A People’s Charter for the Banks

 

In 1842, Feargus O’Connor led the working people of the United Kingdom into a general strike on behalf of the People’s Charter. The Chartists’ aim was for the House of Commons, then run by the elites of the landowning class plus some merchants and millowners after the 1832 reforms, to become more democratic. The six proposals were:

 

  1. A vote for every man over 21 years
  2. Secret ballots
  3. No land qualification for voters
  4. Payment for Members
  5. Equal constituencies
  6. Annual ballots

 

It took many years for the first five to be enacted and many more for women to achieve equality (something not even envisaged by the Chartists). The Chartists failed to drive change because the British economy continued to improve and the other motors for change (such as Trades Unions) were continuously provided with small (even if sometimes significant) improvements in factory conditions, better hours, better wages and the like. This meant that pressure for change in the way that the Chartists demanded were stifled by more practical changes that were seen to immediately impact the working classes.

 

However, the impact of elites continuing to run the country and ameliorated only by small improvements in conditions was (in hindsight) bound to result in extreme consequences. The First World War was a consequence of elites throughout Europe playing a game decidedly different to the vast majority of people and using them as mere playthings – whether in armies or in factories.

 

The BBC’s current six-parter, Tolstoy’s “War and Peace”, shows clearly who was in charge in 1805. That continued throughout Europe until 1918 at least after millions of lives were lost.

 

It may seem difficult to equate the financial crisis of 2007/8 and the consequences of that crisis to the class crises of the nineteenth century but the similarity of elites that are unwilling to give up any power over the economy remains. The elite may now be different (although bankers held great power in the nineteenth century as well) but the way that Banks and their allies in Governments in the UK (Conservative as well as Labour) see the rest of the country as mere playthings is no different.

 

A new film is about to hit the screens in London – “The Big Short”. Based on Michael Lewis’s book of the same name, published in 2010, it portrays the banking world in the USA as completely indifferent to the problems faced by society as they pursue their own, short-term gains and bonuses. Government is either unable or unwilling to address the problems because the banks are so important to the country – too big to fail – and also because most in Government do not understand what to do.

 

Just as the mill owners of the early nineteenth century were seen by landowners as a necessary partner for the future, Governments see bankers and banking in the UK as necessary for themselves. This means that they tolerate all but the very worst abuses.

 

The FCA – Financial Conduct Authority

 

The FCA is the organization that Parliament developed under the Financial Services and Markets Act 2000 to oversee the financial system. Part of its remit is:

 

The reduction of financial crime.

(1) The reduction of financial crime objective is: reducing the extent to which it is possible for a business carried on—

(a) by a regulated person, or

(b) in contravention of the general prohibition,

to be used for a purpose connected with financial crime.

(2) In considering that objective the Authority must, in particular, have regard to the desirability of—

(a) regulated persons being aware of the risk of their businesses being used in connection with the commission of financial crime;

(b) regulated persons taking appropriate measures (in relation to their administration and employment practices, the conduct of transactions by them and otherwise) to prevent financial crime, facilitate its detection and monitor its incidence;

(c) regulated persons devoting adequate resources to the matters mentioned in paragraph (b)

(3) “Financial crime” includes any offence involving—

(a) fraud or dishonesty;

(b) misconduct in, or misuse of information relating to, a financial market; or

(c) handling the proceeds of crime.

(4) “Offence” includes an act or omission which would be an offence if it had taken place in the United Kingdom.

(5) “Regulated person” means an authorised person, a recognised investment exchange or a recognised clearing house.

 

All this is within a framework of law that sits the financial community within itself. By this I mean that the regulator is charged with the above but only insofar that it does not harm banking competitiveness and so that the resources of the FCA are used efficiently under Section 2 of the law. While consumer information is called up in the law, there is no balancing of the “reduction” of financial crime against the needs of the consumer and nothing about how the financial system and banking in particular is to be used to benefit the overall British economy.

 

This means that the FCA is bound by rules that err on the side of the banking and financial fraternity – a financial brotherhood – and does nothing to impact the financialisation of the economy to which I referred in a previous blog.

 

Evidence of the ability of Government to “rebalance” the objectives of the law in favor of the banks is the recent decision of the FCA to shelve its report on the culture of banking and for it to work on an individual basis with banks (behind the scenes). As Michael Lewis’s book and the film so amply shows, culture is at the heart of the problem. The FCA’s step backwards under acting Head Tracey McDermott appears to be sold evidence of its inability under the current law to be effective on behalf of the British economy unless it has a leader within the FCA with enough integrity of his or her own to challenge the banks on behalf of all consumers and all those potentially impacted by wrongdoings of the banks – like Martin Wheatley. Ms McDermott is now no longer in the running for the Chief Executive position. Does anyone on the shortlist that Chancellor of the Exchequer, George Osbourne, has interviewed come up to those exacting standards: someone that has the integrity to see through the shortcomings of the Financial Services and Markets Act 2000 (FSMA 2000) and is able to bring the banks into line so that they serve the economy?

 

I doubt it as this Government has shown repeatedly that it is hell-bent on balancing the books at the expense of all else – even if that means allowing banks to keep the economy from re-balancing to an economy that uses banks and finance from one where the banks suck the rest dry.

 

This means that the law needs to change. It is so important that the UK is “de-financialised” (like an addict that needs to be properly drawn from drugs) that we should seek the FSMA 2000 to be brought up to date with a Charter for economic improvement so that, at the very least, the FCA has to minimize financial crime not just reduce it and so that, in any decisions it makes, the needs for economic well-being override the considerations in Section 2 that could lead to favouritism towards bank and those individuals within that system.

 

Because it has never been shown that a massive banking system does anything other than reduces the ability of other industries to survive because it raises exchange rates, raises property values, sucks the best people into it, restricts business loans because of short-terminism, pays for short-term advantage and (often) criminality at the expense of good business decisions and overly impresses economically uneducated civil servants and politicians with their results.

 

The lessons of an elite taking hold of an economy and leading it to disaster have not been learned. The lessons of 1842 that led to the First World War and the lessons of 2007/8 have been sidelined as this Government now has a majority in the first-past-the-post House of Commons (still undemocratic) and a Chancellor who has decided that bashing the banks has gone far enough. He has done this without any notion of economic objectivity whatsoever.

