Merchant Bankers, the lot of ’em

Every seasoned television journalist knows that TV is good with people, personalities and emotion and bad with complex ideas, facts and figures.  It’s why TV news reports hang big topics on individual cases; TV can’t make us care about 100,000 disabled people losing their benefits in the abstract but it can make us care about one disabled person struggling to get by, trying hard to get a job, being shafted by the system.  And by making us care about the one there’s a chance it’ll get us to care about the many.

Pity then Stephen Hester, boss of RBS, trying to turn a publicly owned bank back into something that private investors will want to take off our hands (albeit at a giveaway price if George Osborne has anything to do with it).

Hester has become the unwilling poster boy for everything that’s wrong with our increasingly divided society.  Bob Diamond, Barclays’ Group Chief Executive last year got a far bigger bonus (£6.5 million) than the one that Hester has just turned down.  But that’s not the point is it; Barclays is doing fairly well and is private, RBS is struggling and publicly owned.  Hester is our man, Diamond belongs to the market.

So why pity Stephen Hester?  Hester is the victim of the fact that the three big parties can’t address the real issues, the big issues.  That would require too fundamental a critique of what has gone bad with our society.  Hester has become the target over a narrow issue that the Tories, LibDems and Labour feel they can address without getting into really uncomfortable territory.

So, at the risk of being a pariah on Bright Green, I’m going to start with a defence of Stephen Hester.  Hester was brought into RBS to sort out its problems because he had a track record with Credit Suisse, Abbey National and, briefly, with a newly nationalised Northern Rock.  His task was to salvage an RBS which, briefly in early 2009 was the world’s largest company by asset value (£1.9 Trillion) with liabilities of £1.8 Trillion – and we; you, I and every other British tax payer, we own 84% of those assets and, by extension, we are underwriting 84% of those vast liabilities.

Clearly we don’t want a numpty sorting out RBS.  The trouble is that people with the skills needed to avert a disaster big enough to warrant a poem from the late William McGonagall are sought all over the world and they’re sought by very, very rich institutions.  Anyone capable of getting RBS back on track could take their CV anywhere are get a very large pay packet.  Hester’s problem is that RBS’s shares have fallen over the last year, the bank has shed 11,000 jobs and that, notwithstanding the fact that he may have prevented the situation being far worse, a bonus for a result like that looks, in political terms, very bad.  Above all though Hester has become a public servant running the kind of enterprise that no state would have chosen to run, let alone create – a high octane, aggressively acquisitive financial institution that mixed dull retail banking with highly speculative investment operations.  As a public servant he finds himself judged not next to his peers in banking but next to nurses and dinner ladies and cabinet ministers.  The criticism levelled at his bonus by the three big parties is founded on his being a public servant and the poor headline indicators of the bank’s performance.

So Stephen Hester gets it in the neck, faces calls for a Commons debate about little old him, and waves goodbye to almost a million pounds in share options.

The reason I feel sorry for Stephen Hester is that the real issue is not one man’s bonus but a system that consistently rewards ‘top people’ with sums of money that are beyond the imagination of most of those who work for a salary, if they’re lucky enough to get one.

So how has that happened?  Banks like to say that they need to attract the best and the brightest.  It’s long struck me as funny that when we reach for a profession that acts as a metaphor for intelligent we come up with terms like ‘rocket scientist’, ‘brain surgeon’, ‘boffin’, ‘quantum mechanic’.  We don’t say ‘merchant banker’.  If we say ‘merchant banker’ without meaning it literally we’re likely to be using it as rhyming slang as a substitute for something a little more offensive.

I happen to know an astrophysicist.  He’s very clever and paid very badly.  I know a few doctors.  They’re paid a lot better but they’re not paid anything like as well as people in banking many of whom have studied far less hard and do far less good.

Banks don’t have any sort of monopoly on talent.  Plenty of bright people do more useful things with their lives.  Banks do enjoy the greatest proximity to absolutely mindblowingly large streams of virtual cash.  The crumbs that fall from the tables of banking giants are, by mortal standards, huge.  As a result they suck in quite a lot of talent much of which is interested, above all, in those huge crumbs.  So remuneration in banking reflects more the availability of cash with which to reward people (and those people’s ability to make cash), rather than intrinsic worth.

