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Bankers: I told you so

Here’s the share price reaction as I type to Barclays being fined £290 million by the US and UK authorities for trying to improperly influence the LIBOR market:

The shares are down 11% so far today.

Barclays is not alone in being investigated by the regulators – it’s just the first to be fined. More fines for other banks seem likely to follow, as well as lawsuits.

The FSA findings that led to Barclays’ fine make grimly comic reading:

For example, on 26 October 2006, an external trader made a request for a lower three month US dollar LIBOR submission. The external trader stated in an email to Trader G at Barclays “If it comes in unchanged I’m a dead man”.

Trader G responded that he would “have a chat”.

Barclays’ submission on that day for three month US dollar LIBOR was half a basis point lower than the day before, rather than being unchanged.

The external trader thanked Trader G for Barclays’ LIBOR submission later that day: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”.

This sort of thing shouldn’t come as a surprise to long-term Monevator readers. I was highlighting the unfair profits and prominence afforded to bankers from the earliest days of the financial crisis.

But it’s easy to forget how hallowed their reputation was in the pre-crisis days.

Most free market advocates (of which I am one) assumed that if banks were making super-sized profits, it must be because of super-sized intellects, operations, social utility, and so forth – as opposed to super-sized leverage that ultimately blew-up the US housing market, and super-sized bets that paid off at bonus time for an individual prop trader, but where the risks were carried by bank shareholders, and ultimately by taxpayers.

The scales having fallen from most people’s eyes since those days, though each fresh revelation seems to come as a surprise to some investors – and to other bankers, who typically say their firm is one of the good guys, ironically often shortly before uncovering skeletons in their own closet.

The deification and subsequent grilling of JP Morgan’s Jamie Dimon springs to mind. His time as a financial saint came to an end when a $2 billion hedge at his bank blew up, leading some to conclude it wasn’t really a hedge, but just another speculative bet gone wrong.

I happen to rate Dimon, and I don’t think all bankers should be tarred with the same moral brush – these specific LIBOR allegations being waged against Barclays and certain other banks seem to me to be in a whole other class of bad to the usual charge of banker greed and recklessness.

Nevertheless, being the best captain – or a hard-working deckhand – in a fleet of rotten ships doesn’t stop the fleet from taking on water and sinking.

I have long maintained:

  • Most bankers (and many other financial sector workers) are grossly overpaid, due to them effectively gaming the system – generally not through personal wrongdoing, but due to the systematic changes in banking over the past 30 years.
  • What is grossly overpaid? I’m not saying a top Oxbridge graduate working at a bank shouldn’t earn say £85,000 a year in his 30s, given the complexity of what they do and the demand for their services. The point is salaries have run far (far!) in excess of that.
  • Much (not all) of financial sector activity is a zero-sum game, with winners and losers netted off against each other, and taxpayers the patsy at the table.
  • The lucrative attractions of work in the City has attracted our brightest minds. That’s a terrible waste, given its aforementioned zero-sum nature. Maybe we’d have cured cancer, solved nuclear fusion or cheap desalination or be colonising the moon without this brain drain.
  • Brighter people than me have (since the crash) pointed out that much financial activity is socially useless.
  • Sure, we live in a free market economy. But we set the rules! We restrain untrammeled union power, apply windfall taxes to natural resource extraction, and break up monopolies, amongst much else. We can and should tackle any undesirable side-effects of the free market system.
  • Most speculative activities – including investment banking – would be far less risky for the system as a whole if it was confined to old-style partnerships (or hedge funds, for that matter), and probably better for our economy, too, even if it increased the cost of capital.

Bankers’ bonuses: First up against the wall?

Some readers may be nodding along at this point. But from experience, I know I’ve also lost the nods of many of you.

A good proportion of you work in the City, my web server records tell me, as indeed do some of my friends for that matter.

So be it. I think increasing income inequality is at the heart of today’s worrying loss of faith in capitalism – even if the typical dinner party agitator claims to be motivated by the lot of NHS workers or rural Indians, as opposed to their own pay check.

And income inequality is a dangerous topic even among supporters of capitalism.

