Broken down or broken up?
by Max Wind-Cowie
Yesterday Nick Clegg, Lib Dem leader and Demos author, asked the Prime Minister if he would consider breaking up the nationalized banks so that they would never again be ‘too big to fail’. This is the third time that Clegg has used his PMQ spot to ask Brown about this issue and the third time he has been rebuffed. Brown refuses to contemplate the idea that investment functions (inherently risky, driven by short term profit and often highly complicated) should be separated from retail functions (lower risk, long termist and relatively simple). It is a debate that needs to be had, the taxpayer owns banks and, so, the Government has an increased responsibility to force those institutions to act in the interests of us all as well as in the interests of profit; the return of public outrage over bonuses shows us that people are not prepared to carry on as before.
We should break up the nationalised banks– not simply to separate functions but (ideally) to make them smaller, more flexible and to diversify the supply of financial services. The terrifying realization, that these institutions could bring the entire country to its knees, came as a shock to most of us. Government has a duty to ensure that the banks can never become millstones around our national neck again; I believe that smaller banks are a step in the right direction.
Brown’s response to Clegg’s question lent unintentional support to this view. He highlighted the fact that Lehman Brothers was solely an investment institution and that it too collapsed; this is true but misses the point. Some businesses will always fail, banks included, but what is unique about Lehman is that we were free to let it. Unlike with Lloyds TSB or Royal Bank of Scotland – which both mixed investment and retail services and had millions of ordinary customers – Lehman could be allowed to go bust because it wouldn’t wreak fatal havoc upon the wider economy. In this instance, perhaps, small really can mean beautiful.
Matt
Andrew,
Your response is perplexing.
Clearly having banks that are 'too important to fail', whose balance sheets exceed Britain's GDP, and which engage in scurrilously risky and self serving investment behaviour exposes the taxpayer to lamentable risk. History shows us that banks will innovate around tougher regulatory requirements (such as those proposed by the FSA) and continue risky trading. Separating deposit taking banks from riskier casino institutions represents our best chance of separating taxpayers from intolerable risk.
The government's proposals to regulate the banks through tackling bonuses and increased capital requirements have thus far been cowardly and populist. New Labour and Gordon Brown have always pandered to the banks and their financial 'wizards'.
Time to give the Tories a go?
Andrew Preston
Perhaps you haven't noticed that the taxpayer is in for about £1.4 Trillion squeaking pips, and yet you consider it unconscionably populist to look askance at bonuses.
With respect, you sound like a City trader whose only knowledge of history is Noddy's little book of large whoppers.
The direct translation of what you, and Mervyn King , say about regulation is.... "There is a life form in the City which acknowledges no authority, and is answerable to no one."
In my opinion, you can't really have that in a democracy, and most certainly not in a scenario where the whole system has failed.
The most sensible comment that I have heard recently was in an interview with the former 2nd in command of Lehmanns. The interviewer asked him what he would do to avoid the same thing happening again. The man immediately replied...... regulation and a return to far more stringent loan to capital ratios...., the figure of 12:1 is what I recall, as compared to the pre-collapse figures of 50:1.
MATT
Hi Andrew,
Nope, don't work in the city at all, never have done, never intend to. Although my gut doesn't like it when one hears about bonus payments for bailed out bankers, I don't think that playing about with remuneration is going to be anything other than a short term 'feel a bit better' measure for the public - hence why I said: "cowardly" and "populist".
A bonus is always, always, always going to be paid out based on a % of the profit that an individual made in the preceding year, or years. Let's say that Mr B. Anker gets a bonus of 10% of his total FX derivative trading profits for the year.
By focusing on his outrageous/ridiculous/fully justified/insert whatever you want here bonus, we are focusing on the 10% cost to the public when we should really be focusing on the 90% profit. That issue is 9x bigger and always will be. We need to understand how that is made, why that is made, how risky that is, and how sustainable that is - are most importantly how that affects the UK's economy.
Reading your blog further, I get confused - because I agree with your "direct translation" of what Mervyn / I say.
Democracy or whatever, you don't want that. Effectively the CEO and CFO can make decisions which will expose us all to vastly greater risks, and we just have to lump that.
Breaking banks up will cut out a lot of synergies and make talent and expertise more expensive, and as a capitalist then it feels inherently wrong to "force" a company to go the wrong way.
But the status quo is simply too risky to maintain, ergo, break the biggest banks up, and do it by splitting loans, receivables and anything with a maturation date from derivatives, swaps and anything of that ilk. It's amazingly simple really.
P.S. Sorry, not sure of the tone of your final paragraph. Are you suggesting you think Mr Big Cheese at Lehman said something valuable from the point of view of us trying to fix past mistakes? This guy's sole priority will be to spend the next 20 years of his life covering his ar*e and watching his back. Might as well ask someone on trial for burglary what his neighbours should do about home security.
Andrew Preston
Presumably part of the sub-text to this is that the Conservatives propose to hand regulatory activities to the Bank of England, and that, completely coincidently in the last few days Mervyn King has popped up with the above proposals, just about the only thing he has said, by public pronouncement, in the year since the bank-crash.
The truth is, on its own record, the Bank of England is a dismal failure as a regulatory body.
Secondly, the Conservative Party and its governments are proven macro-economic incompetents as demonstrated by....
a. the results of their policies, and
b. the virtual indivisibility between their party and the interests of the City, hedge funds,
oil speculators....,
.
Thirdly, as any observer would have noticed..... the recent Conservative party conference. A rather flat affair, despite a relatively supportive mainstream media presence. Poor performance by their Shadow Chancellor, and frankly, the appearance of their economics people rather similar to rabbits frozen in the headlights.
The underlying statement of the obvious is that the Conservative Party is clueless, breaking up banks is far from what is immediately important. And that right now the government is working in co-operation with other countries, in particular the US.
Investment bank activities are not, at root, mystical. It just suits the City, and their supporters, to present them as such.