the credit crunch, and with the country still piling up massive debts on behalf of its bailed-out banking system, it is clear that the way we regulated our financial sector has to be reformed. The U.K. can’t go back to hosting international banks of the scale of RBS. The interesting questions are how, how fast – and whether either King or Osborne will feel comfortable with the logical conclusions of the positions they are staking out.
Because what they are really suggesting in a system in which the City just plays host to the global capital markets, whilst the British banks get broken up –meaning the two giants of the sector, HSBC and Barclays, either split themselves up, or else leave the country.
Of the two men, King has pushed the argument hardest. In a speech last week, he described the way the banking system had returned to profitability on the back of government bail-outs as “creating possibly the biggest moral hazard in history.” It was fanciful, he argued, to imagine that the regulators could possibly control the sector: the bankers were too clever and too fast. The only long-term solution was to break up the banks into regulated deposit-takers that took few risks, and risk-taking investment banks, which could be allowed to go to the wall when they got things wrong.
Osborne doesn’t go as far as that – yet. In a speech on Monday, the Shadow Chancellor called for controls on bonuses at the retail banks. He argued that they should be forced to pay more of their bonuses in shares. What was really interesting, however, was his distinction between the retail and the investment banks, and the suggestion there should be different regulatory regimes for them. In truth, both men are sketching out a future in which the UK decides it isn’t really sensible to host big global banks.
As the Swiss have also realised, hosting global banks is just too risky for small or medium-sized countries. Both Britain and Switzerland avoided the fate of Iceland – a country bankrupted by the recklessness of its bankers. But it was a close run thing (and Britain is not out of the woods yet). Neither country wants to repeat the experience. The liabilities of a huge global bank such as RBS or Credit Suisse can dwarf those of the host country – and yet it is that country that ends up having to foot the bill if things go wrong.
So what should the UK do? The answer, in fact, is pretty clear.
The City should be nurtured as one of the world’s leading financial centres. There is no need to worry about the risks taken by the likes of Goldman Sachs, Nomura, UBS or Deutsche Bank. If they make money trading in London, the British government will collect a slice of the winnings in corporation tax. If they go pop, it is their governments back home that will have to pick up the bill. The bigger and brasher the City gets, the better: it means more tax revenue for the UK: and more business for the estate agents, shops, and restaurants that feed off the City’s money.
The British banks, however, are a different matter. They need to be broken up.
There can be little excuse for creating another monster on the scale of RBS. The smaller banks such as Northern Rock could easily be re-mutualised by handing shares over to mortgage and account holders, perhaps with a proviso that they couldn’t reverse the process for fifty years. The UK needs more diverse types of banks – and some big new mutuals would be a good start.
Lloyds-HBOS looks intent on returning to the private sector by raising cash from its shareholders to replace the Government’s stake. But it was a mistake to allow a single bank to control more than 30% of the market. It should be split into its separate parts, preventing a single dominant bank emerging. RBS looks in no state to be privatised soon. It should be forced to sell the profitable units of its investment bank, whilst the retail bank should be split into NatWest and Royal Bank, then privatised.
The tougher choice is for HSBC and Barclays, the two giants of the UK financial industry. Both are hugely successful global banks, with both retail and investment divisions. Neither needed state aid. To expect them to sell their investment banking units, or to sacrifice the profits from wholesale banking, would be unfair. At the same time, the UK can’t risk being liable for their failure – think of the cost of bailing out HSBC. Instead, reluctantly, they should be encouraged to move elsewhere – the US or perhaps China.
What the UK needs is a smaller, more competitive financial sector – every part of which can fail if necessary without provoking a wider collapse. Anything else is just setting up a bigger, and potentially much worse, crisis for the future. Whether either King or Osborne really have the guts to push that through remains to be seen – but it is the inescapable logic of their arguments.
Perhaps in preparation for the way they will have to work together after the general election, the Governor of the Bank of England Mervyn King and the Shadow Chancellor George Osborne have already formed quite a double act.
Like a pair of street fighters delivering blows to their chosen prey in quick succession, in the last week they have delivered blistering attacks on the way the British banks have been bailed out by the taxpayer – without, it seems, any kind of reform of the way they work in exchange. Both in different ways are looking towards some kind of separation of retail from investment banking.
That is a big improvement on the current Government. Despite the Prime Ministers Gordon Brown’s boats of leading the world on financial reform, he hasn’t proposed a single significant change in the way the system works. After the biggest run of banking collapses in a century or more, that is, to say the least, eccentric. After all, if the implosion of Royal Bank of Scotland, Lloyds-HBOS, Northern Rock, and the rest of them, didn’t suggest to you the system might need a bit of a tweak, it is hard to imagine what might.
A year after the credit crunch, and with the country still piling up massive debts on behalf of its bailed-out banking system, it is clear that the way we regulated our financial sector has to be reformed. The U.K. can’t go back to hosting international banks of the scale of RBS. The interesting questions are how, how fast – and whether either King or Osborne will feel comfortable with the logical conclusions of the positions they are staking out.
Because what they are really suggesting in a system in which the City just plays host to the global capital markets, whilst the British banks get broken up –meaning the two giants of the sector, HSBC and Barclays, either split themselves up, or else leave the country.
