By Michael Baxter 10 Sep 2010 [0 Comments | 424 views]
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Sometimes for journalists, just the name can be like manna from heaven. George Best was the best; Usain Bolt runs like a bolt of lightning; Arsène Wenger is just an L short of having the same name as the team he manages. And then there’s Barclays. Its new boss even transcends analogy with King Midas, its boss is a diamond geezer, is a girl’s best friend, is the hardest substance there is … its new boss is Diamond – Bob Diamond.
It may be just about the most controversial appointment in banking history. Barclays has appointed the man Peter Mandelson called “the unacceptable face of banking”. Vince Cable is spitting feathers. The anti-bank brigade have got proof that the banks are so far out of touch that nothing less than the torture chamber will do. And yet, the other side of the debate are just as voluble. They say Barclays, and therefore maybe Britain, needs Bob Diamond at the helm.
Who is right?
At face value the arguments on both sides are quite simple.
Bob Diamond is an investment banker who enjoys a simply enormous salary. On one occasion his bonus topped £21m. He represents everything that is wrong about banking; greed, risk taking, and yet, in the great traditions of highly paid bankers, doesn’t have to pay the full price if things go wrong. So his remuneration is lopsided. Massive reward if things go well; a fat pension and early retirement if things go badly.
There is a view that bank profits are a sham. That investment banks take huge risks and net windfalls for the men and women at the top, but that in the long term the risks don’t make sense. That one year’s worth of losses can cancel out decades’ worth of profits.
In his book, The Trouble with Markets, Roger Bootle compared the banking business with airlines. You may know, it is often said that airlines just don’t make a profit in the long run. There is even a book out about it called, Why can’t we make money from aviation? Mr Bootle suggested that it may be like that for banks, too.
In other words, all banking profits are short term only, and banks are destined to eventually lose more money than they make.
Remember comments from Lord Adair Turner of the FSA, who said that much of what banks do is “useless”.
On the other hand, when things got tough at Barclays and it was forced to seek funds from overseas just to survive, Barclays Capital was like the diamond in the rough.
This is the division that in the first half of 2009 contributed 89 per cent of Barclays Bank profits. There is no doubting Bob Diamond is extraordinary. He played a bigger role than anyone in turning Barclays around. It seems we all agree a healthy banking sector is a good thing, and the sooner banks are fully back on their feet the better. No one seems to be in a better position to lead this charge to recovery than Mr Diamond. He is a double diamond, by name and by nature, and for Barclays, he works wonders.
But look deeper, and the issues become more complex.
Were Mr Diamond and Barclays just lucky? It was he, after all, who wanted Barclays to snap up Lehman Brothers before the bank went down. If he had been successful, the collapse of Lehman Brothers would have been a British problem, and who knows, maybe the UK would be saddled with the kind of debts relative to GDP that are now Iceland’s. It was down to Alistair Darling that the deal didn’t go through – it was he who put the kybosh on the deal.
In the book, Too Big to Fail, by Andrew Ross Sorkin, it was said that Darling’s intervention left Diamond furious, and apparently a message on his BlackBerry said: “Couldn’t have gone more poorly, very frustrating. Little England.”
And Little England says it all.
Investment banking can be hugely profitable. We know this. As globalisation continues, then the potential profits will be even greater. The City has the opportunity to stand centre stage, and in the process draw in huge sums of money and fork out a fortune in taxes to a grateful UK government desperate to reduce debt.
On the other hand, if it goes wrong and we get another banking crisis, then Britain is well and truly … well, you can fill in the dots for yourself.
Part of the problem with the UK’s reliance on the City is that it creates difficulties for other sectors. During the boom thanks in part to the City’s strength, the pound soared and our other manufacturing sectors couldn’t compete.
Maybe what the UK needs is two currencies. A currency area covering the City and a currency for the rest.
But there is another issue. The threat ever present, a bit like a sword of Damocles plated in gold, or perhaps with diamond studs, is that banks may choose to move overseas.
Saint Vince wants to see traditional and investment banking separated. If investment banks are tied to ordinary banks, then if the worst happens, governments are more likely to bail them out. Therefore, markets feel more comfortable about lending to investment banks. So investment banks get preferential deals from the money markets.
And if they are told that in the UK the two must be separated, they may indeed move elsewhere.
But does not that smack of a kind of blackmail? The bank is saying: “Unless the government guarantees it will always honour our debts, we will set up in another country.”
And yet, which other country? The doubts amongst the UK public relating to banks are not unique to the UK. In the US bankers are every bit as demonised. Nick Sarkozy has made overtures to banks, but will they really uproot to a country that has presented such anti-bank rhetoric in the past? Maybe they can relocate to Switzerland. But as Tim Dawson from brokerage firm Helvea AG said back in January: “People are dreaming if they think the London investment banking world is going to move. There is more office space in Canary Wharf than in the whole of Switzerland.”
And so there it is.
Banks may yet prove to be our salvation. The City may yet recover and pay such huge taxes that UK government debt will disappear. Who knows, maybe banks can fund the baby boomers’ pensions.
On the other hand, maybe banks will never learn, regulators will never get it right, and a banking sector with the likes of Bob Diamond in the driving seat is a recipe for a future and even more serious banking crisis.
What do you think?
