The real G20 breakthrough

Lehman paid bonuses which took 5 years to vest and were mainly paid in stock. But they still went bust!!

Bonuses are not the issue. If you have no bank then you have no bonuses.

The problem is about the bank (any bank) trading recklessly to the extent that it has to go to the taxpayer for an (embarrassing?) bailout, (which taxpayers with any sense won't want to provide!)

The issue is about what causes banks to trade recklessly, obviously profit growth. (Bonuses don't help, of course, but if you don't allow banks to fail, then they won't ever learn when to stop taking daft risks.) So, regulation is put in place to stop the daft risk-taking? Doesn't sound like it so far.

Banks should be made small enough to fail.

Central bankers should be LEGALLY obliged to stop banks lending excessively into property development or speculation.

Bank Directors should not be paid bonuses, just pay them a wage. They should buy shares in their own company if they want to increase their savings and hope, (like other investors have to) that their "talents" will actually materialise in better company performance. They don't need an extra bonus for doing well (and one even if they don't!)Ordinary investors don't get an additional bonus, do they?

Well done, Robert. You have brought the debate to the real issue. The real power-play is happening now in the Bank for International Settlements. Jean Claude Trichet and his 27 central bankers are directing the way this is going.

They have agreed :-

•Raise the quality, consistency and transparency of the Tier 1 capital base. The predominant form of Tier 1 capital must be common shares and retained earnings. Appropriate principles will be developed for non-joint stock companies to ensure they hold comparable levels of high quality Tier 1 capital. Moreover, deductions and prudential filters will be harmonised internationally and generally applied at the level of common equity or its equivalent in the case of non-joint stock companies. Finally, all components of the capital base will be fully disclosed.
•Introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework with a view to migrating to a Pillar 1 treatment based on appropriate review and calibration. To ensure comparability, the details of the leverage ratio will be harmonised internationally, fully adjusting for differences in accounting.
•Introduce a minimum global standard for funding liquidity that includes a stressed liquidity coverage ratio requirement, underpinned by a longer-term structural liquidity ratio.
•Introduce a framework for countercyclical capital buffers above the minimum requirement. The framework will include capital conservation measures such as constraints on capital distributions. The Basel Committee will review an appropriate set of indicators, such as earnings and credit-based variables, as a way to condition the build up and release of capital buffers. In addition, the Committee will promote more forward-looking provisions based on expected losses.
•Issue recommendations to reduce the systemic risk associated with the resolution of cross-border banks.
The Committee will also assess the need for a capital surcharge to mitigate the risk of systemic banks.

As David Cameron says, daylight is the best form of disinfectant. Lets shine the light on these bureaucrats and what they are doing. Keep it up, Bob.

Have we not now moved to an era where there is a stronger moral dimension to economics and the operation of markets. The public mood is against large financial bonuses because the recent crises exposed that significant money has been paid to people who failed.

Equally shareholders should now been challenging the banks on their lending policies. Should banks lend to leveraged hedge funds or mortgage offerors or to small and medium sized enterprises the growth of which ultimately drives prosperity? Its time to stop support to hedge funds and other leveraged business models.

No matter how you look at it lending 70 times your core capital cannot be anything but high risk. Who in their right mind would take out a loan at that level? Surely this has to be corrected as much as the risk taking with hedge funds? Even just 26 years ago I had to justify to the building society that I had saved with for the last 12 years why I needed a 90% mortgage by explaining that as it was my first house I would need furnature and it was cheeper to get a bigger mortgage than buying it on HP and show that I had sone the sums on how I would cover my repayments. A daunting task for an 18 year old, but it did really make me think about what I was getting in to. Perhaps a return to that would be no bad thing.

What is need is an understanding of why banks are able to pay gigantic bonuses and the answer must lie in the extraordinary margins generated by transactions and deals. This indicates that there is absence of effective competition and excessive control of the market and subtle cartels/common understandings cannot be ruled out. So a process of breaking up banks into smaller organisations may help as would a thorough MMC investigation in UK. The state should provide the competitive imperative if it is missing. Regulation no, but supervision yes. Adopting fiscal controls on the T&C's of lending and repayments for mortgages, loans and credit cards (say sharing data on existing holding of CC's and defining a much higher minimum payment perhaps with great age restictions etc). Defining codes of practice for banks when dealing with customers including small businesses.

Robert,

I definitely agree with your analysis about the relative importance of financial strength versus pay schemes, but at the same time I am wondering whether restoring the supposed "strength" of the financial system isn't also posturing. The fact is that for many people there is a financial "industry" when in fact we merely had, or should have had, financial "services". Banks bear a heavy share of responsibility in making people believe they were richer than they actually were; and they are bigger than they should be as a direct consequence. The banking sector has to massively shrink. For one thing, it will make ensuring the robustness of what will remain easier. But trying to make the present dinosaurs stronger will lead nowhere.

I don't think this will hold though, see here. The politics is way to complex for this financial puzzle to be sovled so easily. None of Japan, France or Germany are really going to accept this level of pain when the US and UK will seemingly get off scot-free.

Once the furore of the G20 dies down, so will this idea. Something will get done, but it won't look like this dea.

I'm very relaxed about the ability of the banks to weather financial storms.
For one thing, if circumstances look bad it seems the government will always bail them out. For another, the way they're profiteering at the moment, when base rate is at an all-time low, with loans - if you can get one - attracting extortionate interest charges and rip-off arrangement fees, means they shouldn't be short of cash any time soon. Caledonian Comment

Bonuses are a red herring the real problem is that banks are too big to fail and this is what we as a society have to tackle.

(I find it absolutely and totally incredible the Mervyn King did not realise this was happening far far earlier. I know he was warned in writing by numerous people as was his late predecessor.)

The state has been entirely subverted by the banks; the state is run for the banks; the banks can expropriate our hard earned and saved money; and what is worse the regulators have been so incompetent as to let them get into this position of almost absolute power.

Further, I believe that it can be properly argued that the education and training of our economists is the root cause of these problems - basically they are innumerate twits. Any fool who can do sums and has run the simplest of whelk stalls realised that you have to sell at a higher price than you buy to stay in business - but not Ben and Mervyn! Even not the economists seek to reposition themselves, by appeal to psychology to explain what is/has happening/ed - it is simple arithmetic which if they could do they would have understood! From this it is reasonable to infer that economists cannot do sums.

The rot set in in before the time of the dotcom boom and the associated 3G Mobile licence fiasco - some idiots came up with the idea that businesses that had no hope of ever making a profit were worth something - these fools were economists trained by our leading universities on both sides of the Atlantic - I don't think it is a coincidence that both Ben and Mervyn shared an office at Harvard - when subsequent history has shown that they obviously were taught wrong economics!.

We were the fools that believed in the fools gold and they have taken us for a ride and shown to us that we are the fools they took us for! Now it is payback time! We should take steps to purge these non-economists for everyone's benefit. (Not exclusively Ben and Mervyn - include the current and the previous Permanent Secretaries of the UK Treasury etc. etc! - the US changes these with each new administration) Changing the government is not the answer and may even prevent a proper solution!

If we accept that a very high proportion of stock market betting is a zero sum game it is surely nonsense to pay bonuses to anybody who wins as this just takes money out of the game.

Have ever checked out the articles of a bank to see if gambling is included in their business activitites?

Just think if you could go to the bookies and place bets knowing that if you win you keep the money and if you lose the taxpayer will pay for your losses... wouldn't you bet recklessly? Bonuses may have played a part but the reckless behaviour is due to the fact that they can only win... it must be made clear to the banks that next time that only the depositors funds will be saved and the bank will be made bankrupt...as should have happened with RBS HBOS etc....

As retired Accountant who has worked in Industry all my life I decided to catch up with what the various financial terms mean such as conduits, cdo's etc as well as what a hedge fund actually does. Consequently at the Airport leaving for a 3 week cruise I bought Paul Mason's book - Meltdown.
What an illumination. As someone who operated at a senior level immediately below Board level of a major international Packaging Group I had been involved in the full scope of financing, M & A activity including contact with City Institutions. I retired in 1997.
Quite frankly I am appalled that there exists a multi trillion $ level of debt that is effectively concealed and not part of the Basel II accord. Taking this fact into account and the global imbalances it seems to me that we are in deep "do do". In the UK we need some honesty from politicians as to the longer term implications of unwinding our level of debt. I question if they really understand?
Basically we are a "poor" rich country. We cannot afford the global adventures such as Iraq and Afganistan or having armed forces to match. For the press and conservatives to witter on about renogotiating our deal with Europe is just a laughable side issue bearing in mind they provide 60% of our exports and around 3 million jobs.
I doubt we can rebuild our exports of "real products" as we do not have a sufficiently skilled workforce. Most of new jobs seem to be Mc, low paid unskilled jobs.
We have been fooled over the past 10/20 years that we are a strong financialy sound country when in fact our apparent main source of income - the financial industry, has been found to have "feet of clay".

