Will Sassoon recommend a Haircut for the Banks?
I am not talking about Vidal Sassoon the famous hairdresser but a coalition Finance Minister. Many of you will not have heard of Baron Sassoon but his story underlines the phenomena of the revolving door of politics and banking. From 2002 to 2008 (immediately after Lehman Brothers went belly up to be precise) Sir James Sassoon as he was then, was Gordon Brown’s right hand man in the city. He oversaw recommendations for FSA roles as well as knighthoods (Brown admitted this under cross examination in the select committee meetings).
At the outset of the financial crisis of 2008 he quietly crossed the floor with no fanfare and became David Cameron’s special advisor for the city. He has subsequently been rewarded with a ministerial position and a Baronetcy. This is not a partisan blog about bankers but bankers like red top newspapers back the winning side so it was not unexpected. With Baron Sassoon’s vested interest in banking will he do what is needed and recommend a write down of banks’ balance sheets (the city vernacular is “a haircut”)?
If you are not convinced then look at the text of Mervin King’s speech in
Have a look a this internal report from the Fed Reserve and its shows the sheer complexity of shadow banking which may explain why there has been systemic knowledge failure by opinion formers and academics.
The Banking Industry will argue that they constitute 10% of UK
A counter argument put forward by Professor Karel Williams of the University of Manchester takes issue with this assertion of the Finance industry’s value to the economy and his team argue that rather than banks being net contributors to the economy the direct and indirect taxpayer bailout has negated the tax take.http://www.cresc.ac.uk/publications/documents/AlternativereportonbankingV2.pdf
Rather than impose an opinion I will leave it to you to read both and make your own mind up.
The knee jerk reaction is to do the necessary thing and order the banks to come clean on the true value of their company. However, David Cameron is no fool and realises that this is a “Gordian Knot”, an intractable problem with no easy solution. http://www.alexander-the-great.co.uk/gordian_knot.htm
Order a banking “write down” and the
Until the Gordian Knot is cut, I don’t believe that the banking industry should be taking bonuses out (whether deferred, in cash or in shares) unless they are on a stable footing and are no longer too big to fail. I must stress that I am not against rewarding success with huge bonuses. However, a compensation ratio of over 40% of net turnover which constitutes the typical banking bonus pool doled out to its top bankers is very irresponsible in the 21st century for several reasons.
Firstly – When it is impossible for a solvent bank to have zero turnover why should an individual be guaranteed a bonus irrespective of how well or badly they perform? I teach my students that turnover is vanity, profit is sanity and cash flow is reality. That should have been a lesson the banks learned when they initially asked the taxpayers to mortgage our futures to bail them out.
Secondly - why such a high figure given the fragility of the industry? Without global regulation on harmonised bonus percentages/ reform of the turnover compensation ratio the banking industry have the taxpayers over a barrel.
Finally – Is the compensation ratio a suitable reward that is commensurate with the risk? Since 2008 pure investment banks no longer exist as they are now all “bank holding companies”. That means that all banks can benefit from both direct and indirect taxpayer support. Talk about heads I win tails you lose?