Taxing Problems

While it may help soothe internal feeling about bankers by taxing them heavily for a short period, the reality is that the problem of banks running extreme risks in their business is not solved and we run the risks of other problems.

John Varley, CEO of Barclays, who did not use taxpayers' money to prop up their company in the Crunch, has said that using tax as a stick short and long term is not a solution. His argument is that it drives 'talent' away from Britain. Personally, I really don't care if unaccountable people who thrive on big bucks set up their own island somewhere in the Pacific to go race their fast cars and talk about the size of their wallets or purses. But I do care that if we do not fix the fundamental problems in the financial system, it makes not a jot of difference to the banks where they locate their staff just as long as they can earn big money - and so driving people away from the UK doesn't actually help us.

If the Taliban all dropped their weapons tomorrow, turned themselves in and embraced Christianity without a further shot being fired we might think this a victory but it isn't going to happen on the current tactics employed. Likewise, banking will find a way to continue what it does unless we tackle the underlying problems - it will also find a way to continue doing what they do to earn billions in scam profits and reward a thin wedge of staff beyond all sense of reality in some way or another. They can afford to as there are huge profits at stake and, frankly, we have shown that we cannot do without the banks. A compromise will be found or loopholes used - either way, banking will get what it wants in some place or another.

The UK Government's headline-grabbing move to tax bankers and high earners generally will not have the desired effect. Firstly, only £550m is expected to be raised on the windfall tax and secondly, high earners will find loopholes in the 50% tax on £150k or above - accountants and lawyers are hard at it as we speak, communicating openly on how to 'mitigate tax' on websites as legitimate as the IOD's.

Tax is a useless and archaic system in driving behaviour. As with speed cameras, it is a way to make money out of transgressions but it does not stop dangerous driving which can be done even at low speeds. So too, heavy tax on bankers merely makes a few bob to assuage public opinion but it does not stop the banks trading products that will cause the next bank meltdowns and even harder economic times while staff cream off ridiculous profits. In fact, unless we fundamentally reform what banks do, before we have paid off the bills for this time around, the next bill will be on us. You see, taxing them this way ultimately will get transferred to us anyway by the fact that they will continue to do what they do to cause financial meltdowns.

If the tax burden gets too high, ultimately it will drive people out of the country. The most able to pay will leave, transferring the burden back onto the people who did not cause the problem. The non-domicile rules will ring fence high earners at one end of the spectrum and banking havens will arise nearby fairly soon.

Fundamental reform of banks is what is needed. I applaud the splitting of investment and retail banking as a start - too often staff in retail banking pay with their jobs for the idiots in the investment banking side and the cash is used to hide the activities of the investment arms. But trading debt should be rigidly reformed so that complex, structured products cannot be used to hide poor asset valuations and debt management, creating a convoluted web that no one, even in the banks, understands. Wholesale money markets should not be used to prop up banks' activities, it is not a question of ratios it is far more fundamental than that.

Until we get some people with real sense and courage into the banking industry, regulators and Government who aren't so rich that their views are biased then we will always have this stupid attitude of tax being the tool to solve any problem.

The problem is that taxpayers have to pay for the mistakes. If we, the taxpayers, held people accountable for the money they use from our personal wealth pots, then people like Andy Hornby, Fred Goodwin, Alistair Darling, Gordon Brown and Hector Sants would be flipping burgers at McDonalds learning the basics of business by now - paying tax like the rest of us and ranting at the their former colleagues in the banks.

Banking Governance

Kudos to Sir David Walker who has at least understood some of the big issues in the banking sector and has proposed some major changes which he believes the UK should lead on.

However, I still do not think anyone has nailed the crux of the problem. It's all very well proposing that banks should disclose how many people earn of £1m or more and that Non Execs (NXDs)and shareholders should take more responsibility in the governance of banks but I really do believe it is naive to believe this will actually solve anything, even if it is a step in the right direction.