Long before I began blogging, I used to point out how in my opinion bankers were grossly over-valued and overpaid.

Sadly, only card-carrying socialists agreed with me. My friends on the right – and other investors I spoke to – said the market was extremely efficient, and I simply didn’t understand the good that bankers were doing.

But I kept up the case on Monevator. For example, in March 2008, I wrote:

I’m also angry that capitalism, which I believe is the best system we’ve got for growing prosperity, must seemingly go hand-in-hand with being held hostage to a termite-like financial sector that ceaselessly looks to make a fast buck before adding value, and that remains so loftily disdainful of any suggestion that it might be required to take its own medicine.

Then the second leg of the financial crisis hit, Lehman’s collapsed, and old-style investment banking was wiped away at a stroke.

At last the game was up for bankers!

But it wasn’t. After three months penance – which pretty much amounted to cancelling the Christmas 2008 parties and losing some dead wood – bankers were back, raking in their bonuses, or beginning to shift how they received their ‘compensation’ (the amusing US term for salary, suggesting some token gifts given to saintly bankers for forcing them to grubby their hands with a job).

Bonuses guaranteed

As late as December 2009 I still hadn’t grasped I was flogging a dead horse, writing:

I don’t say [bankers] shouldn’t earn well for doing a vital job, or that they don’t work very hard.

I say so do many other people, and they earn barely 10% as much as elite bankers. The money that goes to bankers is out of proportion, and a clear reflection of market distortion, as plenty of people cleverer than me have written about in depth.

Bankers have seemingly no ability to conceive of the bigger picture, or the fact that the financial system was bailed out by the State for reasons other than their own good. They think they’re a class apart.

As Fed chairman Ben Bernanke has said, intervention to save key players in the system was done despite the fact that doing so stank.

Yet even when we pull back from the brink, bankers can’t take one year off the gravy train before they start to award themselves huge sums again!

Bankers didn’t get it then, and they don’t get it now.

We’re told there were a few rotten eggs at Barclays. These new revelations – bankers will say – don’t reveal anything intrinsically rotten at the heart of the financial system. It’s of no consequence that at the height of the crisis, when people were worried that the cash machines would stop working, these jokers were still trying to influence LIBOR for their own ends.

As the BBC reports:

Between 2007 and 2009, during the height of the banking crisis, the staff put in artificially low figures, to avoid the suspicion that Barclays was under financial stress and thus having to borrow at noticeably higher rates than its competitors.

How poignant now to remember the early commentary from the financial crisis, when old financial hacks would sigh wistfully and talk about the Governor of the Bank of England raising an eyebrow to keep the bankers in line.

Perhaps 40 years ago.

The truth is while the Governor’s eyebrows were hitting the roof, some bankers were allegedly attempting to rig one of the key benchmarks of the entire global financial system.

Every day a pay day

By 2010 huge swathes of the media were railing against the financial sector. Even the FT and The Economist were pointing out that the Emporer had no clothes, with the latter noting that something had to give on pay:

The industry’s continuing prioritisation of staff over shareholders suggests that banks are still being managed badly.

During the boom, banks’ shareholders showed all the resistance of a doormat on pay. But now they have lots of capital tied up in a mature, even declining, industry that cannot control its costs properly, it is time for them to take command.

Yet it wasn’t just the bankers and their investors who shrugged. The general business community didn’t seem to get it either. It repeatedly rallied around these latter-day pharaohs, a bit like slaves supporting plans for yet another, even taller and more socially useless pyramid of stone.

Given the latest figures on income inequality, especially in the US, it’s becoming clearer why. A self-interested slice at the top of the income and wealth league fears any restraint to financial sector pay, surely because it raises questions about their own escalating gains, too.

That’s fair enough – that’s capitalism. But the frightening thing is how the rest of us seem to have lost our ability to stop them.

Divide and conquer

For my part, my negative experience of thankless banker bashing on Monevator was compounded by the fact that only ‘the mob’ seemed to realise we’d been had.

Bankers invariably jumped to the defense of other bankers. And so did many others from the financial sector.