Of the two men, King has pushed the argument hardest. In a speech last week, he described the way the banking system had returned to profitability on the back of government bail-outs as “creating possibly the biggest moral hazard in history.” It was fanciful, he argued, to imagine that the regulators could possibly control the sector: the bankers were too clever and too fast. The only long-term solution was to break up the banks into regulated deposit-takers that took few risks, and risk-taking investment banks, which could be allowed to go to the wall when they got things wrong.
Osborne doesn’t go as far as that – yet. In a speech on Monday, the Shadow Chancellor called for controls on bonuses at the retail banks. He argued that they should be forced to pay more of their bonuses in shares. What was really interesting, however, was his distinction between the retail and the investment banks, and the suggestion there should be different regulatory regimes for them. In truth, both men are sketching out a future in which the UK decides it isn’t really sensible to host big global banks.
As the Swiss have also realised, hosting global banks is just too risky for small or medium-sized countries. Both Britain and Switzerland avoided the fate of Iceland – a country bankrupted by the recklessness of its bankers. But it was a close run thing (and Britain is not out of the woods yet). Neither country wants to repeat the experience. The liabilities of a huge global bank such as RBS or Credit Suisse can dwarf those of the host country – and yet it is that country that ends up having to foot the bill if things go wrong.
So what should the UK do? The answer, in fact, is pretty clear.
The City should be nurtured as one of the world’s leading financial centres. There is no need to worry about the risks taken by the likes of Goldman Sachs, Nomura, UBS or Deutsche Bank. If they make money trading in London, the British government will collect a slice of the winnings in corporation tax. If they go pop, it is their governments back home that will have to pick up the bill. The bigger and brasher the City gets, the better: it means more tax revenue for the UK: and more business for the estate agents, shops, and restaurants that feed off the City’s money.
The British banks, however, are a different matter. They need to be broken up.
There can be little excuse for creating another monster on the scale of RBS. The smaller banks such as Northern Rock could easily be re-mutualised by handing shares over to mortgage and account holders, perhaps with a proviso that they couldn’t reverse the process for fifty years. The UK needs more diverse types of banks – and some big new mutuals would be a good start.
Lloyds-HBOS looks intent on returning to the private sector by raising cash from its shareholders to replace the Government’s stake. But it was a mistake to allow a single bank to control more than 30% of the market. It should be split into its separate parts, preventing a single dominant bank emerging. RBS looks in no state to be privatised soon. It should be forced to sell the profitable units of its investment bank, whilst the retail bank should be split into NatWest and Royal Bank, then privatised.
The tougher choice is for HSBC and Barclays, the two giants of the UK financial industry. Both are hugely successful global banks, with both retail and investment divisions. Neither needed state aid. To expect them to sell their investment banking units, or to sacrifice the profits from wholesale banking, would be unfair. At the same time, the UK can’t risk being liable for their failure – think of the cost of bailing out HSBC. Instead, reluctantly, they should be encouraged to move elsewhere – the US or perhaps China.
What the UK needs is a smaller, more competitive financial sector – every part of which can fail if necessary without provoking a wider collapse. Anything else is just setting up a bigger, and potentially much worse, crisis for the future. Whether either King or Osborne really have the guts to push that through remains to be seen – but it is the inescapable logic of their arguments.
Monday, 22 June 2009
Why The Banks Can't Go Back To Normal
In Money Week this week, I've been discussing why the banks can't just go back to the way they were behaving before the credit crunch. Here's a tatser.
It might not be quite the moment to start re-opening the champagne, and eyeing up ten-million-plus houses in Notting Hill, but there is little doubt the weather is suddenly looking a lot sunnier for the world’s bankers.
In the US, the big players on Wall Street have started to repay the money from the Treasury’s bail-out scheme, re-leasing them from the shackles of state interference. In the UK, Lloyds has started to re-pay some of the money it received from the government, whilst Barclays, flush from the $13.5 billion sale of Barclays Global Investors, has started talking about becoming one of the world’s leading investment banks again.
The markets are bullish, and profits are starting to flow through the industry. At this rate, don’t be surprised if the City is awash with bonuses again by Christmas.
And yet it would be a big mistake for the banks simply to think they can re-wind the clock, and get back to way things were in 2006. There is still plenty of potential pain ahead, and the banks are still on life-support from public money.
In truth, the banking business model needs to be re-built from the bottom up – and the sooner they start work on that the better.
Still, there is little mistaking the renewed sense of optimism in the City and on Wall Street. Last week, ten of the biggest American banks started to pay back the $68 billion of the funds they got under the emergency Troubled Assets Relief Programme (or TARP) launched as Wall Street went into meltdown last autumn. They included JP Morgan, Goldman Sachs and Morgan Stanley, three firms that now look to be the powerhouses of the post-credit crunch US financial system.
Freed from the shackles of part-ownership by the government, with all the public scrutiny it implied, the banks can get back to doing what they do best again – making lots of money for themselves. They are already in a far stronger financial position than they were at the start of the year. The S&P 500 financial index is up by almost 50% in the last three months. With figures like that, the banks should have no trouble raising capital from shareholders rather than the government.