 

We now need a People’s Charter for Banking and De-financialisation – maybe just two elements to start with:

 

Change the Financial Services and Markets Act 2000 to:

 

  • Section 6 – Minimize criminal wrongdoing not “reduce”
  • Section 2 – Add an over-riding requirement so that any decision of the FCA has to show that it is taken in regard to overall economic well-being of the country not just to the financial industry.

 

Just like those that had been left out of the elite ruling classes of the 1830’s and 1840’s, those that are not allowed entry to the financialised sector, i.e. the mass of people – the British public, need to challenge how decision-making in that sector, now taking far too much of the British economy and with very disputed benefits to the mass of people (just like early capitalism) need to agitate for change.

In the 1840’s, the Chartists were successful only in bringing the issues of the working class to the attention of the ruling classes. They did not succeed in most of their demands. It took decades until those demands were met and eighty years before women were given the vote. This country still has a House of Lords and unrepresentative democracy in the Commons as a result of first-past-the-post: we are very conservative. Nevertheless, when British people have their backs to the wall, they react. The FCA is putting British people’s back to that financial wall by their inability to tackle banking as it should be tackled – at the centre. With a pending recession in the UK – in the midst of austerity – this is a dangerous situation. Time to make changes.

 

 

 

 

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Don’t Look, Won’t Find

DLN

 

Don’t Look, Won’t Find – Money Laundering in the UK

Transparency International – UK just published “Don’t Look, Won’t Find” which exposes enormous gaps in the UK’s ability to stop illicit money coming into the the country.

The report shows how all sectors, from banking to the enablers of money laundering like the accounting firms, legal firms, company registration firms to the sellers of final products and services like auction houses, private education, fail the test of oversight and reporting on a consistent basis.

This means that huge amounts (tens of billions of £’s) enter the country illegally from China, Russia, Africa and elsewhere – depriving those countries of the money they need and, as a by-product, pumping up house prices in London.

I had the privilege to Chair the Advisory Committee for this report – part of the Corrupt Capital project at TI-UK which aims to uncover how London (a major financial centre) needs to work hard to rid itself of corrupt capital that enters its system here and in the many tax havens to which it is connected world-wide.

Those who have written this report have done an excellent job of uncovering the chaos that exists in oversight and reporting systems in the UK.

 

Don’t Look, Won’t Find

“Blind Eye” Culture in Business

A good article written by Rowan Bosworth-Davies and posted on Linkedin today prompted me to respond favourably as follows:

This article has a shown a good understanding of “blind eye” corruption that is, unfortunately, at the top of many banks and many businesses. It could be argued that HSBC, Tesco, GSK and many others (from the UK alone) pushed bottom line growth at the expense of ethics and (often) the law while senior management profess no knowledge whatsoever of the problems that were under way in their companies.

When I wrote “Last Line of Defense” 15 years ago, I tried to explain in the book the process that a business (written there as a fictionalised US defense and aerospace business) went through that propelled it to commit corrupt acts while keeping the boss clean. Having worked in that industry, it was something that I had seen at first hand and 15 years’ later, it persists. Businesses are subject to major stresses and opportunities that drive them to the edge of acceptability.

For large companies, the penalties need to be huge to stymie the desire to do wrong and they need to be enforced. Prevention is the best cure, of course, but that depends on rigorous independent scrutiny by NED’s /Independent Directors that has not showed itself to work at HSBC.

It needs external auditors who should be required to carry out audits of potential corruption and the company’s adherence to processes that prevent it.

It requires leadership that drives in a culture of ethics throughout.

It requires a business that makes it clear that is has to know that each area adheres to its ethical culture and where there are no areas of secrecy – again, as is claimed at HSBC.

The banking crises and the problems at Wall-Mart, Tesco, GSK and elsewhere show that the problems that bedevilled the Defense and Aerospace industry (and may still do in some areas) is common throughout finance and elsewhere. This culture is one that has been tolerated by Governments – especially in the UK where prosecutions are not made if there is doubt of success. This is a problem in corruption and money laundering that makes top business people complacent. Only in the USA does there appear to be a drive to resolve this problem – at least via prosecution.

Gulliver’s Travails – HSBC’s Satire on the rest of us

150225_Gulliver

 

It seems like Jonathan Swift’s best act of satire has been mixed with Robert Louis Stevenson’s best story-telling and then updated to the 21st Century as HSBC were derided before the House of Commons Treasury Committee today (25th February, 2015).

Nick Shaxson wrote “Treasure Islands” about tax havens but even he could not have foretold what looks like a complete satire on British society perpetrated by our biggest bank.

The Chair and CEO of HSBC Holdings (Stuart Gulliver and Douglas Flint) may well have been crafted by Swift and Stevenson. Lemuel Gulliver and Captain Flint (or his parrot that sat on the shoulder of Long John Silver) are two of the greatest characters in British fiction.

Gulliver’s Travels was (especially in its pre-Bowdlerised version) a satire on government and the British people.

Treasure Island was a story about man’s greed.

How odd that its two best-known characters come together before the Commons treasury Committee – both trying their best to defend their own position and that of their bank’s.

The Satire

HSBC are surely being disingenuous or maybe downright satirical pouring scorn on the general public. As they have been dealt blow after blow around money laundering, gold pricing, Swiss bank tax evasion and others, the satire has grown.

We sit open-mouthed at the sight of senior business folk that have earned £ millions but who take no overall account for the problems that were caused on their watch. Banking is now held in total contempt by most yet no-one has been brought to account in the UK since the banking-induced recession in 2007/8.

To the banks, the rest of society appears to be merely a group of Lilliputians finding a giant on the beach but being so impressed by their size and strength that we can do nothing.

To the banks, the rest of society appears to be like treasure chests that are theirs to own.

This is the reversal of their original intention – which was to lubricate business and to enable tomorrow’s investments to be made earlier. Society needs to find a way out of the satire that is being played on itself and what better opportunity is there than in the dual presentation of Swift and Stevenson’s characters before us?

No Impunity?

It is very hard to feel empathy for wealthy bankers who have presided over such failings. Douglas Flint points out that he has not taken bonuses for some time and Stuart Gulliver believes that banks are now being held to higher account than the Church and the armed services. The first is irrelevant and the second is a disgraceful statement that does much dis-service to any organization that has made so many gross errors of judgement and suffers so little governance – governance that is only applied when mistakes are found out.