There is probably something in the nature of being a super-high earner in the City that makes you immune to much critical introspection. Yet even other industrial leaders told politicians to lay off bankers.

I didn’t want to side with the mob. Seeing the audience on Question Time blame everything from expensive NHS drugs to brutal policing in the Arab Spring on bankers had me almost feeling sorry for the boys from RBS and Barclays.

So eventually I stopped bothering about bankers, and I never got around to writing much more about income inequality.

But in the light of these latest revelations, I can’t help saying I told you so.

While we’re at it, I warned that bankers wouldn’t voluntarily reign in their salaries in response to the crisis, too.

Sure enough, to quote just one statistic (from April 2012):

Barclays shares fell 25 percent last year, yet its total [staff] compensation ratio rose from 43 percent to 47 percent. Diamond’s 2010 bonus was £6.5m.

Perhaps it’s not their fault. Maybe we’d all be like it if we worked day and night on the floor of an investment bank and were paid £150,000 a year plus a bonus – the self-justification instinct in human beings is strong.

Whatever the cause, bankers really do consider themselves a breed apart. But that doesn’t mean we have to share their opinion.

Please, can we finally rein them in?

{ 24 comments… add one }
  • 1 Tyro June 28, 2012, 10:34 pm

    Hear hear! Hundreds of them in the dock, that’s probably the tweak to incentive structures that’s needed.

  • 2 Gary June 29, 2012, 12:14 am

    The sad truth is that financial institutions make up the majority of the shareholding in these banks. This has go to beyond getting all private shareholders to vote against executive pay packages. In my humble view, not only does the government have to empower private shareholders, but also convince and encourage mom and pop investors to hold their fund manager / pension scheme manager accountable for the shareholder votes they cast on their behalf.

    As this is a site on passive investing, it is also appropriate to raise the problem that although index trackers are becoming powerful shareholders, they are in no way obliged to exercise their votes in the best interests of passive investors. In fact, as far as I know, fund managers and index trackers are not bound by fiduciary duty to their investors.

  • 3 Steven Freund June 29, 2012, 2:30 am

    What’s worse? A few wide boys in suits finagling a few extra mil, or our apparently civilised, democratically-elected Western governments *still* invading and colonising third-world countries, then torturing and slaughtering innocent civilians in pursuit of trillions in blood oil revenue?

    I don’t defend these bankers, but for christ’s sake, society needs to get its priorities back in order. The real bad guys absolutely love this distraction.

  • 4 Neverland June 29, 2012, 8:39 am

    I love the way you say Britain is a free market capitalist society

    Actually to be it looks like a highly unequal, socially stratified society with a narrow ruling class whose industries are largely controlled by state sponsored oligopolies (e.g. media, finance, property, utilities, accountancy, law, etc.) where the “state” is nearly half of the economy

    In that context none of this looks like much of a surprise

  • 5 The Investor June 29, 2012, 9:41 am

    Britain is a free market economy as is popularly understood. Sure the State is involved and there are some more dominant companies. It was ever thus.

  • 6 hotairmail June 29, 2012, 10:41 am

    I take issue with the widely held belief that most deals involve a winner and a loser and therefore is a ‘zero sum’ game. It is zero sum in that such activity adds not to the wealth of mankind, but the facts are that in the last 15 years or so, the City in toto reported massive and increasing profits and the staffers paid out huge sums to themselves leaving a black hole at the heart of financial system.

    If it is largely ‘zero sum’ how can this be? Because traders on both sides of deals have booked profits and ‘assets’ traded rose in value in deals traded between banks. Do we all believe that the $ trillions of derivative trades are now being held at their true value on banks’ books?

    This is much a story of the failings of accounting and the recognition of profits as it is about anything else.

  • 7 The Investor June 29, 2012, 11:08 am

    @hotairmail — Yes, it depends how big the boundary of the ‘game’ you look at extends. I have a great deal of sympathy with the now-commonplace view that much of the apparent ‘wins’ by the big investment banks are down to the cheaper funding they get from their too-big-to-fail status, to give just one example. Above though I am really thinking about prop trading and similar, which had come to dominate investment banking profits prior to the crisis.