A similar story is emerging over here. Lloyds raised £2.56 billion from its shareholders to repay some of its state aid, freeing itself from some of the restrictions of state control. Meanwhile, in Europe, so long as the emerging markets of Eastern Europe avoid total meltdown, the banks appear to have steadied and pulled through the worst of the crisis. Credit Suisse and Deutsche Bank look like the big winners in investment banking, and Santander in retail banking.
Indeed, banking is looking like a lucrative industry once again. Central banks are still pumping money furiously into the global economy, and whenever that happens, some of it always winds up in the pockets of the bankers. Near zero interest rates mean the ‘carry trade’ is lucrative once more (banks can borrow freely for next to nothing, then re-invest the money is assets yielding 5% or 6%). Even fee income may start to swell once again as corporate restructuring work gets underway, and as takeover activity starts to pick up again.
Plenty of bankers could be forgiven for thinking it is 2006 all over again. By Christmas, the talk will be of bonuses. Indeed, since it may well be the last year they can collect big payouts before Gordon Brown’s new 50% top-rate comes into force, don’t be surprised to start seeing some mega-payouts as London’s bankers bring forward any money they are owed to avoid the new top rate. Ferrari dealers will be ready to celebrate. House prices in the smartest parts of London will start to edge up again.
Amid all that, not surprisingly, talk of changing the system is being quietly forgotten. Six months ago, the banks were full of repentance. Plenty was heard about how bonus systems would be reformed, how lending would become more responsible, and how risk management would be taken more seriously.
Not much is being heard about any of that any more.
That is a big mistake.
First, there is still plenty of pain ahead. The worst of the financial crisis may have passed but there is still a long and grinding recession to come, followed by a period of very low growth. We haven’t yet seen anything like the peak in unemployment or corporate failures. As both start to rise, the bank will face a lot more losses.
Next, the banks are still to a large extent being kept alive by public money. Even as they gradually repay direct state shareholdings, they remain dependent on taxpayer support. Only the fact that government ultimately stand behind them keeps their cost of funding down, and so allows the banks to remain profitable. After all, how willing would you be to have money in Lloyds if you didn’t think the government would bail it out again if necessary?
The big question raised by the credit crunch was this: If the banks are too important to be allowed to fail, then can they be allowed to run risks which the taxpayers will end up paying for?
The banks still have to find a convincing answer.
In reality, they can’t just go back to their old ways, much as they might like to. The industry needs to be re-built from the bottom up. The retail banks need to accept they must become a far duller, more regulated business. The investment banks need to move back towards something a lot closer to the old partnership structure that used to dominate the City, where individuals put their own money at risk, and were forced to plan for the long-term.
Trading on the global market, paying big bonuses and expecting American or British or German taxpayers to pick up the bill if it all goes wrong might have been acceptable once. But the bankers shouldn’t imagine they can get away with the same trick a second time. They should press on with reforming the industry while they still have the chance.
It might not be quite the moment to start re-opening the champagne, and eyeing up ten-million-plus houses in Notting Hill, but there is little doubt the weather is suddenly looking a lot sunnier for the world’s bankers.
In the US, the big players on Wall Street have started to repay the money from the Treasury’s bail-out scheme, re-leasing them from the shackles of state interference. In the UK, Lloyds has started to re-pay some of the money it received from the government, whilst Barclays, flush from the $13.5 billion sale of Barclays Global Investors, has started talking about becoming one of the world’s leading investment banks again.
The markets are bullish, and profits are starting to flow through the industry. At this rate, don’t be surprised if the City is awash with bonuses again by Christmas.
And yet it would be a big mistake for the banks simply to think they can re-wind the clock, and get back to way things were in 2006. There is still plenty of potential pain ahead, and the banks are still on life-support from public money.
In truth, the banking business model needs to be re-built from the bottom up – and the sooner they start work on that the better.
Still, there is little mistaking the renewed sense of optimism in the City and on Wall Street. Last week, ten of the biggest American banks started to pay back the $68 billion of the funds they got under the emergency Troubled Assets Relief Programme (or TARP) launched as Wall Street went into meltdown last autumn. They included JP Morgan, Goldman Sachs and Morgan Stanley, three firms that now look to be the powerhouses of the post-credit crunch US financial system.
Freed from the shackles of part-ownership by the government, with all the public scrutiny it implied, the banks can get back to doing what they do best again – making lots of money for themselves. They are already in a far stronger financial position than they were at the start of the year. The S&P 500 financial index is up by almost 50% in the last three months. With figures like that, the banks should have no trouble raising capital from shareholders rather than the government.
A similar story is emerging over here. Lloyds raised £2.56 billion from its shareholders to repay some of its state aid, freeing itself from some of the restrictions of state control. Meanwhile, in Europe, so long as the emerging markets of Eastern Europe avoid total meltdown, the banks appear to have steadied and pulled through the worst of the crisis. Credit Suisse and Deutsche Bank look like the big winners in investment banking, and Santander in retail banking.
Indeed, banking is looking like a lucrative industry once again. Central banks are still pumping money furiously into the global economy, and whenever that happens, some of it always winds up in the pockets of the bankers. Near zero interest rates mean the ‘carry trade’ is lucrative once more (banks can borrow freely for next to nothing, then re-invest the money is assets yielding 5% or 6%). Even fee income may start to swell once again as corporate restructuring work gets underway, and as takeover activity starts to pick up again.
