The morals of bankers have been in the spotlight the past week. The crux of the problem is well summarised by the somewhat crude joke about the wealthy man who asked the lady if she would sleep with him for a $1m.
She thought about it and said yes.
“A thousand dollars?” he asked.
“What do you think I am, a prostitute?”
“We’ve already established that, we’re now haggling about the price,” he said.
White and black quickly become grey when large sums are involved and this is the crux of the problem in banking. Due to the size of modern banks, the incentives paid are small as a % of profit, but excessive when measured in terms of normal remuneration. This especially in the case of “investment bankers,” but also top management. Sure, this caricature is an unfair generalisation but it does sketch the problem.
Understandably, recent events have tainted the industry. South Africa’s finance minister Pravin Gordhan, speaking at a two-day financial literacy conference, accused banks and financial institutions of being “greedy monsters.”
Reading about his criticism of bankers, I wondered what Mr Gordhan’s opinion is of politicians. Just this week the Spanish high court overruled political objections to investigations probing the role politicians played in the Spanish banking losses whilst the probe into Fannie Mae and Countrywide revealed that bank executives gave discounted loans to politicians to ensure votes for the continuation of practices which cost taxpayers hundreds of billions.
Irish politicians were big beneficiaries of the strong loan growth of the Irish banks whilst the tax payers have to pay and suffer afterwards. It would be an interesting study to see what has cost taxpayers more: corrupt practices of and theft by politicians or high bank fees.
“Dictum meum Pactum” (My Word is my Bond), the motto inscribed on the London Stock Exchange wall, does not hold anymore.
Are all bankers greedy?
Warren Buffett said years ago: “show me your incentive plan and I’ll tell you how your staff will behave….” The Libor (the London Interbank Offered Rate) scandal has put the spotlight on those traders who sent false information through to the authorities in order to benefit their trading positions and hence the banks’ profits and, of course, their bonuses. In reality however, very few bank employees are in the position where the size of the asset pool they work with is so big that manipulating outcomes has such an outsized effect on their income.
Take JPMorgan which employs ±220 000 people for example. It was a mere handful that took outsized bets which caused the large trading loss (possibly 33% of profit!). The other 219 900 had nothing to do with it.
Pravin Gordhan’s accusation is wrong. If all banks are greedy monsters then all banks are driven by greedy bankers. Logic as well as experience dictates that not all bankers are greedy. I am privileged to know many of South Africa’s top bankers and can vouch for their integrity, being men of their word with a very high degree of moral standing and sense of responsibility.
Besides, greed is part of human nature and not restricted to the banking world. Each year there are countless examples of global companies in other industries such as the food industry (using excessive pesticides), motor vehicle production, insurance, construction, medicine, education, etc. that take big shortcuts endangering lives of their end-users for personal greed or increased profits and then many more who are caught defrauding shareholders.
Human nature is such that people should not be put in positions of trust where huge amounts of money are involved without the necessary controls being in place. Essentially this is what went wrong on the fixed income trading floors at Barclays.
The governments’ role is to ensure the public is protected against price exploitation. And the South African government has been fulfilling this role with investigations into potential price fixing in inter alia the food industry, our retailers and also bank fees.
And Mr. Gordhan is right, education of users is important. Whilst history has proven that it is impossible to protect consumers against their own greed, they should be protected against their ignorance.
Banking? The state must ensure that deposits and loans and other bank products are competitively priced, at the same time ensuring banks are sufficiently profitable to be able to generate satisfactory returns for shareholders to put their capital at risk.
The FSA was a player
But in the Barclays case it seems there was a combination of both an aggressive culture and poor oversight. The UK FSA (Financial Services Authority) certainly failed in some of its duties.
The extracts below from The Wall Street Journal (Barclays Scandal may Give UK Regulator a Black Eye, 6-8 July 12) articles highlight that:
The FSA never established a rule stating that the data the banks submitted should be accurate.
Until recently the FSA didn’t see the Libor price setting process as posing a threat to market integrity.
For years the FSA didn’t actively police the setting of Libor.
