/ 14 September 2009

Brown: the bankers’ stooge

At the G20 meeting in London last Saturday finance ministers and central bankers put their great heads together — and decided to do next to nothing. Their proposals to restrain the excesses of the banking industry were lily-livered.

Unless there is some table-turning at the Pittsburgh summit this month, there will be no cap on pay and bonuses, no pruning of banks deemed too big to fail, no separation of retail and investment banking, no measure to restrict the speed or scale of financial markets.

There was collective cowardice, but the main impediment can be summarised thus: Gordon Brown.

Before the meeting the British prime minister told the Financial Times that the question of pay and bonuses could not be resolved in the United Kingdom, but ‘is a legitimate debate for the G20 and the world community to have”. He then set out to kill that debate.

Nicolas Sarkozy and Angela Merkel had proposed an absolute cap on bonuses and stiff sanctions for companies that break it.

Brown held out for three days until Sarkozy and Merkel dropped their proposals in favour of a commitment to ‘explore ways” of limiting bonuses. The bankers must be quaking in their Gucci boots.

Confident that no real restraint will be imposed, the banks have already decided that bonuses are back. This year the financial sector in the City of London will reward itself for the destruction of other people’s livelihoods with payouts of about £4-billion (R50-billion).

Nothing has been learned, because governments are not prepared to teach them a lesson. The only firm response to the crisis has been to give money to the people who caused it.

Bankers argue that their new bonuses are just rewards for a return to profit. The banks are booming again — partly because some of the competition has been eliminated, and partly because they are picking up fat fees for brokering rising volumes of government debt, which were, of course, incurred by the banks’ own recklessness. But the notion of legitimate profit in banking is a slippery one.

In 2005 Patrick Hosking said in the New Statesman magazine: ‘It’s possible that the big bank profits aren’t really profits at all. If the credit bubble bursts, banks could find they’ve not made enough provision for bad loans and duff investments … The banks only know for sure whether they have made a profit on a loan, transaction or investment when they get the capital back. That can take 30 years.”

Hosking suggested the ‘banks may be accounting too optimistically for their vast derivatives positions”, which could result in ‘a big financial shock”. He was right on every count.

And the banks are again singing presumed profits long before they can be accounted as such, and rewarding their traders accordingly. There’s no shortage of ideas for sorting them out.

Bank of England Governor Mervyn King argues that ‘if some banks are thought to be too big to fail, then … they are too big”. Providing state guarantees to banks whose functions have not been separated, he suggests, is madness.

Lord Turner, chair of the UK’s Financial Services Authority (FSA), the city’s watchdog, proposes governments should ‘eliminate excessive activity and profits”, perhaps by means of a tax on all currency transactions across borders.

Others proposed a high-pay commission, a windfall tax on bonuses, and a ban on bonuses at any bank backed by taxpayer guarantees. None of these ideas goes far enough. It is hard to conceive how a banking bonus could be socially useful.

If bonuses are paid for high-risk banking, they expose the whole economy to hazard. If bonuses are paid for routine, low-risk banking, the bankers are earning money for old rope, and the clients paying for this extravagance (which includes anyone with a pension) are being robbed.

Bankers are either gangsters or clerks. In neither case do they deserve the money they receive. But, timid as they might be, all the proposals so far have been dismissed by a government terrified of confronting the City of London’s misbegotten might.

The UK government maintains that if its regulations are too stiff British bankers will leave the country. It’s true that they have been threatening to depart in droves, but the obvious answer is: ‘Sod off then!”

The government wrings its hands about the potential loss of revenue. But in the year before the crash the entire financial sector (of which the City of London is just a sub-station) generated only £12.4-billion a year in corporation tax.

According to the Office for National Statistics, the government’s interventions in the financial markets have already added £141-billion to net public sector debt. Its potential liability is £1.2-trillion.

It would take, in other words, between 12 and 97 years for the government to recoup the money it has given to the banks, assuming that its failure to regulate doesn’t result in another bailout in a few years.

The City of London is a net drain on public accounts. To sustain this parasitic industry every other sector must be cut.

This week it was revealed that the UK government is now prepared to cut the health and overseas aid budgets — hitherto considered sacrosanct — to plug the deficits caused by the country’s bankers.

Every new arrival on the dole queues, every delayed operation, potholed road or crowded classroom for the next two generations will be the achievement of the City of London. Arguably no one on earth except Alan Greenspan bears as much responsibility for this crisis as Brown.

In 2004 he told an audience that ‘in budget after budget I want us to do even more to encourage the risk takers”.

In 2007 he boasted that the city’s success was the result of the government ‘enhancing a risk-based regulatory approach, as we did in resisting pressure for a British Sarbannes-Oxley after Enron and Worldcom”.

Even as analysts warned that a crash was due, he continued to deregulate the city and appoint its villainous bosses to government committees and parastatals. —