    It makes no sense to pit one genius level quant against another genius level quant so one bank gets richer at the others’ expense, from a social utility point of view. Each to their own — I am not engaged in trying to find a cure for cancer, either — but I see no reason for society to actively support — or even not regulate against — such pointless endeavors.

    There’s plenty that big international banks can and do that’s good for the economy. For example, opening up new markets, creating useful financial products that genuinely mitigate risk — I don’t mean structured retail products here, that just make them profits, I mean ways for companies to hedge currencies and other exposure when dealing internationally etc — as well as investing in more profitable new enterprises.

    That’s what they largely did prior to the 1980s, when they were either dull retail institutions or risk-averse partnerships, rather than increasingly having speculative activities at their core funded by cheap shareholder money and state support, with staff having no personal downside to making big bets. Unfortunately the latter proved very profitable in the short term, which forced even the likes of Goldman to eventually succumb and go public.

  • 8 Neverland June 29, 2012, 11:20 am


    “Britain is a free market economy as is popularly understood.”

    You mean Britain is a free market economy as defined by Anglo-Saxons

    Unfortunately the Anglo-Saxon “free market model” doesn’t seem to have worked so well over the last 25 years perhaps because it isn’t really that free a market and its hobbled by a lot of special interest groups, of which bankers are just one

  • 9 Baxter Basics June 29, 2012, 11:40 am

    I must say that Britain is looking less and less like a true free-market economy by the passing of each day. “Crony capitalist oligopoly” seems to be nearer to the mark. It’ll all end in tears, I tell you.

  • 10 Romford Dave June 29, 2012, 11:46 am

    Off topic comments have always added to the debate, it’s just unfortunate that they never resolve the original issue and allow flogging a dead horse syndrome to take hold.

    The question is can the UK afford to rein in these monoliths or is she even able to?

    Having embraced Mammon, we either live with the reality or reject it in it’s entirety, I don’t really think there is a middle way unfortunately and we’re well past the point of praying for a miracle.

    Of course I’ve always been a glass completely empty person, so I’m probably looking at the worst possible scenario.

  • 11 david stuart June 29, 2012, 2:16 pm

    you have a feeling bankers dont know the value of money to the individual except themselves

  • 12 Julie at Nutmeg June 29, 2012, 2:31 pm

    Good post. The quote at the beginning with the FSA’s findings leading to Barclays fine is pretty grim.

  • 13 Alex June 29, 2012, 3:29 pm

    See ‘The Guardian’ today (29 June 2012) for some excellent letters on Barclays.

  • 14 ermine June 30, 2012, 12:05 am

    > Please, can we finally rein them in?

    But who watches the watchers? How do we know what the distant early warning line should look for next time?

  • 15 The Investor June 30, 2012, 7:46 am

    @ermine — Yes, I’m skeptical about the power of regulators, too. I think Mervyn King’s comments yesterday (doubtless after reading this blog) are more to the point. The culture has to change, and that won’t happen via regulation. It might happen by splitting the banks, so that the prop trading can’t be (implicitly) backstopped by retail deposits and government guarantees, by actively encouraging through legislation partnership structures that force the principals to carry the risk, by increasing capital requirements (these may already be high enough and we just have to wait for it to settle down), and by generally understanding that bankers didn’t suddenly start adding vastly more value in the 1980s, but rather they started handling vastly more money and so skimmed off a vastly bigger percentage, and either legislating accordingly (very tricky) or better just never giving them the benefit of the doubt when it comes to pay, bonuses, skewed incentive set-ups etc.

  • 16 ermine June 30, 2012, 3:18 pm

    @TI Absolutely agree. But remember that when you and I are old and grey (well, you, anyway 😉 ) and getting ready to shuffle off this mortal coil there will be a new breed of upstarts who say that it’s all different now and that culture will be back. Remember what happened to the Glass-Steagall Act, when people who were born after the 1930s decided that that was then and this is now, and we don’t need any of that fusty old separation any more.

    Money is crystallised power, a claim on future work. It gives off intoxicating vapours, that in time eat through the chains placed by the tears of previous generations…

  • 17 TheMoneyGrower June 30, 2012, 5:00 pm

    A very interesting article, Mr Monevator.

