It is time to call the bankers' bluff

In a take no prisoners column in the Guardian, Simon Jenkins says that it is time to call the bankers' bluff.

Regular readers know that the bankers are bluffing on a wide variety of issues.

Bankers bluff when they threaten to "move" their banks to another country if policymakers and financial regulators suggest that there should be a separation between banking that supports the real economy and gambling (in the US, this is the Volcker Rule; in the UK, this is ring-fencing; in the EU, this is the Linnanken proposal).

Excuse me, but where could the banks move to where the country that accepts them is capable of backstopping them and providing the resources that the EU, UK and US did at the beginning of the financial crisis?

Bankers bluff when they say that they need to provide big bonuses to retain their talent.

Excuse me, but where is all this talent going to go?  Those bank employees (i.e., traders) who have been lucky enough to have a good track record already head for the exits and the world of hedge funds for better compensation.

Bankers bluff when they say they could not provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details as it would be giving away proprietary business secrets.

Excuse me, but there is nothing proprietary about a bank's exposure details other than its proprietary bets.  Bets that policymakers and financial regulators have already shown they want banks to stop taking.

As for the loan pricing that disclosing the terms on each loan would reveal, this pricing is already known to competitors.

Why?  Because borrowers shop for the best terms on the loan and ask if a bank will match what they are being offered by another bank.

JP Morgan himself at the turn of the 20th century helped to set ultra transparency as the standard for a bank that could stand on its own two feet.  It was because of this standard that JP Morgan was able to gather the other bankers in his library and put out the panic of 1907 by discussing which loans each bank had to write off.

Bankers bluff when they say they need to be recapitalized or they cannot make any loans.

Excuse me, but the origination and funding of loans has been separate for at least 4 decades as banks have a ready buyer for the loans they originate in pension funds and insurance companies.

Bankers bluff when they say then need to show a positive book capital level to prevent a run on the bank's deposits.

Excuse me, but every depositor learned when they first open an account with their parents that the way they can be sure they will get their money back is the government guarantee.

I keep asking a wide variety of individuals including bank regulators, politicians, economists, money managers and reporters if they know how much capital their bank reported at the end of last quarter.  Almost 100% of them have no idea (a couple offered up a guess that was directionally correct).

Bankers bluff when they say...

The peasants are revolting across Europe. They want bankers' blood and mean to get it. Until now, public response to the credit crunch has been one of general bafflement and wrist-slapping. 

The banks persuaded the world it was all an act of fate. 

As it was, they were too big to fail and their leaders too saintly to atone for it. 

For four years, British banks were showered with nearly half a trillion pounds of public and printed money. They duly recovered and stayed rich, while everyone else went poor.

This was true in the EU and US too.

The worm has turned. The banks and government alike have failed to deliver recovery.

As predicted by your humble blogger as soon as I saw the policymakers' response to the bank solvency led financial crisis.

The people want revenge, and have found it – of all places – in the European parliament. It has declared that EU bankers cannot get bonuses bigger than their salaries, or twice as big if shareholders approve. This applies wherever EU bankers work, and to any overseas banker working in the EU. 

Meanwhile, a Swiss referendum now requires top executives to seek explicit shareholder approval for their pay, with a ban on golden hellos and goodbyes. The Netherlands is talking of a tighter 20% cap on bonuses. Even laissez-faire Britain has seen the National Association of Pension Funds demand that boards keep executive pay rises down to inflation. 

Europe's once omnipotent banking lobby has been all but neutered by the scale of scandal....

It should not have taken the Libor scandal to neuter the banking lobby globally.  The financial crisis itself should have been more than enough.

Only in Britain do ministers still dance to the bankers' tune....

Actually, the Obama administration still dances to the bankers' tune too.  See US Attorney General Eric Holder's comments on why the Department of Justice cannot prosecute the Too Big to Fail/Jail banks.

Last year the City of London's much-heralded "shareholder spring" got nowhere. Revolts against executive pay at WPP, Barclays, Trinity Mirror and elsewhere had little noticeable impact. 

While overall pay stagnated, that of top executives rose 12%. 

Opinion polls showed the public overwhelmingly hostile to top pay. 

Only the government and the London mayor stand between the very rich and a furious public.

This was exactly the position staked out by the Obama administration while it allowed the bankers to secure what they wanted by bluffing it on every issue.

The peasants' revolt means that even British ministers cannot defy opinion for ever.

Nor can the Obama administration, even with the retirement of former Treasury Secretary Tim Geithner.  His legacy of pursuing the policy of financial failure containment and its corollary, the Geithner Doctrine (do nothing that hurts the profitability or reputation of big and/or politically connected banks), lives on.

The reality is that the banking community has allowed this thirst for revenge to build up for over four years, and it just did not care.

Caring about anything other than their bonuses is not something that bankers do.

This has been well known since the 1930s and the Pecora Commission investigation into Wall Street's behavior during the Roaring 20's.

This is why we have a financial system based on the FDR Framework.  The framework combines the philosophy of disclosure with the principle of caveat emptor (buyer beware).

The philosophy of disclosure is there because everyone knows that transparency/sunshine is the best disinfectant for bad banker behavior.

Given opacity, and the banks created plenty of it across wide swathes of the financial system including their own balance sheet and structured finance securities, bankers exhibited exactly the behavior they did in the Roaring 20's.

Ever since the 1980s and financial deregulation, the profession took home sums of money unheard of in any other line of work. 

This had nothing to do with free markets, except within a tight group of high-rolling traders.

Absolutely correct that this has nothing to do with free markets.

By definition, free markets require transparency so that both buyers and sellers have all the useful, relevant information in an appropriate, timely manner so they can independently assess this information and make a fully informed decision.

Modern bankers derive "economic rent" from exploiting oligopolistic cartels in financial services, with shareholders kept at one remove.

They extract "economic rent" through opacity that creates information asymmetry.

The astronomical traders' bonuses are asymmetric returns on cash that properly belongs to depositors and shareholders whose money bears the risk....

This is an example of profiting from information asymmetry.  Bankers know how risky their exposures really are.  Investors do not as bank disclosures leave the banks resembling 'black boxes'.

As a result, bank investors underestimate the risks that a bank is taking and do not require a high enough return on their investment.

The benefit of the investors mis-pricing the cost of funds to the bank is captured by the bankers in their bonuses.

For four years the British government – Labour and the coalition – huffed and puffed but was too terrified of the banks to act. Regulators were suborned by lobbyists and ministers, their offices packed with seconded bankers, and did as they were told.

Nobody was willing to call the bankers' bluffs.  Instead,

They gave huge sums to the banks in the belief that this was benefiting the demand economy. In Britain, some £400bn of cash was "pumped into the economy" via the banks. 

They merely traded or hoarded it, to their ever greater enrichment....

As your humble blogger has been saying would happen since the beginning of the financial crisis and the adoption by EU, UK and US governments of the Japanese Model for handling a bank solvency crisis.

Under the Japanese Model, bank book capital levels and banker bonuses are protected at all costs.  This is justified by the bankers by all those bluffs they make.

A thousand pounds handed to every British citizen would have had more impact on the economy.... 

Never in the history of money can policy have been so glaringly inept. The banks laughed....

They have only one plea on their side. The culture of greed in the City was nothing to the culture of ineptitude at the Bank of England and the Treasury. They pumped out the money. Never in British economic history can so much have been so wasted on so fruitless a cause. And still no hint of remorse.