The Penny Hasn't Dropped

It is difficult to compare the issues of bank bonuses and MP expenses but somehow there is a link.

I have just read some guff about entangled photons and being able to teleport their states to one another. It gives some credence to the Star Trek teleporter but in reality, the teleporting of matter has not been proven, just quantum state information. Why do I mention such complexity in an article on bank bonuses and greedy MPs? Well I think the state of mind is linked, perhaps even teleported to one another.

Many MPs have railed against the investigation by Sir Thomas Legg. In effect, he has imposed some regulation on an unregulated system - and MPs don't like it. They accuse him of changing the rules when he would insist all he is doing is setting some sensible benchmarks by which to measure whether claims were reasonable or not. How on earth he allows people like Jaqui Smith, Hazel Blears, Geoff Hoon and others to go scot free is another question. But in a way, on a smaller scale we have the bank bonus syndrome.

Goldman Sachs are one of 3 banks who have reported enormous rises in profits in the last quarter. They have set aside no less then $5bn for staff bonuses which would pay out on average $172,000 per employee - the total estimated to be paid for this year will be $22bn in bonuses. It seems no one has learnt anything and there is a huge anti-regulation body within banks. The argument goes that banks must be able to compete for the talent that is capable of yielding such profits. I suppose MPs would say the same - if MPs couldn't make a few bob on the side then who would want to be one?

It is the base attitude that is the same even though the amounts of money are hugely different. Bankers just do not connect themselves with the last year or so of financial chaos that was the worst economic disaster since the Great Depression. Having lost hundreds of billions there were few casualties, hardly a hiccup in earnings and within months the same people who lost the money are rewarding themselves with even bigger bonuses.

MPs have the same layer of thick skin too. They simply do not understand that honest, law abiding and decent people have a fundamental issue with an MP claiming even a penny for dry cleaning, gardening or kit kats let alone being allowed thousands of pounds for such things. Cleanliness is a personal choice and expense - it's ridiculous to believe that the taxpayer gets any value from paying to clean someone's moat or flat. Yet MPs simply don't get it. When someone as intelligent as Ann Widdecombe, who does not even draw her second home allowance, argues in favour of MPs who are cheesed off just because the 'sensible' limits are applied retrospectively then you know MPs are out of touch with the electorate.

The similarity between bankers and MPs is that they believe that their own world is a real one and correct - and they don't see what it has to do with the external world. We all have a stake in banks and the financial system. If it fails, our money goes down the swanny - so the answer to the question about what has it to do with us, it has everything thing to do with us. Should RBS or Goldman Sachs fail as a business then we are all directly affected in some way, some more than others.

These banks have a duty of compliance to normal rules. They have the best of both worlds right now - they can gamble billions and if they win, they can reward themselves astronomically. If they lose, we pay to reward them astronomically.

It is as simple as that in banks. For MPs, every single one of them are beholden to us. We vote for them, they represent us, we pay their salaries, expenses and allowances. It should not be down to Party leaders to question or sack them for abusing expenses, it should be for the people to decide as that's who foots the bill.

These worlds operate around us as if we can have no access or have a say. It is time we did. Our money and futures are at stake. Banks have a duty to maintain stability but they are run like Vegas betting shops manned with people who believe they have talent but have no more skill than the average punter at Joe Corals. MPs are much the same.

The time for change will pass us by once again and these issues will haunt us well into the future, because the wrong people are making the rules.

Who Regulates The Regulators?

You know one of the big problems with the whole concept of regulation, whatever it may be for, is that it is a fat cat job with virtually zero responsibility and no accountability.

Of course, Lord Adair Turner of the FSA may tell you otherwise but let's face facts, on his watch 5 high street banks went belly up and more had to be bailed out as he presided over the worst financial disaster since The Great Depression. As if that was not bad enough, he gets to write and implement the new regulatory plans, called Macroprudential Regulation to help us understand it more easily, and these are little different to before.

Meanwhile, some £17m in bonuses have been paid to the 2,500 staff of the FSA while they have also received substantial pay rises of up to 10%. It is a huge price for abject and total failure to the do their jobs.

And while their own snouts are in the trough, the City is right back to its old habits. Not only has the issue of massive profits from high risk deals already raised its head as we still dole out more money for the whole collapse of the little game last time, but also we are actually talking of paying incredible bonuses to City staff just a few months after we all thought the whole concept was both wrong and risky. In fact, it's worse.

The bounce back to profitability by banks was inevitable - they couldn't go down again after we propped them up. So the banks and their traders are actually taking profits on a massive scale on the back of our money, lent to them at virtually no cost, with a blank cheque underpinning any losses they may incur in the future.

In that environment, they cannot fail and they still have the chin to ask for bonuses and the regulator stands back as if this is the way it should be. It is still paying for failure, as some take their employer's to court for bonuses they think they should have earned when they clocked up the losses. We are paying for failure and the bounce back - we must be absolutely stupid. We are - in fact, the City relies on it.