Teh longer the debate goes on eth more red herrings will be raised and teh only isse is as you and many commentators have raised is do we go on paying bonuses which have no relationship to performance.
It vcan be generally vied that 'Big is no longer beautiful' and no bank shoudl be anle to operate under the sublime belief that eth lender of the last resort will bail it out irrespective.
There must be limits and ther is nothing wrong in setting them, either sufficient solvency is available or it isn't. When a private company wants to borrow they don't get 30-40 times the amount they want based on what they can put up as security so why should a bank?
The French Finance Minister appears to be the only one talking sense and one wonders whether too many politicians are in the pocket of Bankers, either discreetly or openly as 'consultants'
History is showing we cant reinvent the wheel but we can make sure we do not repeat the demented errrors of the recent past and that means serious discipline.
What is so awful is that the Regulators have had endelss opportunity to take the bull by the horns and chose to back off. Yes the Bankers over extended themselves which was clealy unforgiveable but lets not leave the regulators free from guilt.
Certainly in the UK FSA senior management have shown a level of incompetence that beggars belief, and for them now to start shouting from the roof tops is just a joke.
No wonder Cameron has rightly decided thoer party is over, we cant afford to have inferior senior management in a regulatory role with no idea what to do running the show.
In most areas the principlal of strength being as good as the weakest link normally relates to some unfortunate who was overworked, underpaid and overwhelmed. But with the FSA the senior management have been grossly overpaid, underworked, unwhelming and in totality singularly incompetent.
It can and will change only once Labour is out of office, and with luck for at least 20 years. Brown has shown he hasn't a clue and his taunts of 'no return to boom and bust' and 'prudence' will be the final nails in his and Labours political coffin.

I would suggest another hughly and unresolved matter is that banks continue to lend to SME's during the non boom times i.e at the time SME's may need to borrow.

I would agree that although large bonuses rub salt into the wound they were not the major factor of the credit crisis.

Personally i would prefer the small is beautiful approach to banking, without this their is always, at best the large banks believing they are too big not to be bailed out when they take too big a risk that goes wrong or at worst entities of a size that can dictate to the government.

I agree that banker's bonuses are just a symptom of what is going on but what a symptom they are! They merely expose the lie that the regulators (governments) are in control of the economy.

We have a crazy situation in which the taxpayer is supporting the banks who continue to overpay themselves whilst the main economy goes down the drain. Not only is this an inversion of what should be happening it is a total perversion of economics.

I acknowledge all the points you raise in your blog, Robert. What is exercising me is how long are the governments in this world prepared to allow this nonsense to continue? The longer this goes on the prospect of another banking crash increases. I think the situation has gone beyond discussion: now is the time for action.

The first action should be to split retail banking from investment banking. This should be implemented this autumn. Over to you, Gordon.

It may not be the most important issue on the table, but limiting of pay and bonuses should not be left out of consideration. Similarly, an issue's importance isn't necessarily correlated with how easy it is for a layperson to get their head around it.

Clearly, banks and bankers are not operating in a fenced-off bubble - their actions and strategies have hugely wide-reaching consequences, good and bad. As such I think it would be sensible to introduce some criteria to pay awards which recognises the effect the 'behaviour' of the financial sector can have nationally and globally. Hence to qualify for the highest pay and bonuses, bankers should need to demonstrate that they are acting in a professional and responsible manner.

I appreciate this is quite vague, would be very difficult to implement, and that my understanding of the financial sector stops at quite an early stage, but while improving and increasing regulation may seem quite a facile view on preventing a repeat of this 'credit crunch', it doesn't mean it doesn't have value

Just where are the bank shareholders (mainly pension funds) in this argument? They are the ones that should suffer the most from reckless lending, and they are the ones with the power to sack boards that do not manage the business prudently.

The big unanswered question in the banking collapse, is what were the shareholders doing? Why didn't they object to the risks being taken with their capital?

Hmm, French German UK and US banks but not much said about the Chinese and Indian banks. These are the banks for the next 10 years +.US banks leverage are,

Asian banks on the other hand operate in the comfort zone and can pick and choose any potential deals with Western businesses.

www.time.com/time/business/article/0,8599,1902404,00.html

"...which do you think is more important: limiting how much bankers are paid, or strengthening banks so that they are better able to absorb losses on loans and investments..."

Neither thing is important, what is important is to isolate retail banking which may warrant taxpayer support from investment institutions which take increased risks and therefore should not be eligble for tax-funded rescue.

The feeling that bonuses have somehow caused this recession is false, there are many factors but the single most painful part is that the government has been trapped into underwriting massive investment losses or face breakdown of the financial infrastructure of our society.

The financial sector must never be allowed to hold that gun to our heads again.

Fascinating - we want to restrict and claw back bankers pay when they fail to perform, so how abouit having the same fair and balanced view of MP's salary and perks? If the government fouls up them perhaps the PM should have to repay his salary or lose his pension, or perhaps some others could lose the extra houses we have been paying for ? Sauce for the goose is sauce for the gander and the governemtn was every bit as much to blame for greedy britain and the bonus culture as the banks were

Industry was once run by honest men who had something to loose. Generally they had morals and most importantly they had "Shareholders" Since the institutions now manipulate all business the Directors pander to those instituations who are part of the same club.
With regards to Pay, we didnt do very well paying these people vast salaries in the past so we should question why these have to be bought by huge sums. When you talk about the size being to big to fail, they only achieved the growth because of the unregulated risk taking, often at the expense of those banks and building societies who tried to do things right. Unfortunately, the later were crushed whilst the likes of N.Rock executives were classed as "Outstanding" leaders with "Vision"
If we were to let criminals regulate themselves would you and your readers expect them to comply to honest John rules ? That is why we nedd tough regulators, something we dont have in ANY sector.

Interesting questions, Robert.
Firstly....should banks hold more capital....yes.
If they didn't pay out all those so-called "profits" in crazy bonuses, they would automatically hold far more capital.
Multiply that by several years of trading, and those banks would have the vast reserves they need.
Secondly, no-one has yet explained why bank workers need millions to survive, when the rest of us manage on thousands. There are many workers in this country that are far more important than bank workers, and do that vitally important work for 25k to 100k. (No, I'm not a communist, just a realist).
The truth is that, because the financial industry is the one which holds everyone elses' wealth, financial industry workers have been "helping themselves" to it. Huge bonuses on non-existant profits equals theft.
The responsibility for that theft must remain with certain bank directors.
The government know that it is theft, but are too embarrassed to admit it.
Thirdly...The Americans have always been the bastion of hard-nosed capitalism, and are proud of it. Unfortunately, "Middle America" has had to step in and save the arch-capitalists butts.
All those middle-Americans are paying through the nose to keep the Wall-Street boys in luxury. At what point does Capitalism become Feudalism? When Wall Street workers have 99% of Americas wealth?
Because that is the way it is going.
Would party funding have anything to do that?
Wake up Middle America.
It seems that all of us in the Western World have to slave our lives away so that financial sector workers can become super-rich.
Capitalism has gone very wrong in the last few years.
Sarkozy recognises it. Merkel recognises it.
They also recognise that Capitalism has become totally biased towards the financial sector, and the rest of us are merely slaves...and that is dangerous, politically and internationally.
The Europeans will have to keep plugging away at the Americans to get the reforms and regulations that they want.
Who got themselves into the biggest mess?...France and Germany or Britain and the USA?
It seems that there are 2 Americas....the Americans that we this side of the pond respect and admire....and then there's Wall Street.
Is Gordon Gecko as loathed in the USA as he is here?

The G20 has the right idea. How much bankers are paid is irrelevant - we have long since moved away from the state controlling salary in the private sector (for simply reason it did not work), banks are private sector and should be treated no differently than directors and managers of a widget manufacturer.

The issue is about controlling risk and ensuring that banks have the capital base to ride out economic recessions. By concentrating on that the G20 is looking to deal with the cause not the symtoms of the banking crisis.

One issue which does need to be looked at is to separate retail banking from investment banking (as 20# says). Whilst I do not think it needs to be separate it definitely needs to be looked at.