Firstly, disclosing millionaire earners is neither here nor there - meaningless in the great scheme of things and it reveals nothing of how a banks works, the basis of reward schemes or whether it is acting properly or not. It is a mere barometer and if anything, it advertises to peer companies which bank is prepared to pay more of its employees more money. As for NXDs and shareholders having more say, I believe there are several issues here.

Firstly, we have seen how NXDs have acted in the lead up and during the crisis. As the proverbial hit the fan and one of its biggest perpetrators was being thrown to the dogs, they still acted as if nothing was wrong in conjuring up a massive pension pay off for Fred Goodwin or re-engaging Andy Hornby on a £60k per month consultancy contract at HBOS. Because the rewards of the NXDs are inextricably linked to the profits, they are hardly likely to kill the golden goose - they are by definition already wealthy people who are there to make a great deal more money. Then there are the shareholders. Of course, their rewards are dependent on the banks' fortunes as well but there is a bigger issue at play.

The vast majority of bank shares are owned by the public but indirectly - either via the Government and its vehicle, UKFI, or via pension funds and the like. The general public owns very few shares individually. Therefore any involvement by shareholders comes as 'block votes' from these 'aggregators'. Again, both fund managers and directors of UKFI are charged with obtaining maximum value from the shareholdings so they are hardly likely to vote against making profits. Again, they are all wealthy individuals and are motivated by making a great deal which their own bonus schemes generously allow.

Finally, as the whole of the banking industry now has a safety net of unlimited lack of liability to their losses should there be wide scale failure, there is zero incentive for any of the 'aggregators' to act in any way different to the banks themselves. Indeed, even the staff at the FSA all received bonuses for last year despite presiding over catastrophic losses.

There are far more fundamental issues to be resolved here and it isn't rocket science. At the heart of the banking system lies a serious flaw and a massive liability. Upon this flaw, the global financial system has built an estimated $550 trillion of open derivative positions and a further $400 trillion of associated insurance positions - all of which are so convoluted as to be virtually unauditable. As long as banks are allowed to continue trading in such products and financial instruments, then the rewards will be massive and yet largely unreal.

Until we get to grips with these 'Financial Weapons of Mass Destruction' as Warren Buffett called them, we will always have a basic issue of governance in banks for which the taxpayer will be liable - yet we are the biggest shareholders.

A Sad Demise

Would you want to be a shareholder in Lloyds Banking Group right now?

Those who own Lloyds shares will wistfully remember the good times of a steady bank which paid good dividends, made some shrewd acquisitions and maintained a good share price. Theirs were a share renowned for a good long term performance and a company for its sensible management.

Just about a year ago, all that changed. From a peak of £8.20 the shares of the bank dropped to a low of 25p. In the face of the credit crunch, the bank made its most disastrous move in its long history when it made a bid for the beleaguered HBOS, who had been guilty of some of the most reckless corporate lending amongst other sins. As the bank suddenly realised the extent of HBOS' woes and the incredible strain on its own finances as the crunch took hold, it frantically tried to renegotiate the deal and even back out, despite the fact that EU competition rules were temporarily waived to allow the new group to own a whacking 28% of the UK mortgage market.

It was a collision of management incompetence and all consuming greed.

Then in stepped the final bunch of meddlers - the Government. It is widely believed that the PM himself personally intervened at the 11th hour to urge this merger to go through. Incredibly, the handshakes had barely stopped when Lloyds saw the folly of what they had done, tried to mess with the price of the deal and then went cap in hand to the Government to shore up the group's finances in order for the deal to go ahead and for the two companies to survive. As the whole mess unravelled, the taxpayer came to the rescue and took a 43% stake in the new group to stop BOTH banks sinking. The shareholders at Lloyds, after years of content, suddenly saw their investments collapse to virtually nothing.