It seems crazy, yet when you delve into what the regulators get out of keeping their heads down and saying nothing in their part time jobs, you get a sense of why it is not good practice to stick your neck above the parapet and criticise the obvious. For one simple reason, other than the obvious rewards, is that each and every one of them are part of the same fabric and system. Lords, Dames, Sirs and the right education and backgrounds and the single biggest qualifier of all, a portfolio of Non-Executive Directorships to prove you can stand the heat and pressure of part-time jobs and know how to make a few bob out of them.

And they do. Lord Turner is on umpteen quangos and whatnot as well as boards - at the FSA alone he earns over £200,000 a year for a few days a month and he even gets that unbelievably wrong. Then you have the other regulators like Lord Mogg at Ofgem where he does a marathon at 3 days a week regulating the energy market. He claimed over £35,000 in expenses last year to do that job alone and that included a £5,300 plus for a first class season ticket and a £5 canteen meal as well as a subscription to the Financial Times. His CEO, Alistair Buchanan, lives in Egham just a few miles from London and the office but he managed to clock up £5,700 for 23 overnight stays in hotels in London amongst his £28,000 of expenses. Lord Mogg gets £145,000 a year for his part-time job, of which this is only one, while Buchanan gets a derisory £260,000.

The story is not pretty at Ofgem as they all are at it. Mogg managed to do £18,765 in travel in 14 months on 30 trips abroad (why??), and that's going some as I travel almost every week to somewhere in Europe and can't challenge that spend. Buchanan's curious 23 nights in London hotels included £826 for just a single two night stay.

The point here is that these bodies are there to supposedly protect us from these industries but in both cases all they do is to consume money and we foot the bills - and they are huge. There seems to be no rules by which they have to work and they can clock up vast expenses, salaries and bonuses without a jot of accountability as there is none required. The FSA stands watching as the City again squabbles over headhunting and acquiring staff with vast new salaries, bonuses, golden handshakes, earn-outs and guarantees to bolster the 'talent' in their trading areas while they cull vast swathes of staff in the only consistently profitable parts of their businesses.

And, yes, we pay for it as it is all funded by taxpayers' cheap money, capital and guarantees and, of course, new cash from Quantitative Easing.

If someone had said 6 to 9 months ago that we would allow all this to happen again then they probably would have got lynched but thanks to the regulators once again being unaccountable and standing to one side to let the industry get on with getting back to normal, we have just let all happen again.

And it may just get worse when it collapses next time. Not until we get wholesale reform and proper regulation in with the right people at the top, who are not part of the system and not just cash sumps, will we actually get some change. And, boy, do we need it.

What Price Silence?

It's okay, only 5 of the UK's top financial institutions failed so badly that they are in varying degrees of public ownership and depending on whose number you use, we are only liable to loans, capital and guarantees of £1.3 trillion. Not a bad year all in all.

That must be what the executives of the FSA decided when thinking on handing out bonuses last year. Not just any bonus, mind you, £19.7m in total to be precise. Lord Adair Turner, the Chairman of the FSA, who not only presided over the biggest financial meltdown since the Great Depression but has been given the remit to write a new role under 'Macroprudential Regulation', will be facing angry questions from the public about how he can possibly justify such bonuses which average £7,880 per member of the 2,500 staff.



Oh, but do not think that everyone will be receiving such a princely sum. After all, the CEO Hector Sants, deserves most credit for costing the taxpayer such an enormous, almost incalculable amount of money. He gets a further £130,000 bonus on top of a salary of almost £1m per year - so the lowly administrators at the FSA will get a bag of peanuts.

In a year when we have been whirled around by prodigious bonus scandals at banks and outrageous misappropriation of money by MPs, this is perhaps the icing on the cake. Or, indeed, the final insult.

The Conservatives wish to disband the FSA and give the Bank of England the power to regulate markets. Meanwhile, Gordon Brown says disbanding the FSA would be a huge mistake and, if anything, the FSA should have even wider powers. And more bonus, perhaps.



I am sure many people around Britain will be as aghast as I that the FSA is awarding anyone a single penny of bonus after doing nothing while the whole financial system crashed around it. The pathetic excuse that Lord Turner gave that the Government effectively told it to turn the other way simply does not cut it and shows how stupid Brown is. If Brown asked the FSA to turn the other way, then he could do it again, so it does not matter where the regulation sits, in the Bank of England or on Mars, if the PM intervenes to tell it what to do then it will fail again.



The city is working itself up into a lather as profits are up and the bonus good times are back. Meanwhile the FSA is piddling around trying to justify its future - not reforming the system to stop the excesses again.

Once more, lots of talk and no action will mean the gravy train has left the platform and the regulator is long way behind. But at least they will be able to count the bonuses they so richly deserve.

Mervyn's Day At The Casino

In The Bank of England's incredible 315 year history no Governor has ever tried it, not even in very bad times before. Today Mervyn King will become the first man in British banking history to use the Fiscal Policy known as Quantitative Easing - for those of us who have not swallowed the Economics textbook it simply means to print more money.