Plenty of bankers could be forgiven for thinking it is 2006 all over again. By Christmas, the talk will be of bonuses. Indeed, since it may well be the last year they can collect big payouts before Gordon Brown’s new 50% top-rate comes into force, don’t be surprised to start seeing some mega-payouts as London’s bankers bring forward any money they are owed to avoid the new top rate. Ferrari dealers will be ready to celebrate. House prices in the smartest parts of London will start to edge up again.
Amid all that, not surprisingly, talk of changing the system is being quietly forgotten. Six months ago, the banks were full of repentance. Plenty was heard about how bonus systems would be reformed, how lending would become more responsible, and how risk management would be taken more seriously.
Not much is being heard about any of that any more.
That is a big mistake.
First, there is still plenty of pain ahead. The worst of the financial crisis may have passed but there is still a long and grinding recession to come, followed by a period of very low growth. We haven’t yet seen anything like the peak in unemployment or corporate failures. As both start to rise, the bank will face a lot more losses.
Next, the banks are still to a large extent being kept alive by public money. Even as they gradually repay direct state shareholdings, they remain dependent on taxpayer support. Only the fact that government ultimately stand behind them keeps their cost of funding down, and so allows the banks to remain profitable. After all, how willing would you be to have money in Lloyds if you didn’t think the government would bail it out again if necessary?
The big question raised by the credit crunch was this: If the banks are too important to be allowed to fail, then can they be allowed to run risks which the taxpayers will end up paying for?
The banks still have to find a convincing answer.
In reality, they can’t just go back to their old ways, much as they might like to. The industry needs to be re-built from the bottom up. The retail banks need to accept they must become a far duller, more regulated business. The investment banks need to move back towards something a lot closer to the old partnership structure that used to dominate the City, where individuals put their own money at risk, and were forced to plan for the long-term.
Trading on the global market, paying big bonuses and expecting American or British or German taxpayers to pick up the bill if it all goes wrong might have been acceptable once. But the bankers shouldn’t imagine they can get away with the same trick a second time. They should press on with reforming the industry while they still have the chance.
Saturday, 25 April 2009
Don't Bet On The Banks
In Money Week this week, I've been writing about the banks, and how despite the small recovery, they won't get vack to their old strenght. Here's a taster....
It has been a great couple of weeks for the global banking industry. Admittedly, it is coming off a low base, but after a year in which banks went bust, begging bowls for bail-outs were handed out, and bankers were pilloried for their greed and rapaciousness, there were at least some signs of health back in the financial system.
In the US, Goldman Sachs, always the class act of the industry, produced a terrific set of results. Morgan Stanley managed to do better than anyone in the market expected. And in this country, the stockmarket has started marking up the shares of the battered banks again.
Has the long-awaited bounce back in the banking industry started? In truth, probably not. Ignore the green shoots. Banking around the world remains a deeply troubled industry, and it is still going to be a very long time before it starts returning to a healthy level of profitability again.
Still, there is little mistaking the signs of recovery. If you were feeling optimistic, you might even be inclined to call them ‘green shoots’. In the US, Goldman Sachs posted earnings of $1.81 billion last week, easily besting even the most optimistic analysts’ forecasts. The old Wall Street rule that after a nuclear holocaust there would be only there things left alive – cockroaches, Keith Richards, and Goldman Sachs – appeared to be coming true again. Even the worst financial carnage in a generation turned into little more than a blip for the firm.
But it was far from alone. Wells Fargo last week posted record earnings for the period, as did JPMorgan Chase. Citigroup, perhaps the most bombed out of the major American banks, managed to end five consecutive quarters of losses by posting a profit of $1.6 billion. The American banks that survived the carnage looked to be clawing their way back towards health.
There are similar signs in Britain. We’re not yet seeing big bounce backs in profits. But the shares prices of our main banks are starting to anticipate better news down the track. Take Lloyds. From a low of 33p back in January, the shares have broken back through 100p. They jumped by a third last week alone.
Or Barclays. It said in March Barclays it had made a “strong start” to the year, and in February posted a 49 percent increase in profit for the second half of 2008. The sale of its iShares business has boosted its capital position. The shares have started to reflect that. From a low of 47p they are back above 200p.
Even Royal Bank of Scotland, now majority owned by the British taxpayer, is twitching back into life. From a low of 10p the shares are above 30p. It is a long way from recovery, but at least the corpse has been dragged out of the morgue.
True, fund managers have been seizing on any good news they can find. Everyone knew, even at the start of this year, that some kind of banking system would emerge from the crisis. Eventually it would be a profitable industry once more. At some point, there was always going to be a massive rebound in burnt-out share prices. Fund managers don’t want to miss out on that. They are making sure they are long on the shares wells before it happens.
There are positive signs. The worst of the credit crunch has passed. No more banks are likely to go bust – not big ones anyway. And there are reasons for thinking that profits may grow from here on. First, house prices are steadying, both in the US and UK. That will stem the flow of losses from sub-prime lending – and from a lot of commercial loans as well. Next, competition has been reduced, as anyone looking for a mortgage or a credit card will have noticed. Less competition means fatter margins, which is always good for profits.
Against that, however, there are three big issues overhanging the global banking industry.
