George Osborne talked tough on bankers but didn’t deliver


9:10 am - January 7th 2011

by Sunder Katwala    


      Share on Tumblr

Not long ago, our Chancellor George Osborne was talking tough on the banks that caused the financial crisis.

When it comes to the Government and the banks, surely the public are entitled to ask why the Government talk tough and make promises, but then fail to deliver. As we wait to see bonus payments over the coming months, we will remember the Prime Minister’s promise that the era of the big bonus is over.

Osborne will naturally expect his comments to be remembered now that, as Chancellor of the Exchequer, he can do something about it.

If he talks tough, surely he can deliver now?

We also had assurances last month from Nick Clegg that he won’t stand idly by if banks pay out billions in bonuses, as though little or nothing had changed.

The banks should not be under any illusion, this Government cannot stand idly by.”It is wholly untenable to have millions of people making sacrifices in their living standards, only to see the banks getting away scot-free.”

But that was then.

The BBC’s Robert Peston has the latest:

The government has become reconciled to British-based banks paying out bonuses running to many billions of pounds in the forthcoming bonus round.

After weeks of talks between ministers and senior bankers, the best that ministers are hoping for from the banks is a statement from them – possibly at the end of next week – that they will pay out less than they would otherwise have done.“They are looking for some words from us that prove that the negotiations have achieved something,” said a senior banker. “I fear however that there may be more spin than substance to what we say.”

Is “Government seeks spin not substance over bank bonus billions, say bankers” the headline George Osborne was looking for? Osborne may have a good claim to the accolode.

He, rather curiously, had been trying to water down disclosure regulations he claimed were too weak. He’s introduced what he says is a pretty tough bank levy.

Strange, then, that the Wall Street Journal reported under the headline UK Levy Not Taxing for banks that the bankers could “count themselves lucky” to get away so lightly, with one senior banker telling the paper that anything under £5 billion was a “rounding error”.


cross-posted from Next Left

    Share on Tumblr   submit to reddit  


About the author
Sunder Katwala is a regular contributor to Liberal Conspiracy. He is the director of British Future, a think-tank addressing identity and integration, migration and opportunity. He was formerly secretary-general of the Fabian Society.
· Other posts by


Story Filed Under: Blog ,Economy

Sorry, the comment form is closed at this time.


Reader comments


1. Cynical/Realist?

Two examples were given on the news last night – Barclays and RBS. Barclays I don’t really give a monkeys about – I don’t believe they had any bail-out. RBS are giving reduced bonuses – but only due to trading conditions, the actual scheme itself is paying out as it would have anyway.

The story suggested Osbourne has ‘realised he can’t do anything about these bonuses’. But if HM Tresury owns more than three-quarters of RBS, how is it possible the government can’t, as clear majority share-holder, do something?

Is it just complete smoke and mirrors from the Torys, or is there some legitimate reason the government isn’t able to dictate such matters to companies it owns?

“George Osborne talked tough on bankers but didn’t deliver”

But the tough talk about bankers was at the time of the election.

Remember Cameron’s pledge about the NHS just days before the election?

“David Cameron has denied that ‘tough’ decisions on spending will mean cuts to frontline health services while campaigning in marginal seats he needs to win to secure overall victory.” [Nursing Times, 4 May 2010]
http://www.nursingtimes.net/whats-new-in-nursing/news-topics/conservative-party/cuts-wont-hit-frontline-nhs-insists-cameron/5014238.article

3. Sunder Katwala

@1

If Osborne shares your view and doesn’t care about Barclays, he would need to then take the opposite position to that which he took last year, when he argued the Barclays bonuses should have been stopped (on the grounds that Barclays have also de facto benefitted from the government underwriting of the sector)

http://www.guardian.co.uk/business/2009/aug/14/george-osborne-barclays-bankers-bonuses

@3: “when [Osborne] argued the Barclays bonuses should have been stopped (on the grounds that Barclays have also de facto benefitted from the government underwriting of the sector)”

It is. of course, open to the government to withdraw or reduce deposit protection from any bank paying what are deemed to be “excessive” bonuses to its staff.

The inevitable question is whether the government dares to do that and risk systemic instability of the banking system.

But if HM Tresury owns more than three-quarters of RBS, how is it possible the government can’t, as clear majority share-holder, do something?