The ability of senior bank staff in the UK to maintain complete impunity from prosecution remains a singular insult to the rest of the population that has seen real wage deflation since 2007/8.

However hard it is to bring bankers to justice under UK law, there seems to be as little chance of action now as there was when Gordon Brown was snuggling close to that community when the roof caved in.

HMRC appears complicit in its investigations since the receipt of whistle-blown data five years ago but that should not inhibit the UK’s investigators from doing more than the Treasury Committee – which seems to accept that it cannot find anything out before it goes wrong time after time after time and just hopes that HSBC gets it right sometime.

Messrs Gulliver and Flint had an uncomfortable day today and I am sure that they are working hard to make things right. Yet, claims that they did not know what was going on in Switzerland (or elsewhere where the bank failed) are weak claims that have not been sufficiently critiqued. When HSBC bought the Swiss private banks, they knew the secrecy laws in that country and they knew that there were major risks. To adhere to the escape clause of Swiss secrecy in a UK-registered company with world-wide shareholders seems to be an attempt to escape responsibility for any problems that might ever be encountered when an acquisition is made.

The reputational losses to HSBC as a result of the acquisition is substantial. HSBC’s shareholders should be mounting a class action on that basis alone as today statements were made that seemed to suggest that when HSBC makes an acquisition in a place of opacity, no matter what the outcome the senior staff that signed off on the acquisition cannot be held to account.

That is in addition to the nonsense that HSBC Board members should be relieved of governance responsibilities if there is secrecy in a jurisdiction.

This is surely a great satire perpetrated on the rest of us. Someone does need to unravel it. Swift originally wrote Gulliver’s Travels as a gross satire on society. We should not allow Gulliver’s Travails (and Flint’s) be Bowdlerised in the same way.

So and so’s. How Some Banks Con

What does HSBC stand for? What do we do about it?

“so and so” – an undefined person considered beneath contempt

  • So, HSBC is shown by the BBC to have systematically organized illegal tax benefits for hundreds or thousands of its customers through its Swiss subsidiary. No surprise.
  • So, HMRC (the UK’s tax collection agency) has recovered only £135 million since that time in tax and penalties out of billions that are illegally saved each year. No surprise.
  • So, HMRC and this government agreed with the Swiss authorities (after the leaks about HSBC were found) not to prosecute except where the cases would be virtually guaranteed to succeed. No surprise.
  • So, the then Sir Stephen Green (now Baron Green), then HSBC’s CEO at the time is not talking and the Conservatives (via the chief Secretary to the Treasury – David Gauke) say that there is no evidence that he directly knew of what was going on. No surprise.
  • So, the Conservatives demand to know why Ed Balls, now Shadow Chancellor and then City (of London) Minister did nothing at the time. No surprise.
  • Anyone see the actions that the issues and finger-pointing provoke? Just politicians ranting at each other while the poor taxpayer – those “so and so’s” who have been squeezed mercilessly since the banking industry exploded in 2007/8 – is left with the bill – lower wages and austerity.

Meanwhile, the real “so and so’s” who should have been prosecuted and some doing time in prison are seen as outside the justice system – no longer within the law despite proof of a multi-billion pounds swindle on the UK.

So what?

Well, there has been extreme tax fraud – no-one denies it. Even HSBC accepts that they have had to make major changes in their banking practices – although, according to staff who have left HSBC this did not really make any progress until well into 2011.

Sir Stephen Green may well not have known the specifics. CEO’s of big banks (and most large organisations) are sheltered from the bad things going on but it is no defence to state that they did not know “specifically”. CEO’s are appointed as heads of such organisations and set the tone – the culture – of any organisation. As such, they are culpable for any major misdeeds that occur. In his excellent book on RBS, Shredded, Ian Fraser takes apart any claims that CEO’s can be said to have stood outside the fray. Maybe RBS was even worse than HSBC but senior management set the culture and reap the rewards of profits – Sir Stephen would have benefitted personally from the gains made through tax fraud in the Swiss subsidiary and, if he did not know what was happening (just as Henry II is alleged to have made the claims about Thomas Becket’s murder in 1170), then his lack of pro-activity in finding out would have been a joke. We don’t seem to have learned much in 845 years!

Anyway, if Sir Stephen Green knew nothing and is as innocent as a puppy, then how can Ed Balls (City Minister at the time) be accused of knowing everything by the people who then appointed Sir Stephen Green (now Baron Green of Hurstpierpoint) to Government in 2010?

Is there really a case against Ed Balls when the good Baron knew nothing, apparently? David Gauke sounded ridiculous on BBC Radio 4’s Today programme today because he was being so. Stupid political points were being made when the “so and so’s” who rule the world (the bankers) are freed from the rigours of the law (and any ethical codes) and continuously benefit.

Public Accounting for the “So ands so’s”

So, Margaret Hodge (the Chair of the British Parliament’s Public Accounts Committee – PAC) states that she will bring those responsible before her Committee. She states, quite properly, that the UK is not “aggressive enough” is tackling these issues. Even though the issues occurred during the previous Labour Government’s period in office, Mrs Hodge states very clearly that Stephen Green has a responsibility – he either “knew” of the tax dodges or was “asleep at the wheel” – quite right!

The PAC should now (seven years too late) point to what should be done: not just who is culpable but how the UK will recover the lost tax and how the UK will not stand for repeated situations. The USA fines banks billions of dollars. The UK (with the political establishment too much in hock to the banks and the civil servants and HMRC too timid and weak) does almost nothing but whimpers about no-one being responsible and it being too difficult to prove.

Which “so and so’s” are running the madhouse?

Isn’t it time that those who have suffered so much from the banks’ failures begin to see some recompense? This is not a desire for revenge but failures of this size have not led to a discernible change in this country’s culture or efforts to ensure such failures do not recur.