One, there is still way too much capacity – they only reason competition has lessened is because of a shortage of funds. Banking looks set to become the auto or airline industry of the next decade. There are too many players making very similar products, but just as governments wouldn’t let their flag-carrier airlines go bust, and are still reluctant to let their car manufacturer go under, so they won’t let their banks go bust either. They will stagger on, over-staffed and barely profitable, until finally someone puts them out of their misery. Eventually there will four or five global mega-banks, and a host of niche players – but it will be a long time before we get there.
Two, banking is about to become zealously micro-regulated. There are already plenty of signs of that. In the US and the UK, Europe and even the offshore centre, financial supervisors are busy devising new rules and regulations. There will be caps on pay. There will be limits on lending. And there will be a clampdown on innovation. You’ve probably got more chance of getting a new type of cigarette advertised on children’s TV than you have of launching a clever new financial product right now.
Three, the best people are about to quit the industry. For a generation, banking attracted the most hard-working, ambitious, creative talent on the planet. Admittedly they devoted much of that brainpower to blowing the system up. Still, it made the industry dynamic. But a low-growth, micro-regulated industry isn’t going to attract anything but clock-watchers and pen-pushers – hardly a recipe for growth.
In reality, the banks will stabilize at some point. We may have reached bottom in January and started the bounce back. But it won’t be another boom in finance or banking – that is going to be the dullest of dull industries for a generation or more.
It has been a great couple of weeks for the global banking industry. Admittedly, it is coming off a low base, but after a year in which banks went bust, begging bowls for bail-outs were handed out, and bankers were pilloried for their greed and rapaciousness, there were at least some signs of health back in the financial system.
In the US, Goldman Sachs, always the class act of the industry, produced a terrific set of results. Morgan Stanley managed to do better than anyone in the market expected. And in this country, the stockmarket has started marking up the shares of the battered banks again.
Has the long-awaited bounce back in the banking industry started? In truth, probably not. Ignore the green shoots. Banking around the world remains a deeply troubled industry, and it is still going to be a very long time before it starts returning to a healthy level of profitability again.
Still, there is little mistaking the signs of recovery. If you were feeling optimistic, you might even be inclined to call them ‘green shoots’. In the US, Goldman Sachs posted earnings of $1.81 billion last week, easily besting even the most optimistic analysts’ forecasts. The old Wall Street rule that after a nuclear holocaust there would be only there things left alive – cockroaches, Keith Richards, and Goldman Sachs – appeared to be coming true again. Even the worst financial carnage in a generation turned into little more than a blip for the firm.
But it was far from alone. Wells Fargo last week posted record earnings for the period, as did JPMorgan Chase. Citigroup, perhaps the most bombed out of the major American banks, managed to end five consecutive quarters of losses by posting a profit of $1.6 billion. The American banks that survived the carnage looked to be clawing their way back towards health.
There are similar signs in Britain. We’re not yet seeing big bounce backs in profits. But the shares prices of our main banks are starting to anticipate better news down the track. Take Lloyds. From a low of 33p back in January, the shares have broken back through 100p. They jumped by a third last week alone.
Or Barclays. It said in March Barclays it had made a “strong start” to the year, and in February posted a 49 percent increase in profit for the second half of 2008. The sale of its iShares business has boosted its capital position. The shares have started to reflect that. From a low of 47p they are back above 200p.
Even Royal Bank of Scotland, now majority owned by the British taxpayer, is twitching back into life. From a low of 10p the shares are above 30p. It is a long way from recovery, but at least the corpse has been dragged out of the morgue.
True, fund managers have been seizing on any good news they can find. Everyone knew, even at the start of this year, that some kind of banking system would emerge from the crisis. Eventually it would be a profitable industry once more. At some point, there was always going to be a massive rebound in burnt-out share prices. Fund managers don’t want to miss out on that. They are making sure they are long on the shares wells before it happens.
There are positive signs. The worst of the credit crunch has passed. No more banks are likely to go bust – not big ones anyway. And there are reasons for thinking that profits may grow from here on. First, house prices are steadying, both in the US and UK. That will stem the flow of losses from sub-prime lending – and from a lot of commercial loans as well. Next, competition has been reduced, as anyone looking for a mortgage or a credit card will have noticed. Less competition means fatter margins, which is always good for profits.
Against that, however, there are three big issues overhanging the global banking industry.
One, there is still way too much capacity – they only reason competition has lessened is because of a shortage of funds. Banking looks set to become the auto or airline industry of the next decade. There are too many players making very similar products, but just as governments wouldn’t let their flag-carrier airlines go bust, and are still reluctant to let their car manufacturer go under, so they won’t let their banks go bust either. They will stagger on, over-staffed and barely profitable, until finally someone puts them out of their misery. Eventually there will four or five global mega-banks, and a host of niche players – but it will be a long time before we get there.
Two, banking is about to become zealously micro-regulated. There are already plenty of signs of that. In the US and the UK, Europe and even the offshore centre, financial supervisors are busy devising new rules and regulations. There will be caps on pay. There will be limits on lending. And there will be a clampdown on innovation. You’ve probably got more chance of getting a new type of cigarette advertised on children’s TV than you have of launching a clever new financial product right now.