No, for about the fifth time on here. HMG hold category ‘B’ non-voting shares in RBS, meaning that they have no say in the management of the bank – a quite deliberate policy by the last Government, and one in which they were, unusually, quite correct.

6. Luis Enrique

I would like to see left-winger be much more ambitious about bankers pay than this.

cutting banker pay, whether bonuses or salaries, simply increases bank profits, all else being equal (although enforced lower pay might reduce bank revenues to some extent – it’s not clear). Higher bank profits is actually not such a bad idea right now – we want banks to rebuild capital buffers – but otherwise it’s a very odd thing for left-wingers to want.

I think the left need to take the question of why bankers are paid so highly more seriously, rather than just leaving it at “bankers are greedy”. The answer is to do with the nature of production, market structure and the bargaining power individual bankers hold. I think if you try to impose a legislative solution – such as a law limiting bonuses – without changing the underlying environment, you are going to fail. the system will just reconfigure itself around your new law.

I’d like to see some good ideas about how to stop banks making so much money in the first place. If banks made much less money, it wouldn’t matter whether how those choose to split those revenues up between profits, salaries and bonuses.

Oh great the annual banker bashing when bonus season comes around. It is almost like a tradition added on to the festive season. When the Coalition leaders indulged in a bit of banker bashing before Christmas, just after the student fees vote to take the heat off themselves. Behind the scenes they had been working on watering down the EU rules. What they say in public and what they do behind closed doors are quite different.

http://blogs.ft.com/westminster/2010/12/how-coalition-sought-to-water-down-eu-bonus-proposals/

Bob, the ‘deposit protection’ is an insurance protection for, er, depositors not banks.

“Behind the scenes they had been working on watering down the EU rules.”

Obviously, they get 50% of all the bonuses. Assuming they are paid to people who don’t avoid the tax on it.

Luis, very good questions. But I’d go further, which is better and easier for the short term interests – stopping bonuses, or ensuring they can only be paid to people who pay full UK tax rates on them.

9. Luis Enrique

planeshift

I don’t know about bonuses being paid in a way that avoids taxation. Taxing bonuses may be a better policy than trying to limit them.

But I’d go further, which is better and easier for the short term interests – stopping bonuses

Which will mean greatly increased salaries and annual salary reviews. If you want to impose a maximum earnings regime on the country you have to use a pretty blunt instrument.

8. Planeshift

“or ensuring they can only be paid to people who pay full UK tax rates on them.”

The British banks employ hundreds of thousands of employees overseas. Some of them have never set foot in the UK. Over ninety per cent of Standard Chartered employees are in Africa and Asia.

Yeah, thats why I was implying in the short term tackling tax avoidance and evasion was a better approach.

Luis raised the key issue about high pay, which is that it is a result of the structure and barganing power some hold with the financial system, and it is this that needs to be tackled if you want to reduce pay. Can’t say I have detailed answers.

From experience;

Bonuses *are* taxed as income….

There is no simple way to avoid that tax if paid the UK. Defferred shares fall under income as well, and any increase in value of those RSUs under CGT.

Not sure why people are so het up about bonuses when 50% goes straight back to the govt as tax.

As to why bankers get paid a lot; It’s very competative to get in, obviously, but also though there might be a lot of bankers, each individual role is pretty specialised on the whole. The job I do probably has no more than 30 odd people doing it globally. It means experienced people for specific roles can be very hard to come by. Careers tend also to be quite short for a variety of reasons….but burnout is common. Thats assuming you don’t get fired for losing money.

People might not like the pay, but banking isn’t exactly laughter and roses.

14. Luis Enrique

Tyler

As to why bankers get paid a lot; It’s very competative to get in, obviously, but also though there might be a lot of bankers, each individual role is pretty specialised on the whole. The job I do probably has no more than 30 odd people doing it globally.

Nonsense.

There are millions of salesmen and assorted blaggers around the globe.

Any one of them could do your job or that of any other banker.

16. Cynical/Realist?

@Tim J

So its correct that you buy a majority stake in a company that has effectively failed (they would unquestioningly have collapsed), but then take faith that the management of said spectacularly failed enterprise knows best?

I can understand that ministers aren’t best placed to run an international bank (though I’m sure there are people in the treasury and other government depts that could have a legitimate voice). But to not have any say in any policy what-so-ever?

