Down the Odessa steps…
The Parliamentary Commission on Banking Standards has finally issued the report we’ve all been waiting for. It’s an impressive document, eloquent in its exposition of just why the public are so angry with bankers, thorough in its research (having considered a vast deal of evidence), intelligent in its analysis (by and large) and clearly and memorably expressed, with allusions running from Tacitus to Agatha Christie. Russian eighteenth century history is not omitted, with an apposite reference to certain aspects of corporate governance as Potemkin villages, set up to give an illusion of control without substance. For reasons that will emerge, I wondered by the time I had finished the report whether it too was a Potemkin village: a hugely thorough undertaking with no real prospect of effecting change. And another image associated with the name of Potemkin, from a later century, came to my mind as an expression of what we were dealing with…
I’m not going to respond to all 571 pages tonight, particularly since you already have my evidence on this blog. A number of the recommendations were accurately foreshadowed, such as the suggestion that bonuses be deferred for up to 10 years, which I have recently discussed. There is no need to amend those comments, except to repeat that the 10 year deferral, exposing bankers to the widest range of issues outside their control (many, probably most, will already have left the banks they worked for before the end date), will simply lead to their grossing-up their pay demands beyond even current levels – to the detriment of all of us shareholders and taxpayers. It’s a silly idea that won’t achieve what the Commission is looking for.
What the report fails to consider, despite its apparent depth and undoubted breadth, is the real causes of the crash, which in my view arise from the attempt to produce more profit for employees than can possibly be created in an economy the size of ours. They analyse the effects but not the cause. As of course did Vickers, set up with the same constraint.
Generally I find myself disagreeing on a number of recommendations which, rather than fix the problem they identify, exacerbate it, often because the proposal separates punishment from control. A good example is in relation to the passivity shareholders have shown, which the Commission justly criticise. Their suggestion is that creditors are bailed in, and that this would introduce market discipline. But creditors are even less involved than shareholders in the direct management of banks: they have no vote (until it is too late), and are rarely represented on boards. More to the point, and what the Commission seem to have forgotten, is that an increasing number of creditors now only lend (for more than overnight) on secured terms. They couldn’t care less how the bank is run. A proposal to bail in unsecured creditors will simply result in all interbank lending being secured, and hapless depositors’ positions will be worsened accordingly.
Many will delight in reading about what is nicely termed the Murder on the Orient Express defence, by which senior bankers have so far escaped penalties for this mess by pleading collective responsibility. I think they’ve got this wrong too: the four-eyes principle is one I grew up with, alongside vigorous debate at credit committee which is a far more effective challenge than regulators can make. This disappears with a single person in charge, and risk goes up. Putting senior bankers in jail (even if it ever happens, which I rather doubt, and I think they do too) will have no effect on the behaviour of organisations where any Neinsager is immediately replaced by someone else. What the Commission have failed to understand is that this isn’t really a matter of individual culpability: very few of those they criticise were dishonest, or so consciously reckless that an adjustment of the penalty would have changed their behaviour. Banks show what in another world is called emergent behaviour: they have, put simplistically, a mind of their own.
But in its unsparing attribution of blame to virtually everyone (regulators and politicians not excepted) it seems that the report itself has adopted the Murder on the Orient Express solution.