RAGE against bankers is reaching yet another crescendo, especially as many of the main players are once again making bumper profits. In large part, the anger is visceral and emotional, fuelled by a staggeringly simplistic analysis of the causes of the crisis peddled by much of the media; but plenty of intellectually powerful arguments are also being deployed. These deserve calm analysis.
The first is that all the banks – even those which have repaid their Tarp funds with interest, or those that were able to refuse state money altogether – are still enjoying implicit government guarantees. This is allowing them to borrow more cheaply. A wider argument states that government intervention in the economy saved the banking system, which means that all profits are now logically due to the state. Second, that there is still far too much risk-taking going on (rewards are still being privatised, while risk and potential losses remain socialised). Third, that “excessive bonuses” mean that banks are failing to retain enough profits to build up capital. Finally, that there is too little competition, which means banks enjoy super-profits. There is some truth to all of these points but the proposed remedies are misguided.
Banks often already pay for “implicit” guarantees – and if they don’t, they should have to subscribe an insurance fee (though of course they and their staff already contribute billions of pounds in corporation tax, income tax, national insurance contributions and other taxes). But the real answer is to create a system so that banks can be allowed to fail – new wind down procedures that wipe out equity-holders, bondholders and management in the event of insolvency. Living wills are part of the answer; the “too big to fail concept” can be addressed without breaking banks up.
We should also remember that everybody has benefited from policies that prevented a depression; this doesn’t mean we should all be punished for “profiteering” from the bailout.
The point about risk-taking is equally unfair: risk is going down on every measure. Bank balance sheets are less leveraged (and shrinking very slightly overall) even though there is much further to go. Goldman’s Value at Risk – which gauges the maximum likely loss the firm could incur on any one day – fell 15 per cent to $208m in the third quarter (compared with the second). Compensation practices are improving, with G20 rules already widely observed; total pay is not especially high as a share of revenues (compared to other industries) and in many cases has fallen sharply. Goldman’s Tier 1 common ratio capital rose to 11.6 per cent from 10.9 per cent (though as ever, more is needed). Further capital raising will be easier if banks continue to do well.
Financial profits jumped as a share of GDP during the boom because of soaring leverage; it had nothing to do with competition. There is indeed too little of it; but many of the rules being imposed will further cartelise the City. Smaller players offered multi-year guaranteed bonuses to poach good staff; while these deals were highly imperfect, banning them altogether will help big firms keep the best talent. Super-profits are never sustainable for long – but only as long as new competitors can enter the market.
Such is the public’s rage, however, that the facts no longer seem to matter. We will all be the poorer for it.