I am not swayed by the increasingly shrill comments, whether on this site or others, for bankers pay to be capped to meet the public mood. The public (at least in UK) has consistently registered in opinion polls that they want the death penalty back - it is one of the few good points about Parliament that they have for the last 30 years consistently refused to back the public mood and not brought back the death penalty. In other words the public mood is not always right and politicians should be able to rise above it, vote in accordance to what they think is right and then seek to convince us, the public. Of course under this govt, where much legislation is based on the basis of class hatred and bigotry rather than reasoned thought, maybe I should worry more

Thanks for the information on leverage ratios of the continental European banks vs the US banks - had no idea this was the case, and indeed it explains a lot.

But re your questions here, yes, I guess the answer is we need to do a bit of everything.....

Capital requirements - yes, surely any organisation that is classed as systemically important (implying some sort of government guarantee) must have a higher capital requirement level imposed on it. But in addition to this should there not be a global agreement also on the issue of internationality - i.e. why should the UK government stand behind a Barclay's subsidiary in a country the other side of the world. Maybe, rather than banks actually having to completely break themselves up, they simply should have to produce full accounts split up country by country which show all links between each country operation, and the nature of all loan/deposit instruments in each country. This would make clear where the major liabilities lie and would translate seamlessly into the wind down plan that Adair Turner mentioned in Prospect (.... um, I'm sure he must have got the idea from my suggestion in this blog on the 20th July). But, overall we just do need a huge amount more info on these big guys to be in the public domain, so the market can get a better view on 'em.

Deterring banks from foolish lending - yes, central banks/regulators should certainly have to include asset prices in determining base rates, as well as the amount of money flowing into the country. But, beyond continuing to set base rates, I guess that they should also be able to increase capital requirements (maybe within a range that had been agreed internationally and also by our national parliament beforehand). Could I suggest also another 'tool' for central bankers and regulators - complete financial independence themselves individually and personally from any banks and financial institutions? We really must get away from any hint of the insiders regulating themselves.

Leverage ratios - (isn't this basically the same as the Basle 1, 2, 3, 4 etc capital ratios?) yes, there needs to be a limit somewhere. Why would this be good? Well it would encourage new entrants into the banking system, which we desperately need to give the existing guys a harder time and help achieve a properly functioning competitive industry.

Rebuilding capital reserves how quickly - no, don't do it stupidly quickly, just lay out a plan for achieving proper levels over the next five years, say (but of course that might mean UK plc has to sell the state banks back into the private sector with a warning sign: Beware, capital requirements will be increased significantly over the next few years).

A cap on bonuses - it's not really bonuses but the total level of remuneration packages that you are talking about, but, basically this would be completely impractical, and indeed there is no harm and there should be absolutely no restriction on the management of an equity fund with no borrowings (i.e. no leverage) agreeing to pay an employee any level of bonus/remuneration at all, as this merely becomes a discussion between the shareholders and the employees. If the management here mess up, the shareholders have themselves to blame to have allowed it, and there are few if any systemic consequences for wider society. The problem occurs when such a fund borrows, and another party is introduced - the depositors who put their money in the bank to lend to the fund, who are supposedly (and laughably!) represented by the bank management but are not at all in fact. What is more, of course, if this is a large bank then the taxpayer, who is making some guarantee, becomes involved as well, and needs to be represented somehow. It is the presence of unsecured debt (yep, also an asymmetric instrument just like bonuses themselves) that we need to link somehow to pressure on containment of remuneration/bonuses. But this is incredibly difficult.

Would not Adair Turner's suggestion here be the one to follow up? Realise that regulation just cannot solve this problem, accept the imperfect market, but levy a tax on transactions in place of unworkable regulation (.... or even phase in making debt taxable. It is as far as income tax is concerned, so why not also as far as corporation tax? This in itself would lead to a much better balance between companies debt/equity ratios too - debt would cost more but equity would then cost less).

There are a couple of things that ordinary people find very hard to understand.
1)We have been repeatedly told that huge rewards must be offered to get the very best people, yet it is blatantly obvious that so many of these super-talented individuals didn't have a clue about running banking organisations or how global financial systems were working.
2)Major banks posted massive profits for many years if not decades and yet couldn't survive one or two years of losses. This almost defies belief.

Robert

one of the most disappointing aspects of the last year has been the reluctance of the banks and financial community to come forward with their own proposals to create a better regulatory framework and deal with inappropriate bonus culture.

It appears that they are content to leave the debate to the politicans and the regulators. It also suggests that they remain distant from the issues and concerns of the business community and voting public. Government's around the world should be demanding a more responsible attitude from those that have cost us all so much.

It is rather surprising to read all these positive reviews of a meeting which yet again managed to ignore the big question, harmonisation of economic policy across the Globe. The panacea that is being suggested by the G20 governments seems to be just the latest of many random ideas streaming in since the meltdown a year ago. Has anybody shown much more capital would be needed to avoid the unfolding of the crisis the way it did, or is all we have is a reference to the improved care of risk-taking by the bankers as a consequence of more money being put down. For, that would be rather silly, wouldn't it.

#20, #24

Agreed - so how do we make it happen?

Another point: it isn't the Joe Public which have created a 'Derivatives market' containing bets worth 10 times the entire world's economy - this is entirely down to criminally-reckless banks. How many more months before this implodes? AIG x 100, anyone?

Betting on an 'underlying asset' is gambling, pure and simple. Whatever happened to 'insurable risk'?

Making one's money safe in a bank is one thing, saving it from the predation of the various reserve banks run by the very people meeting in London is another. Personally I feel the latter is a much bigger problem; they leave you with the same number of cash units or even a little more but lower your purchasing power by inflation. I suppose it could be regarded as a tax on pensioners and other fixed income dependent people.
I have a belief that inflation favours the rich and the powerful whilst deflation favours the "worker". It is for this reason that continued attacks are made on deflation and moderate inflation is held up as to be a good thing.
I feel sorry that you decry financial nationalism for it seems that all those successful countries seem to espouse it, or is that my imagination?

Personally I’d be less concerned about investment banker bonus if:
1) Retail banking was separated from investment banking.
And
2)Investment banks were reduced in size such that they were no longer too big to fail.

With regard to the "breaking up" of huge institutions.....
I believe that in future there needs to be a clear line drawn in the sand, between what the public WILL bail-out and what the public WON'T bail out.
These large companies need to be re-organised to seperate smaller profit-centres and seperate entities, and it should be set in stone WHICH ones the public will support, and those that are "on their own". (If they fail, they will be put into administration...bankrupted.)
How you do this, I don't know, but the experts do.
This crisis has exposed the vulnerability of the public to recklessness in the City, and that situation must now change.
Whilst I realise that the government is frightened of bankers, they have to address this situation urgently.
The days of the gold-dripping Ferrari-driving country-estate owning City worker must end...the rest of us have clearly been conned....
the mill-press worker from Bolton is now supporting him, and saving the **** of his company.
Roll on Tescos bank, then we can put our hard-earned cash somewhere that is run by sensible folk.
Bankers and the establishment need to stop enriching themselves while the rest of the population go backwards, or some very nasty politics may follow.

Reducing the size of banks might help us to not have to bail them out. However, most of the UK banks (and a few building societies) succumbed to the false attraction of earning high profits from lending too much to too many people/ organisations who could not afford to repay. The size of the bank / building socisety seems to not have made a difference.

Wouldn't it be better to split banks into ordinary everyday retail banks on the one hand and merchant banks on the other?
The retail banks would need to have more capital than now, would need to stopped from, in future, the stupid 100% and more than 100% mortgages, the stupid 5 times earnings mortgages, and be audited (on a sample basis) to ensure that they are keeping a balanced portfolio of loans and borrowing with some high risk lending to small and medium sized business.
The merchant banks could do whatever they wanted to do, as everybody would know that the risk level would need to be carefully investigated before investing. If one or more failed, then let them fail, without taxpayers having to rescue them.
Finally, "If it looks too good to be true, then it probably is".

