Saturday, October 31, 2009

Layer 214 . . . Vince Cable, Bankers, Berlusconi and Wankers

It must be obvious to anyone who pays any attention to these matters that Vince Cable is the one politician who has any real understanding of what's happened and what's continuing to happen in finance and banking - and a man  who can speak with real authority on financial matters. When he writes about the continuing crisis, therefore, we need to pay attention to what he says if we have any pretentions at all to being knowledgeable and informed, and therefore to being active citizens rather than bystanders and helpless pawns in the political game.

In yesterday's Guardian he wrote the following column -

We rage at bankers, and the state-backed casino rolls on

Rough justice could backfire. But as long as unconditional guarantees remain, bankers can take wild risks with impunity

The public currently sees bankers and their bonuses through a red mist. Punches are being thrown, like one-off windfall taxes on profits or bonuses, which may feel satisfying but don't connect with the underlying problems. These relate to having a banking system where profit – and bonus – maximisation occurs on the back of state guarantees, for institutions that are deemed too big or important to fail. As long as the guarantees exist, the key issue becomes one of how best to make banks pay a fair fee for the privileges they enjoy.

The anger has had several causes. Even before the crisis, customers resented the capricious and unreasonable charges, the incompetence and the impersonal nature of modern retail banking. Then, highly paid whizz kids managed to destroy their industry through recklessness – the taxpayer then being called upon to rescue them. Then we had rewards for failure (Sir Fred). And latterly there have been bonuses in institutions on state life support. It is like a building contractor who made a fortune putting up unsafe dwellings and, when they collapsed, made another fortune clearing up the debris.

Of course people are angry, and they have every right to be, especially when so many are losing their jobs in a recession triggered by a banking collapse.

The immediate political question is what to do about bonuses. There will be a crescendo of indignation as bank profits and bonuses are announced in coming months. There is some force in the argument that governments should act collectively through the G20 or the EU, since the bits of banking that generate the biggest bonuses are global. But this can be a cop-out, like those pious calls for "general and complete disarmament" which signal an unwillingness to do anything much about reduction. A policy of unilateral bonus disarmament is less risky, not least because other governments are already decommissioning.

One option is to use nationalised and semi-nationalised banks to set a standard of behaviour, stopping or restricting bonuses. Some of us thought such an agreement was reached a year ago by the government for RBS and Lloyds, but it does not appear to have been implemented.
It's obvious that the government intends to restore banking to the status quo as soon as it possibly can, since it's only ideology is that of neo-conservatism and it can't bring itself to think creatively and seriously about real structural changes to the banking system, imcluding keeping the failed banks in public ownership in order to provide proper competition to the baking cartel by setting fair charges and rates of interest.

Don't reward risky business

by Pat Garofalo

Banks are still looking to get rich quick. Reckless risk-taking should be discouraged by limiting executive pay
Kenneth Feinberg, the US Treasury department's special master for compensation, delivered the highest-profile rebuke to Wall Street's excess last week, slapping the seven companies under his office's purview with a 50% cut in compensation for their top 25 employees, including a 90% average reduction in salary. Feinberg also curtailed many corporate perks for these executives, including the use of corporate jets and reimbursements for country club fees.

Feinberg assuredly made the right call, as these companies – AIG, Citigroup, Bank of America, General Motors and Chrysler, plus GM and Chrysler's financing arms – have swallowed billions in taxpayer money and should not be regressing back to pre-crisis levels of compensation. AIG reportedly proposed pay packages worth millions, and full of perks, that Feinberg correctly quashed.

However, reining in these seven firms doesn't help to address compensation at the Wall Street firms that have paid back their bailout funding, and are thus immune from Feinberg's oversight. And the rest of the Street is where the real problems lie.

As Nobel prize-winning economist Joseph Stiglitz wrote:"[Wall Street bankers] did what their incentive structures were designed to do: focusing on short-term profits and encouraging excessive risk-taking." And according to an analysis by the Wall Street Journal, compensation at Wall Street banks is on pace to reach record heights this year, to the tune of a combined $140bn at the 23 largest firms. This would eclipse the previous high of $130bn in 2007, the last year before the crash.

Goldman Sachs alone has already set aside $16.7bn for compensation (with one more quarter of earnings still to come). And Goldman Sachs adviser Brian Griffiths actually said last week that we must "tolerate" income inequality, "as a way to achieve greater prosperity and opportunity for all", revealing that some on Wall Street haven't learned any lessons at all.

If we want a financial system that serves a function beyond creating private profits with socialised risk, regulators need to step in and ensure that Wall Street's pay packages don't incentivise short-term gains over long-term viability. But will any besides Feinberg actually take that step?

Silvio Berlusconi, neo-fascist billionaire and politician, is the one European leader (apart from Gordo) who supports Blair's canditature for the European presidency. Say no more?


Charlie Brooker
in the Guardian today -


Sir David Nutt and New Labour

This is SO New Labour. Appoint a scientific advisor, ask him to find evidence to support what you think is politically expedient, and sack him when he tells you the opposite of what you've asked him to say.

They never had this problem with Chris Woodhead, Michael Barber, Andrew Adonis et al - because education's not . . . scientific.

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