COMPREHENSIVE REFORM OF THE CITY – Pay, Practice & Structure

by Julian

The global financial crisis was caused by banks and financial institutions taking disproportionate risks, fueled by blatant greed and excessive reward combined with an almost complete lack of government regulation over them.

It was not caused by governments spending too much on health, education or public services.

It was not caused by governments spending too much on family credits or sickness benefits.

It was not caused by single mothers, bad parenting or the unemployed.

In my personal opinion, one of The Left’s biggest failures was allowing the whole debate over the on-going slow-motion collapse of the global economy to be hijacked by discussions over government spending.

So the truth needs to be repeated at every opportunity:

The global financial crisis was caused by banks and financial institutions taking disproportionate risks, fueled by blatant greed and excessive reward combined with an almost complete lack of government regulation over them.

But don’t just take my word for it.

The official US government Financial Crisis Inquiry Commission report on the causes of the financial meltdown crisis concluded;

  • Widespread failures in financial regulation and supervision proved devastating to the stability of the financial markets.
  • Dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.
  • A combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.
  • There was a systemic breakdown in accountability and ethics.
  • This financial crisis was avoidable.

http://www.gpoaccess.gov/fcic/fcic.pdf

So why are top Labour politicians seemingly so reluctant to place the blame where it clearly lies? Is it because they would have to admit their own culpability in maintaining a lack of regulation over city practices which occurred to a great extent on their own watch?

If so, then they should remember, there is nothing wrong with admitting mistakes.

There is, however, a lot wrong in refusing to learn from them.

Perversely, even the right-wing in the UK seem more willing to place the blame where it lies.

The Daily Mail, not exactly a bastion of left-wing opinion, has this to say about the failure to regulate City practices and its links to the recent riots;

The bankers have the same contempt for the law-abiding public as those looters and the same sense of entitlement to wealth as the teenagers who smash shop windows to steal flat-screen televisions.

The bankers’ refusal to rein in their greed is fuelling the politics of envy in Britain — and envy is a toxic and corrosive creator of social unrest.

The banks have had plenty of time to change their ways voluntarily, but have contemptibly refused to do so. Mr Cameron must now force their hand.

If he continues to allow the banks to disregard basic rules of integrity and fair play, he ignores another source of  simmering injustice.

http://www.dailymail.co.uk/debate/article-2024944/UK-RIOTS-2011-Bankers-looters-politics-envy.html#ixzz1VlDnmEyu

Enough is Enough.

The financial sector has already cost UK taxpayers £68bn in bail-out and other support costs (3). Banks have pushed for, and got, spectacular reductions in regulations, but they have only used deregulation to gamble on high-risk futures markets. And when it all went wrong, it was the tax payers who had to bail them out. To make matters worse, they’ve shown no remorse, and there is nothing to suggest that lessons have been learnt to prevent this happening again in the future.

Last year, average City workers’ bonuses were £6.7bn (2).

To put that into perspective, the spending review cuts announced by Tory Chancellor George Osborne included a cut in the higher education budget from £7.1 billion to £4.2 billion.

If the City were willing to cut its bonuses (not its salaries) by 50% for just one year, it would cover the cuts to the higher education budget.

But we’re all in this together remember……

Here is an extract from a leading London estate agent’s portfolio, entitled ‘City Bonus Postcodes’:

No.8: Docklands and Canary Wharf, E14

Famous for its modern penthouses boasting all mod cons and a dream commute to work, Docklands and Canary Wharf are an investment hotspot for City bankers.

We recently sold two penthouses to City buyers for £1.5 and £1.3m – they were guys with family homes in the country and in leafy south London suburbs.

At the moment buy-to-let is strong – it’s really staged a come-back and enquiries from investors are up 11% year-on-year. Investors with bonus money go for the prime developments around Canary Wharf – newer buildings like Pan Peninsula, Discovery Docks, and Landmark. Prices would range from £350,000 for a one-bed to £500,000+ for a two-bed.

(1)

You could be forgiven for thinking this was written at the height of a financial boom, for example in 1984 or 2006.

But you’d be wrong.

It’s 2011.

So what happened to the recession?

What happened to the crash?

What happened to all the promises of sensitivity from the City and the promise by the government to rein in its excesses?

What happened to the public anger?

 A Monumental Reward for Failure

Although Barclays pre-tax profits dropped 9% in the first quarter of 2011, it still plans to pay its chief executive, Bob Diamond, £1.35 million a year, along with a bonus of £6.5 million for 2010, a future conditional share award of £6.75 million and £13.8 million in other shares (4).

The year after it reported a net loss, Lloyds decided to award its chief executive, Antonio Horta-Osorio’s a new pay deal worth £13.4 million.

Taxpayer-owned Royal Bank of Scotland made a loss of more than £1bn last year.

However, it awarded its chief executive Stephen Hester a £7.7m pay package, which the bank’s chairman described as being at “the lower end” of pay deals.

Assuming a teacher or nurse earns around £25K p.a., Bob Diamond’s bonus alone is the equivalent to the salary of over 200 of them (5).

How can we avoid another financial meltdown caused by the banking sector?

The answer is Regulation Regulation and Regulation.

Regulation of Practices, Pay and Structure.

REGULATION & REFORM OF

CITY PRACTICES

1) Strict capital and liquidity controls must be created and enforced. Rules are also desirable which encourage executives to take a long-term view of the profitability and viability of the financial institutions that they manage.