If Governments are serious about reforming our banks, rather than grandstanding over bonuses, they should be discussing an enforced (re)seperation of retail and investment banking activity. The former is a utility function, effectively an oligopoly, and should therefore be subject to rigorous regulation and implicit State guarantee. The latter is speculative and high risk, and should be subject only to minimal regulation, and there should be no State guarantee for its investors. Those who place their money with the former organisations would expect realistic but secure returns; those with the latter would expect higher risk and higher returns, and would need to accept that the value of their investments could fall (or be wiped out) as with any equity investment. I believe that this would address materially the concerns about banks being "too big to fail" (no retail bank would be allowed to fail but no investment bank would be bailed out by the taxpayer). I imagine also that retail bank remuneration would rapidly re-align to normal utility levels (moderate salary, limited bonuses), and that investment bank remuneration could then be set by the market.

sadly bankers and their kind live in a world of their own where money grows on lollipop trees and all other humans are only there to annoy them.
sadly curbing their pay will only annoy them and create bad feelings.
but removing the bonuses etc will hopefully cause them to work harder and safer with money.

The banking collapse had very little to do with bankers pay but more to do with risky lending ,poor management and weak regulation.The reason why its on the front pages is because it is media driven,its easier to put bankers pay in to sound bites.Its clear to me very little will change to the banking system in the years to come,status quo will remain.

Regarding other stories, how about the BBC doing a feature on likely budget cuts starting in the coming months,its obvious to all that the treasuries forecast of £175 billion is miles out due to political interference on the forecasting/over optimistic view on the recovery.

Apologies, this story is not due yet,we still need to rant on about banker pay for another 6 months.

The high levels of bonuses may be of interest to the media, but as you saym these do not directly reflect on the levels of exposure of the bank. Nor indeed does the level of leverage - it also depends on risks taken.

We are in danger of being handed a simplistic solution based on limiting bonuses and/or leverage. Such an approach may be popular and an electoral success, but it will do nothing to address the real problems faced by the world economy and may well make things worse by restricting sound businesses.

All very interesting, but isn't the bottom line for banks "Lend to someone who will pay you back" and the failure to do so the reason for the crisis? Sure, take the odd risk, but only that which is covered by previously realised and retained profits. Big bonuses equal less retained profits and less capacity to take on risk.

Still, this was the first time American banks lent vast sums to those who would obviously struggle to ake repayment. If we ignore the South/Central American debt crisis in the 1980s.................

This comment was removed because the moderators found it broke the house rules. Explain.

The two go hand in glove, with banking (and most corporate) directorships acting as barons in charge of their feudal realms, ignoring their responsibilities in the rush for astronomical personal wealth no organisation can be sustainable. Without stringent controls on these fiscal barons they will, like the Taliban, re-emerge to take more out of the financial system than they can ever pay-in. Taxation should be the strongest weapon, remove their ability to have wealth accumulated in tax havens by supporting those minor realms that permit such practices to see the errors of their ways. If rogue states such as North Korea, Lybia of old and Iraq more recently can have embargos placed on them for falling from world favour - so should tax havens that enable bandits to filter away moneies that should rightfully be paid into the greater good. 90% tax rates for all earnings over a set ratio to average earnings (either nationally or even within their own organisations) would ensure these robber barons would are forced to show conscience rather than arrogance.

If an individual on PAYE is taxed at 0 rate until a taxcode is established, do the same with all high earners until they can clearly demonstrate that they earn less than a set figure per annum. How can the super rich be allowed to negotiate a tax figure with the Revenue when these civil servants are paid to ensure every individual earner in this country pays their relevant contribution? How many university places; new hospitals; new schools; people obtaining the drugs they need are remaining lost/unsupported while these greedy/fraudulent individuals are allowed to continue of their leeching of our resources? If we can employ an array of social benefit sleuthes to track down the relatively paltry sums (thousands not millions or billions) then the same enthusiasm should be excercised in regard to taxation, any remuneration (salary, bonuses, free lunches in all forms cars/child education/travel/mortgage relief, etc) taxed at a sliding rate. If these individuals think they are worth salaries of millions whilst those who earn thousands have to pay then let us make it clear where that money goes - just as calorific and health values now appear on food items let us do the same with banking charges; product and service costs, to clearly see what we as individuals are paying for those on billionnaire row (or more to the point some distant shore where their wealth resides).

The bonus culture doesn't work, check out Dan Pink on the surprising science of motivation on www.ted.com to find out why.

Very interesting article Robert, one statement I would slightly take issue with though -

"...we have been badly let down by the priesthood of regulators, central bankers and finance ministers - to whom we unknowingly delegated all authority to devise rules to maintain the stability of our banks and the financial system."

In one sense perhaps we did unknowingly delegate too much power to the financial priesthood, on the other hand it could be argued that we got the priesthood we deserved, because since the Thatcher/Reagan era we've been voting in governments that have always essentially supported "free market fundamentalism" including massive deregulation of finance and business operations.

Now we have a historic opportunity to reverse the tide and elect a UK government which is not beholden to the desires of our business oligarchy, and I believe it is only the Green Party which can deliver some sane and rational new thinking on how we go forward from here.

The existing fractional reserve banking system, in which money is created for fun out of thin air and then lent to some poor bugger who has to repay it with interest (! - on money that short earlier did not even exist!) is utterly unsustainable and will most certainly collapse.

Of course it would have collapsed already, had I and you not invested several tens of thousands of our money into preserving this crazy system through the medium of our government.

Messing around with bonus schemes or even reserve levels will not help at all. To see what has to be done, look at this: https://www.transitionnc.org/node/50/126. To safeguard you own position look at this https://www.transitionnc.org/node/68.

Who was it that said "We have nothing to fear but fear itself", disease, squalor, violence, starvation, global war and the total collapse of civilisation.

When is somebody going to talk about the real reason that the 'Credit crunch' Happened.

In the mid ninety's the UK government came to the conclusion that the only way that UK plc could expand its economy was raise the availability of cheap credit to people who had, up until this point, been deemed uncreditworthy. The government, through lite touch regulation, then allowed banks, building societies and anybody else who wanted to set themselves up as mortgage brokers to a) increase the multiples of peoples pay that they were allowed to borrow, and b) to lower the threshold of creditworthyness that people would need to have to borrow.
This is why there has been a polarisation in the UK economy during this credit crunch. A majority of people have not been affected by the credit crisis, other than seeing the interest they are paying on there mortgage fall and the interest they receive on there investments tumble. The other percentage were people who should never have been allowed to borrow money in the first place. These people have been hit particularly hard (there is an argument to say that if you have borrowed more than you can afford, then it is your own fault!).

What noone seems to be talking about is the fact that credit and borrowing are going to have to go back to pre 1994 days, when a certain percentage of the population would not be deemed credit worthy. This means a permanent contraction in the UK economy, something which no one in government is willing to talk about. Therefore we have this ridiculous merrygoround of finance ministers trying to come up with headline grabbing policies, which will not have any effect in the years to come.

SOMEBODY PLEASE BE HONEST WITH US!

John_from_Hendon (#11) "We were the fools that believed in the fools gold and they have taken us for a ride and shown to us that we are the fools they took us for! Now it is payback time! We should take steps to purge these non-economists for everyone's benefit. (Not exclusively Ben and Mervyn - include the current and the previous Permanent Secretaries of the UK Treasury etc. etc! - the US changes these with each new administration) Changing the government is not the answer and may even prevent a proper solution!"

Just how do you practically propose we "take steps to purge these non-economists for everyone's benefit."if"changing the government is not the answer and may even prevent a proper solution!" ?

Prima facie, you appear to subscribe to 'foolish' (?) magical-thinking and ranting. Does such behaviour work to your, or anyone else's, advantage elswhere?

#11

In a steady state much of the "gambling" in the city would be a zero sum game with winners and losers. Such a game would not generate much surplus (zero in fact) and would not have lead to the bubble and crash.

The fact is that the city was not "gambling" during the housing/securitisation bubble - and the game was a "win-win" for the players. It continued to be so for as long as people were prepared to and able to pay the ever higher mortgages required to cover the ever higher house prices: while borrowing against their increasing equity to pay for current consumption.

One way or another all the money and profits that the banks took from this business was drawing from people's future income (as pledged against their debts). As long as the total sum continued to grow then everyone in the City was a winner - and so everyone was a high flier.

Remains to be seen Robert. Government is yet to show it can make any move while balancing the need to respond, for reform against its anxiousness to continue to please the 'bankerchiefs'. We don't have to talk about whether making it more expensive for these institutions to carry on speculating is technically more important or isn’t, it intrinsically is.

We have to talk about what the breakthrough will look like when government finally disentangles itself from the financial influence of these individuals and actually puts the kinds of constraints we are talking about on all forms of 'recklessness' across the board.