Three, the best people are about to quit the industry. For a generation, banking attracted the most hard-working, ambitious, creative talent on the planet. Admittedly they devoted much of that brainpower to blowing the system up. Still, it made the industry dynamic. But a low-growth, micro-regulated industry isn’t going to attract anything but clock-watchers and pen-pushers – hardly a recipe for growth.
In reality, the banks will stabilize at some point. We may have reached bottom in January and started the bounce back. But it won’t be another boom in finance or banking – that is going to be the dullest of dull industries for a generation or more.
Tuesday, 24 March 2009
Bankers & Bonuses
I was on France 24 last night discussing banks and bonues. You can watch it here. Although I tend to agree with the view that the arguments over bonuses are a distraction from fixing the economy, it's also true that public upport for banking rescues won't be sustainable whilst these huge bonuses are being paid. So something does have to be done about it.
Saturday, 14 March 2009
Nationalised Banks
In Moneyweek, I've been writing about what a disaaster natioanlised bank will be. Here's a taster.
Another week, another bank get nationalised.
This time around it was the turn of Lloyds-HBOS to slip into public ownership as the government increased its stake in the merged banking group from 43% to as much as 75% in return for the state guaranteeing of £260 billion in high-risk assets.
It has plenty of company. The government already controls Royal Bank of Scotland, Northern Rock and the parts of Bradford & Bingley that it didn’t manage to sell on when that bank collapsed last year.
Nor does it necessarily stop there. Barclays has resisted allowing the government a stake but may not get through this crisis without state funds. Even HSBC is starting to look shaky: on Monday, in Hong Kong trading, its shares fell back to 1996 prices.
And yet there has been criminally little discussion about the wisdom of the course the British government had embarked upon. True, we may not like fat cat private sector bankers with their lavish bonuses and generous pension schemes, much any more, but just wait until we start getting used to their public sector successors. In truth, there were far better ways of rescuing the banking system than nationalisation – and we may be paying for the mistakes of this year for decades to come.
No one disputes that the banks needed to be rescued. As much as many of us would like to see bankers pay for their excesses with their jobs and their companies, the consequences for the economy would be catastrophic. Too many savers would lose their money. Small business loans would be called in. Confidence would plummet.
And yet, it is a big step to take banks into public ownership. Amid the chaos of collapsing markets, the consequences have not been thought through. But fast-forward a few years, and the chances are we will have learned to hate public sector bankers just as much as private sector one.
The historical record is instructive. In the early 1980s, France’s President Mitterand nationalised much of the French banking system, in one of the last gasps of old-school European socialism. By the end of the decade, banks such as Credit Lyonnais had run up huge losses. Among many terrible decisions, it ended up owning the MGM film studio.
In a few years, we may well see RBS bankers running around Hollywood, partying with actresses, and blowing millions on new films. There are three reasons why state-owned banks can be expected to run into big trouble.
First, without any shareholders there won’t be any pressure on banks to perform. Right now, we think that will mean they will tale fewer risks, and for the next couple of years that might be true. Over time, they will take even more. After all, they won’t be constrained by a lack of capital anymore, and they won’t have any irritating shareholders to answer to. Expanding rapidly is how you make yourself more important. So why not go as fast as you can?
Next, the banks will be subject to constant political interference. Without shareholders, there will be nothing to stop politicians meddling in their decisions. They won’t be foreclosing on dud loans, and certainly not if there is a factory or call centre at stake in a marginal constituency. They will be dishing out money to ‘national champions’. Worse, over time, we can expect to see a crony culture build up. Property developers and industrialists who want access to loans will need to get the bankers on board and that will mean getting the politicians on side as well. Expect to see a big increase in party donations, and generous non-executive jobs for even the most brain-dead backbenchers. It isn’t going to be very efficient. Nor will it do anything for the honesty of public life.
Lastly, there won’t be much in the way of innovation. With the bulk of our banking system state-controlled, there won’t be any or competition to spur new thinking. Right now, we have had a surfeit of financial innovation. But as we emerge blinking out of the recession, we’ll need finance to repair battered balance sheets, and to pay for mammoth government deficits. We’ll need more clever financing, not less.
In truth, it is a myth to think that state owned banks will allocate money any better than private sector ones. They will still blow it, only in a different way. Bankers like nothing better than spending other people’s money, and, courtesy of the taxpayer, they have just been offered a bottomless pit of the stuff. Don’t expect the results to be anything other than very ugly.
There was a better way. The government could have set up a series of so-called ‘bad banks’: one for each institution in trouble, or else one for each class of asset that had turned sour. The ‘bad banks’ would buy all the troubled loans at par, using money printed by the Bank of England if necessary. It would hold onto them until they recovered in value – as many mortgages will eventually, for example – or else until they had been deemed worthless.
The losses in the short-term would be horrendous, and would be shouldered by the government. But the taxpayer is taking on terrible losses anyway. Against that, the country would be left with a clean banking sector, with the toxic loans taken off its books, which could then start lending again, and competing with each other. The slate would have been wiped clean, and a fresh start could have been made. Doesn’t that sound better than a group of state-owned banks stumbling inevitably towards the next disaster?
Another week, another bank get nationalised.
This time around it was the turn of Lloyds-HBOS to slip into public ownership as the government increased its stake in the merged banking group from 43% to as much as 75% in return for the state guaranteeing of £260 billion in high-risk assets.