So here we go again. Today, Lloyds launch the biggest rights issue in history. A further £21bn is required to shore up its capital which is only around £22b now, principally so that it does not have to join the Asset Protection Scheme (APS), the euphemistic name for the financial cesspit where toxic debt is to be parked and underwritten, in full, by the taxpayer - the premiums for which, Lloyds deem too expensive.

It's remarkable. They deem the insurance premium for APS too expensive - less than a year ago, they would have paid anything to be saved. As taxpayers, we should be happy, I suppose. Lloyds was always a dedicated stock market performer, so it would make sense to see it steadily rise again so that our 43% can be sold and returned to us. In the short term we will need to pay a further £4bn as our part of the rights issue so our stake rises but we would all believe it is money well placed?

That's if the management know what they are doing. Remember, the same bunch of individuals, which is a truism of all the management of all banks with the exception of RBS, the Lloyds Chairman and Andy Hornby of HBOS, are running the show. The daft investments they all made are being made again across the board as banks feed on the frenzy of a nicely depreciated market courtesy of the taxpayer. Across the globe, banks are accruing nice bonus pots for their good work and in the Sunday Times, the CEO of Goldman Sachs claims that his bank is doing 'God's work'.

Many economists are now coming to the conclusion that it would have been better and cheaper in the long term to have just guaranteed the deposits of savers, created a central mortgage bank and let the rest go down the swanny with the idiots who took them there with it. We would not be talking about bonuses and reforms now, we would have a new look banking system based around sensible criteria and practice.

I find the fact that genteel Lloyds shareholders having to stump up to pay for the whims of a management that nearly bankrupted the company abhorrent. Further, to pay for the suicidal practices that led to this sad demise of a once great bank, 5,000 staff at Lloyds will have to lose their jobs - people who were not involved in the abysmal decision making that got them to this point. That act alone has been described by unions as 'arrogance' and I agree. At all banks, we see low level staff paying the price while people like Stephen Hester at RBS accrue bonuses equivalent to the salary bill saved - in just one year at the helm of a company propped up by the taxpayer so that he could not possibly fail. Even then, he has us all pay more and been let off around £10bn of debt he owes us - for that he accrues £9.6m.

You could not write a script with such a plot as no one would buy the book - it would have been deemed too far fetched. The problem is that within a year, we will have all forgotten what and how it all happened. We will carry on and allow the whole process of rebuilding the house of cards again, ready for the next gust of ill wind to sink the whole lot.

Monumental hubris and arrogance at the most senior level in the banks, the regulators and the Government are at the witch's cauldron stirring up a foul future for the lot us. They will do nicely though, thanks to the taxpayer.

From Loan Sharks To The Stupid

Yesterday we saw the cases of some horrifying debts imposed on desperate people by loan sharks. One woman who borrowed just £500 to buy a computer, was forced to repay a staggering £88,000 over just 7 years. It is beyond belief that such people can operate in Britain today and only get a suspended sentence of 51 weeks as their punishment.

The true extent of loan sharking is thought to be far greater than these test cases and as many as 165,000 people use loan sharks in Britain as the recession and credit crunch take their toll. Worse still, despite record low interest rates which are expected to remain at 0.5% for a sixth successive month, this figure could rise a further 35,000 in the short term. And it is not the domain of the destitute necessarily - professional people like nurses have been caught up in using loan sharks after their hours were reduced. These are desperate times.

While the advice from Government is to not use loan sharks and some £16m has been pledged to tackle the issue, the fact remains that even as we see light at the end of the tunnel in this recession, there are dark times ahead by those worst affected by it.

The Stupid Side

Contrast this terrible situation, if you will, with the utter stupidity that went on at HBOS. Yesterday we got another glimpse of some of the activities of Andy Hornby and his former executive team prior to the disastrous Lloyds take over last year. How Lloyds would wish to have turned back the clock as their Board, at the insistence of the Prime Minister himself, went ahead with the merger even though all indications pointed to the fact it could ruin their business. Indeed, so far did it ruin their business that we taxpayers now own 43% of the new group.