HSBC seems not to have been penalized for tax avoidance schemes and a culture that would not be tolerated even at Tesco. The UK has a need to change the way it deals with abhorrent schemes and aberrant behaviours. Politicians and those who work in the public sector need to feel the pressure that the public wants them to be under – pressure that needs to result in the defence of public needs. If it does not, then Syriza in Greece was an outcome of such lack of public interest and UKIP in the UK is another (although not quite the anti-aberrant banking behavior that is needed). If this Government does not ensure that the “so-and-so’s” aren’t allowed to run the country, then May’s general election in the UK will see an even more angry electorate ditching them.

Banging the Cultural Drum for Banks

 

Banging the Cultural Drum for Banks

Banging the Cultural Drum for Banks

Culture – the total of the inherited ideas, beliefs, values, and knowledge, which constitute the shared bases of social action (Collins English Dictionary) 

Ethics – the moral value of human conduct and of the rules and principles that ought to govern it |(Collins English dictionary)

“The epitome of the multifarious cultural and ethical failures at the bank include the fact its investment banking arm, now due to be largely shut down, was only able to thrive by cheating, and that the arm, now called Markets and Investment Banking (M&IB), continued to rig various benchmarks, swindling investors and counterparties, for years after the bailout.” Ian Fraser – describing one aspect of his book “Shredded: Inside RBS The Bank That Broke Britain”


 

Just last week, Cass Business School and New City Agenda issued: A Report on the Culture of British Retail Banking . It is a useful analysis of the banking failures but, for once, centred on culture at the banks. As such, it deserves attention.

In a previous note my focus was on how the banks had got themselves into a grand mess because they rushed into a culture that was short-term and focused more on individuals working for the banks than their customers.

The Cass / NCA report is a useful attempt to understand the cultural problems of the banks and what needs to be done to change those problems. It seems churlish of me to sound a note of concern with the analysis bearing in mind how much I have written on the need but, despite the work that has gone into the study, I do find some serious gaps in the assumptions, the recommendations and the risks.

 

  1. Society

 

One concern is that the study suggests banks (particularly the larger ones) are similar to any other large companies – like those in the oil sector (to which reference is made concerning culture change) – and should therefore be treated like those in other sectors. Unfortunately, banking is unlike any other sector.

 

  • No other sector creates money;
  • No other sector holds the rest of the economy to ransom through its systemic economic risk;
  • No other sector is so intertwined with economies and governments.

 

For these reasons, the thought that banks have to be allowed to take care of themselves (which is a crucial assumption of the report) contains dangers that the report does not examine. While banks are intimately involved with other organisations in both private and public sectors, the report does not seem to share a view that wider society has a stake in them. The fact that general taxpayers are paying off the burden of their recent misdeeds is a real and proper concern. It is not just “customers” (a key focus of the report) that feel the problem of poor investment in IT or bad service – it is also all those affected by huge government deficits and cut-backs that have been the result of the banking induced crisis. I don’t see this recognition.

 

What this means is that banks cannot just be left alone to reflect on their cultures. There does need to be a societal involvement in the cultural thinking that shows banks understand what they are there for – which is different to most industries. This culture is not just about being sustainable or not creating “externalities” (like oil companies should be focused on – e.g. pollution) but on the central role that banks play in society and the huge risks that they provide. This short note is not the place to examine the role that banks should perform (although I have touched on that before – https://jeffkaye.wordpress.com/2012/02/05/banks-and-time-travel/) but their national and economic roles and their inherent risks have to be important aspects of their culture.

 

  1. Ethics

 

The mention of ethics in the banking system is a touchy one. Ethical codes are often there to be abused (viz. FIFA) but the banks perform such a key role in society that they should not be allowed to differ in how they develop ethics codes and they should be regulated around ethical behavior.

 

The word “ethics” appears fleetingly in the Cass / New City Agenda report. Yet, it should be the basis upon which culture is developed. It is via an ethical approach to its customers and wider society that banks need to be based. The report focuses on how banking culture has been “Sales” led (even excessively so) but this would not have happened if banking culture and banking leaders had been ethical in their approach.

 

  1. Accountability

 

Again, the report states that the banks operated a “Sales Culture” – and was excessive in that direction. Of course, all businesses have to operate a sales culture to a degree or they go out of business. But, the extreme form of “sales culture” that operated was enabled by top management.

 

It can be stated reasonably that banks operated (and still operate) without a culture of accountability. Another crucial organisational mandate that appears to be missing from the analysis in the report is this one – individuals within the banks seemed to be accountable to themselves or to just small groups. The businesses did not seem to have areas of key accountability for such fundamental mistakes and still do not. Any successful business or organisational culture requires accountability – culture is driven from the top so that it must be clear that “the top” has to be clearly accountable for major deviations.

 

This accountability has to be within the Board, Board Committees, Regulators and Auditors. The culture has to be clear that accountability is embedded within it.

 

  1. Governance

 

This is linked to accountability, of course, but Governance has to include the oversight of business culture – which is itself wrapped within the overall purpose of the organization. Governance is, by law, the responsibility of the Board acting on behalf of shareholders. However, in the case of large banks – and this becomes a crucial requirement – societal governance should also be required. A bank’s board, when deemed to be large enough, should include Directors who are there to judge whether the bank is meeting its societal objectives – a privately owned, market-driven business but with key societal objectives. This is, therefore, linked to both accountability and societal inclusion. Having The Banking Standards Review Council under the auspices of Sir Richard Lambert is fine but this Council is likely to be dominated by the banks – indeed, Sir Richard is looking to the banks and building societies for members – a bit like the police governing the police. The BSRC (if it is to work at all) needs outside members who are not influenced overmuch by the banking fraternity.

 

  1. International Norms

 

Another problem for the banks (and the report) is that we now live in a global economy. As in the period leading up to the disasters of 2007/8, our banks did not act alone but were in a group of western banks throughout Europe and the USA that played the same game. Next time, the centre of the storm may be elsewhere.

 

This requires some real thought being given to how British banking will (if it adopts sustainable cultures) not be persuaded to ditch their ethics if others go haywire as in 2007/8. This requires international banking to be based on the same footing. It may require a set of ethical baselines such as the one that EITI (The Extractive Industry Transparency Initiative) has developed for that industry.

 

  1. Sustainability

 

Covering all of the above is the need to banks to be properly sustainable – and the report does focus on ridding the industry of its short-termism. However, this is, again, for both the industry and for society to develop a sustainable path – as banks are often too big to be left to themselves and have shown a distinct lack of ability to judge what will make them sustainable.