17. Chaise Guevara

@ Luis

“I don’t know about bonuses being paid in a way that avoids taxation. Taxing bonuses may be a better policy than trying to limit them.”

You mean more than they’re taxed already, some kind of special Bonus Tax? That seems both unfair, as I don’t see why I should get more take-home money than someone who gets the same total gross pay as me but earns part of it through commission, and easy to dodge – why not just re-sign top bankers’ contracts each year and add last year’s totally-not-a-bonus to their annual salary?

18. Chaise Guevara

@ 5 Tim J

“No, for about the fifth time on here. HMG hold category ‘B’ non-voting shares in RBS, meaning that they have no say in the management of the bank – a quite deliberate policy by the last Government, and one in which they were, unusually, quite correct.”

I’ve always wondered why the government seemed so happy to enter into such an apparently shitty deal. What’s the justification?

19. Luis Enrique

Chaise

it’s not perfect, but it could be justified on the basis that bank earnings are so high because they enjoy implicit insurance from the central banks [1] and also on basis earnings are derived from rent extraction rather than productivity (this is not equally true of all bankers, so would be unfair on some).

[1] http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2010/10/worthless-banks.html

20. Luis Enrique

BenM

don’t be silly. A goodly proportion of jobs within banking can be rightly called salesmanship and blagging. But plenty of banking jobs are highly skilled with a large premium on experience.

5 TimJ

No, for about the fifth time on here. HMG hold category ‘B’ non-voting shares in RBS, meaning that they have no say in the management of the bank – a quite deliberate policy by the last Government, and one in which they were, unusually, quite correct

That was a pretty daft deal by the previous HMG.

But by no means insurmountable.

Just convert the shares. What’s the bank going to do? Scweam and scweam and stamp its feet?

17 – largely I believe because if the bank was taken into majority public ownership it’s liabilities would be considered to be UK sovereign liabilities. Plus B shares give a preferential dividend payout, meaning that ordinary shareholders (who would otherwise have lost everything) won’t benefit nearly as much from any return to profitability.

Just convert the shares. What’s the bank going to do? Scweam and scweam and stamp its feet?

When the RBS share price rises to 65p or above for 30 days, they can be converted, until then (price currently about 30p), until then they can’t, thanks to that pesky rule of law. But I’m pretty confident that the Government still doesn’t want to manage the banks, and when and if a sale becomes possible the shares will either be re-purchased by RBS, or traded on the secondary market.

23. Chaise Guevara

@ 18

“it’s not perfect, but it could be justified on the basis that bank earnings are so high because they enjoy implicit insurance from the central banks and also on basis earnings are derived from rent extraction rather than productivity (this is not equally true of all bankers, so would be unfair on some).”

Hang on, are you talking about a tax specifically on bankers’ bonuses? That’s just attacking tabloid hate figures. Why not have a traffic warden tax and a Muslim tax and a health and safety inspector tax while you’re at it?

Even were it not such an unreasonable idea, it also sounds extremely dodgable (“Pay a bankers’ bonuses tax? I think you’ll find that technically I’m not a banker and technically that’s not a bonus”).

Better solution: tax the institutions and raise high-band income tax.

24. Chaise Guevara

@ 21 Tim J

So you’re saying less control, less liability and better returns? Sounds like a fair enough deal.

23 – Exactly. Plus less responsibility for the bank’s unpopular decisions – whether on bonuses or lending. It’s a fourfer.

Umm, slightly missing one of the points here aren’t we?

One of the arguments against bonuses was that by paying out a huige wodge of cash it encouraged short term high risk taking.

So there was a call for he bonuses to be only partly in cash, with some more deferred nd possibly a goodly chunk paid in shares whioch could not be sold for three to five years.

So as to align the incentives with the long term health of the bank.

All of these are now in place. So there’s no problem now with the owners of banks (the shareholders) paying their employees whatever they damn want, is there? We’ve already solved the externality of short termism.

Unless you just want to whine about highly trained and highly skilled people being paid lot that is.

17. Chaise Guevara

“I’ve always wondered why the government seemed so happy to enter into such an apparently shitty deal. What’s the justification?”