Quantitative Easing (QE) - The Idiot's Guide

Imagine a pyramid made up of three layers of champagne glasses. QE is much like pouring in liquid into the glass at the top so that it overfills and cascades into the glasses below it which in turn fill and then overflow into the glasses at the lower level which also eventually fill and overflow. If you think of the top glass as the banks, the middle layer as business and the bottom layer of glasses as consumers, then what you see is pretty much the process of QE.

It's the idea that if you print a load more money, pour it into the banks, they will want to lend more to businesses who in turn offer us, the consumers, more credit.

Now the real dummies amongst us may point out that a great many transactions today do not use money and that therefore the process of printing more money will have far less relevance today than say in the period known as The Great Depression in the 1930s when the theory was honed.

All I can say is that the intelligent people who came up with this idea have pulled their heads out of the theory book, written all those years ago, and noticed that fact and have, of course, taken it into account. I think.

These intelligent people are the ones who have presided over the collapse of 5 major UK banks and pumped a great deal of money into the banking system already without any great effect but, keep quiet cynics, because now it's Mervyn King's turn - and he has kept a discrete distance from the fiasco to date, adding a few acidic words about policy every now and then. To a large extent, he has kept his credibility alive by doing so.

But today marks the start of his big gamble - one unprecedented in modern times. Let's all hope 'Big Merv' is right.

How Does It Work In Practice?

At midday today - as such is the pageantry of big banking business - an imaginary gong will go and the Bank will start to use its £75bn of new money it has printed to offer to buy £2bn of Government debt in the form of bonds from institutions.

It's some convenience to just go and print a load of new money and that's based on the concept of a 'Fractional Reserve'. This is vaguely about the notion that at any time The Bank of England has, say, £100bn in its coffers but it may print up to, say, £600bn of bank notes to go into circulation - remembering each bank note comes with a promise to pay the bearer the amount on the note its value should the bearer present it at The Bank. Fractional Reserve tells us that in practice no one ever does and certainly not at the same time - so we can print vastly more notes to go into circulation than their total promissory value held in the Bank's vaults. Quite how the Bank would pay these days as it no longer has any gold is another discussion entirely - but don't worry, our PM has thought of everything.

So the first of these bond auctions will start today and The Bank of England will be buying these £2bn batches of Government debt or Gilts. Two hours later, there will be a second stage when the institutions and banks will be allowed to participate in these reverse auctions - and similar activities will carry on twice weekly until all the new cash printed is consumed.

Gilt prices have risen sharply in the last few days as the financial system salivates at the prospect of more money being created out of thin air and being spent - it's just like a sucker walking into the East End with a wadge of new notes wanting to buy a car from Arthur Daley, there is not a chance in hell these Gilts will be a 'good deal'.

The top champagne glass is being filled starting today. The one snag in my analogy which is reflected in real life is that nobody knows how much the champagne glasses hold and so how long and how much money will it take to fill them all.

Deflation

This amazing gamble comes after The Bank has dropped interest rates to 0.5%, the lowest rate in history. This kind of Fiscal Stimulus goes into a new area known to some (i.e. me) as Fiscal Defibrillation - a series of very sharp and big jolts to the heart of the financial system to stimulate it into life. QE is the second major jolt, if you discount the meagre £1.3 trillion of bank bail outs, loans and guarantees on offer to the UK banking system. The disease that The Bank is trying to avoid is 'Deflation', the banking equivalent of 'MRSA' which is what the injured financial system may catch after its major surgery and tries to recover.

Thankfully, the financial system is not being treated by the NHS but by clever people like Mervyn King, Alistair Darling, Gordon Brown, Yvette Cooper and a host of really brainy, intellectual and incredibly greedy bankers. So our economy is in fine hands, as it has been for the last 10 years.

Deflation is a bit of a killer disease itself - it's the concept that just as the financial system is recovering then prices to start to fall rapidly - just as in the fire sales we have been seeing in shops. Consumers, of course, those irrelevant carriers of wealth that rich people would like to have, like lower prices - but we are not the important ones here. If bankers cannot make huge profits, where is the fun of loaning us money?

The perverse logic of deflation is that textbooks say that we, the evil consumer, will delay spending the cash given to us via our champagne glasses, in anticipation of yet lower prices - the concept that I will not go to the East End and buy that car off the nice man in the sheepskin coat and trilby this week as he will have a lower price next week. This of course has the effect of increasing the effect of the downturn.

When A Science Is Not Exact

The financial process of treatment and recovery is sadly not an exact science as we have seen so far from the vast bank bail outs across the globe, estimated at around $5 trillion and rising. Mervyn King grimly warns that he does not have any idea how long he has to keep printing money and how much will be needed to get us to spend again. All he knows, or should I say, thinks, is that eventually it will work.

That's why no one has ever tried it before. I don't know about you, but that really fills me with confidence.

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.