The losses within HBOS' Corporate Lending Division are staggering. In total over £19bn of loans have had to be written off since the merger related to loans made to businesses such as hotel groups, property developers and simple investors. The fact of the matter is that HBOS, in their absurd eagerness to lend as much as possible, simply did not undertake much, if any, due diligence on any of the loans - they just handed out the money to literally anyone for anything and had not a shred of interest if the businesses were able to service the debt in the long term.

While we may think these debts are not related to such exotic concepts as Collateralised Loan Obligations and other 'Derivatives' but are related to good, old fashioned bank loans, we would be wrong to think that. Ultimately, in a world where debt can be traded like a piece of precious metal time and again, and at each trade a smidgen of incremental profit is taken without anyone referring to whether the debt can be repaid, then it really did not matter in the 'New World Financial Order' whether HBOS did their due diligence or not. The debt was the precious item, not the asset or business it was related to.

I find it hard to believe that in the hubris that followed the credit crunch, people like Andy Hornby who as CEO and was responsible for this madness, were paid £60,000 a month on a consultancy retainer to help the business even after being fired - until someone finally noticed.

It is obscene that such incredible amounts of money could have been wasted for the pursuit of greed. Meanwhile, in the real world, if only a fraction of that wasted £19bn written off or the monthly £60,000 paid to Hornby even after he threw the money away was used to give loans to people who would otherwise use loan sharks, then we would not have loan sharks in this country.

It is that simple. If banks had lent even a tiny proportion of the combined £584bn currently ring-fenced in the Asset Protection Scheme as Toxic Debt, then the problem of 2,500% interest rates to desperate people would never occur.

Here's the rub. Loan sharks exist because they know people are desperate enough to pay anything for a loan. And they survive because people pay the astronomic interest rates back. Defaults simply get rolled up in more interest and in the end they make incredible profits on tiny debts.

It's a salutary lesson for banks and credit card companies. If they just thought about it, they could lend money to such people and get the debt serviced and repaid. Instead the banks lent money to any old company without so much as a cursory glance as to what the money would be used for and the company's ability to survive and repay.

In a world where a company can collapse and rise again like a phoenix the very same day, shedding its debt obligations and leaving creditors in the mire, we find this far more acceptable than helping desperate people who need money and have every intention, and often the means, to repay.

It is a direct consequence of the banking system we have today that more money than God has can be chucked away without a cursory glance, the executives expect bonuses for it and then desperate people are ignored. The disgusting thing about these two shocking stories is that we have the wherewith all to stop this now without even thinking about it. The solution is right there and can be implemented within hours. And loan sharks would be out of business and never seen on these shores again.

The chances of it happening and interrupting the party in the banking world are negligible, not while the investment bankers are murmuring in the PM and Chancellor's ears to make sure the world is how they want it - and we paid £11m for that advice too. Again, a sum that would mop up every loan sharked debt in existence if only we used money the right way.

Welcome to the world of finance, just complicated enough to make sure we never question it but simple enough to know it's wrong.

All That Education And Nothing To Show For It

To some of us, academic achievement did not always come easy. To some, whizzing by exams and getting firsts at some Oxbridge College ensured a lifetime of achievement. All they had to do was turn up.

For those who fit into that bracket at the FSA, that's about all they did do. Today, the Chairman of the FSA, Lord Adair Turner, was giving his interpretation of events leading up to the world's worst financial crisis since the Great Depression of the 1930s to the Treasury Committee.

The Light Touch

We have heard the contrition at these committees from the likes of Andy Hornby, former CEO of HBOS, who was very sorry indeed - more sorry than Fred Goodwin, ex of RBS and Eric Daniels, CEO of the new Lloyds Banking Group. After an estimated £1.3 trillion of liabilities hurled at the taxpayer, sorry doesn't seem to quite cut it. I think for many of us, exile in Guantanamo Bay would not be good enough for them - sadly President Obama has shut it down too hastily.