Only around 23% of the Treasury stake are non-voting B shares. The other 60% are voting ordinary shares. The last government set up UKFI to manage the Treasury holdings at arms length from government. The reason was they anticipated every activist lobbying government to say don’t let them lend to X organisation because we do not like them. For example, oil companies. Lend to Y because they are nice and cuddly. They wanted the banks to repair their balance sheets not be run as a committee with a membership of 62 million.

1) The Government should have no role in determining how private companies pay their staff.

2) The Government should not rescue any company when it fails.

3) The Government should regulate markets properly to ensure monopolies and oligopolies do not develop and thus to ensure fair competition. This should apply to cross sector consolidations.

If the above three dictums were followed, bonuses would be self regulating because the company that paid it’s staff more than they were worth would do less well than it’s competitors.

29. Chaise Guevara

@ 25 Tim Worstall

“All of these are now in place. So there’s no problem now with the owners of banks (the shareholders) paying their employees whatever they damn want, is there?”

Someone on the radio this morning was trying to get me outraged about bank employees getting pay rises, for God’s sake. Media policy really does seem to be that working in FS is the Mark of Cain.

They could make those promises, Pagar. The only problem is they would not be credible and no one would believe the no bailout promises no matter which government was making them.

“Not sure why people are so het up about bonuses when 50% goes straight back to the govt as tax.”

The reason is essentially because the entire industry is insured by the state, and people generally don’t like their taxes paying for high salaries (even if only in perception rather than reality). The secondary reason is the total lack of accountability, most people consider a bonus to mean a reward for good performance. But it seems bonuses get paid regardless of how the bank performs. This links in with wider concerns over executive pay, and in particular the numerous examples of CEOs and directors of companies who fuck up managing to walk away with massive pay offs. It is as if failure is rewarded. For most people in this country, you get fired if you fuck up your job and get to live on benefits. For senior management this isn’t the case, fuck up and you get a years salary for “gardening leave” before a pay off equivelant to what most people earn in a lifetime.

Also consider that executive pay goes up regardless of how well the economy does. Most people in the UK this year are getting a pay cut in real terms, whilst boardroom pay in the FTSE 100 has gone up 55% (and goes up by these amounts every year). Yet this is during a recession, a time when share prices have stayed static, and sales are down. This isn’t market forces simply rewarding talent, it is a parasitic social class rewarding each other whilst the rest of us suffer. No doubt in 4/5 years time they’ll be urging restraint in pay awards as the rest of us try to catch up.

32. LaChupacabra

The vast majority of bonuses in London are paid by non-UK banks (to non-British nationals). Over 50% comes from US banks. Much of the rest is paid by Swiss or European banks. UK banks’ share is less than 30% and even this includes their employees based outside of the UK.

This seriously limits the ability of the government to intervene unilaterally in compensation dynamics. Of course it could (and actually did) relatively easily limit bonus payments at the institutions that received direct taxpayer support, but this would run the risk of seeing the better employees defect to their non-UK competitors.

The only solution would be multi-lateral, but there is no indication that the US Administration (and even more so Congress) are inclined to do anything about this.

Planeshift, we might just be struggling along after the recession but the corporate sector are awash with cash. Apart from some retailers listed businesses are making good profits. Getting rid of a lot of marginal workers meant quite often their profits rose because the marginal workers were not making firms money.

Pagar @ 27

A genuine point, though Pagar. Regarding your first point: Do you make room for the possibility that the Government EVER have the ‘right’ (for want of a better expression) to directly intervene if there is a sufficient public outcry regarding the ‘morals’ of an ongoing economic situation?

I am not suggesting that this is one of them, but is there any position for which if the GOTD saw enough moral outrage, they would be right to step in and attempt to mediate or regulate? During a War or natural disaster of some kind, for example?

The reason I ask that is because I think that the ‘Government’ stepped in to stem ‘moral outrage’ regarding housing benefit. They did not look at the big picture or set up an enquiry to the likely effects of such a move. They merely plucked a number out of the air and hoped it would satisfy all sides and hoped for the best.

Is there any point for which you would suspend the so called ‘free market’ for the sake of social stability or to contain civil unrest?

Jim,

I won’t presume to answer for pagar, but can I point out that intervention and regulation are generally two different things.

36. Dick the Prick

Is it just one big circular bullshit circus? I’m surprised they’ve hung around so long.

