By Michael Baxter 9 Dec 2009 [0 Comments | 358 views]
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The great and the good of the banking world poured into the room. A siege type atmosphere was in the air. Outside the room they were loathed. Inside they were brothers (and sisters) in arms. While the bankers tried to sit comfortably a wave of anticipation ran through the room. At last they could listen to a man who knew his stuff, a towering figure on the global stage, but a man who understood them, who would fight their cause.
The lights dimmed, their great ally strode to the stage. He spoke, and their confidence evaporated. “Wake up, gentlemen,” he said, “your response, I can only say, has been inadequate.”
The debate as to whether banks actually serve a purpose roared on yesterday. The City’s rearguard action continued, with the big guns wheeled out to justify their role in society. But when the man who chaired the Fed for most of the Thatcher/Reagan years, a man associated with free market principles, a fan of less regulation, slams into you, then you know the game is up.
Bankers have been put on public trial. A guilty verdict has been returned. The sentence is about to be passed. But, is this right?
The £40 million a year man, Bob Diamond of Barclays, was leading the fight back. At least, £40 million a year is what he is supposed to have earned a couple of years ago. He warned the chancellor that should the Pre-Budget include the announcement of a tax on bonuses then bankers will be off. “Both financial capital and human capital are extremely mobile,” he warned.
Of course you know what most people would say to that. “Well go then, and good riddance.”
If the City loses its lustre we will pay a heavy price warned the City of London Corporation. It has worked out that around 12 per cent of Britain’s tax income comes from the City.
In short, the City is our golden goose. If there’s an exodus of bankers, running from the British public’s fury, the goose will die and the flow of golden eggs will cease.
That may be true, but supposing the money the City makes for us is based on a lie. Supposing they provide a service the world doesn’t need? It may help boost the exchequer with coffers, but is it coffers we want? And when you consider the damage the City can do, maybe by supporting the City we are acceding to little more than a devil’s pact. We sell our soul and enjoy riches for a few years, and then we rot in economic hell.
Paul Volker knows a thing or two. When he stepped down as chairman of the Fed, to be replaced by Alan Greenspan, he was considered to be the most unpopular Fed chairman ever. But then again, it fell to him to conquer 1970s inflation. Today, there are many who say he was the Fed’s greatest leader, and it’s Alan Greenspan who is vilified.
Volker, who stands 6 foot 7 in his socks, said that the economy enjoyed a more rapid rate of growth during the 1960s when the City was less important. Then he dropped the bombshell: “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth - one shred of evidence.”
At the same event, Sir Deryck Maughan, a partner in Kohlberg Kravis Roberts, said the industry had not “faced up to the intellectual failure of risk management systems, which are still hardwired into many banks and many trading floors”.
Mr Maughan’s comments are worrying. As you probably know, back in the 1990s Long Term Capital Management (LTCM) became a giant in the financial world, with its investment strategy based on algorithms developed by three former winners of the Nobel Memorial Prize for Economics. But the algorithms were based on false assumptions, and in 1998 LTCM failed, and the financial world was taken to the verge of collapse. It was a foretaste of the troubles to come. But what is scary is that it seems the lessons of LTCM weren’t learnt.
When banks rely on complex mathematical formulas that only a handful of rocket scientists understand, you just know trouble is being stored up for a later date.
Mind you Paul Volker may be venomous on the role of banks; they may not have yet learnt the lessons of LTCM; the public may be baying for their blood; but the danger we overreact is a very real and present danger.
Yes, banks have many faults. Maybe their contribution to the UK’s performance is suspect.
But maybe now is the wrong time for a public trial, followed by politicians taking on the role of judge.
In Britain and the US, although apparently not in Italy, a jury is isolated from the media, and required to make its decision in an atmosphere which is as objective as possible.
We are trying the banks, but no effort is being made to ensure the trial is fair. And notwithstanding the damning verdict of Paul Volker, that is very dangerous.