It has plenty of company. The government already controls Royal Bank of Scotland, Northern Rock and the parts of Bradford & Bingley that it didn’t manage to sell on when that bank collapsed last year.
Nor does it necessarily stop there. Barclays has resisted allowing the government a stake but may not get through this crisis without state funds. Even HSBC is starting to look shaky: on Monday, in Hong Kong trading, its shares fell back to 1996 prices.
And yet there has been criminally little discussion about the wisdom of the course the British government had embarked upon. True, we may not like fat cat private sector bankers with their lavish bonuses and generous pension schemes, much any more, but just wait until we start getting used to their public sector successors. In truth, there were far better ways of rescuing the banking system than nationalisation – and we may be paying for the mistakes of this year for decades to come.
No one disputes that the banks needed to be rescued. As much as many of us would like to see bankers pay for their excesses with their jobs and their companies, the consequences for the economy would be catastrophic. Too many savers would lose their money. Small business loans would be called in. Confidence would plummet.
And yet, it is a big step to take banks into public ownership. Amid the chaos of collapsing markets, the consequences have not been thought through. But fast-forward a few years, and the chances are we will have learned to hate public sector bankers just as much as private sector one.
The historical record is instructive. In the early 1980s, France’s President Mitterand nationalised much of the French banking system, in one of the last gasps of old-school European socialism. By the end of the decade, banks such as Credit Lyonnais had run up huge losses. Among many terrible decisions, it ended up owning the MGM film studio.
In a few years, we may well see RBS bankers running around Hollywood, partying with actresses, and blowing millions on new films. There are three reasons why state-owned banks can be expected to run into big trouble.
First, without any shareholders there won’t be any pressure on banks to perform. Right now, we think that will mean they will tale fewer risks, and for the next couple of years that might be true. Over time, they will take even more. After all, they won’t be constrained by a lack of capital anymore, and they won’t have any irritating shareholders to answer to. Expanding rapidly is how you make yourself more important. So why not go as fast as you can?
Next, the banks will be subject to constant political interference. Without shareholders, there will be nothing to stop politicians meddling in their decisions. They won’t be foreclosing on dud loans, and certainly not if there is a factory or call centre at stake in a marginal constituency. They will be dishing out money to ‘national champions’. Worse, over time, we can expect to see a crony culture build up. Property developers and industrialists who want access to loans will need to get the bankers on board and that will mean getting the politicians on side as well. Expect to see a big increase in party donations, and generous non-executive jobs for even the most brain-dead backbenchers. It isn’t going to be very efficient. Nor will it do anything for the honesty of public life.
Lastly, there won’t be much in the way of innovation. With the bulk of our banking system state-controlled, there won’t be any or competition to spur new thinking. Right now, we have had a surfeit of financial innovation. But as we emerge blinking out of the recession, we’ll need finance to repair battered balance sheets, and to pay for mammoth government deficits. We’ll need more clever financing, not less.
In truth, it is a myth to think that state owned banks will allocate money any better than private sector ones. They will still blow it, only in a different way. Bankers like nothing better than spending other people’s money, and, courtesy of the taxpayer, they have just been offered a bottomless pit of the stuff. Don’t expect the results to be anything other than very ugly.
There was a better way. The government could have set up a series of so-called ‘bad banks’: one for each institution in trouble, or else one for each class of asset that had turned sour. The ‘bad banks’ would buy all the troubled loans at par, using money printed by the Bank of England if necessary. It would hold onto them until they recovered in value – as many mortgages will eventually, for example – or else until they had been deemed worthless.
The losses in the short-term would be horrendous, and would be shouldered by the government. But the taxpayer is taking on terrible losses anyway. Against that, the country would be left with a clean banking sector, with the toxic loans taken off its books, which could then start lending again, and competing with each other. The slate would have been wiped clean, and a fresh start could have been made. Doesn’t that sound better than a group of state-owned banks stumbling inevitably towards the next disaster?
Monday, 16 February 2009
A £2,000 Cap On Bank Bonuses Is Fair
David Cameron's proposed £2,000 cap on bonuses at those banks bailed out by the taxpayer is completely fair - as well as quite a neat way of dealing with the issue, since it means junior staff can still get their performance-related pay, but the City traders don't. The arguments against don't begin to stack up. It doesn't matter if people leave. RBS isn't going to go back to being a hyper-aggressive global bank, so it doesn't need them. Neither is HBOS. As for the contracts, test it in court. The bank was bust, so presumably all the employment contracts can be re-written. The fact the government has taken so long to get to grips with this issue show just how clueless it is.
Friday, 23 January 2009
Banks, Banks and More Banks
I appear to have been either writing or talking about banks all week. On France 24 I took part in a pretty good discussion about the bonus culture, which you can see here. In the Spectator, I've been writing about the problems with the private banks. Over on Bloomberg, I've been looking at the run of mistakes and misjudgements that led to the collapse of Royal Bank of Scotland. From the Bloomberg column I got lots of response from former RBS bankers about just how badly the bank was run. My favorite was a story about how the head office in Edinburgh decided the receptionists around the world had to wear tartan uniforms, ignoring the fact that in countries like Singapore and Malaysia it was far too hot. That perfectly illustrates how little they understood the markets they were operating in.
