Lord Turner, the head of the UK’s Financial Services Authority, is my new hero. He is willing to tell banks to do things that are in the public’s best interest but are singularly unpleasant and costly to the financiers. The fact that what is good for the banksters is increasingly at odds with what is desirable for the rest of us simply highlights how predatory the industry has become, and how the incumbents are pathologically unable to see that (I may be being charitable in taking their wounded-sounding protests at face value)
Last week, he stirred up a hornet’s nest by suggesting the unthinkable, namely, that the financial services industry needs to shrink. In reality, quite a few people have made that observation, but anyone in authority who dares say such a thing out loud must be beaten back.
Lord Turner is not deterred. Today he pressed forward by again provoking the industry with another sound idea that they are certain to fight tooth and nail, namely, to restructure themselves and develop plans in the event they fail. This move is a necessary step in implementing a bankruptcy regime for financial services firm, which of course is something the firms do not want. The “No More Lehmans” doctrine has put banks in the catbird seat, deemed to important to be allowed to fail, yet managing to evade the sort of controls that would be appropriate given their utility status.
The reason for the howls of protest, however, is more immediate: financial firms often have complex structures either to minimize taxes or circumvent regulations. So they would not only face the cost of restructuring, but higher ongoing expenses. How horrid. Those banks have an absolute right to their profits, or at least that’s what they expect us to believe.
Even if Turner is catching a lot of flack, he is at least willing to stare down the industry. The financial services sector is even more important to England than to the US, but they also have been longer at the empire and banking game than we have, and as a result, at least some recognize the importance of having sound institutional structures. We have completely lost the plot in the US. While Timothy Geithner is giving lip service to having banks draw up resolution plans, every measure the Treasury has proposed had either been bank-friendly from the get-go, mere posturing, or half hearted and easily beaten back. The Turner discussion of the need to simplify legal structures reveals what a serious version of wind-down plan would need to include, and it is a virtual certainty nothing of the sort will be required in the US.
From the Financial Times:
Lord Turner backed international moves to force the big, systemically important banks to draw up “living wills”, wind-down plans in the event they fail.
But the chairman of the Financial Services Authority said this drive would also have the benefit of unravelling banks’ structural complexity used to minimise tax….
Lawyers predicted that banks would resist fiercely any wholesale restructuring that could cost them hundreds of millions of dollars. They also warned that any such moves would be extremely hard to implement.
Louise Higginbottom, head of tax at Norton Rose, the law firm, said: “Many banks operate through a complex series of subsidiaries and branches. It’s taken years for these structures to evolve and killing them off at a stroke would be difficult.”
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I’m beginning to see greater significance in Europe’s willings to stare down the bankers given the U.S.’s inability to do so. While we in the U.S. have tended to pity the over-regulated Europeans since the early 90’s, could it be that the next 25 years will be Europe’s time to out shine the U.S. because the sort of backbone on display here?
The fact that what is good for the banksters is increasingly at odds with what is desirable for the rest of us simply highlights how predatory the industry has become, and how the incumbents are pathologically unable to see that (I may be being charitable in taking their wounded-sounding protests at face value)
One good piece of evidence for this is how they seem utterly incapable of restraining themselves even in cosmetic ways in order to try to take off a little but of the political heat.
(While it’s true they’re getting very little of this heat from governments, surely they must be at least intellectually aware of the bottom-up opposition.)
To give the most egregious example, it seems like their rushing to hand out the same old “bonuses” every chance they get is politically pound-foolish.
Of course, there’s the other possibility, that the banks know far better than governments how impossible this putative “recovery” is. Perhaps they figure there’s only a few years left of the happy time anyway, so they better loot every cent they can get right now.
Yves,
With friends like Lord Turner, the City does not need its usual foe, Brussels.
The UK has due to the City’s past successes exercised a disproportionate influence over EU financial services and banking legislation. This has pretty much been going on for the past twenty years, but is now changing fast.
Separately, the German left is gaining momentum ahead of the up-coming federal elections in a couple of weeks. If Merkel’s position is weakened (assuming that she will be forming the next federal coalition Government) with the left increasing its influence, it would probably almost immediately filter up to the EU level through a radicalized German position. Hence further demands to control the banks and the bankers.
How’s this for some trite old concepts. Managers of a publically traded financial institution’s main responsibility is to its shareholders and also its fiduciary responsbility to society. In the first instance, the manager’s pay reflects their ability to generate either payable dividends or long term value aggregation to the institution. The accounting rules must be transparent and open for everyone to review. In the later case, and especially in a fiat currency regime, the managers have a social responsibility to ensure their activities are prudent, risk averse and add value to society’s markets. These minimum concepts (once adhered to for decades) therefore require rules, regulations and audits to ensure compliance with market and social rules.
This isn’t rocket science or the creation of anything new.
I beginning to think that the main impediments to what seem to be almost common sensical implementation of regualtion are simply doctrinaire. Or, just possibily, the banks know there are very few investment opportunities in the West that will create high returns and have turned to gambling as means to generate huge short term profits.
FYI, the UK government laid out fairly detailed living will proposals in its consultation on whether the country needs a special resolution regime for investment banks. It also said that, at least preliminarily, its preference was for such wills rather than a special regime.