In 2007 Barclays officials warned the FSA a few times that Libor is becoming unreliable due partly to “problematic actions” by some banks.
In the fall of 2010 the FSA cleared Jeremy Del Missier of wrongdoing concluding that his instructions (to submit lower rates) were based on an innocent misunderstanding. On June 22, 2012 the FSA approve his promotion to the role of COO, yet 5 days later on June 27 Barclays reach a £290m settlement with the US authorities and the FSA.
Reading Catherina’s notes on her meeting with Bob Diamond & Jerry del Missier (at the NYC Barclays Capital offices on 9 March 2010) with the benefit of hindsight is interesting. It reflects the tensions and frustrations that were there.
The politicians are now doing their best to discredit Diamond. Frankly, it seems some of it has to do with the fact that he was American. “The colour of the tie he wore to the hearing was not in keeping with the gravity of the occasion.” A tweet from one: “Really annoying that Mr Diamond is using our first names, so rude” (The Wall Street Journal, July 5, 2012).
The questions at the parliamentary hearing were superficial and thus never got to the bottom of it all, but hey, they followed the process (“where was your desk situated?”, “did you not take notes at the meetings?”, “surely as CEO you should have done that…”).
Besides, investigators are now conveniently forgetting the circumstances in 2008. The British banking system was in danger. Barclays was at risk of being nationalised. If Barclays had gone under, the effect on the UK Debt/GDP would have put Britain in a similar position as Ireland and Spain. To recreate circumstances now in a safe, quiet courtroom and apportion blame is in my opinion a bit of a joke.
The board of directors
As a youngster I had a huge admiration for the Dutch midfield maestro Willem van Hanegem because of his motto: “Ik speel niet voor mijn lol, ik speel voor Feijenoord” (I don’t play for fun, I play for Feijenoord). I suppose we were both naïve. Capitalism incentivises “rainmakers” to make rain for shareholders (or their clubs). That doesn’t necessarily make them all greedy monsters. Some will sleep around for a 1$m, others not.
Bob and Jerry should have picked up that the culture was wrong…but then maybe their own incentives were such that they did not want to know. Over the years “aggressiveness” had become part of the culture.
Who failed? I think the board.
Bob Diamond earned £150m+ since 2005 and walks away with a golden handshake exceeding £16m when things go wrong. Surely that is a case of badly planned incentives?
In going through clippings I came across a statement from Warren Buffett who said that he and his board had picked an individual (as his successor) to whom they have had a great deal of exposure and whose managerial and human qualities they admire. That I suppose is the most important task of a board. To select a CEO to whom they can entrust the running of the company in the best interest of shareholders, without taking undue risks.
Code of conduct for bankers
There is now talk of a “code of conduct for bankers”. I deem this to be a waste of time. They couldn’t police Libor, how are they going to police a code of conduct?
It’s much more important to ensure incentives reward the right behaviour. “Option” in “share options” is quite descriptive. Far better when management have to buy shares via a loan account. It will make them think like shareholders. And then the shares may only be sold three to five years after leaving the company.
Regulation overkill on its way?
Classical example: Lifeguard saves the wrong life…
The Independent (Lifeguard who saved “wrong kind of drowning man” is sacked, 5 July 2012, by Guy Adams) reports that Thomas Lopez was fired by his employer for saving the life of a swimmer 1 500 feet outside the area he was supposed to be protecting. Had the rescue gone wrong he could have left his employers with a “liability issue”. Mr Lopez says he put his morals before his job. Seven of his colleagues have resigned saying they refused to work for a company that puts potential loss ahead of saving a life.
Post the Libor investigations bankers will be regulated to such an extent that they’ll be afraid to lend money…but in the meantime maybe Barclays should ask for the CV’s of those lifeguards.
Whilst investigations are on the go, those tasked with generating returns for investors need to decide: is Barclays a buy or a sell?
Eighteen banks were involved in setting the Libor; 17 investigations are still to come. This is only the beginning. I think in a few months’ time Barclays will be in the background and the focus will be on Citi, UBS, RBOS, JPM, etc.
* Kokkie Kooyman is the head of Sanlam Global