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Weekend reading: Buttonwood bangs bankers to rights

Weekend reading

Some good reads from around the web.

I suspect everyone is getting a bit bored of banker bashing again. I am, and I was at it only a couple of weeks ago!

Boredom is not a solution, though. There needs to be change, or financial insiders will continue to capture an undue share of the profits of our capitalist system, while periodically wreaking havoc doing so.

In the lively discussion that followed my latest post, a couple of readers suggested I was unfair for expecting bankers to be less venal, selfish, and self-justifying than the rest of us.

But that’s not the case. I don’t.

My argument against what was once almost banker deification – stretching way back before the financial crisis – was that we don’t give sufficient attention to the fact that they are just like the rest of us!

The ordinariness of bankers implies two important things:

Firstly, there’s no reason why ordinary people should earn superstar salaries for either doing routine work, or for gambling.

Yes, the best should earn a lot when they truly add value, and banking will never be supermarket check-out money. But the market is effectively rigged and anti-competitive, and prospects in banking should be more like they were in the 1960s and 1970s, before deregulation opened the honeypot.

Some in the City compare the best-paid bankers with rock star footballers. The difference is the best footballers are demonstrably better at football than 99.99% of everyone else in the world – as opposed to uniquely having access to the football pitch.

Secondly, the ordinariness of bankers means big banks should have similar incentive structures to other employers, instead of the current heads they win a fortune, tails they win a fortune scenario.

Bonuses should probably be scrapped altogether for most areas of banking. Bank employees could instead invest a portion of what will still be healthy salaries into discounted share schemes, like other office workers. The current system has repeatedly delivered bad outcomes for society and the economy, which shareholders and taxpayers have carried the can for.

Still not convinced? Read the superb indictment of big banking from Buttonwood in The Economist this week.

It points out four things we’ve learned about elite bankers:

1. The laws of supply and demand do not apply.
2. Success is down to personal genius; failure is caused by someone else.
3. What is lucky for an individual trader may be unlucky for the bank as a whole.
4. Resigning can be a retirement plan.

It’s well worth reading in full.

p.s. According to the well respected Fixed Income Investor, Friday was just “another day in the paradise that is the retail bond market (every new issue has opened at and maintained a premium).” Glad my thoughts on stagging retail bonds are in such good company.

From the blogs

Book of the week: Amazon is taking pre-orders for J.K. Rowling’s first novel for adults, The Casual Vacancy. Will be interesting to see if it’s any cop. Nothing to do with money, admittedly (except J.K.’s bank account!)

Mainstream media money

  • What cutting-edge ship design now looks like – The Economist
  • Halifax says houses are most affordable since 2002 – BBC
  • Ways to reform the UK savings system – FT
  • Meeting care home costs with whole-of-life policies – FT
  • Grandlords: More pensioners investing in buy-to-let property – FT
  • Three niche ETFs, tracking Pakistan, Bangladesh, and rare earths – FT
  • Cheap BoE funding could reduce fixed mortgage rates to 2.7% – Telegraph
  • Five ways to save on an iPhone upgrade – Telegraph
  • The retirement wealth gap: Which side are you on? – Independent
  • Restating the case for the Caledonia investment trust – Independent
  • Auto-enrollment pensions: Top-up or pay-cut? – The Guardian

Product of the week: The new five-year fixed mortgage from HSBC is billed as the UK’s cheapest ever rate at 2.99%. But you’ll need a 40% deposit, and there’s a hefty £1,499 arrangement fee.

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{ 7 comments… add one }
  • 1 Salis Grano July 14, 2012, 12:54 pm

    Too true, to which I would add that a way should be found for banks to fail. They should be businesses, not state-subsidised worker’s collectives.

  • 2 Alex July 14, 2012, 12:55 pm

    1. While a lot of people seem to be telling tales at the moment, I think you mean ‘tails’ here: “current heads they win a fortune, tales they win a fortune scenario”.

    2. Agree with you about that Buttonwood column: very good.

    3. But don’t simply dismiss your – or anyone else’s – critical thinking on the problems we face with banks as ‘banker bashing’. That term is just silly and serves as a distraction.

  • 3 The Investor July 14, 2012, 2:06 pm

    @Alex — Thanks, you’re becoming my trusted sub-editor on Saturday mornings. 🙂 As for point (3) I know what you mean, but it’s also a convenient shorthand I think.