A couple of years ago I had £40k of my own money ready to chuck at Barclays shares when they were trading at 56p but not being a complete dick bottled it as, yer know, it’s my cash. Bankers couldn’t give a flying chuff about losing my cash at all – ergo, sod all risk. All they need is a computer terminal, a steady line of schmucks and a payroll department and kerching!

The fact that we’re getting some tax back on the pheeeeenomenal bailouts is one of those ‘thank God for small mercies’ things. They’ve got London by the bollocks and it’s only gonna get worse.

Party politics is fundamentally supine and that pain in your colon is the huge shafting we’re receiving because money is so transferable.

As everyone knows, there needs to be global regulation but there’s more chance of Kylie popping round my house offering to do the washing up. 100 years seems optimistic and then only after a few nuke wars. Hey ho – are they happy tough? Are they, are they happy?

Anyone who thought Osbourne’s ‘We are all in this together’ was anything but a cynical slogan has got what they deserve.

@ 15 Ben M

*sigh*. There are a lot of bankers. Some do less specialised jobs. Most could be trained to do most of the stuff over time. Helps if they have a maths degree though (ever built a monte carlo simulator?). Experience in certian markets is vital though, and that doesn’t happen overnight. A healthy % of the younger traders don’t make it past 5 years.

That all said, in one market I trade there are only 4 people in the world willing to make prices, myself included. It’s not as simple as just putting numbers on screens.

But then again, I suppose you’ve never worked in a bank, and you’re going to rubbish my 10 years at the coalface regardless?

@29 Chaise

I agree; apart the from the good opportunity I was offered to move to SA, the pariah status of FS in the UK did make me feel somewhat unloved. Don’t get me wrong, but in the good times banks and their employees were a massive contributor to the big increases in spending under the last government. Seems peopel have forgotten that.

@ 31 Planeshift

Dyed in the wool aren’t you? But in answer to your point;

It is VERY easy to fire bankers. It is VERY hard to fire civil servants, and most of them contractually end up huge severance payments. Even if they are rubbish.

The media reporting of high profile banking dismissals is often a little lacking. Rarely if ever would anyone get some bumper payout if they get sacked for poor performance or the like. The money is normally a settlement in relation to stock or defferred pay *already earned*….

which brings me on to my next point, rasied by Tim Worstall above.

Banker pay has been defferred for years….typically a bonus was about 30% cash upfront and 70% stock defferred for 2-3 years (called RSUs). Of that stock most clauses would be in place that you lose some or all if you move to a competitor or are fired under certain circumstances (40-100% depending on the bank). These new rules aren’t really new for most institutions – it was a way of retaining good staff (hard to leave when most of your pay is defferred).

Bonuses aren’t always big either…they are very dependent on that years financial performance. One place I worked almost no-one got bonuses in 2008 because even though our team had made a lot, the bank overall hadn’t. We weren’t happy but that’s the way it is….

John Harris, for the Guardian, asked Osborne in August of 2009: “So, under [your]new regime, if Barclays said, “Our bonuses are going up by 32%,” what would happen?” To which bright young thing, then shadow chancellor responded: “I don’t think a strong regulator should sign off on that,” he says. “They shouldn’t allow it … Let me repeat: it is totally unacceptable for bank bonuses to be paid on the back of taxpayer guarantees. It must stop.”

Pretty stright kinda guy right?

40. Dick the Prick

Cheers Tyler.

“The media reporting of high profile banking dismissals is often a little lacking. ”

Yeah, its the usual stuff of one off examples being drip fed regularly that creates public perceptions that are inaccurate, which is why I was careful to explain that it is what the perception is of bankers and high pay. You might like to bear this in mind next time you talk about areas outside your own direct experience.

42. gastro george

Let’s be clear – this was all inevitable, and much of what is going on is pure PR hand-wringing.

After the crash the government needs the banks to be profitable in order to rebuild their balance sheets (and that’s also why current bank lending to industry will inevitably be lower). They’ve even fixed the game so that banks can make money easily (they can borrow money effectively for free and lend it on at historically high margins). Monkeys could make money for the banks right now. And as Luis points out, if the banks are making vast profits, then it’s going to be easy for them to put their snouts in the trough – especially given their historical tendency to do the same – despite any rhetoric from the government.

So the issue has to be split in two. Short term, the only solution is a bonus tax chargeable against the bankers. Long term, the solution can only be to reduce the profitability of the banks. The free market that they worship isn’t actually operating in their workplace. There’s plenty of scope for simplifying and regulating that workplace to reduce their fees and marginal gains that provide no real benefit to the economy.

