The Project Merlin Back Story

Not a bad couple of week’s work for the banks, since the “Project Merlin” publicity? Actually it’s taken a bit longer than that, and reconstruction of some of the behind-the-scenes action might be instructive.

Although other banks get walk-on parts, the story is mostly about Barclays. Let’s start the timeline in September 2010, when John Varley stepped down as CEO of Barclays. His move was all to do with bank break-ups:

The business secretary, Vince Cable, today expressed concern that Bob Diamond’s appointment as chief executive of Barclays showed the banking sector was not taking the threat of break-up seriously. Cable is overseeing an independent commission considering whether high street banks should be split off from their “casino” investment banking operations.

Sources close to the Liberal Democrat minister said he felt the move to install Diamond, a high-profile investment banker who has taken home £75m in the last five years, at the top of Barclays vindicated the government’s decision to set up the commission, which is chaired by Sir John Vickers.

Although Diamond and other members of the Barclays board insisted that they were not pre-empting the outcome of the commission, due to report next year, the bank has previously warned that it is considering whether to move out of the UK because of the Vickers inquiry.

A little further on in the same piece, we have this reading:

Pete Hahn, a former investment banker lecturing in finance at Cass Business School, saw the appointment of Diamond as a challenge to the government: “Diamond has been promoted to stand his corner [against a break-up].”

Varley stepped down with the stated goal of using the final period of his tenure to spread some much needed sweetness and light between banks, politicians and voters. From his FT piece in September:

The Group of 20 nations’ global pay standards are being implemented across many markets. Banks have already built higher and better capital ratios, have reduced leverage and hold many more liquid assets.

But regaining trust will require more. It requires reconnecting with stakeholders on a different level. In many ways, banks have a simple role in society. We help customers take appropriate risks. Our business objective is to make it easier for people to do some of the things that matter to them and which, collectively, can have a significant impact on economic growth. Customers that I speak with want to move on from the recession and want to know what banks are going to do to help them. It is a fair question.

But regaining trust will require more. It requires reconnecting with stakeholders on a different level. In many ways, banks have a simple role in society. We help customers take appropriate risks. Our business objective is to make it easier for people to do some of the things that matter to them and which, collectively, can have a significant impact on economic growth. Customers that I speak with want to move on from the recession and want to know what banks are going to do to help them. It is a fair question.

Simply running that trailer didn’t work all by itself: on the 24th of September, unperturbed by hints from Barclays, Standard Chartered and HSBC that they would consider redomiciling overseas if bank breakups became policy,  the Independent Banking Commission announced that it would indeed be considering bank breakups.

Varley ploughed on with his velvet-gloved PR campaign anyway. The first result seems to be the announcement of a small business support fund; small indeed, at £1.5Bn.

In the mean time, Bob Diamond, Varley’s successor, is playing ‘bad cop’. From the Daily Mail, 25th October 2010:

Barclays president Bob Diamond was on a collision course with the Bank of England last night over proposals to shake up the banking system.

The American multi-millionaire launched a staunch defence of a ‘universal’ bank model that combines retail, commercial and investment banking operations under one roof.

But just hours later, Bank governor Mervyn King called for a radical overhaul of the industry including the possible separation of high-risk casino style banking from traditional activities.

More lobbying is needed: Varley steps up the PR campaign and Project Merlin is born:

Britain’s high street banks could pledge to lend £180bn each year to British companies, commit £1.5bn to David Cameron’s “Big Society Bank” and promise a broad cut in bonus levels as part of a package of measures intended to end the war between politicians and bankers that has raged since the crash of 2008.

Although on lending:

The number is broadly in line with the amounts banks are already on track to lend this year

…on the Big Society Bank, one of the bankers is openly contemptuous of the underlying idea:

“We saw this as an opportunity,” said one person closely involved. “[David] Cameron had a problem. He’d come up with the idea but it was a bit vacuous. We thought we could take it from black and white into technicolour.”

….and on bonuses:

A banker involved admitted: “It’s a pretty flaky offer. Bonuses are pretty sure to be down anyway, given that revenues will be down.”

The British Bankers’ Association said: “We have said repeatedly that the banks understand the public mood with respect to remuneration and the banks also understand their societal responsibilities.” But a senior banker admitted: “This is more a PR exercise rather than something of real substance.”

Given that level of tepidity amongst its proponents, it’s not very surprising that Project Merlin Mark 1 fell in a heap before Christmas (12th Dec). Varley, apparently defeated, then accelerated his departure, falling on his sword a few days later, and three months ahead of schedule.