    @Salis — I think we need to see them split up, and to put risk taking back into partnerships. I’m a fan of hedge funds, as it happens, for this reason (though you still get problems of systemic risk from unknown ‘shadow banking’ inter-connectedness etc)

  • 4 ermine July 14, 2012, 3:54 pm

    I think you’re being too hard on the bankers. There are a lot of guys at the top of nominally capitalist firsm that seem to run on the same heds I wind tails you lose principle.

    Being a CEO of a FTSE100 firm is another devilishly hard thing to test whether shareholders are getting value for money or control fraud as the board loots profits for excess pay. That’s what’s great about footballers – the results metric in terms of games won is specific, measurable, attainable, relevant and timebound. Unlike most things in business – it’s worst at the top but even in my job the objectives became more and more random and spurious. I hanker for the days when the CEO worked his way up the firm from the bottom – at least he had an idea of what the firm did and what mattered for success.

    So why stick it just to the bankers, eh 😉

  • 5 The Investor July 14, 2012, 4:47 pm

    @ermine — I do think many top CEOs are paid too much for what they do, with little evidence of impact on the results, clues that there is a magic circle for want of a better word mutually floating free of the wider workforce by creating a top compensation culture, little accountability etc, and so forth.

    The difference is it’s not clear to me that big technology, engineering, drug, consumer goods, food, or even oil, mining and property companies are ‘gaming’ the system like the big banks have. I think with the banks/bankers there is ample evidence of repeated market failure.

    The reason that’s important to me is the best justification I have thought up (another article I’ve never written) for excessive CEO compensation is that it encourages lots of other people in the company to strive harder to get the top job/s. So even if the CEO is overpaid, the incentive of ascending to the boardroom might spur thousands of underlings to greater things.

    I don’t want half of the world’s cleverest bankers to be spurred to greater things in banking. I think it’s pointless. I want them to do something else.

  • 6 Neverland July 15, 2012, 12:03 pm

    The problem here is state subsidy without strings attached

    The bankers (in the UK at least) received about £150bn of state aid (that’s just the visible bail-out bit ignoring the annual subsidy of a UK state guarantee), its not surprising that much of it leaked into employees pay packets

    By contrast the entire government costs £600bn a year to run (http://budgetresponsibility.independent.gov.uk/wordpress/docs/FSR-presentation-2012.pdf)

    Even when we had a nationalised industries, did the government pump something equivalent to 1/4 of its other spending into them?

    Its instructive that when the US bailed out its car industry it made an effort to improve the efficiency of what remained….

    …but when the banking industry was bailed out no root and branch restructuring was imposed by the UK government

    The one prediction I can make is that David Cameron and George Osborne will be on the boards of some global banks in the 2020s…

    …along with Tony Blair and Peter Mandelson…

    plus ca change plus ca c’est la meme chose

  • 7 ermine July 15, 2012, 9:39 pm

    @TI That’s a good asessment of why the bankers are special in deserving of opprobrium, I hadn’t really split out the difference, thanks!

    > So even if the CEO is overpaid, the incentive of ascending to the boardroom might spur thousands of underlings to greater things.

    You may be right, though I’d be surprised nowadays. This was probably more right in the past, when CEOs actually did rise through the ranks. They’re usually parachuted in, er, headhunted, these days, after all the CEO needs to manage, not understand the biz. So we seem to end up with monumental cock-ups like G4S. A previous generation of CEOs might actually have a clue about how big an ask ‘Get me 15000 security chappies’ is.

    How the heck did we shareholders let this happen to the firms we own? In some ways it’s not so much the excessive CEO pay that’s the problem, it’s the arrant incompetence, and the refusal to accept responsibility and provide a terminus for the buck. It always seems to be someobody else’s fault, it was those other guys, it wasn’t me, I wasn’t there, I wasn’t the only one.

    But yes, for all that overpayment for underwhelming results, it’s more tractable than the bankers. As you so delightfully summarised

    I don’t want half of the world’s cleverest bankers to be spurred to greater things in banking. I think it’s pointless. I want them to do something else.

    Should be on the wall, perhaps, at numbers 10,11, and the BoE…

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