The Great Cop-Out

Impeded by Gordon Brown, the G20 has decided that bankers won’t be properly regulated.

By George Monbiot. Published in the Guardian 7th September 2009

So there will be no reckoning. There will be no firm restraint, no punishment, no measure sufficient to prevent a repetition of the crash. The only people who will not be harmed by the banking crisis are the bankers who caused it.

At the G20 meeting in London on 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 meek, flimsy, lily-livered(1). 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 the financial markets. Their dam is built of paper and it’s already beginning to leak.

There was collective cowardice here, but the main impediment to effective restraint can be summarised thus: Gordon Brown. Before the meeting Brown told the Financial Times that the question of pay and bonuses could not be resolved at home, but “is a legitimate debate for the G20 and the world community to have.”(2) He then set out to kill that debate. Nicholas Sarkozy and Angela Merkel had proposed an absolute cap on bonuses and stiff sanctions for companies that break it. Brown refused. He held out for three days until Sarkozy and Merkel dropped their firm proposals, in favour of a commitment to “explore ways” of limiting bonuses(3). 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 City of London will reward itself for the destruction of other people’s livelihoods with payouts of around £4bn(4). Nothing has been learnt, because governments are not prepared to teach them a lesson. The only firm response to the crisis so far has been to give our 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; 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 had this to say in the New Statesman. “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.”(5) He went on to suggest that the “banks may be accounting too optimistically for their vast derivatives positions”, which could result in “a big financial shock”. This unsung prophet was, of course, right on every count. But 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. Mervyn King, the governor of the bank of England, 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(6). Lord Turner, chairman of the Financial Services Authority (FSA), proposes that governments should “eliminate excessive activity and profits”, perhaps by means of a Tobin tax on financial transactions(7). Others have proposed a high pay commission(8), a windfall tax on bonuses(9) and a ban on bonuses at any bank backed by taxpayer guarantees(10).

None of these ideas go far enough. It is hard to conceive of the circumstances in which a banking bonus could be socially useful. If bonuses are paid for innovative, 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 put forward so far have been dismissed out of hand by a government terrified of confronting the City’s misbegotten might. The only recommendations that have been allowed to stand are the risible voluntary measures proposed by the government’s Walker review (conducted by a former investment banker) and the feeble FSA code, which has already been downgraded from principles to guidance(11). The political establishment is in thrall to the financial establishment.

The 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 £12.4bn a year in corporation tax(12). According the Office for National Statistics, the government’s interventions in the financial markets have already added £141 billion to public sector net debt(13). Its potential liability is £1.2 trillion(14). 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 bail-out in a few years’ time. The City of London is a net drain on public accounts.

To sustain this parasitic industry every other sector must be cut. Yesterday the Guardian revealed that the government is now prepared to cut the health and overseas aid budgets – both hitherto considered sacrosanct – to plug the deficits caused by Britain’s bankers(15). Every new arrival on the dole queues, every delayed operation or potholed road or crowded classroom for the next two generations will be achievements to be laid at the gates of the City of London. Yet the bankers have seldom had it so good.

No one on this side of the Atlantic – arguably no one on earth except Alan Greenspan – bears as much responsibility for this crisis as Gordon Brown. In 2004 he told an audience of bankers that “in budget after budget I want us to do even more to encourage the risk takers”(16). In 2007 he boasted that the City of London’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”(17). Even as analysts warned that a crash was due, he continued to deregulate the City and appoint its villainous bosses to government committees and quangos.

No one now bears as much responsibility for ensuring that the crisis can be repeated as Gordon Brown. There are several pressing questions that historians of the United Kingdom will ask of this age. One of them is as follows: why was this man permitted to remain in power?

www.monbiot.com

References:

1. G20, 5th September 2009. Declaration on Further Steps to Strengthen the Financial System.

http://www.g20.org/Documents/FM__CBG_Declaration_-_Final.pdf

2. Financial Times, 31st August 2009. Transcript: The full Gordon Brown interview. http://www.ft.com/cms/s/0/17676ef6-9669-11de-84d1-00144feabdc0.html

3. Patrick Wintour, 4th September 2009. Gordon Brown joins French and Germans in call for global crackdown on bank bonuses after days of stalling. The Guardian.

4. The Centre of Economics and Business Research, cited by Andrew Sparrow, 3rd August 2009. Banking bonuses: prospect of return to ‘business as usual’ alarms politicians. The Guardian.

5. Patrick Hosking, 7th March 2005. The business: Patrick Hosking questions the bank’s profits. New Statesman.

6. Jill Treanor, 17th June 2009. King calls for banks to be ‘cut down to size’. The Guardian.

7. Adair Turner, 27th August 2009. How to tame global finance. Prospect. http://www.prospectmagazine.co.uk/2009/08/how-to-tame-global-finance/

8. http://www.compassonline.org.uk/news/item.asp?n=5250

9. Letter from 14 professors at British business schools, 11th August 2009. Bankers’ bonuses are not justified – but a windfall tax on them is. The Guardian.

10. George Osborne, 14th August 2009. Quoted by John Harris. ‘Maybe I’m being too optimistic’. The Guardian.

11. Katie Allen and Jill Treanor, 16th August 2009. Barclays lures US traders with $50m pay package. The Guardian.

12. HMRC, 2008. T11.7. Corporation tax payable after set-offs by year of liability, 2006-7. www.hmrc.gov.uk/stats/corporate_tax/table11-7.xls



13. ONS, 4th September 2009, pers comm. This is the total to June 2009, the most recent date for which figures are available.

14. John Harris, 14th August 2009. George Osborne attacks ‘unacceptable’ City bonuses. The Guardian.

15. Patrick Wintour, 7th September 2009. New Labour strategy: NHS and overseas aid will not be spared cuts. The Guardian.

16. Gordon Brown, 16th June 2004. Speech to Mansion House. http://www.hm-treasury.gov.uk/speech_chex_160604.htm

17. Gordon Brown, 20th June 2007. Speech to Mansion House. http://www.hm-treasury.gov.uk/speech_chex_200607.htm