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The news out of Euroland this weekend, if we understand it correctly, is that the ECB is still prohibited from buying busted Mediterranean debt, but can instead lend its money to the ESFS for precisely that same purpose. Either way they won’t get it back, so we don’t really see the difference, but there must be one because Jean-Claude Juncker, the most important ( self-important? ) person ever come out of Luxembourg says this is the final solution to the continent’s pressing issues. If so, it’s a shame he didn’t think of it sooner, but we’re glad that everything is going to be all right now. We expect to report next week on the reasons why this plan has crumbled, only to be replaced by an even better one.
Hot off the London presses, we learn that the newly retired head of the UK Civil Service, Gus O’Donnell, is no longer in the running for the vacant post of Chairman of Barclays Bank. It appears that several major investors have expressed fears that he might be hampered in his ability to do this job by his complete lack of experience in the field of banking – it is suggested that the Bank’s regulator has indicated that it shares these fears. This immediately caused us to wonder whether they might feel the same way about his parallel desire to take over from Mervyn King at the Bank of England, or whether industry experience is considered less important in that role. We shall follow that part of the story with interest, but meanwhile wish to concentrate on the Barclays question.
It must be said that all four of the big UK banks are facing some nasty PR issues at the moment. Our quote of the week comes from David Cameron’s Business Minister Stephen Green, regarding his years at the top of HSBC when, as has now been revealed, that institution was money launderer by appointment to Mexican drug lords and international terrorists. “I do not believe that I have a case to answer other than in the important sense that as chairman and chief executive I was responsible for what the company did.” Err, precisely. RBS has warned shareholders to expect another wave of claims and fines relating to past misdeeds involving Libor and dodgy selling practices, while Lloyds HBOS is desperately keeping its head down until the inevitable euro blowup exposes the huge scale of its problems on the continent. And yet, Barclays remains at the top of everyone’s list of dysfunctional management teams. Impressive, so what can be done?
We listened with interest to a leading BBC commentator discussing possible ways to fix the Libor system. He explained that the daily reported rates, which have immense financial repercussions, are in fact plucked out of the air by bank employees and do not necessarily reflect the rates at which money is actually borrowed. So, should they instead be based on actual trades, producing more realistic results? The problem with that, he patiently explained, was that the bankers would simply put through some small trades which they would report for Libor purposes, and then do their genuine business at different rates. We listened for some comment that this would of course be morally wrong, and possibly illegal, but it did not come. The idea that any experienced banker would not behave in this way simply no longer occurs to anyone familiar with the way this industry works. In these circumstances, do we really wish to insist that anyone parachuted into the top jobs in Barclays, or any other bank, should have a history there?
We suggest that these banks have two separate needs from management. The first is a way out of their current financial predicament, which in most cases requires insolvency experience more than anything else. A banker’s natural inclination is to redouble the irresponsible behaviour which produced their present state of distress, partly hoping to hit a run of luck but primarily to remunerate themselves generously for their unique understanding of huge and complicated financial positions. This is of course a terrible solution for all other sectors of the economy, most notably the taxpayers who inevitably pick up the eventual bill, and it would be far better to bring in a team of the most boring accountants who can be found, with instructions to run down everything as quickly as possible, with depositors protected but gambling debts, if they cannot be paid, simply revoked.
The second requirement is for new management to bring the banks ( or their successors to the extent that the existing group have fallen into bankruptcy ) back to their real purpose, which is to oil the wheels of the economy while eschewing speculative trading. Only the oldest employees can even remember the time, which can be dated from London’s deregulation in 1986, when this model started to disintegrate, and it must be assumed that they have been poisoned by a quarter of a century of bad behaviour. While we have expressed some reservations regarding Mr O’Donnell’s merits as a bank chairman, Barclays could do a lot worse and, we fear, probably will.
Category: Market Commentary