    Generally, everyone always thinks they are worth more (salary) than they get because we choose our own benchmarks. The financial wizards will be no different. It is rare to hear someone say they are thoroughly overpaid for what they do.

    Your comments about much financial wizardry being a zero-sum game and generally lacking social value are of huge importance.

    Unfortunately, banking and finance is one of the few industries where it is relatively easy to monetise the value of what a front of house worker does.

    Relative to the SHORT TERM profits generated, each banker is probably worth every penny they are paid. Who can really blame the bankers for doing what they do and making the decisions they make when the system, whatever company or industry system they happen to be operating in, incentivises their behaviour. So why not change the system?

    People will alway learn ‘the system’, and the values ‘the system’ prioritises. For bankers, and most businesses, it is bottom line profit, for some it is market share and if you are in education, it is grades and levels.

    The sad thing is that short -term performance indicators are generally easy to set and clearly definable. Long term ones are much more difficult to set and less clear cut. Hence the emphasis on short-term performance and the frankly rather reckless behaviour that goes with it.

    What you said about the brain drain is a very good point. Just as a sunflower grows towards, people will act in their own self interests (and I don’t mean that to be a bad thing) and so for the time being, I can’t see any reason for the bright young things to turn away from the city and its attractions. Apart perhaps from flooding the city with bright young things with the necessary attributes and attitudes for that lifestyle.

    The Money Grower.

  • 18 Financial Samurai July 7, 2012, 11:41 pm

    Monevator, how much should the mid 30’s Oxford graduate make at an investment bank in your opinion and how much is too much?

    Don’t think you’re going to like my upcoming book on how to profitably quit your job because of one particular chapter!



  • 19 Financial Samurai July 7, 2012, 11:51 pm

    Thoughts on punishing those responsible and not condemning the entire multi-tens of thousands of people organization? OR, let’s get them all!

  • 20 The Investor July 8, 2012, 5:59 pm

    @Sam — In an investment bank, perhaps £100K or so a year, plus a £50K bonus. That’s for literally the brightest kids of their generation, not the run of the mill clever.

    That said, I don’t *want* them to earn that much, because I don’t believe most of them are really adding that much value — I’d far rather someone stupider was doing the job. It’s a tragedy that someone who could be designing a new form of power or curing dementia or just keeping us competitive with China instead makes £500K because he’s better (or luckier) at finding ways to scythe off 0.05% from zero-sum financial transactions that in most cases have not enriched the world even up until 2007, and since the credit crunch have proven to demonstrably enfeeble it.

    As to your second point, I don’t believe they’re all evil and I don’t really even blame them for pursuing great riches; I think the financial system has been distorted post-deregulation in the 1980s and it’s up to us as a society to redress that. (Arguably this process is now underway).

    Without reading all my posts (which I don’t expect you to do! 🙂 ) it’s perhaps not clear what my point is… I don’t think they’re all crooks, at all. I think the system itself is crooked, in that it creates unstable/shoddy outcomes at immense cost in terms of human capital and occasional blow-ups, as well as resentment due to wealth affects.

    If we saw lots of property developers building skyscrapers that fell down ten years later and left the developers rich, we’d be up in arms.

    Even worse bankers for years told us the free market was rewarding them accurately; but again and again we discover it’s due to some other affect (leverage, asymmetrical bets, implicit state guarantees, a lack of true competition, inside dealing (even if just using one side of the book to inform the other side of the book) that in fact gives most giant financial companies their edge.

    Banking should be a dull activity that does require a bit of brains and makes you a bit of money but that most bright people wouldn’t be interested in. It should be like (and paid like) accountancy say.

  • 21 Financial Samurai July 8, 2012, 6:13 pm

    Perhaps bankers are driven because their clients are driving them? If there was no demand for said products, there would be no creation by bankers of said products.

    I like your idea of regulating people’s maximum incomes, so long as my income isn’t regulated!

    The older I get, the more I do appreciate the European socialist idealogy. Helps a lot of people from falling into poverty. When I’m retired (oh, that’s today btw in my post), I totally understand Socialism!