 

  1. Risk and pay

 

The final issue I believe has been de-focused is that bankers pay themselves when they do well and just lose bonuses when they don’t. Assuming they work within the law, why are bankers paid as entrepreneurs on the upside but as staff on the downside?

 

If pay is to be maintained on the upside, then so does the opposite apply. Entrepreneurs are risk animals that bet their own money to reap fortunes if they succeed. A major flaw in our economies is how the financial sector and managers within it (to a reduced extent the same in other sectors) have captured the winnings from those with “skin in the game” – which used to be the shareholders.

 

The latter suffer the risk of loss on the downside, bankers do not. This should be changed.

 

21st Century Banking Culture

 

Society, Ethics, Accountability and Governance appear to be the basis for any banking system in the global economy of the 21st Century. While the report is highly practical and research based, leaders within the UK (not just bankers) should be developing the strategies for the future based on a society that will perform and that we want to be part of.

 

Banking is too important to be left to just practical considerations. Real leadership is required and unless societal, ethical, accountability and governance concerns are fully embedded into banking culture, the same problems will arise time and again.

Banking on Politicians?

I have just read two books that should be read by anyone interested in the huge banking and financial problems that face us:

The Finance Curse by Nicholas Shaxson and John Christensen;

Just Money by Ann Pettifor

Both attack the finance industry and my brief comments on the two books are as follows:

The Finance Curse: Shaxson and Christensen compare the Finance Curse to the Resource Curse that afflicts so many resource-rich, economically-poor nations. The Finance Curse is a more complex story and as difficult to resolve. It is analysed well even if the suggestions about to solve the Finance Curse could have done with more time and resolve. This is a highly important subject that two knowledgeable writers focus on with passion. Clearly, one book will not solve the problem that has taken root over several hundred years but the world is waking up (slowly) to the issue and this book assists that wakening process.

Just Money: Focuses on how Keynes’ monetary policies have been overtaken and forgotten and how modern-day rogue banking is fleecing (as rentiers) business people and society at large.
It is a convincing account of the rentier landlords of money, the new robber barons who have put a cost to the trust that money was invented for.
If right, Ann Pettifor’s future is bleak as her need for political change is mired by the lack of ability of politicians and even business people to understand the problem – the same misunderstanding is apparent in economics. This suggests that, if she is right in her analysis and prescription, no-one will change anything – even after the terrors of the 2007 banking crash. Add to this the positions that bankers and ex-bankers hold in the Establishment and the likely future is more money being absorbed by the banking system and its “owners”.

Financialisation

The overt Financialisation of our economies have progressed to a degree that is now untenable. I wrote about this in my earlier posting in 2012: The Financialist-Political Complex where I likened the supremacy of the banking fraternity to the Military-Industrial Complex identified by Eisenhower after WWII as the key danger to society.

If that danger has been heeded and (maybe) reduced, the new danger to all of us that want to enrich society (and that includes real entrepreneurs) is banking and finance.

In my earlier posting I included the following quote from Tom Armistead:

Banks need to be returned to their primary purpose, which is to serve the real economy, as financial intermediaries between those who work, save and invest, and those who need funds to create new means of production, or to buy a home, or a car.

Yet, Ed Miliband today focuses on a break-up of ownership of bank branches as the answer – as if retail banking of this type was the problem. Ann Pettifor must be screaming at the wrong attack on the wrong enemy – it is the internationalism of banking and the rentier progress of the international banks; Nick Shaxson must be amazed at the simple-minded attitudes of politicians that go for quick sound bites rather than tackle the core issues – how massive banking centres like in the UK damage our economy.

We cannot bank on politicians clearly – they don’t understand. So, the question is who does? While I may not grasp all of the issues myself and while I may not agree with all the remedies that Messrs Pettifor, Shaxson and Christensen propose (and I propose different ones in my earlier post- like a Foreign Corrupt Practices Act for banking), I am sane enough (I think) to grasp the intensity of the problem and to see that our politicians seem either not to have a clue or to be in hock to the bankers (a point I made in that earlier post).

Either way, the two books show the problems starkly but maybe we need a bunch of NGO’s and radical economists (at least as radical as Keynes) to help understanding and an economic overturn of the new rentiers that are destabilising our economies and leading to vast wealth (in money terms) going to fewer people at the top and the destruction of the middle classes.

Cyprus – Cinderella and the Ugly Sisters

The oldest known version of the Cinderella story dates back to ancient Greece – how ironic.

Cyprus was, for many years, an idyllic island – originally settled by Mycenaean Greeks around 4,000 years ago. Known for its beauty and its beaches, it became a tax haven before 2004 when it joined the European Union. Its economy benefitted enormously – Cyprus did, indeed, go to the Ball.

The Sisters turn Ugly

Yet Cyprus is now being rejected by its two ugly sisters – the EU and Russia, who have conspired with Cyprus throughout the last ten or so years by enabling illicit money to flow into the country. Cyprus has benefitted from its relationships with the EU and Russia but those sisters are now turning ugly.

Isaac Newton was an alchemist but even he could not transmogrify base elements into gold. Modern counterparts are far more able to magically transform base elements into gold on a massive scale that would amaze even the alchemists of the seventeenth and eighteenth centuries. Now that money is digitized, base elements (the profits made from illicit activities) can be changed in seconds within banks situated in secret jurisdictions.

The essence of the problems in Cyprus is that a vacation destination, home to many hard-working and energetic people, has been itself transmogrified into an offshore banking centre that is many times the size of the rest of the economy. That the part of Cyprus within the European Union is close to bankruptcy is astonishing enough to many.  Even more astonishing is the evidence that is mounting about a small country enriched in the short-term by a Faustian sale of its soul to Russian criminals.

Cyprus is an island with around 1 million people and a GDP of around $24 billion. Some years ago, the government of Cyprus decided (or was persuaded) that attracting huge sums of digitized money from wherever it could get it would increase their income. So, through increased secrecy laws, a multitude of double-taxation agreements with other countries and low tax rates in Cyprus, it created itself as a tax haven. Russians, for many years with interests in the country, flocked to Cyprus – preceded by their money. Cyprus became a home of money laundering as well as a tourist destination. The combination has been very powerful.