The loss of tens of trillions in global wealth, caused by these people whose 'foolishness' by and large was sanctioned by government, comes down to whole generations of families everywhere losing almost everything they've ever worked for, leaving a new generation to pick up the pieces and begin again the painstaking task of building wealth out of nothing but hard work.

The prospects of this seem at present remote given the 100 million or so people unemployed as a result of the whole monstrous stupidity. It cannot go without correction via accusation.

Cut down the bonuses by all means, the breakthrough will also be judicial: evidence for intentional deception of investors, regulators and everyone will be sought through the civil cases now under way. There is every suspicion that there will be prosecution in the near future. Expect it.

The Chancellor increased the tax rate to 50% for those earning more than £150k from April 2010 so I cannot understand why he is pursuing this daft idea of restricting the one sector of the economy that tend to earn more than £150k.

I enjoy Preston's pages, this issue about bonuses though, is fidgeting me...

Surely, whether or not banks decide to pay out large bonuses is a matter for the shareholders to decide, not the public. EXCEPT

When the public then find themselves unwitting investors, NO bonuses are relevant, not until the loans are re-paid, or at least the equity stake we now hold is returning a dividend?

The bank should be treated like any other business. I accept the need to bale them out, when they mess up, they are a uniquely essential service. had a power Company been in the same way, again, the public would have to bale them out.

BUT NO BANKER should be in receipt of a bonus until they have re-paid what they took from the public purse. After that, they should be at liberty to do as they wish, subject to the shareholders.

e-logic.

Now that money can be moved around the globe so fast, wouldn't it be better if there was less money in circulation? And wouldn't that reduce the sort of bubble we have recently witnessed?

Will any of this lead to a broader and more balanced economy?

No - of course not. There was no mention of this. Nothing is being done about wiping out hedge funds and private equity companies and rebuilding a genuine venture capital industry. This Govt isn't interested and nobody else has to. They've got their industries and if they want more they'll just buy what we have left. The Americans despite being big on hedge funds and PE companies are still investing well in start-ups, spin outs and early stage companies...... It's only the UK that consistently fails to reinvest in new companies because neither the Treasury mob nor the City is interested or bright enough to understand why need to do this.

The additional option of encouraging the development of more, smaller, provincial banking options to facilitate deposit taking and localized personal and commercial loans is a bigger and better priority for the British population than the choice between the only two options you pose,Robert.
The 'too big to fail' syndrome has not been addressed yet.It needs to be, ....and very seriously.
It is too costly and takes too long to start a new bank in the UK compared to the US where one branch can be granted a license, and marketing can be local,too.
Maybe you should start to get out more?
In the UK, BIGGER has not resulted in lower charges and costs for the consumer,in just about anything, and certainly not with Banks
Competition works! Let's see a lot more of it.
John C.

The big new banking story is surely RBS / Nat West breaking ranks with the rest on overdraft fees.

This will surely lead to huge changes in the UK personal and possibly business banking sectors and impact across not only the UK personal but also UK business sectors.

https://news.bbc.co.uk/1/hi/business/8242144.stm

Arguably now is the time to encourage the securisation and syndication of loans made by banks and mortgage lenders. So long as such assets are sensibly priced this would lead to a risk-reduced lending environment and limit capital requirements.

This comment was removed because the moderators found it broke the house rules. Explain.

"in general, US banks have lent between 10 and 13 times their core equity capital, whereas French and German banks' equivalent lending multiples are between 30 and 70."

Amazing I thought it was the reverse! Now as you say rightly, French banks are more conservative in terms of lending (In France you get a loan for a house if you have a future & secure income stream and you need an "apport personnel" (downpayment), it is extremly difficult for a small enterprise to get a loans, so if French banks have financial difficulties, this is because they bought, without understanding, toxic assets from anglo saxon banks.
Are you sure of yr. leverage ratio 30 to 70 for German and French banks? If correct, in this case, there is no way to have a coordinated approach between anglo saxon banks and European banks. The paradox is that relatively well run banks have a high leverage ratios, whereas poorly managed banks (anglo saxon) have a low leverage ratio.
The issue, in this case is not in the capital ratio but in something else?

Robert, you just don't seem able to get yourself out of your own old-style thinking. The challange is not to regulate bonuses because bonuses encourage risk taking. The challenge is to regulate against risk taking itself. This is relatively easy to achieve via capital ratios.

The argument that restrictive capital ratios will force business elswhere is bogus. It will just force high-risk taking elsewhere, which is good. London does not want to hold the baby again.

When risk taking is in check, bonus culture becomes irrelevent.

The bonuses are an indicator or how unequal our society has become. The government really must control these levels, signalling a fairer society as we face the future (and also since they are a flag to the level of city sexism taht really has to be sorted so bring those bonuses down, don't push the women's up).

Controlling the level of bonuses effectively, along with closing down the tax dodging should have an impact on the benefits of 'gambling', thereby reducing the risk. Gamblers should, if they want to have bonuses, face loses too. Otherwise don't gamble so stupidly.

This is what we see on the surface of the city (and the city isn't just about banks). The engine under the bonnet also needs to be redesigned significantly.

Banks are not operating in a captilist market (the government can't let them fail). That alone says they must be broken down into smaller companies to a size where failure will not impact so many lives so tragically.

Regulators must be recrutied from a wider pool, and regulators must be held responsible for failures, just as the bankers should.

Criminal law must have a place in the regulation of the markets (a bit like drug dealers whose assets can be taken by the state). Naturally, they will squeal, but those that squeal can always find a new job, just as they expect the legions of newly-unemployed to find new employment (but hey, it isn't their kids who are now living below the poverty line so they really should think twice before feeling life isn't fair).

Criminal law, must be used as and when required; no one should be in any doubt that laws apply to even the rich city boys.

The banks need to have more captial, but that can be enforced incrementally if need be, over a period of years.

We also need to take a close look at what our politicians are upto. Can you imagine a cabinet minster rising from working in a supermarket, and then, once out of office, going back to their previous life. For too many politicians, politics seems to be a means of making a fortune in a later - so who are they making frineds with, and what lobbyists are they listening to?

How are they making judgements? What evidence are they using and where does that evidence come from? Are they listening too much to the city players rather then Jo Bloggs? We need clarity from the politicians too, not spin.

This capital/assets ratio business was well-looked-after by the Bank of England before Thatcher deregulated the thing - then later Gordon Brown spotted the huge tax windfall he'd make by letting things go on unregulated as they were in 1997.

All we need do is restore the levels in force when the B of E was looking after things. Then stop these exotic financial instruments until a risk value can actually be put on them.

Bankers took excessive risks because there was no one to stop them. Where were the regulators?

Ah........, it's gone quiet again.

The bankers thought they were doing right - encouraged by Gordon Brown dribbling at the sight of so much tax.

For that reason, remember when you talk about bankers' bonuses: they actually only get 55% of the figures quoted these days.

Lord Adair talks about taxing the banks to keep them smaller and more manageable. This is a good way forward. The ordinary taxpayer should not have to carry the burden for the mistakes of the financial institutions forever and a day. The banks and their shareholders should never again be able to socialise their losses for they will have to repay the taxpayers from future profits at higher rates of tax.

We can forget the thirties for this crisis is far bigger and more complicated in this computerised age than it ever could have been then.

I love the idea of present ecomomic models being thrown to the wind. They have proved useless in predicting the problems and even more useless at resolving them.

I have always thought that the country has to put its own house in order and that will take years. It is essential that we have a proper national bank which provides the facilities of a normal retail bank and is always a safe haven should times become even more volitile. It ensures that society will not break down and pensions and benefits can still be paid. Prferably non profit making without shareholder interests with savings guaranteed by the government but not run by them.

The economy as a whole will take years to recover but certainly needs to be restructured so it is more self-sufficient. New business start-ups to be encouraged both for home and export consumption a more realistic attitude towards population growth and the strain on what will be creaking public services and more emphasis on modern agriculture again so we can feed ourselves All in all a far more widely balanced economy fit for purpose.

If countries cannot even put their own houses in order as part of a future strategy then there is no hope for the global economy. We could see a fracturing and movement to the east. Even more important then that we strive for more self-sufficiency during what could be an ever changing and challenging period.

Linking pay to long term performance, with the possibility of claw back if things go badly wrong is good.

Of course it would be fair if Politicians also had the same arrangement!

#45. JadedJean wrote:

Rubbish as usual.

"Just how do you practically propose we "take steps to purge these non-economists for everyone's benefit."if"changing the government is not the answer and may even prevent a proper solution!" ?

