Friday, 1 February 2008

Why won't bankers say sorry?

By Martin Vander Weyer
Last Updated: 1:33am GMT 01/02/2008

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'Vampires. Assassins. Bankers," shouts a large poster in Bond Street station. On closer examination, this turns out to be an advert for Terry Pratchett's latest Discworld novel, Making Money, but I sense from passing commuters' reactions that it strikes a strong chord as a comment on current news stories.
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As headline follows headline of financial catastrophe today and economic doom tomorrow, there are plenty of villains to choose from: America's (and our own) greedy, debt-laden consumers; Chancellor Alistair Darling, with his half-hearted attempt to "strengthen banking regulation" and "ensure financial stability" months after Northern Rock bolted out of the stable; Prime Minister Gordon Brown, with his Downing Street summit of European leaders discussing how to address the next market crisis when none of them have a clue how to address the current one.

Yet among this gallery of rogues, it is the vampires and assassins of the banking world, and their cousins in the hedge fund community, who surely take the biscuit - with their ability to go so spectacularly astray in markets which they invented; their refusal to accept responsibility for damage wrought to the wider economy; and their appetite, come what may, for gross personal rewards.

I used to be a banker in my youth, and I know many of the people in that profession to be admirable, intelligent individuals. Many, I'm sure, are kind to animals; some even have social consciences. Philip Richards, the hedge fund manager and outspoken Northern Rock shareholder, is a committed Christian who speaks of "righteousness" in his approach to investment. Stephen Green, chairman of HSBC, is actually an ordained Church of England minister in his spare time. Yet collectively, financiers seem to have become so punch-drunk with their own power to play God with our money that they have lost sight of the effect of their actions and reactions. Their sense of the proper relationship between risk, responsibility and reward has been overwhelmed, I fear, by their arrogant self-regard.

Take this week's news stories. First came the sad tale of pub-chain operator Mitchell & Butlers, which had been obliged by its bankers - Citigroup and Royal Bank of Scotland to the fore - to buy £1 billion worth of hedging contracts to protect itself against interest-rate and inflation risks connected with a deal to sell and lease back 1,300 pub properties. No need to go into the details: suffice to say that when the property deal failed to go ahead, the company had no need for the hedge, which turned into a massive one-way bet that lost M?&?B some £274 million and has left the shaken company vulnerable to takeover.

How could banking advisers have allowed a client to get into a pickle like that, and not come up with a way to get the company out of it again? How big a share of the responsibility have they admitted to? Have they volunteered to share the pain, or hand back their fees? I think we can guess the answers: bankers' legal get-out clauses are as impregnable as the vaults they keep their gold in.

Meanwhile, there had been ducking of responsibility on an even grander scale over at Société Générale. The French bank's management has long prided itself on the sophistication of its computer systems and internal controls - yet we learn that rogue trader Jérôme Kerviel claims he had been taking unauthorised trading positions for the past two years, and so had some of his colleagues, and that the Eurex derivatives exchange had been trying to warn SocGen about the extraordinary scale of Kerviel's dealings for two months before the bank finally woke up to what he was doing.

Despite these revelations, SocGen chairman Daniel Bouton remains in post - with the "unanimous" support of his board and despite messages from president Nicholas Sarkozy and finance minister Christine Lagarde that it would look better if Bouton fell on his sword. From everything we know so far, it's a fair guess that SocGen's internal controls were far from robust, that its authorised trading volumes were startlingly large in relation to its capital (hence Kerviel's book did not attract attention until someone realised it included €40 billion worth of unauthorised trades), and that, as when Barings collapsed in 1995, the senior directors really didn't understand what was going on down on the trading floor anyway: they just relished the profits. The early spin from SocGen was that Kerviel must be "a genius of fraud" to have beaten the bank's system, but the real story looks like one of catastrophic management failure. If that's so, Mr Bouton should set an example and walk the plank as soon as his dignity allows.

And no doubt when he does go, his dignity will be well looked after: an office and a limo at his disposal while he sorts out his affairs, a commodious pension package. After all, new benchmarks have just been set for rewards for boardroom failure: Chuck Prince of Citigroup and Stan O'Neal of Merrill Lynch, respectively carrying the can for their firms' multi-billion losses on subprime mortgage debt, suffered no hardship in their recent departures. Their only difficulty will have been the matter of how, in such turbulent markets, to invest their enormous pay-offs - reported to be $42 million for Prince and more than $150 million for O'Neal. Soon another Titan may be joining them on the golf course: Marcel Ospel, chairman of the Swiss bank UBS, which has admitted to £9 billion of subprime losses so far, looks unlikely to survive a shareholders' meeting next month. But if they do defenestrate him, watch for the fluttering of another giant golden parachute.

Bankers individually are just the sort of chaps we'd all be happy to have lunch with at the club. And we should resist the Leftish urge to bash them purely because they're rich - an instinct to which, bizarrely, the celebrity gardener Monty Don gave vent on Radio 4 the other day in an outburst about how glad he was to see bankers losing money they should never have been allowed to make in the first place. No, Monty, let's leave the spirit of '68 out of this.

That said, there is still something peculiarly unattractive about the way financiers have been behaving. Other sickening lurches of the securities markets - such as the dotcom boom and bust - took place in a kind of cocoon, with little impact on ordinary economic life. But this time it's different. The spread of subprime contagion through the derivatives markets led directly to the credit crunch, making life more difficult for borrowers of all kinds; short-selling of bank shares by hedge funds was a direct contributing factor to the panic of Northern Rock depositors; speculative trading was largely responsible for the last spike of the oil price towards $100 a barrel, affecting fuel and heating costs for all of us. This time, it is the traders and financiers, more than the politicians or the central banks, who have put the global economy in peril. The least they can do is admit their responsibility, and start showing some contrition.

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