The banking crisis

When the sub-prime crisis hit in 2007/8, Cyprus was enjoying substantial growth. However, it had followed the high interest rates in Greece and invested in Greek banks. When they failed so famously (requiring massive “haircuts” from those investing in them), Cyprus – massively over-extended in them – suffered badly.

While its two ugly sisters worked out a way to enable Cyprus to be the beneficiary of illicit hot money for many years, one ugly sister (the EU) rebels at the thought of such mismanagement leading to a call on it to prop it up. While the EU is full of tax havens – from the City of London to Luxembourg to Austria – the political will of members of the EU such as Germany to continue to prop up Cyprus is vanishing fast. Hard-working German taxpayers, already riled by the needs of Greece, the political anarchy in Italy and the mass youth unemployment in Spain, have been further spooked by the machinations of discredited politicians in Cyprus – already in hock to the Russian mafia on a grand scale. This is why they demanded a contribution from Cypriots that resulted in the mass demonstrations in Nicosia and elsewhere as the middle classes were confronted by the fact that their insured deposits in Cypriot banks were not, after all, insured against the EU.

Where’s the Fairy Godmother?

Cyprus now realizes that its pact with the devil (Russian mafia) and its focus on becoming a secretive, tax haven has turned sour. To remain in the EU, it needs to save its banks. To save its banks, it needs to raise significant sums from its people (in terms of further tax revenue or long-term bond issues) and also from other, overseas, depositors. The latter are mainly Russians – and much of that money is illicit. The mere thought of taxing the Russian mafia is enough to make the story of Cinderella into a horror film – that might make the new wave of horror films based on fairy tales (such as Hansel and Gretel – Witch Hunters) look insipid by comparison.

There appears to be no Fairy Godmother who will let Cinders go to the Ball. It seems to be the case that Cyprus is between the rock and the hard place – between two ugly sisters: one that has plied it with funny money for years, the other that has conspired with it to do so and stayed quiet until now.

Greece has suffered five years of depression. The problems for Cyprus are only just beginning but whereas Greece’s problems remain its own, Cyprus is in much more danger – it is in hock to a mafia-ridden nation and appears to have few friends within the EU who are willing to turn it around. For its people, this could be a disaster – economically and also in terms of the way of life for its citizens. The EU allowed this situation to develop – it should not be blind to the plight of its smallest member. It is enough that fear has been struck into the citizens of Cyprus and to those in Italy, Greece, Spain and maybe France, who now know that bank deposits are not theirs any longer. Bank runs come from times like this.

Allowing Cyprus to be so wayward for so long is bad enough – to allow it to go completely off the rails and into the clutches of a mafia state would be too far.  Cyprus needs a short-term remedy and a long-term plan to get it away from the drug of tax havens. The EU has to turn from Ugly Sister into the Fairy Godmother (and stay the course) or this may well be a Lehman moment that will not easily be forgotten.

The Ownership Disconnect – Managers, Shareholders, Risk and Markets

Or a case of: Absent owners,  managers that act as if they own and get paid as if they take all the risks

Since the banking crisis that became a sovereign debt crisis, the world has begun to focus on the huge salaries and bonuses that are paid to bankers and top business people. In the last week, Barclays Bank announced that over 400 of their staff earned over £1 million in the last financial year.

Whereas those who place their financial lives on the line by building their own businesses and then, if successful, reap the financial rewards – but, if not successful, may lose everything – remain in high esteem amongst most people, those that risk no financial penalties whatsoever (but take massive salaries) have slipped further and further down in the public’s esteem quotient.

Senior managers and directors of major companies (including banks) and sales staff that take home huge bonuses (especially in banking and finance) are no longer lauded for any value they bring amidst a view that their rewards are far too high bearing in mind the lack of risk that they have. This has resulted in the EU plans to limit the bonus payments to bankers – an extraordinary intervention in the marketplace.

Does the marketplace work?

Stock markets are deemed to be the best place to see demand and supply at work. There is more data collected on stock prices than anything else and it goes back hundreds of years. Constant pressure on transparency and liquidity means that markets like the US (DOW, S&P, Nasdaq) and the London Stock Exchange (and others of similar size and liquidity) ensure that supply and demand usually results in a price that means something.

While this has changed markedly with the intervention of computer-driven buying and selling as well as the fact that around 70% of stock is owned by institutions, nevertheless stock markets appear to be mainly market driven. That never means the price is “right” – markets provide a price on any day that may be driven by a myriad of reasons. However, the market price is the price and buyers and sellers are able to take legitimate decisions whether to buy or sell.

Secondary markets

The owners of stocks and shares have, in the vast majority of cases, bought those stocks and shares in a secondary market – long after the IPO. While the majority of today’s owners of Facebook may be IPO buyers, this is only because the company had its IPO just months ago. For the rest of the publicly traded corporate sector, buying shares has little to do with the company involved.

Ownership of a share means potential increase in capital value and dividends growth – and some ownership rights which are rarely used by the individual buyer (although Martin Sorrell is facing some pressure from recently voluble fund holders). Shareholders are primarily interested in the value of the stock – almost unrelated to the company.

Robert Beckman, a well-known business writer from the 1990’s, estimated that 70% of a share’s value related to the way the market was going, 20% related to the industry and only 10% related to the individual stock. If true, this means that ownership of shares in the quoted sector is almost unrelated to the individual stock and owner responsibilities are negligible and rarely used.

In addition, the development of the joint stock company limits the risk to just the loss of the investment and no more (unless buying stocks through leveraged schemes or option trading).

Ownership means almost nothing these days when that ownership is in a publicly traded company.

Staff acting as owners

Lack of ownership in publicly traded companies (the understandable move away from the 19th Century where owners were managers), means that senior managers now act as owners. While it is absolutely true that managers spend considerable time talking to representatives of shareholders (pension funds and similar) and to others who write on their stocks (such as journalists), this is to keep the price up in the market relative to other stocks in the secondary market. It is part of the process of market transparency. Today, that is the main connection between management and owners (at least in terms of the value placed on the stock).

The Board  (with non-execs here to represent the shareholders) carries out primarily a governance role and has, usually, a compensation committee. Their job is to see that senior staff are paid a salary commensurate with the market or whatever and to secure senior staff in their jobs. This crucial role has, of course, been shown to be spurious in recent years.