Prima facie, you appear to subscribe to 'foolish' (?) magical-thinking and ranting. Does such behaviour work to your, or anyone else's, advantage elswhere?"

Your are absolutely illogical. The civil servants and academic economists, that I want purged, are not the political government appointments that your response implies. Your cretinous rubbish and objections serves only to show how stupid and ignorant you are.

Precisely - Political Governments change and whilst this happens matters are put on hold - this always happens everywhere in the World. The executive takes time to assess the administration and to make its mind up. Perhaps you disagree with this - that is not my problem it is your ignorance that is showing through.

Live in your fantasy world is you wish but let the rest of us delay with the real world not some hypothetical academic nonsense that you see in your dreams as the 'real' real world. You are wrong and have been wrongly educated and have wasted your time being educated and our money educating you.

The second paragraph of you critique of my previous post is a logical absurdity based upon your idiotic fantasy version of the world, fractionally understood and half read arguments and the fake version of reality that you inhabit. You are, in short, wrong and your contribution is a waste of blogging space! The arguments you put froward make no sense at all and your basis of understanding is fundamentally flawed.

Eventually the system will correct itself.

Bankers offspring will no longer have to compete with plebians for university places. Their fathers will have bought them a place.
Likewise, hospital beds will be for the gentry only.
Deep mining and ship building will flourish again all over England.
English men and women will return to the fields.

Why?
Because those awfully clever bankers will have reduced most Brits to penury.

Once the UK standard of living is low enough to compete with the third world then all sorts of industries will return.

But with industry comes unions.
They will sort out the banker class.
Then the middle classes will rise.
They will sort out the unions - allowing the rise of the bankers.
And then everything will repeat itself.
Ad nauseum.
..

To me it's clearly not a case of either/or. We need capital and regulatory reforms AND we need changes to the bonus system to make it more focused on balanced risks and long-term performance.

But the most essential thing is that all of these changes are co-ordinated internationally. Banks are global businesses that will play one country off another if Governments don't work together.

Robert

Good analysis of a complex subject but at the end of the day - only bankers really understand banking as it is set up now in the current systems.

Per A. Turner - banks are too big and too complex and the analysis is too complex and this plays to the bankers as turkeys do not vote for Christmas (sorry, I mean Winter Festival) and on current progress it will take about 37 years (just a guess) to make any real progress on resolving these issues.

The whole thing is far too complex for most people to understand too many banks doing different things in different countries etc.

Transparency is needed and so is simplicity:

Banker X - Salary 950K - projected annual bonus £470,000
Banker Y - Salary £1.2 m - projected annual bonus £645,000
Banker Z - Salary 300K - projected annual bonus £200,000

Who on paper is over-paid - silly question as we don't know the background - but each banker would have their own story - perhaps one, all or none are over-paid.

However, under the review of an experienced banker/regulator, if the bank and individuals name are redacted and a brief statement given about the banker's activities - most bonus reviewer would be able to see at a flash where the problems are likley to arise and this needs to start with projected bonuses so that over payments can be spotted early.

The question is to sees and reviews the list - should be the BoE in my mind and should apply to all bankers without exception - discrepancies could be spotted and the reviewer would have an over-sight of the industry.

That is all that is needed and tranche 1 review - a GCSE kid could get it started and do a reasonable job.

It just needs someone with some guts and common sense to get it started - the critical missing ingredient - the Eienstein factor!

I can think of a few crusty old accountants who would do a few dozen pages of these lists in their lunch hour and still finish the Times crossword.

Perhaps Not so Jaded would give us a psychometric profile of the ideal candidate for this role?

is it possible that the majorty in the UK and USA are being played in a wider, more pernicious game of 'piggies in the middle'? Where did all the money from the the late investors in the Madoff scam etc go?

Robert, why in this whole sorry process have you not mentioned the impact of the shadow banking system in the financial crisis? it is the unregulated parts of the financial system which contributed a significant amount of the turmoil we experienced and it could be said triggered the run on the banks similar to those experienced in the US in 1907 and the depression years. Why is so little of this explained to the general public? it is up to you at the BBC to represent a balanced account - somehow there is a feeling out there that you have followed the line of weakest resistance on your explanations of the crisis and helped fuel the public perception. Try reading a number of economist research notes rather than following the politically-driven escape route demonstrated by the hopeless Brown and Darling.

E-logic (#49) "BUT NO BANKER should be in receipt of a bonus until they have re-paid what they took from the public purse."

Have you seen it explictly spelled out anywhere what the terms of the loans to/investments into, the bailed out banks actually were? And how about this - what exactly is the future?

66. At 8:00pm on 07 Sep 2009, JadedJean wrote:

'Where did all the money from the the late investors in the Madoff scam etc go?'

I should have thought that was obvious... It went to paying interest to those that had 'invested' earlier at unsustainably high rates. That's what ponzi schemes and pyramid schemes do.

If for a moment we consider a true "Global Economy" in a three dimentional World Economy, we have all "Lost" several Trillion Dollars in asset value since this crisis began. This has major consequences for all of us, particuarly those in the West who enjoyed high standards of living. We shall have to face lower standards of living, higher taxes and possibly deflation or little growth for a decade whist we pay back personal, corporate and national debt.

The game has changed in that the World will have many more people, with us no longer enjoying the high standards of living we had up to last Year. The damge has been done yet we are not yet addressing the consequences as Politicians globally desperately try to return us to growth, based again on debt. This is no solution and history will show this to be right

We also need to understand what asset value really means. Jaded Jean asks where has all the money gone?

Liquidity and cash is only one part of wealth as assets are "valued" at a price. If your house drops from £300,000 in value to £200,000 in value you feel poorer and are poorer. You are possibly in negative equity or if you have paid the mortage, you have lost £100,000 in value.

Banks profits and their accounts rely on valuations of millions and trillions in assets which can be drastically cut back overnight if Standards and Poors Rating Agency takes their AAA rating and drops it to an ABB or similar.

Asset valuations of companies, other assets such as Gilts, Houses, Factories all are susceptable to falls and thus the "Cash" available if you sell falls too. The money in Trillions has gone, simply gone. We are all now less wealthy as a Global Nation of Nations. No National Politician is going to pick up that hot potatoe however as there are no votes in it.

66. At 8:00pm on 07 Sep 2009, JadedJean wrote:

'Where did all the money from the the late investors in the Madoff scam etc go?'

To be really clear in my post at 69, I should have said... It went to paying dividends at unsustainably high rates to those that had invested earlier.

John_from_Hendon (#62) More rantig and blustering as usual ending with: "... You are, in short, wrong and your contribution is a waste of blogging space! The arguments you put froward make no sense at all and your basis of understanding is fundamentally flawed."

Yes, yes, but aside from all the above invective (instead of answering the question), who is going to do what you say, and how and why should they?

I keep asking you bow these policies which you imagine are required are ever to be implemented given that we have had liberal-democractic (anarchistic) governments which have been essentially hands-off window-dressing for years. This is the policy (devolvement/dregulation/freedom) which Civil Servants in 'agencies' have been told to implement for decades (including bodies like the FSA). It's been like this since the 1980s. Honest.

It seems to me that you don't know that this is how the 'real world' out there has been working. Do you work in one of those 'colleges' I referred to a while back? It's you who keeps saying what should happen whilst being blind to what is happening by design, it seems to me.

So, I ask you again:- without a Command Economy (National Socialist state), just how is any of what you demand ever going to happen?

Or are you here just to rant and abuse? ;-)

robiati (#69) Yes, but did you look to what the feeder funds were, how well they did, and where the money went? This all about in-group vs out-group size.

Wow ! I think a lot of you guys are missing the point here when it comes to bankers. Its like doctors, teachers, professionals in general, they get their kids to join them. You end up with a closed shop, well 95% closed. Banker fathers create banker sons, then grandsons bankers.

They have brothers and uncles called polititians and bishops.

I dispair....