This time we had the turn of the vicious city watchdog, whose job it was to watch over 10 major banks and in that time only 5 of them went bust - it could have happened to anyone. Turner alluded to a 'Light Touch' that was 'politically preferred' and so the FSA complied. That part was easy, most Chairmen of watchdogs have several other jobs so it easy to get distracted. Not the same could be said for the highly paid Hector Sants, CEO of the FSA. His lucrative salary was plenty enough to turn a blind eye to the obvious.

Intelligence Lacking

Let's face it, most of us with half an ounce of intelligence knew that the housing market was massively overcooked. The relentless price rises, year after year were fuelled by a flawed business model in banks which allowed them to leverage each new debt to raise new money to fund the next debt and the next capital. It was an upward spiral that simply had to implode because at some point the connection between the debts and the value had to disconnect. This is where the genius Gordon Brown tries to blame sub-prime but that was just a manifestation of the fragility of the model - it could have just as well have happened anywhere. The funny thing was that because the UK did not have many sub-prime mortgages, it was reckoned we would not be vulnerable. The problem was that there were many points of weakness in the model, any one of which could have taken the one thing out of the equation upon which all other things depended - Trust that the assets were at their original value when the original loan bargain was struck. Britain always stood to lose the most if this was ever recognised as our house rise was way ahead of others.

Wallop! The moment the flawed model was exposed, everybody was caught up in the web of debt swapping, derivative flinging, exotic swallowing, option swilling daftness that was the model. Trust was lost and the one thing they all needed to survive was credit and it simply dried up as no one knew who held what debt.

The FSA couldn't see that because they did not have the time in their busy days, they operated their 'Light Touch' very lightly, they had not the intelligence to notice, they were well heeled enough not to care or they were part of the deception system that allowed the whole scam to survive and flourish (delete as necessary).

What Does A watchdog Do?

Some of Lord Turner's answers were so pathetic as to wonder why he was not summarily dismissed from his post for not at least taking the time to come up with more plausible excuses. His constant references to 'political assumptions' make you suspect that perhaps the Government were pulling his strings but you would think a successful businessman in the past would have more guts than to just sit at a desk and do nothing.

But it's what he and all the highly paid idiots there did.

It beggars belief that he and Sants still have jobs anywhere, frankly. They have presided over the unhinging of 50% of the British banking set up and allowed the taxpayer to become liable for all their lunacy. Not once did he or anyone else step in to ask questions over business models and methodology. Yet he thinks the way the FSA acted was 'competent'.

Lucky for us it wasn't 'incompetent' or else we would have really been in trouble.

Independence

Lord Turner consistently referred to political assumptions and lack of independence and I think there is no smoke without fire. It seems the Government tack was to tone down the role of the regulator and this probably is endemic in all the watchdogs. Each are manned by Chairmen who have at least 5 or more other Non-Executive roles, are paid lucrative salaries and and are hand picked for their abilities to do what they are told.

So what happened to the CEOs? Surely the same can't be said of the well paid Hector Sants? Well the sum of it came when he outlined what was the only consideration to be taken into of when a senior banker was put into a post - whether he had a criminal record or not. It reminded me so much of the Monty Python sketch of the guy being interviewed for the Secret Service - he was asked, 'Can you keep a secret? Well you're in.' It would be funny if it wasn't so real as this was in response to HBOS appointing an executive to be in charge of risk at the bank who had no previous experience of the field.

The saga continues tomorrow - I just wish I could make it all go away. The shower of total incompetence belies the intelligence of the people involved. Surely they had more sense of conviction to do the job properly no matter what the Government said? How can they be kept in these jobs for the future if they didn't care before?

For a fraction of the £900,000 a year Hector Sants earns anyone who read the papers and could add up could have done his job the proper way. But that of course would presuppose that they cared enough to take it seriously in the first place.