@ 41 PS

There really isn’t any way of getting things you don’t want to hear into your skull is there?

The MSM in most of these examples are not interested in the gory details.

Example:

Banker gets fired for whatever reason. With his bonuses over the previous 3 years he has built up significant deferred pay. If he is fired he is due to lose a good portion of that.

Obvously, he doesn’t want to. Laywers start to get involved, which can mean years of hassle and huge cost. Bank and banker come to some settlement with respect to his deferred pay, meaning banker doesn’t lsoe all, bank doesn’t pay all and no-one pays the laywers as much.

Media reports this as banker getting paid for leaving. It’s not that simple.

Only in extreme cases, where the bank itself has acted incorrectly will a banker get some extra compensation. Normally in discrimination cases.

It’s worth noting that the most anyone can get for wrongful dismissal is 54k GBP (there is no cap on discrimination cases). Legal fees would eat that up in minutes. Those huge numbers you see in the papers for failed executives will be payments contractually (thus legally) obliged or some kind of settlement for money earned on a deferred basis.

Watchman @ 35

I do not dispue that, but the motive behind both ‘can’ be the same.

A couple examples. A couple of years ago there was one of those awful ‘reality’ shows where an unemployed couple, through a very unusual set of circumstances, including having one severely disabled child and where ‘lucky’ enough that a second developed a chronic, life threatening disease. They were ‘reputed’ to be getting several thousand pounds a month in benefits.

Few (but there were a few) demanded that we should stop paying parents who have severely disabled children, but many where convinced that ‘something must be done’. Sure enough, the GOTD (it happened to be the incoming Tory one, but it could have been Labour) decided to limit the amount that such lucky families should receive. No matter that we would not have wished such a severely disabled child on anyone or even the actual life (as opposed to the tabloid version) these people lived was pretty grim. ‘The Government’ had to be seen to do ‘something’ and ‘something’ was done.

The other example was the teacher who took on a specialised position on the local education authority. Again, there was no suggestion that he was getting other than the ‘market rates’ for these jobs or that he was doing anything other than a good job, yet some felt that this was wrong.

There are people who think ‘rightly or wrongly’ that bankers are paid too much. There is, theoretically at least, the potential for this to cause ‘civil unrest’. Without getting into the ‘politics of envy’ crap, does the GOTD have the moral ‘right’, ‘duty’ to intervine in the ‘free market’?

Let us imagine that a natural disaster meant that the ‘free market’ led to a rise in the price of bottled water to twenty quid each. Should the Government interfere? What if after conscription in wartime, it turns out that those who escape the draft are earning 5 grand a week while ‘Tommy’ on the line gets fifty quid?

45. Luis Enrique

Planeshift

Why not have a traffic warden tax and a Muslim tax and a health and safety inspector tax while you’re at it?

because these individuals are not earning pot loads of money by virtue of an implicit subsidy from the central bank nor are they guilty of rampant rent seeking.

46. Planeshift

Tyler, you’re missing the point. I agree that media portrayals are inaccurate. My point was that this is why people dislike bankers pay, and have the perception that failure is rewarded.The only reason you know the media perception is inaccurate is because you work in the industry. You might like to bear this mind on other issues such as when debating with an actual doctor on NHS reform.

Of course he did not do anything. Before the crash he was calling for more deregulation (which the MSM conveniently air brushed out of history once the banking meltdown came and he suddenly was all FOR regulation)

Bankers are his mates,, he has just magically found another 7 odd billion to bail them out in Ireland. Socialism for the rich is this govts philosophy.

48. Chaise Guevara

@ 45 Luis

“because these individuals are not earning pot loads of money by virtue of an implicit subsidy from the central bank nor are they guilty of rampant rent seeking.”

T’wasn’t Planeshift that said that, t’was me.

If anyone is legally guilty of anything, by all means fine them for it. But as you’re talking about a tax, the proposal is basically mass punishment regardless of whether the individuals affected are guilty. You want to hurt people just because their job description is similar to people you dislike. It’s basically a Bastard Tax that isn’t even designed only to affect bastards.

49. Planeshift

Luis, I think you are confusing me with Chaise.