Tuesday, 6 January 2009
The Hedge Fund Catastrophe
FT Alphaville is one of my favorite financial sites - it is about the first thing I log into when I turn on my computer - so I was pleased to see they ran my Bloomberg column on hedge funds today. Likewise The Times. A lot of response to the basic argument, which was that by stopping their investors from taking their money out, the funds were doing a lot of damage to their reputation. One reader pointed out that it was much the same as the ban on short-selling last year - which, of course, the hedge funds objected to loudly. Another pointed out that it was similar to emerging markets closing up for a few days - such as Malaysia, Thailand, or more recently Russia. True enough. The funds are guilty of gross hypocrisy. There were already having a rough time. But I suspect this kind of crass response means they are just about finished.
Saturday, 3 January 2009
Saving the World...?
The catastrophe of Gordon Brown's response to the recession is becoming clearer by the day. It now looks as if his recuse of the British banking system - which saved the world, let's remember - is falling apart. The papers are reporting that another bail-out is being considered, and this one might involve a 'bad bank' which would take the toxic assets of the bank's balance sheets. Like the original Paulson plan, that makes a lot more sense. You need to drain the toxic assets out of the system before the banks can get back to normal. Brown's plan just pumped more capital into them without fixing the problem - and may well end up with a nationalised banking system, which will just make the problem even worse.
The real problem for the UK is that it was pumped up on a wave of foreign capital, and that has now fled. The botched bank rescue and, even worse, the destruction of the public finances, has scared foreign capital away, and looks likely to push the UK into deep recession.
The real problem for the UK is that it was pumped up on a wave of foreign capital, and that has now fled. The botched bank rescue and, even worse, the destruction of the public finances, has scared foreign capital away, and looks likely to push the UK into deep recession.
Monday, 17 November 2008
Bankers Bonuses
Back in January, I wrote a column for Bloomberg suggesting that bankers at firms such as UBS and Morgan Stanley should be made to hand back their bonuses. The argument was fairly simple: the deals had gone pear-shaped, and so they didn't derserve the money. The column took a fair amount of flak on some of the financial blogs. So I'm pleased to see that the UBS is reported this morning to be planning to re-claim some of the bonuses it paid out in previous years. Good for them. It is time investment bankers learnt that bonuses aren't just free money. You actually have to earn them.
Wednesday, 15 October 2008
More Nonsense From Vince Cable
Vince Cable continues to be the most over-rated man in Brtitish politics. At Prime Minister's Questions today he's arguing that the government should tell the Bank of England to cut interest rates. But surely the independence of the Bank is about the only worthwhile reform of the British government in the last 10 years? Indeed, I seem to remember interviewing Cable for a Bloomberg column some time ago when he criticised Gordon Brown for telling the Bank what to do. As it happens, the Bank will cut interest rates dramatically over the next six months anyway..but once it starts taking instructions from the government its independence is gone forever. Surely even Cable can figure that out.
Wednesday, 24 September 2008
British banks
The Times are running my Bloomberg column this morning. Amid all the doom and gloom about the UK economy, it seems to be both Barclays and Llouds have done great deals for themselves. It won't be enough to save the British economy from recession - but at least the banking industry will be in good shape.
Saturday, 13 September 2008
Stephen Green On Banker's Pay
The BBC is letting the Stephen Green get away with a little too much organised hypocrisy today. The HSBC chairman is complaining that extragant bankers pay may well have contributed to the current financial crisis. It is a fair point, if not a very original one. But hang on. Is this the same Stephen Green who allowed HSBC to go on a massive hiring spree to beef up its own not-very-good investment bank? That wouldn't have done anything to push up pay and bonuses would it?
Saturday, 28 June 2008
Investment Banking
One of the consequences of the credit crunch is going to be a big change in the way the investment banks work. The swaggering, deal-making culture is going to have to change. The banks will probably have to start going back to their roots - working for clients, operating like partnerships, thinking long-term. The interesting question is how they get there. One way, would be to merge with some of the private equity houses, who have plenty of money, and also the kind of long-term, partnership culture the banks need to re-create. So it is fascinating to see two senior executive from Carlyle Group, Olivier Sarkozy and Randal Quarles, arguing in the Wall Street Journal that the rules should loosened to allow private equity firms to own banks. I think they've had the same thought -- and as soon as they are allowed to, the private equity moguls will start buying banks. In the UK, we've already seen the start of it with TPG taking a stake in Bradford & Bingley. But we will see a lot more before the credit crunch is over.
Thursday, 5 June 2008
Tuesday, 18 March 2008
What's Bear Worth? Nothing.
Felix Salmon is pointing out on his Portfolio blog that Bear Stearns is still trading at more than twice the price JP Morgan (or rather the American government) is paying for it. And it's true. It's quoted at $4.81 this morning, compared to the $2 it is being sold for. Clearly, some people in the market think the JP Morgan deal won't go through. They are betting the bank can be revived. Now, it may well be true that Bear is worth a lot more than $2 and JP Morgan is getting the steal of the century. But investors such as RAB Capital thought the same about Northern Rock in Britain, and they ended up losing a packet. Once a bank has to be rescued by the government, there is no point in betting against the deal.
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