Nepotism still rules the world....:o(

Comment to post #27, my view is I imagine we don't see or hear the dialogue taking place because it doesn't make for an interesting story, which I believe is one of Mr Peston's points. Besides, it's proving cathartic to demonize the entire financial sector and politicians know that. Normally the furious ill-winds of a recession get directed full bore at politicians. This time at least they've got some greedy dragons to slay.
I agree with others, singular focus on bonus pay as a means to prevent systemic failure is a red-herring; it appeals perhaps because of a disparity of income across our society and maybe a sense that big business capitalism is not that efficient at redistributing wealth - except to those at the top. Bonuses may have played a small part for some, but there is far more to why some banking business models resulted in an over-reliance on short-term wholesale markets, a number scrambled to become big-players and others got caught with their trousers down working with specific fixed income products relating to subprime and credit insurance products. I don't have all the facts so others may have a more informed view. Noise abounds.
Promoting financial stability I hope continues to form the mainstay of any G20 meeting even if the public focus is on slaying dragons. Stemming all risk taking now is probably not conducive to growth either, nor would an abrupt vault face of our saving habits (i.e. none). In addition to some of the questions Mr Peston raises, I'd like to ensure that the plop foisted on tax-payers in the medium-long term goes back to where it belongs. Free-market private capitalist neo-cons should be frantic with desperation that their ideology has been atomised; better come up with a couple of carrot and sticks. Is a smaller, perfectly formed financial sector better? Possibly, but at least get the wheels chugging along again first. Enhancements to Basell II ? Maybe but the more capital banks have to hold surely implies accepting a higher cost to obtaining credit which might not help in the short-term to a nation of borrowers. Not convinced Basel II would save us from systemic failure. Will it see the wood for the trees? Will it spot the collective liabilities across all financially linked institutions on and off balance sheet? Can a bank ever hold enough capital to avoid failure without giving up fractional banking model? It will be a challenge to spot the “tipping point” on all risk taking (except in retrospect), perhaps better to focus on specific risk taking, say, prevent excesses that relate to booms based on the illusion of wealth creation, only real to those who just happened to be well placed to take advantage, and that’s not just some bankers.

Can anyone explain to me why individuals who have become homeless and or lost their jobs as a direct result of the knock on effect of the chaos caused by Banks here and Wordwide, are unable to claim individual compensation direct from those Banks. I know there is a process in the UK but it is almost inefectual as it is Government processed, when in my opinion the Banks should be made to reinstate the status quo of innocent individual losses. Is it not possible to to make a "Class Action" claim for all those concerned as happens in USA? After all, this is a real case of serious financial consequences to innocent parties.
imp-man

Where did all the money go?

'It' (or some of it) 'went' in consumption and some of it was never really there in the first place as being in the form of or a portion of over-valued assets - it was a combination of paper money and world natural resources which have been used up or converted into waste - economic theories still apply!

#73. JadedJean wrote:

Tripe! (again)

Your inane comments never directly address any question and all you do is support the status quo. You have no understanding of number or of the simplest (or more complex) mathematical drivers of business, yet you spout nonsense supported by quotes by your fellow travellers of wrong and failed economists and psychologists. Your persistent desire to look for conspiracies is I believe directly attributable to you lack of understanding of the arithmetic of business and commerce. This is the main driver of business not as you put it "happening by design" - a conspiracy. Most business have enough trouble actually doing business, selling the things they buy for more than they have paid for them, to 'design' anything more devious. You don't seem to understand the basic arithmetic imperatives of business and this is why you simply don't understand.

I would also add that at least I am looking to find solutions to the some of the problems of the UK economic world - you never do! All you do and all you can ever do is criticise any proposal for change and that is yet another validating reason to denigrate you and your contributions. While I am about it: here is a mechanism for change, with historical support - your great friend and fellow far right winger, Mrs Thatcher disliked the prevailing economic atmosphere so when she came to power so she took away their grants and hey presto she got rid of her economic critics to the dole queue. That is where the present band of failed modern economists should be consigned - it has been done before it will be done again and probably by David Cameron!

Haven't we missed a level here.... shareholders!!

We are talking about financial organisations that are connected at the hip to institutional investors...

So I'm managing a portfolio with substantial holding of shares in a Bank... I'm looking for a short term gain. I put a Patsy in charge (on a good salary) and directly employ an ex-banker to advise.....

I get my massive bonus, my ex-banker get's his :)

Bottle-Glass.. Glass-Bottle..

Bankers bonuses are not the only issue

#77

That would be a lovely idea - just think the government could do that on behalf of the population in an attempt to reduce the social security payments.

We should also remember the role played in this huge mess by the overpaid board members. Remember, these guys have been found out; they sat around doing not a lot, giving jobs to mates, and there was the well-reported instance of a risk manager being pushed out, as was heavily discussed in this blog.

Some reports are coming out of America that those with good credit ratings are now entering load default. First the sub-prime, and now the prime.

Any report of this crises being over is a mere expression of hope.

The Priesthood or just hoods in suits.
Here is the true nature of central banks and their divisions...

https://www.youtube.com/watch?v=u-54Y-A9iBo

It is very simple but also very complicated because the scam has gone on for so long.

A bonus is a reward for extra good work. It should enable the recipient to have a really good Christmas or a special holiday. But a million pounds is life changing. It is more than a person on the average wage will earn in a lifetime of work. In my view it is about time we stopped kidding ourselves. These payments are not 'bonuses'. They are bribes to ensure that the recipients will support the dubious practices which their leaders privately want used but wish publicly to deny.
It is time to get back to basics. What are the financial institutions for? What purpose do the banks, the exchanges, the insurance companies etc. serve? Once those questions have been answered regulation should ensure that they do just that.

Nothing has changed. Over the next week or so City fund managers will get ready to sell Cadbury to Kraft so weakening the UK economy a little bit more by taking away some of its potential. They won't then take some of their gain and use it to create another company but turn a lot of it into cash and/or go and gamble with it somewhere else in the market.

All we can hope for is that the EU competition people step in and stop this unwelcome takeover before it gets moving. Alistair Darling won't do anything because he doesn't believe in economic patriotism.

How many banks does the World actually need.
If you were to listen to the bankers, they would be more than happy and argue accordingly for one.
It is the diversity of society that needs a diversity of banks.
Banking is not a luxury as it was in the 30's or 40's when few in society had bank accounts or infact the need for bank accounts.
To exist in this modern day society each of us needs a job, a bank account, and a house. The actual productive wealth created by working is now so diluted by the banking system that serious change is required.
When a pound is moved from place A to place B and crosses the boundaries of financial definition (cash to transfer, to credit, to asset, to cash) so many fees have been levvied it nolonger looks like 100 pence anymore and much more like less than 90p. The whole financial network is now too large, too complicated, and too self serving.

Reforming bankster pay and tinkering with core capital requirements are just spitting in the wind. The assets held at or just below par on banks' balance sheets are in fact worth bupkis. Go look at the delinquency rates, the cure rates and the chargeoff rates for yourselves and you'll see how Govvy borrowing is just papering over the cracks. There is no more future demand left to be pulled forward. The consumer has hit the wall in terms of the debt burden they can handle. Consumer DTI needs to fall by ~30% to get us back into equilibrium, never mind the issue of balancing the federal books.

"Reflation" worked for inventory-led recessions like the early 90s and 2000-2001. It won't work for the first credit-led recession since the Depression. You won't hear about this from the commercial news orgs (CNBC et al) since they exist to sell you that good feeling which sells ads. I had hoped the BBC, blessed as it is with a huge subsidy, would have the balls to run with the real story here, but obviously not. I can understand why - telling people in a blog every few days that many of the major banks are insolvent due to bad asset marking doesn't make people "feel good". It also gets real old real fast - a bad angle to take from a copy perspective.

How about a story on the banks bidding par at the public auctions for their own repo'd properties Bobby Boy? You could even get out of those nice comfortable boardrooms for a change.

market dash ticker dot org.

The great risk here is that the grandstanding politicians force the central banks and other regulators to forget why Basel I was an insufficient basis for bank capital adequacy control - namely that the banks' risk assets are not all uniform (in fact, very far from that).
By imposing one overall leverage ratio (if at a low level) – as Basel I largely did - you naturally force the banks to increase their risk taking, so as to maximise the earning power of the available capital.
In other words, you promote a 'race to the bottom', in terms of relative riskiness of the banks' risk portfolio.
Also, a tightly-imposed overall leverage ratio will also inevitably increase the cost of credit - a factor that is getting absolutely no coverage or attention at the moment.
The fundamental drive behind the Basel II developments was completely correct - namely, that the capital adequacy measurement and control system needs to properly differentiate and identify the ‘capital loss’ risk of any given banks risk asset portfolio.
Where it went astray was in allowing too much credibility to be placed upon (a) Rating Agency assessments, and (b) Value at Risk systems that many banks were utilising.
This led to the under-estimation of certain risk aspects, including in particular those of (i) ‘market’ pricing (for assets that are not typically held to maturity), and (ii) the funding structure for each bank (the root cause of the Northern Rock problems, of course).
It should also be remembered that many of the worst cases of excess leverage were in either investment banks (not usually subject to the same regulatory regime as the commercial banks), or hedge funds (often funded largely by those same investment banks).
Removing those 'regime' anomalies, and tightening (but not abandoning) the requirements from Basel II, would be a much better way to go, as compared to what seems to be the focus of discussion at the moment - driven (as I noted before) by the grandstanding politicians who (as is often the case) don't understand the realities of what they are spouting about.
It has to be hoped that the more mature regulators will put things back onto a better track, when some of the current public debate heat has cooled off.