50. Planeshift

“It’s basically a Bastard Tax ”

Now there is an idea I could support, were it feasible.

The banks cannot ‘ borrow money effectively for free and lend it on at historically high margins’ that is a myth. The opposite is the case. Their average interest rate is 3.0 percentage points above the 0.5% BoE rate. In the years before the financial crisis it averaged 0.6 points. They can’t get marginal funding at the BoE rate and have no chance of getting the quoted short-term interbank rates for any significant size. The interbank repo market where all the problems originated is still fucked. Therefore, their true funding costs is the average interest rate on household time deposits- 2.6%. This is an expensive way to finance their balance sheets and a majority of deposit accounts will be losing them money. For example, the average mortgage rate is 3.5% giving a spread of 0.9 percentage points over the time deposit rate. In the years before the FC the spread averaged 1.1 points.

Therefore, the low interest rates are harming the high street commercial banks through a hit on their net interest income. Through the QE programme they were were net lenders to the BoE. So they have £140 billion cash reserves at the BoE earning the 0.5% Bank rate. Meanwhile, the BoE are earning an average yield of 4% on the gilts they purchased. It is the BoE i.e. the state who are making money. That is just one of the factors why the high street banks are reluctant to lend, they are invariably losing money by lending to some types of customers. The investment banks are making money and that is what the bonuses are all about. However, that is quite different to the plain vanilla high street banks.

Should have said that was @42. gastro george

@ PS

Fair enough….though I think the NHS debate with AFZ was a bit odd, given I wasn’t suggesting abolishing the NHS or anything like that, jsut saying that it should be reformed given its expense and worse outcomes than a ot of the private sector.

@ Richard W 51

Pretty much correct, though not really in the scope of a blogpost to go into some of the more curious detail.

Also worth nothing that most of the much touted “bailout” figure of 850bn was very short term (3m) money which has almost entirely been paid back. The current cost allotted to bailouts is about 10bn, and even then the UK might well turn a profit on the whole thing. The 850bn number was the BOE stepping in when the interbank market froze up – a lot of that lending was short term to perfectly good banks who simply couldn’t otherwise get access to GBP securely.

tax bankers bonuses, now theres a novel idea. Didnt a certain Mr Darling do that and raised £3.5b?

55. Luis Enrique

Richard W

I’m very interested in that. This ‘myth’ is pretty widespread – this looks like an example from a Harvard Prof:

http://blogs.law.harvard.edu/philg/2009/10/17/how-wall-street-is-making-its-billions/

or is that a somewhat different idea?

What does explain the dramatic rebound in bank profits, if not anything to do with access to cheap money which is then lent to the govt?

planeshift/chaise sorry for mix up.

Chaise: no it’s not founded on my dislike of bankers. I am ex-City. It’s based on my beliefs about why people who work in finance earn so much money. They are benefiting from a state subsidy and a super-tax would go towards recovering that. Also it’s based on the idea that much of what the City does is “rent extraction” – any theory of taxation will tell you to tax rents when you can (it’s what the idea behind land value tax is). don’t tax the “institutions” unless that tax will help reduce systemic risk (which it can do if done right, so that’s a good idea) tax the people who benefit from the system.

“No, for about the fifth time on here. HMG hold category ‘B’ non-voting shares in RBS, meaning that they have no say in the management of the bank – a quite deliberate policy by the last Government, and one in which they were, unusually, quite correct.”

UKFI holds voting shares, and reports on how it votes them:
http://www.ukfi.co.uk/index.php?URL_link=press-releases&Year=2009

It was UKFI that defeated the RBS remuneration report at the 2009 AGM.

“So there’s no problem now with the owners of banks (the shareholders) paying their employees whatever they damn want, is there?”

shareholders don’t “pay” the management in public companies in any meaningful sense though. the management set the remuneration policy, and shareholders get a non-binding vote on the remuneration report. some shareholders (or more accurately intermediaries- asset managers) argue not unreasonably that the advisory vote doesn’t actually have any bearing on below-board pay, which is where most of the concern is in banks, surely? in reality then banks pay their staff whatever they want and shareholders largely nod it through, perhaps because it’s usually not their own money (ie asset managers usually vote). as far as I am aware the only remuneration report defeated at a UK bank was at RBS in 2009, and that was because UKFI opposed it.

