The last twelve months have seen bank profits reach pre-crunch heights. There is no doubt that the banks were able to continue their activities only because of the intervention of world’s governments who have pumped eye-watering amounts of liquidity (money) into the banking system.
Now that the banks are producing a surplus, they have four very clear choices:
1. They can increase lending (on reasonable terms) to commerce and business.
2. They can place the money in their reserves – just in case there is another crisis or a “run” on bank assets.
3. They can repay money to the world’s taxpayers who have underwritten the banks’ past, present and future losses.
4. They can extract the money from the banking system through the medium of high salaries and bonuses.
The reality is that the banks have dabbled in all four options but through their smug bumptiousness, have created the perception that all that they are interested in is Option 4.
The banks appear to have closed ranks and decided to keep their heads down while they pick both government and taxpayer pockets.
Here in the UK, the Prime Minister and Chancellor have made increasingly strangulated noises in the bankers’ direction and attempted to appeal to the bankers’ better nature. They are yet to find it. The situation here in the UK is a delicate one because the Financial Services Industry used to add about £100 billion per annum to the country’s wealth. There are over 500 banks in the City of London and Docklands, where the majority of the business is being carried out internationally. Golden goose and all that.
To put it simply, the United Kingdon economy is over-reliant on the banks. That is why all that the politicians can do is to try and shame the bankers into complying but at the same time, they do not want London to lose its place as the world’s leading financial centre.
Our own Chancellor has stopped short of introducing legislation to curb the bankers’ excesses but instead has dabbled with a one-off bonus-related tax which the bankers have side-stepped and swatted quite neatly because they know that any levy claimed by the government will consist of no more than a refund of the government’s own money back to the government. The bankers are not-only in the driving seat but they are driving a limousine while all that the government can do is to run alongside barefoot and knock on the window while the bankers sigh, light up another Monte Cristo and count their bonuses.
Bankers used to be “middle-earners”, whereas nowadays – especially Investment Bankers, are well-and-truly in the top 10% of all earners. It is interesting to see how income distribution looks after so many years or “ersatz” socialism: The Lowest 10% of earners in the United Kingdom collect about 3% of the total earnings, whereas the top 10% of earners take home about 30% of the total.
It is doubly frustrating for a nominally socialist government which (on paper) is committed to fairer income distribution, having to stand-by as a mere spectator, while the bankers continue to plunder the economy. Some may say that the plundering is being carried out with the government’s connivance or perhaps merely as a result of the government’s intransigence and ineptitude.
That is why it was so refreshing to hear that President Barack Obama has decided to declare war on the bankers and impose some rules. The reaction of the financial markets has been spectacular and not-only indicated fear but has also demonstrated the banking industry’s foot-stamping petulance.
Bank values fell in the United States and the good news is that the “Obama-effect” is spreading .
The US Dow Jones fell by 2%. In London the Stock Exchange fell by 2.2% – led by Barclays which dropped by 3.5%. Barclays was followed by the German Deutche Bank which more-or-less matched Barclay’s fall.
The banks are fearing an imposed break-up of their operations because most of them realise that they are too big. If you listen carefully you will hear the rasping sound of Bank Directors choking on their Remys.
If a bank is too big to fail – then it is too big. THAT should be a self-evident truth.
President Obama has said that he is “ready for a fight” with the banks. He is a very brave man because there are many within the US establishment – both Democrat and Republican who are still not 100% comfortable to see a black democrat with a social conscience running the show. Mr Obama has a difficult year ahead – but good luck to him.
He said “Never again will the American taxpayer be held hostage by banks that are too big to fail.”
Goldman Sachs has just announced the equivalent of a £500,000 bonus to each of its US employees – each one of whom already averages about £300,000 in salary. Needless to say, Goldman Sachs shares have fallen in value and perhaps finally, their stranglehold on the US economy will be broken. READ HERE.
In spite of Gordon Brown’s delusions, he has not been the “leader” during the global financial crisis. He is very much a follower who has always found it difficult to go out on a limb in the way that Obama just has. Brown’s spokesman , City Minister Lord Myners said yesterday that the US proposals were “very much in accordance with the direction we have been setting” . Since when? Yesterday?
George Osborne, the Conservative Shadow Chancellor has said that if elected, the Conservatives would dismantle United Kingdom banks but only if he managed to secure international agreement. It would seem that no-one wanted to be the first to blink and now that President Obama has shown the will and the courage – the bandwagon will begin its long and creaky journey to banking reform.
We should not be surprised however, if the banking industry regains the initiative any day soon by announcing its own plans for reform and reorganisation. Watch this space.
One of the main causes of the 2008/09 banking meltdown was (and still is) the habit that the banks acquired through gambling with their own money – the so-called proprietary trading . The problem is that they weren’t always using their own money – they were themselves borrowing the money from other banks and “investing ” it. Hopefully, that will now stop and they will only invest their customers’ money – which after all, is what they are supposed to do. Banks are not in the business of putting themselves into hock in order to gamble borrowed money on the stock exchanges.
Obama said: “While the financial system is far stronger today than it was one year ago, it is still operating under the exact same rules that led to its near collapse.”
He will change those rules but the more likely outcome is that the banks will comply without any bloodshed. There is a saying that “the fight is won – even before the first blow is struck.”
Obama has nothing to lose and everything to gain. He has been in office for one year and the banking fiasco has been a constant irritant from Day One. In addition, US unemployment is rising, he has a battle with his proposed health-care reforms and Republican Scott Brown has captured Ted Kennedy’s old Massachusetts Senate seat.
Make no mistake – Obama has diamond-hard resolve. His attack on the banks is no more than the play of a wily gambler who pushes his chips into the middle and says ” I’m all in. What have you got?”
The banks are facing him across the table but at this stage they are not sure which of them is holding the weaker hand.
My money is on the President to prevail and for the rest of the world’s governments to back his hand.