None of this you’ll hear from LabDemCons.  Nor will you hear any fundamental criticism of the way banks operate, of the effect that banking remuneration has to divert useful people away from more socially useful professions, of what it does to a society when tens of thousands of people are propelled into a stratospheric earning bracket creating a vast pay divide (with all the social ills that follow in its wake) and distorting asset prices (such as housing) in a way that positively impoverishes those outside that world.

So let’s have a sensible debate about banks.  Banks can be very useful.  They handle money – money being a clever invention that saves people having to stick a cow in their pocket when they want to buy an iPod and saves Apple having to parlay a cow with a software developer who has time to offer but only a balcony on which to graze a cow…

OK, I’m being flippant, but financial institutions can act as flexible links to ease fluctuations in demand, spot and invest in new trends, facilitate trade between nation states, allow people to save the proceeds of a lifetime’s work against old age and sickness and so forth.  In Germany banks traditionally forged long-term relationships with companies, in which they’d invested, installing a representative on the board to offer advice and provide oversight; it was hands on banking focused on encouraging the production of real and useful stuff that people need and want.  Banks can have a useful, though often rather dull, role in society.

The trouble began when banking started to get rather exciting.  The biggest practical issues to have arisen in the Anglo Saxon world in recent decades have been the increased ability of banks to create cash on their balance sheets and to (supposedly) offload risk, and their tendency to engage in making profit through speculation rather than investment.

Since big bang in 1986 UK banks have typically reduced their capital against their liabilities (what is generally termed increasing their leverage).  With the extra dosh they’ve ‘invented’ they’ve been able to bring US style consumer credit to the UK and Europe (allowing consumers to run up more debts doesn’t of itself lead to more houses being built but it does create more cash to chase the available stock of houses pushing up prices while increasing their exposure to defaults).  They’ve magick’d up financial instruments (of which CDOs were merely the most infamous) that are essentially ways of disguising how bad the quality of debt they’ve been trading amongst themselves is, removing the risk from the lender but not transferring meaningful oversight of that debt to its new owner.

On an international level markets have gone beyond their traditional role of helping to determine true value to a state where they can create crises in order to profit from them.  One could make a cogent argument that what we’re seeing at the moment is disaster capitalism writ large – with markets demanding that states downsize and hold a fire sale of assets (which can be bought cheaply by those able to raise cash) and that governments are unable to take sensible Keynesian measures, such as investing in capital projects that upgrade infrastructure and make an economy more competitive, for fear that they’ll be held to ransom.

The banks aren’t alone responsible for their being too much cash sloshing around and with the asset price and localised wage inflation that’s gone with it.  Technology has also allowed people to become more productive.  Rather than result in a more generalised increase in living standards it’s benefitted those who are in a position to pitch their skills into the biggest and most lucrative markets.  Globalisation works to push up remuneration for those at the top and push it down for everyone else.

Likewise international corporations are able to shop around in a beggar my neighbour search for the lowest tax rates.  Of course any suggestion that global capital needs global regulation provokes cries of ‘new world order’ from the libertarian right, a political movement funded by, of course, big corporations (c.f. the Tea Party and the Koch brothers).

A single article isn’t the place to discuss the answers to such big problems.  One article doesn’t even allow room to set out all the problems.  However it should illustrate that Stephen Hester isn’t the problem.  He’s a symptom.

The reason the flock throws one of its number to the wolves is to keep the wolves distracted.  We can’t take down the rich one at a time (we’ll we could but we’d be about it for ever).  It’s even morally highly questionable whether we should as a society turn on one person – rich though he may be, Hester is but a single human being.  Following the mob won’t lead us to the new Jerusalem.

No, we should refuse to allow our focus to be drawn from the biggest issues of an increasingly divided society and a world where the nation state is being outmanoeuvred by transnational corporations to the detriment of the many and the benefit of a very few.  We shouldn’t be happy about Hester’s bonus but nor should we make him a scapegoat.


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