Tuesday, September 15, 2009

Obama urges banks to accept new sense of responsibility.

On the anniversary of the collapse of Lehman Brothers, Obama has headed to Wall Street to lay down the new rules. Or has he?

On a visit to the heart of New York's financial district a year on from the collapse of Wall Street's fourth largest bank which threw the global financial system into disarray, President Obama expressed confidence to an audience of senior figures in the financial world that "the storms of the past two years are beginning to break". But during an address inside a hall directly opposite the New York Stock Exchange which briefly quieted Wall Street's usual hubbub, the White House incumbent ordered the financial community to move further in cleaning up its act.

"There are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are recovering, they are choosing to ignore them," said Obama. "We will not go back to the days of reckless behaviour and unchecked excess that were at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses."

But what has really changed in the last year? As I've written here many times, the bonus culture of the banks continues, indeed, only yesterday we discovered that, even during the recent recession - whilst calling for cuts in benefits to the poorest members of society - the bankers have enjoyed a 10% pay increase whilst the rest of the nation has tightened it's belt.

Robert Reich lays out just what the message of the last year actually appears to be:
Let's be clear: The Street today is up to the same tricks it was playing before its near-death experience. Derivatives, derivatives of derivatives, fancy-dance trading schemes, high-risk bets. “Our model really never changed, we’ve said very consistently that our business model remained the same,” says Goldman Sach's chief financial officer.

The only difference now is that the Street's biggest banks know for sure they'll be bailed out by the federal government if their bets turn sour -- which means even bigger bets and bigger bucks.

Meanwhile, the banks' gigantic pile of non-performing loans is also growing bigger, as more and more jobless Americans can't pay their mortgages, credit card bills, and car loans. So forget any new lending to Main Street. Small businesses still can't get loans. Even credit-worthy borrowers are having a hard time getting new mortgages.

The mega-bailout of Wall Street accomplished little. The only big winners have been top bank executives and traders, whose pay packages are once again in the stratosphere.
So what exactly has changed here? Nothing as far as I can see. Lessons learned? Nil.
Goldman Sachs is on course to hand out bonuses that could rival its record pre-meltdown paydays. In the second quarter this year it posted its fattest quarterly profit in its 140-year history, and earmarked $11.4 billion to compensate its happy campers. Which translates into about $770,000 per Goldman employee on average, just about what they earned at height of boom. Of course, top executives and traders will pocket much more. Every other big bank feels it has to match Goldman's pay packages if it wants to hold on to its "talent."

Citigroup, still on life-support courtesy of $45 billion from American taxpayers, has told the White House it needs to pay its twenty-five top executives an average of $10 million each this year, and award its best trader $100 million.
They are still feeding from the trough. Gorging themselves, even whilst being kept on life support by the American taxpayer.

Let's be clear. One year ago we almost saw the complete collapse of our financial system, brought about by the colossal greed and rank stupidity of the people who flatter to see themselves as the "wealth creators".

And yet, one year on, there is no indication that they have learned any lesson from this at all; other than that the government will bail them out if they f#ck things up.

Like most people, I was reluctant a year ago to watch the government bail out the banks. But, I supported it because the alternative - the complete collapse of the banking system - was simply too horrendous to contemplate.

However, one year later, I expected lessons to have been learned. But the truth is, despite enjoying billions in bailouts, the banks still aren't lending to any but the most secure of borrowers. Credit remains crunched. And the bonus culture continues unabated.

I would argue that the politics of Reagan, the notion that one should "deregulate, deregulate, deregulate" has been proven to be an utter disaster. In fairness, of course, Reagan always imagined that there would be some link between the lender and the risk that he was taking; something which modern banking has managed to obliterate almost completely:
The basic function of commercial banking in our economic system -- linking savers to borrowers -- should never have been confused with the casino-like function of investment banking. Securitization, whereby loans are turned into securities traded around the world, has made lenders unaccountable for the risks they take on.
It appears that Obama is prepared to, at least partially, force them to accept some responsibility for the risks that they take:
Mortgage companies will be obliged to hang onto part of every loan, rather than selling them on to shed risk.
It's a step in the right direction, but that's all it is, a step.

One year on, there is not even a sense of gratitude amongst the bankers towards the ordinary men and women whose income tax was used to bail these bankers out.
Among financial professionals, few are willing to extend gratitude to government officials and taxpayers for intervening to prop up the banking system. Bob Iati, global head of consulting at the strategic advisory firm Tabb Group, said: "Those in the industry are very reticent to give the government credit for turning business around. Most are in favour of less regulation and certainly don't believe politicians have a good sense of what's going on."
They still don't get it. Obama should regulate heavily and restore some common sense to the casino like mentality which represents our current banking system. One thing is clear, left to their own devices, they will simply carry on as before.


The screaming need for regulatory reform.

There is certainly plenty of evidence that they are up to their old reckless ways. Obscene remuneration contracts are returning as banks compete for the "talent" able to generate fat profits from short-term speculation. Make no mistake: the seeds of the next banking crisis are already being sown.

So the need for regulatory reform is screamingly urgent. The question is: will those reforms materialise? There is much in President Obama's legislative proposals outlined to Congress yesterday (and also in the regulatory principles of the international Financial Stability Board) which is welcome. Banks should indeed be forced to hold more capital to absorb losses. And it is common sense that any financial institution large enough to pose a systemic risk should be closely scrutinised by the authorities. Bringing the sprawling derivative markets on to transparent exchanges is also vital for stability.

Sadly, the White House, like our own Government, lacks the appetite to go further.


One of the key features of the era which ended with Lehman's demise was the obeisance of the authorities – especially in the US and the UK – to the idea that financial markets are essentially self-regulating.

It is not enough for governments now to acknowledge that this ideology was dangerous and wrong. They need to put in place the regulatory framework that will consign such complacency to the dustbin of history forever.

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