  • 22 The Investor July 8, 2012, 6:56 pm

    Perhaps bankers are driven because their clients are driving them? If there was no demand for said products, there would be no creation by bankers of said products.

    Perhaps. The evidence from retail banking at least in the UK is very poor in this regard. Leaving aside LIBOR fixing, the banks have just admitted to mis-selling interest rate hedges to plenty of UK small businesses:

    Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland have all agreed to immediately halt the sale of complex interest rate hedges to smaller businesses and have pledged to compensate potentially thousands of customers who have been hurt by the products that have left some firms with hundreds of thousands and even millions in costs they say they were never warned about.

    Last year they were admitting to mis-selling payment protection insurance. Lloyds wrote down £3 billion to cover the compensation costs:

    Which? executive director Richard Lloyd said: “The rest of the UK’s banks must follow suit and draw a line under the great PPI mis-selling scandal by withdrawing their legal challenge of the FSA and proactively reimbursing the millions of customers who were mis-sold PPI.”

    He added: “We don’t think Lloyds should have kept its shareholders in the dark for so long about its PPI liability. This should serve as a wake-up call to shareholders of other banks that treating customers fairly cannot be ignored. Instead of trying to claw back these losses from its customers, Lloyds should instead look at the bonuses of the senior managers who presided over this systemic mis-selling.”

    In both cases this is banks foisting unneeded products onto people that don’t understand them.

    If there’s one good thing to come out of the crisis it is hopefully the last vestiges of a bank being thought of as an ‘institution’ has been swept away. If people approach them the same way they’d approach someone coming to their door selling double glazing cheap, there’d be a lot less problems. 🙂

    By the same token, enough supporting them by the State / bailing them out because they’re “systemically important institutions”. You don’t bailout market traders when they go bust! Obviously there was no choice in the meltdown because of how important/big they’d been allowed to become, but it shouldn’t happen again.

    I far prefer hedge funds / old-style private equity etc as the place for high-risk wealth traders. Good luck to them. I don’t think a hedge fund has asked for a bailout in the entire crisis. They’ve just gone bust, quite properly, if they got it wrong, while some like Paulson got rich betting against other banker folly — the entire sub-prime mortgage market. 🙂

  • 23 Tedious Pseudonym July 11, 2012, 8:58 am

    I would take issue with your final comment:

    “Whatever the cause, bankers really do consider themselves a breed apart. But that doesn’t mean we have to share their opinion.”

    Bankers are clearly just like everybody else – self interested – and have been clever enough to get themselves into a position of power within “the game” such that they can reap outsized rewards for it. It is no different from, for example, the London bus drivers who are striking in order to get a £500 unearned Olympic “bonus”, simply because they think they can. They aren’t working for the bonus – they expect to receive it even if on holiday during the games – they just know that they have enough collective clout to demand and receive this.

    You are singling out bankers for their perfectly standard human nature, and missing that the problem is that they are simply better at the game than you, I, or a bus driver and hence receive more of it. But it’s no good to blame them for the greed that we (nearly..) all share.

  • 24 The Investor July 12, 2012, 9:14 am

    @Tedious Pseudonym — Thanks for your comments. I agree with you that self-interest is near the top of the agenda for nearly everyone. However that’s not what I’m trying to talk about here. I’ve tried debating the City with bankers and I believe they absolutely lack an awareness of the disproportionate incomes they receive relative to talent/value-added, and also at least some (certainly not all) are barely on nodding terms with wages/risks/rewards in the real-world.

    But perhaps you’re right, and talking to uncompetitive miners in the 1980s say would have produced similar incredulity, fingers pointing back to history and heritage in their case, etc. At least they did a filthy and dangerous job for average wages, though, so I’m more inclined to give them the benefit of the doubt. (The bus drivers I agree are just chancers. For most of my life that sort of stunt would make me call for breaking up the unions etc, but in the current climate of negative income growth while the rich get even richer I don’t blame the working masses for trying to claw back some income from the super high-earners (not me) and owners of capital (me, albeit modestly! 😉 ).

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