2) Outlaw FRACTIONAL RESERVE BANKING and replace it with full reserve banking. Simply put, fractional reserve banking is the common practice whereby a bank can lend you a mortgage of 150,000 pounds, say, without actually having the money available.

3) Limited liability for executives should be reviewed. Tax avoidance schemes should be criminalised with executives held personally responsible and corporate immunity abolished in cases of tax avoidance.  There should also be an independent oversight body for the banking sector with a disciplinary code which includes removal of the right to practise for gross incompetence on the part of executives.

4) Financial derivatives should be strongly regulated. Credit Default Swaps in particular, which actually encourage defaulting on investments (and which were the main cause of the collapse of Bear Stearns, Lehman Brothers and AIG), should be made illegal.

5) There needs to be higher corporation rates of tax for organisations involved in high risk investment practices.

REGULATION & REFORM OF

CITY PAY

1) City bonuses should be paid into a trustfund. The money must remain in the fund for a minimum of 5 years. If the company is still in profit, the fund must be distributed to ALL company employees. This will stop executives (and indeed all employees) from benefiting from dangerous risk-taking practices.

2) Individual bonuses from high-risk financial activities should be taxed at a rate of 90%.

3) Executive pay and bonuses in large financial companies (more than 500 employees) should be no more than 15 times the lowest paid company employee. This should be legislated and controlled by a National Pay Commission.

4) At the moment, executive remuneration is under the control of remuneration committees comprised of a small group of unelected ‘independent directors’. This is fat-cat speak for ‘friends’. Seats on remuneration committees for employee representatives from each main pay grade within the organisation must be mandatory.   Executive pay should also be regulated by a National Pay Commission which will ensure executive pay reflects corporate performance and is aligned with pay packages in other sectors (3).

 

REGULATION & REFORM OF

CITY STRUCTURE

1) Retail and Commercial banking must be separated from Investment banking – with an updatedUKversion of the 1933 US Glass-Steagall Act.

There is a side of banking which is really just a big pyramid selling scheme and doesn’t really benefit anyone. It is not sensible to allow large banks to combine high-street operations with risky investment banking or funding strategies, and then provide state underwriting.

If banks are too big to fail, then they are too big.

The Banking Act of 1933, known as the Glass-Steagall Act, was American legislation which introduced post-depression banking reforms, designed to control speculation and curb the banking excesses that contributed to the Wall Street crash.

It was repealed in 1999 under pressure from Wall Street bankers, who argued they needed more freedom to face foreign competition, especially fromLondon.

The proof is there for all to see. Six decades of relative banking stability under a Glass-Steagall regime, as against a decade of greed and catastrophic collapse since the Act’s repeal.

2) Regulatory boards, such as the FSA or the BoE must be independent of the financial sector they are supposed to be regulating. They should also be made accountable to parliament, not just to government ministers.

3) The government should be prepared to take a majority control in major banks and large financial institutions if they endanger the wider financial system.

In such circumstances, creditors could be reimbursed by the Government if necessary but shareholders (and executives) should not be reimbursed for their losses.

4) The UK’s reliance on the financial sector should be reduced, with more investments (and subsidies if necessary) made in the industrial, manufacturing and service sectors. Our economy has been allowed to become so unbalanced it has put our economy in danger: the size of our banking sector in relation to GDP is five times that in the US. Legal limits should be placed on the size of high-risk taking financial institutions in particular.

5) The government should do what it can to encourage everyone, from businesses to individuals, to put their money in cooperative banks. This should include tax breaks for institutions and individuals who used a cooperative bank.

 

Labour should be the natural party to lead these reforms. 

The Tories will never bring about the reforms to the City which are so badly needed.

The City accounts for over 50% of the Tory party’s funding (6);

The top ten City donors together provide 13% of all Tory funding (7);

In short, the City is the Tory Party’s best friend.

Labour should admit its love affair with the neo-liberal fashion for deregulation of the financial sector was a catastrophic mistake during its time in power.

Labour should stop trying to be the investment bankers’ best friend and become once again the people’s best friend.

References:

(1) www.primelocation.com -

http://www.primelocation.com/articles/property-in-docklands/#ixzz1MeMpCeMy

(2) Independent Commission on Banking Report: http://bankingcommission.independent.gov.uk/wp-content/uploads/2010/07/Issues-Paper-24-September-2010.pdf

(3) – Michael Meacher MP – Banks Public Enemy Nr 1 * : http://www.michaelmeacher.info/weblog/2010/10/banks-public-enemy-no.1-get-off-scot-free/

(4) 2010 Barclays Remuneration report  http://www.barclaysannualreport.com/ar2010/index.asp?pageid=56

(5) Robert Peston – Barclays_Executives_Enriched http://www.bbc.co.uk/blogs/thereporters/robertpeston/2011/03/barclays_executives_enriched_s.html

(6) The Bureau of Investigative Journalism – http://thebureauinvestigates.com/2011/02/08/the-data-the-growth-of-city-donations-to-the-conservative-party/

(7) The Bureau of Investigative Journalism –

http://thebureauinvestigates.com/2011/02/08/the-data-top-ten-city-financiers-of-the-tory-party/

* A special thanks to Michael Meacher MP for the inspiration which led to this article.

8 thoughts on “COMPREHENSIVE REFORM OF THE CITY – Pay, Practice & Structure

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