“We’ve already solved the externality of short termism.”

surely only if you think the only driver of short-termism was/is remuneration policy.

55. Luis Enrique

Richard W

” I’m very interested in that. This ‘myth’ is pretty widespread – this looks like an example from a Harvard Prof: ”

Luis, I was speaking specifically about the high street banks and the idea that they can borrow from the BoE at 0.5% and lend at ‘historic’ high margins. It is just not true. That plain vanilla type of high street banking is having to be financed through retail time deposits and the net interest margins have fallen from the prevailing margins before the FC.

A steep yield curve allows investment banking to be highly profitable and that is where a lot of the profits are coming from. A steep yield curve is not really helping high street banking because their business models were predominately fixed on the interbank repo market and that is still dysfunctional. This is a good interview with Gary Gorton about repo. Until people understand the repo market they will never understand the GFC, as that is the market that blew up in 2007/08.
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4596

The British banks have not really been big lenders to the government this year so borrowing from the BoE and lending to the government is a myth. Nearly half of the net gilt issuance in the first eight months of 2010/11 was bought by overseas investors. Last month was the banks and building societies highest buying level since Jan. 2009 and that was 40% of the issue. Moreover, the profit for banks is in buying the debt in primary auction and selling it to other investors.

A lot of the rent seeking critiques have validity and I am not disputing that. However, a lot of people critique the US and British system interchangeably and they are quite different. For instance, investment bank fees are more competitive in London and Europe than the US.

A couple of reasons that is not often mentioned why they have returned to profitability. They were too aggressive in writing down their assets. As a consequence, they have not suffered the expected losses. They have laid off a lot of workers and as many corporates have discovered their profits as a result have gone up. I would not go as far as describe them like Tyler Cowen as ‘ zero marginal product workers ‘. However, there was a lot of workers in firms not making firms any money. Therefore, shrinking their workforce has not harmed them and has actually increased profits. There is an element of that in banks returning to profitability.

59. Luis Enrqiue

Thanks Richard.

The conditions under which banks make lots of money is something I want to learn more about. I thought I knew Gorton’s stuff pretty well (it’s assigned reading on courses I teach) but I still have lots to learn about banking. I don’t immediately see the connection from repo markets to the question of profitability right now. On the subject of steep yield curves, if QE involves driving down longer term rates, I wonder what that does to investment bank profits. The thing I am really interested in is the question of whether and how monetary policy can act as a hidden subsidy to banks, and more generally how banks profit from the current state of affairs.

Of course you’re right that a big part of recent reported profits must be writing back up what was earlier written down, I should have thought of that.
(somebody I think is good on this stuff, whom you might not have encountered, is this guy: http://hyunsongshin.org/ )


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  2. Max Hernández Calvo

    RT @libcon: George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  3. John West

    RT @libcon: George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  4. Sunder Katwala

    RT @libcon: George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  5. Carl Baker

    RT @libcon: George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  6. Richard Hall

    another example of #state #fail? @chrisgold: George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz via @libcon

  7. Pete Phillips

    RT @libcon: George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  8. Paul Burgin

    RT @libcon: George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  9. Ian 'Cat' Vincent

    Osborne talked tough on bankers but didn’t deliver http://bit.ly/fCgsc9 Banks reply? Anything under £5 billion was a “rounding error”

  10. A bloke from Norwich

    RT @libcon: George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  11. Craig O'Brien

    George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz <<<did we really expect him too #bounses #condems #liars

  12. Mark Worgan

    RT @libcon: George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  13. Chris Patmore

    RT @libcon: George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  14. david

    RT @libcon George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  15. conspiracy theo

    George Osborne talked tough on bankers but didn't deliver … http://bit.ly/g8lW6H

  16. Andy Bean

    RT @libcon: George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  17. Frisky the Snowman

    RT @libcon: George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  18. toby blume

    RT @DavidH1967: RT @libcon George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz >sadly, dont they all?

  19. Pucci Dellanno

    RT @libcon: George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz

  20. Nick Beddow

    RT @tobyblume: RT @DavidH1967: RT @libcon George Osborne talked tough on bankers but didn't deliver http://bit.ly/idYEbz >sadly, don …

  21. Rachel Hubbard

    George Osborne talked tough on bankers but didn’t deliver | Liberal Conspiracy http://goo.gl/wB0Na





Sorry, the comment form is closed at this time.