The most amazing revelation in this article is that Gordon Brown has become one of the big banks’ most ardent apologists. The Tories’ reaction that it wants to eliminate the FSA is totally understandable and predictable. But the fact that the leader of the so-called “Labor” Party has also taken the side of the big banks highlights what an incredible sham the “Labor” label has become.
The same thing has occurred in the US with the Democratic party, traditionally the party of labor and the dispossessed, where Barak Obama has joined Gordon Brown as being one of the finance industry’s greatest defenders. It all goes to highlight what Robert Hughes wrote in “The Culture of Complaint” some fifteen years ago:
“In effect, the Republican and Democratic parites since 1968 have practiced two forms of conservative policy, one episodically liberal and the other aggressively not. Both are parties of upper-middle-class interests: the last genuinely progressive tax reform proposed by a President, for instance, was put forward by Jimmy Carter in 1977–and it was immediately sunk by the vote of a Democrtic Congress.”
Most fascinating are the changes in the polity that allowed this to come about. As I noted the other day, I don’t think there’s a better nuts and bolts analysis of how everyday people are systematically and intentionally eliminated from the political process in the US than in Peter Skerry’s “Mexican Americans: The Ambivalent Minority.” Skerry’s snapshot is taken from California politcs with an emphasis on Los Angeles, but it provides an unparallelled insight into what has happened across America, and perhaps in Great Britain too.
I do not believe that meaningful economic reform is possible without political reform. This is not to say that economic problems don’t provide the impetus for political reform. But before political reform can be accomplished with economic reform in its wake, there must be an understanding of what went wrong with the American polity. Skerry’s intimate investigation of the mechanics of “elite-network” politics provides an invaluable look at what went wrong.
This is the original interview in which Lord Turner talks a lot of sense and doesn’t in fact propose a Tobin tax
http://www.prospectmagazine.co.uk/2009/08/how-to-tame-global-finance/
Yves,
“The fact that what is good for the banksters is increasingly at odds with what is desirable for the rest of us simply highlights how predatory the industry has become, and how the incumbents are pathologically unable to see that (I may be being charitable in taking their wounded-sounding protests at face value)”
No, it doesn’t. This conflict between business interests and what is desirable for “the rest of us” is immanent to the nature of capitalism and has existed since capitalism was born in Europe in the 16th century. When ever was the purpose of any private business in capitalism to serve the interests of “the rest of us” or to serve the “common good”, whatever this is supposed to be? The primary purpose of any private business is to make money for its owners/investors, but not to make the rest of society happy. Moralistic accusation like yours that private businesses actually do what their purpose is won’t change the nature of capitalism.
rc
@DownSouth,
The dreaded concentration of power raises it head again. Whilst the American forefathers were in them selves concentrator’s of wealth and power their ambivalence toward the (at the time) British Monarchy Empire precluded them from using such systems, although it was brought up…eh. Seemingly a one size fits all approach was the solution after much haranguing.
Unfortunately after filling the boarders east to west and a few nasty WW followed by the cold idealogical war, many items of that accord went out the window for immediacy’s sake. Sort of like *thou shall not kill* in the ten commandments was amended quick smart for rational reasons with in a religious construct (Pastor I’m going broke help me, well my son, I’m a spiritual adviser not a financial one vs today, sure give us all your money and we will pray for you and if your wishes are not forth coming you have done something wrong).
So before I become too abstract, what did we expect. Were not the forefathers business men first and revolutionary’s second. Was not the revolution an effort to conduct business in the manner they saw fit out side interference from England (see libertarians, its mine), is not the Constitution an accord to bind the citizens to them as a promise of good husbandry. Has America evolved to a point where easy wealth creation has become increasingly difficult (see recourse depletion, health concerns in unfettered production, uncompetitive advantage in regards to countries with little law enforcement etc), to the point that that accord is now broken for profits sake.
The sad part to me is the American and International land scape via American MSM has been imprinted, critical thinking out side this construct is seen as *evil*, and with out merit in the discussion. Just look at Americas position over the last hundred years regarding intervention in other sovereign countries especially South America, nothing but interference for profit (see Venezuela coup attempt, CIA gunboats firing on oil ports, Colombia’s favored state status with ongoing drug cartels influence in politics etc) and we wonder why things on Wall St. and DC are fubar.
Until the chain of power is broken and the original portents of the first accord are reestablished and this time enforced in the strictest terms, every thing else is just shadow puppets to keep the kids distracted whilst they rob from the future. That one thought kills me the most, todays wealth is not enough, they need 20 odd years into the future *possible* wealth to prop themselves up and as we all know there are no guaranty’s in life.
Skippy…how many buisness men, people have gone to Vegas for one last chance to save their failing companys, lives…more than you would like to know.
Man I need a song, sorry YS its been awile: http://www.youtube.com/watch?v=1loyjm4SOa0&feature=related
Yves, you are the master of understatement (I may be being being charitable taking their wounded-sounding protests at face value)
made me smile girl!
Just chop the big banks into little banks small enough to let fail without government interference and stand back. All will be resolved. That or amend the laws so that it is legal to shorten your local bank executive with knotted hemp.
The whole point of having laws is to keep angry mobs at bay. Without a legal system the public trusts things quickly degrade to warlordism. It’s happened in the Former Soviet Union and it can happen here.