And that leaves us with Bad Cop Bob Diamond, who, it appears, really turned the heat up under the government over Christmas: by the 12th of January, he’s ready for his victory lap. Compare and contrast Varley’s line from his September FT op-ed:

The general features of rebuilding trust are an admission of past mistakes, contrition, gratitude for the help that has been supplied, sincere and credible collaboration on the reform package, the prevention of recurrence, the expansion of lending, and ensuring that pay is consistent with the minimum needed to remain competitive, and no more.

with Bob’s directive to the Treasury Select Committee:

Responding to the criticism, Mr Diamond said he could not “isolate” bonuses from the rest of the bank’s business, adding it was time for the debate to move on.

“There have been apologies and remorse from bankers. What we need is a dose of confidence; we need to think about what’s best for the economy of the UK.”

To get a grip of the degree of capture involved, note how Bob’s talking points make it from his public utterances into the Treasury’s version of the embarrassingly resuscitated Project Merlin. Here are the Treasury’s irritating bullet pointed commitments again, interspersed with Bob’s speaker notes from the 25th Oct CBI speech (in italics), and snarky glosses from me (in bold):

• creating a stable, predictable and competitive tax system;

We applaud the government for its actions bringing the deficit under control
and we understand why, in light of public sector spending cuts,
there are calls for UK banks to shoulder more of the tax burden.
But if this makes it more difficult to compete on equal terms with the best banks in the world
it will hamper our role in supporting the UK economy
so we welcome the Government’s efforts to ensure a consistent international framework. (which we know are are just cosmetic; success would sink our £1Bn/year tax arb business)

• promoting a strong and proportionate regulatory system, securing international agreement where appropriate;

…the key to managing systemic risk lies in resolution plans
to wind down operations that fail, rather than bail them out
and the work that Paul Tucker is doing with the Financial Stability Board is very important
Large banks like Barclays, HSBC and Standard Chartered have competitors
like JP Morgan and Bank of America Merrill Lynch from the US,
Santander from Spain,
Deutsche Bank from Germany,
and BNP Paribas from France.
We see no signs of authorities around the world restructuring these institutions
so the most effective way we can contribute to economic growth and job creation in the UK
is with the model that best serves our clients’ needs. (UK guys, you’re on your own with these loser bank breakup ideas)

• implementing and applying European and international rules to create a level playing field in both policy and practice whilst protecting and maintaining the particular strength of UK financial services, and without pre-judging the outcome of the Independent Commission on Banking (IBC).

…Equally when it comes to the size and model of banks
we’re in favour of the industry offering a range of business models to give clients choice.
We respect the Independent Commission on Banking
and we welcome their investigation
because we know they’ll examine wide-ranging evidence rigorously. (we don’t mean to preempt the IBC; but anyway, don’t listen to those BoE airheads who want to break up the banks)

• maintaining the competitiveness of London and the UK as a location for global financial services;

We know that compensation continues to be contentious
We recognise that and we continue to try and balance our responsibility to manage pay
with the need to be both commercial and competitive
once again, measures to address this issue have to ensure a level playing field on a global basis (if we don’t pay the big bonuses, the entire banking business will up sticks to Zug and Geneva)

• promoting the merits of the UK as a location in which to set up and run a business, including a bank or other financial services firm;

One of the most important ways to stimulate economic growth is through cross border trade
Over the centuries, no city has benefited more from global trade than London
Almost every company in the FTSE 100 has operations outside the UK
and they need UK banks that can support them across borders.
…companies need much more than international financing and payment mechanisms
they must be able to hedge equity, commodity, currency and interest rate risks as well.
31. And the most efficient provider for clients like this is an organization that can do all these things simultaneously
in other words, an integrated global universal bank. (don’t break up the banks)

• encouraging good corporate governance and effective shareholder engagement; (yawn)

• fostering the infrastructure, skills and business climate that support a world class financial services sector, and world class businesses; (yawn)

• promoting effective dialogue between Government and businesses, the financial services sector and consumers;

We’ve also committed to a range of actions through the Business Finance Taskforce
which comprises chief executives from the 6 largest UK banks and the British Bankers Association
under strong leadership from John Varley.
Those actions are intended to:
strengthen customer relationships,
ensure access to finance,
and promote greater understanding and transparency (some cheap and harmless cosmetics from Varley)

• not repeating in 2011 the one-off bonus tax announced in Budget 2009.

We know that compensation continues to be contentious
We recognise that and we continue to try and balance our responsibility to manage pay
with the need to be both commercial and competitive
once again, measures to address this issue have to ensure a level playing field on a global basis (That bonus tax must have been a real bugbear…mind you it also suits Osborne to point the finger at the preceding Government)

A reasonable overlap between what Bob thinks is important and what the UK Treasury is offering, I think you’ll agree.