The banking crisis has shown that there is no such thing as market rates for top staff in major corporations. Has it been just a way of jockeying for position that seeks to provide pay at the highest levels possible? CEO’s claim that they need to be paid international salaries to stay in their UK jobs no matter how poorly their companies’ share price performs.

Recent comments from those involved in the industry show how few CEO’s move abroad or from abroad to the UK. This basic tenet is mistaken, let alone the requirement to pay huge commissions to banking staff when their risk – like those of CEO’s – is no more than to keep their basic pay (already substantial) or in the worst case lose their job. This is completely unlike the entrepreneur, who has both management and ownership, and the heaviest of financial risks – the potential to lose his / her financial assets as well as their job. Both get potentially great rewards, but their risks are completely different.

Market rates of pay are notoriously difficult to derive. Where there is a vast statistical database, then it is possible – although here the markets are driven in different directions by groups of people getting together in unions to drive up market rates (and other forms of benefits).

The shareholder / manager dilemma

 

This can be stated for modern corporate life (in publicly traded companies) as:

Owners that stand back too far leaving managers that act as if they own companies and get paid as if they take all the risks

The issue is important for many reasons. We now have huge and dominant multinational corporations. We have shareholders that seek high and constant returns but have no affinity to the companies they “own”. We have managers that are (too?) highly paid and have wrestled a much higher share of the companies’ income to themselves than ever could have been envisaged and (in the UK and the USA at least) with over-dominant banking and financial centres which have tended to suck the life out of the entrepreneurial sectors rather than giving it life.

Can Shareholder Activism be Re-ignited?

As the West sinks dismally into austerity and behind the newly developing economies of China and India, where corporate ownership is complicated by government (intervention or direct ownership), we need a rebalancing away not just from banking and finance to areas of real value creation. We also need incentives for owners to own and managers to understand and accept real risk before they can access the type of returns that real entrepreneurs can access.

This will (if it is possible) drive any massive returns to the holders of real risk – those who can lose everything or gain massively. This is not the lot of managers – whose risk profile is slanted to the positive and whose manipulative skills are far greater than the quasi-shareowners buying their ownership in secondary marketplace.

Entrepreneurship is at the heart of business and growth of any economy. But, it is stifled by the rise of the manager in publicly traded companies where that rise absorbs far too much of the value created.

Shareholders are slow to act as they are, in the main, too far from the action, unknowing or a manager themselves – as in pension funds.

Now, the UK coalition government will be giving shareholders the right in annual general meetings to reject senior Directors’ pay proposals. The EU is considering the same thing. So, the pendulum is swinging in the direction of shareholder activism after many years of drift and decay. On both sides of the Atlantic, it is necessary for shareholders – who actually, in law, own companies, to assert themselves in pay and other issues. Economies in the West are dividing between those who are in control of an unrealistic share of corporate income (and in 2011, FTSE Directors pay rose 49% while average pay in the UK rose just 2%) and others. The others are shareholders and other employees.

A true market can only operate where monopolies fear to exist. It is apparent that quoted company directors have been able to set their salaries within a close market situation. In a long recession that we have seen in the West since 2008, it would be remarkable for there not to be a kick-back against the ability of one sector of society to benefit so much. Asking for constraint is insufficient. Markets have to be enabled and the recent moves to encourage shareholders to be more active and to give some powers that actually work are in the right direction.

Now it is up to the shareholders (basically, the senior staff of fund-holders like pension funds) to bare their teeth – like they are doing at WPP – and show that just because they go to the same clubs and come from the same schools, shareholders can be properly represented and the market for top directors’ pay can be made efficient.

A Proposal or Three

With stocks bought in a secondary market where ultimate owners have little or no real understanding of the business or ownership responsibilities, it seems reasonable to require large owners of shares to take their responsibilities more seriously – how should secondary market shareholder activism become real? Some suggestions:

Proposal 1: all owners of more than 1% of shares of any traded company should be required to nominate a non-executive director or actively support the nomination of one proposed by another such organization.

Proposal 2: such organizations, who normally buy shares on behalf of others (pension funds, hedge funds or similar) should ask their own investors (mainly those who put their savings into those companies – not just their own shareholders) to vote on their proposals.

Proposal 3: all such organizations have to register as “major shareholders” when they accrue over 1% of stock in a company and the FSA / Stock Exchanges should monitor the job they individually do to actively monitor companies – in the same way that organizations monitor MP’s voting.

All the above relies on making this easy – e.g. online only voting within pension funds and similar (i.e. no computer access, no vote) but, in an age of digitization and where companies and owners are so disconnected, secondary markets need to become activated.

 

See-through Society – transparency

Cleaning Up

Chuka Umuna, the Shadow Business Secretary, recently called for companies in the UK to declare their tax payments to Her Majesty’s Revenue and Customs (HMRC). This followed the widely reported, bad publicity surrounding the minimal tax payments made in the UK by Amazon, Google, Starbucks and many others. Whilst not wishing to name and shame, he believes that all companies should glory in the tax they pay. Justin King, head of Sainsbury’s, one of the big four food retailers in the UK, made a similar statement, suggesting that consumers could make change happen through their custom. International Corporations have been cleaning up by transferring their tax liabilities to low tax regimes and tax havens – they can virtually choose where to pay tax.

Nick Clegg, the leader of the Liberal Democrats and Deputy Prime Minister, states in his most recent letter to LibDem members: “The idea of combining a strong economy with a fair and transparent society is something that will also be seen in an international context this year when we host the G8 in Northern Ireland.”

Transparency is becoming the mantra of the well-meaning in society and many would say “about time, too”. While not the answer to all of societies’ ills, it is a precursor to re-directing society towards solving some of the greatest problems we have – because transparency of key information allows people (civil society) to make informed decisions – either on their own (through the marketplace) or through their government.

Sweeping away the leaves

For years, organisations like Transparency International have campaigned for dramatic improvements in the way governments, publicly owned organisations and companies provide important information. The danger with secrecy (and the UK remains a very secretive country) is that beneath the opacity of information lie secrets that those with vested interests wish to keep hidden. Whilst secrecy is always claimed by Governments to benefit all of us where they wish to enforce it, the evidence is usually to the contrary. The benefits of secrecy accrue to vested interests and results in economic mismanagement at best – at worst, in countries which are, for example, resource-rich and economically poor, it leads to mass corruption, impoverishment of the mass of people, illness and suffering.