Nice sentiments Hosier.

How do you intend to put a figure on the risks arising from market pricing and funding structures? Leading on from that, how do you intend to avoid the banks gaming such an overly complex system as they invariably would - a race to the bottom indeed.

There is one over-arching regulatory system which would ensure as far as is possible in a market economy, prudent behaviour.

Its called capitalism. Its called letting failure be punished and prudence rewarded.

Out with corporate profiteering. In with capitalism.

I don't see why we have to make a choice between banning bankers' bonuses and reducing banks' leverage to sensible levels. Both are achievable and highly desirable.

It's obvious that the banks dont have enough money to get out out of the brown stuff because all of the money that is supposed to help with the situation is being paid to the big boys who obviously dont know what they are doing, if they did we would not be where we are now. I dont care if these "big boys" think that they have more degrees than a thermometre, the only degrees or PHD's that they have are PHD's in STUPID and they are the biggest conn artists and everybody in the Government department lets them get away with it. I just wish that the Government has as much interest in the Justice system and start getting their prioroties right.

What we really need is:
(i) Penalties for failure to match those for success. i.e. get it wrong you don't only use your job (with a huge payoff) and keep the bonuses you've been paid for failure. You also go bankrupt and can never work in finance again.

(ii) Banks small enough they can go to the wall if they fail.

There is nothing wrong with big bonuses for doing well then.

Unfortunately this is not what the banking industry want and Brown and Darling are in thrall to them not the electorate.

I still think it very odd that the very people who encouraged the bankers to behave badly with "light touch" regulation, and thereby make their economies money,are the same people proposing new regulation and punishment for their buddy nasty bankers. And I repeat an earlier posting #30: the reserve banks are the problem.

I now understand why there has been so much smoke from the French and the Germans. Hedge funds and bankers bonuses are a nice irrelevance to distract the media. The real issue in a fractional reserve banking system is the ratio of lending to core equity capital. Over ten is reckless. Over thirty is wildly reckless.

If only the money being lent was being invested in global exploration or manufacturing industry where large returns (mixed with risk) were expected as at one time it was then a ratio of ten (or more) could be easily justified. But if it just being used for mortgages or something, then we are doomed. Doomed!

Robert, of course your primary concern in these articles is the recovery of the economy, but that is not the only thing that is important. It is important for people to feel that they live in a fair society. We have learnt not to take economic stability for granted the hard way recently, I hope we never have to go through the same lesson as regards political stability.

John_from_Hendon (#79) "I would also add that at least I am looking to find solutions to the some of the problems of the UK economic world - you never do! All you do and all you can ever do is criticise any proposal for change and that is yet another validating reason to denigrate you and your contributions. While I am about it: here is a mechanism for change, with historical support - your great friend and fellow far right winger, Mrs Thatcher..."

You appear not to have answered the question again. Did you notice that?

Do ant colonies operate by design (conspiracy)? Is their 'business' mathematical? has it ever occurred to you that you may benefit from learning something about subjects which you know nothing about?

As to the rest of your post, if your grasp of what's going on in eh economy is anything like that of your grasp of my posts, I advise others to pay little attention to what you have to say, as what you say will be based on wild conjecture not reality.

Thatcher's far-right government was anarchistic. It was pro-individualism and libertarianism. It 'sold off' the family silver built up by taxpayers under Old Labour, and all but destroyed the Civil Service (state).

Your grasp of what has been going on is demonstrably very poor, and your understanding of my posts is demonstrably even poorer. That people like yourself do not grasp what is going on, or what others tell them, whilst confidently asserting that they have answers, is just one of my reasons for posting here. It is extreme self-centeredness.

I suggest you need to 'listen' more. Look up 'The Principle of Charity'.

thatmcgrath (#92) "I still think it very odd that the very people who encouraged the bankers to behave badly with "light touch" regulation, and thereby make their economies money,are the same people proposing new regulation and punishment for their buddy nasty bankers."

Why? They are Liberal-Democratic governments. They've spent years (decades) and billions of dollars/pounds etc, fighting statism at home and abroad, on behalf of business and the free-market, i.e. de-regulation. Why would you expect that to change? They've just tapped the electorate's purse when they've run low on capitalization. Liberal-Democracy is predatory on i.e. expolitative of, people, it's what's meant by 'freedom' and consumerism. It's why for decades statists were portrayed as gas-chamber fanatics and worse.. See the Hayek cartoon of 'The Road To Serfdom' made 'by' General Motors or the Youtube BBC program on the same subject made by teh BBC, (chicken farming)...

Robert,
All thid huffing and puffing about banker's bonuses being the cause of this "recession" is we all know political posturing to deflect peoples' attention away from the real causes of the mess the world's economy is now in. To answer your four bullet point questions;

1] NO

2] Rules need to be put in place to prevent banks from moving so much lending off balance sheet thereby allowing to make fresh loans which effectively allowed the banks, because of competition, to print cheap money into a market where loan demand dictated interest rates should rise. Plus rules pertaining to remaining within prudent lending criteria e.g. LTVs of 100% or more should be outlawed - whatever happened to ones ability to repay? Another question: All those banks which invested in other banks issues of mortgaged backed securities did they ever count that investment/lending against their own property lending concentration risk limit?

3] Capital & Liquidity adequacy rules in terms of ratios are fine. Its the ability of financial institutions (as indicated in 2]) to sidestep, within the current rules, these ratios whilst on the face of it complying with them.

4] No, governments should stay out of setting caps bankers bonuses unless of course they are shareholders. It is the shareholders who should have the ultimate say on the bonus structure in any company. However, there should be accounting rules which mean bonuses can only be paid on realised profits and not unrealised mark to market profits.

The only way to get this whole mess sorted out is to hand it over to the ILLUMINATI, they have more money put together in their own OWNED BANKS then anybody else and then they can put the people that are qualified to do the job properly into the necessary positions and there would be no more cock ups because the ILLUMINATI would not stand for that and if the "Big Boys" that they employ get it right they will then be rewarded for it, if not watch out for a red dot on your forehead and I am not talking about a Bindi.

Good point NO 97,
we, the British public are all share holders in the banks as we have lent them how many billoins? And please tell me where our bonuses are? I dont see my bank account looking any healthier then it did from last pay day.
We the working public do things right,like the police and the fire department and the doctors and nurses do an amaizing job and an honest days work and what do they have to do to get bigger pay packet and bonus? They have to fight for it, now wheres the justice in that? The people at the top are setting a very bad example for the rest of us, what goes for one should go for all.

74. At 8:41pm on 07 Sep 2009, JadedJean wrote:
"robiati (#69) Yes, but did you look to what the feeder funds were, how well they did, and where the money went? This all about in-group vs out-group size."

But nothing about this looks to be anything other than classic ponzi scheme stuff. As the article you link to says, in a ponzi scheme the first 'investors' will often be winners and make a profit. The later you make your investment the more you lose. The money... has gone to paying fund running costs, enriching Madoff and paying unsustainably-high dividends to earlier investors.

To prevent such a scheme from collapsing you need many more investors and much more cash as time goes by. The more investors you get the more you need. That's why similar frauds are sometimes called pyramid schemes. In the end such schemes always collapse and they collapse when there's no more cash to make dividend payments and meet withdrawal requests. Often because investors have become uncomfortable and started to withdraw their money en masse.

I have no time for baseless knee-jerk accusations of anti-semitism but if you ask me the article you link to makes way too much of Madoff's Jewishness. Certainly inter-ethnic trust played a big role foundation of Madoff's operation. But this is perfectly natural. Pretty much anyone in business starts by selling to people they know and then works outward. If Madoff were Chinese, Australian, Hindu or Christian he'd have done the same thing with one of those groups. The lesson here is about not placing trust in someone simply because they come from a group to which you happen to belong.

I think you'll find Madoff will have leveraged associations with any and every group he could influence in keeping his scheme afloat. There are no 'in' groups and 'out' groups as such. Just people that invested early and those that invested later on.