Economics and economies thrive on the open availability of good information and only monopolies thrive on secrecy. It is only when information is made available that proper judgments can be made by the mass of participants in the marketplace.  In a world population of billions, markets can only work where information is not controlled from the top down. Stockmarkets and financial markets depend on the freest possible flow of information to the widest audience and there has been a progressive move towards freer access to information along with the spread of technology that enables it to be used. The driving force is the same human one that drives freedom and democracy. There is an inherent motor behind individual freedom and the right to self-govern and the same motor drives transparency because it is with transparency that the potential can be seen and with transparency that informed decisions can be made.

Transparency is not closing your eyes when the wind blows

In the UK, a nation that always appears to be governed by a conservative mindset where change is difficult, where the Official Secrets Act dominates, where GCHQ and CCTV appear ubiquitous, where the challenge to maintain a fairness between an open society and a society that bears down on terrorism often seems so far weighed in the latter’s direction, the motor for transparency often seems to be running in neutral. Conservatism (especially in England) means keeping things the same and with direction from the centre. This often means that vested interests operating from the centre or with the centre will disallow the move towards more openness. The Labour government provided a Freedom of Information Act, for example, to the chagrin of its then leader, Tony Blair., who was and remains a centrist. In a sense the provision of the Act was odd, because Labour remains as much a centrist party as the Conservatives. Nevertheless, the human motor for more transparency was stronger than the urge to opacity in this case – even if the Act is not itself allowing the freedoms desired.

Yet, it was a step towards a more open society and towards transparency that many countries would relish. A free press (the subject of so much discussion following and before Leveson) has helped to unearth the secrecy in banking, for example, that has plagued the UK for centuries. Manipulation of LIBOR, money laundering, sub-prime casino banking and support for tax havens may have helped to make London a key banking centre but it did not insulate the UK from the collapse in 2007 – it made it far worse – and “only when the tide goes out do you discover who was swimming naked” (Warren Buffet commenting on naked transparency). Sometimes, opening our eyes hurts.

Nothing to Hide?

One example of eye strain concerns the opacity of the banks and their cozy relationship with Government (not just in the UK). The secrecy allied to the special relationship has hindered the UK to an intolerable degree. Under Nigel Lawson (one of Margaret Thatcher’s Chancellors) the post-manufacturing society was hailed as the future as banks gained more freedoms and we all kept our eyes closed. Yet, we now see Germany as Europe’s economic motor because of its manufacturing prowess and the revitalization of the British motor industry (although hardly any it owned by Brits) is now lauded much louder than our “success” in financial services. The illusion of banking remains, though – as a key driver of the economy rather than what it really is – a provider of services that should assist the real economy. And the illusion has been propped up by a lack of real transparency which enables banking to remain a secret society.

Transparency is the ability to be strong enough to reveal information because there is nothing to hide. The true strength of transparency is the confidence that it portrays. So, the opportunity for companies and Governments to be open, to be transparent, only exists where there is not much to hide. Clearly, international companies that are paying virtually no corporation tax on sizeable UK earnings have something to hide; clearly, those (companies and individuals) who put money into offshore tax havens or to secrecy jurisdictions may have something to hide.

If banks and individuals had nothing to hide, Wegelin, the oldest Swiss bank, which is closing as a result of its plan to take on all the clients of Swiss banks that had decided to be more transparent with the US authorities over tax evasion would still be open for business. Their clients, who wished anonymity, made their way to Wegelin – which had been founded in 1741. They knew they were doing wrong and Wegelin knew the same – and the bank is closing after a hefty fine from US regulators and after 271 years. Secrecy was in the bank’s DNA – it could not evolve to the realities just beginning to dawn in the 21st Century. It became extinct.

So, lack of transparency in a world with eyes opening can be also hurt and be expensive and the US executive is now proving to be vigilant on  behalf of transparency on a world-wide basis – as is the US Congress which passed legislation in 2010 called Dodd-Frank. Part of this related to section 1504 which requires extractive industry companies registered with the SEC (Security and Exchange Commission) to disclose their revenues and taxes paid on a country by country basis worldwide. This includes all companies registered on the NYSE no matter where they are based. The EU looks to be following this example so that the people of resource-rich, economically poor countries will know how much money their precious natural resources raise in annual income and then can follow through what their Governments do with that money.

However, the American Petroleum Institute and the US Chambers of Commerce (vested interests if ever there were) are trying to fight back and have initiated a law suit in the US to nullify section 1504

How curious that libertarians fight on behalf of secrecy – the proponents of a free market arguing against a main tenet of economics – free information.

Battle lines are being drawn – the light and the dark.

21st Century Schizoid Man, King Crimson’s take on Spiro Agnew, was written in 1969 but the 21st Century does even now witness such schizoid tendencies characterized by corporate and governmental secretiveness, emotional coldness and apathy that typifies the illness. The lack of openness is world-wide and exhibited by the Chinese authorities’ suppression of its Southern Weekly newspaper when an editorial criticizing Chinese leadership was thrown out and one supporting the leadership was superimposed. Anyone reading Martin Jacques book “When China Rules the World” would not be surprised at the suppression. It characterizes the central leadership of this “civilization state” but Jacques argues that we see it too much with western eyes. But, what if we in the West are right and democratic freedom and openness are the motors that drive our human endeavours? What if the Chinese have, for 2,000 years, actually got it wrong. As China grows stronger, the move away from freedom for information will intensify and Chambers of Commerce will battle against laws for transparency that they will argue provides Chinese firms with advantages. This is a battle that has to be fought world-wide.

Our pursuit of progressively greater freedom (whether press freedom, open markets, democracies, freedom of speech) and equality (of race, religion (or non-religion, sex, sexual orientation and more) appears to be the real motor rather than the schizoid tendencies of the centrist control of monopolies, dictators, and vested interests. Transparency is a hugely important base upon which this basic human drive can persist. In a post-2007 world where the risk is that wealth is being driven to the top 1%, the drive for transparency is fundamental.