The Second Coming of Swiss Banking?

President Obama has launched one of the biggest reforms of the bank system for many years as he bids to try and grab the money back that bankers have lost.

The plan is to claw back over $100bn which seems a great deal of money but in the great scheme of things it represents but a fraction of what the US has had to spend to save the banks and actually is not a massive amount compared to the profits banks are earning again. Just over the weekend, the bank that claims it does 'God's work', Goldman Sachs, has capped its partners' pay at £1m a head - a move seen as akin to wearing sackcloth for a year in the City. In the UK, we have the bank roll tax which may raise around £500m if we are lucky. Yet despite the fact that bankers seem to be getting off lightly, they are actually squealing like stuck pigs at such perceived 'unfairness'. The mantra seems to be, 'You can't live with us, but you can't live without us.'

It's the classic gun to the head situation in the UK - allow us to earn or we will move elsewhere.

The elsewhere is increasingly looking like Switzerland. The traditional old stuffy, discrete and positively criminal image of Swiss bankers of the past as they provided an anonymous and impenetrable home to illicit money, far from the hands of taxmen, the Swiss banking industry is not what it used to be. But for a land-locked country with no real other source of income other than banking, pharmaceuticals and chocolate, it always punches above its weight and has even won the Americas Cup.

City rumours are that the Swiss are in town murmuring in the ears of disgruntled bankers telling them that there is a welcome in the green valleys of Switzerland, where the individual tax regime is very accommodating. The cost of living may be high, but why worry when you are earning the kinds of money people of your calibre deserve?

A collective sigh of relief may be exhaling around the City - it's a bit of a trek for the Americans but they will find somewhere closer and maybe join the real casino boys in Cayman Islands or Bermuda, but the message is that there are willing homes for these poor wretches to rise again - and be richer than they are now.

'Be careful what you wish for,' say the bankers. Good riddance, I say.

Social Economics

I am absolutely sure I am using the term 'Social Economics' wrongly. Then again, I am not an economist or a real socialist for that matter. However, I probably know as much about economics as those who profess to by the state in which we find ourselves.

Recently, I blogged on National Debt being the new sub-prime but in the heart of that piece was the idea that external markets are watching our economy closely with a keen view to see how we can tackle our budget deficit and therefore be able to pay our debts. Given much of our National Debt is being subsidised by Quantitative Easing (QE) money to the tune of £200bn, soon it will go back on the open market and we will see what the real world, with real money, thinks of our ability to service our debt. There are many who now believe that as we leave a cogent strategy to tackle our debt until after the election and have built our strategy to date on using new money which we don't have to support ourselves, that Britain is in a precarious state.

It was described by an editor for the FT the other night as a period where a boy scout is trying to light a fire - the QE money is the firelighter which is burning brightly but there is little evidence that it has lit the fire that will be our economic recovery. But I would argue there is far more at stake here.

In my idea of 'Social Economics' which has nothing to do with its real definition, our future relies on two aspects which are not classical economics. 1) Politics - we are in a period of hiatus, marked by our lack of enthusiasm to actually do anything about the budget deficit, not even a spending review in preparation which is due to the imminent General Election. This may be understandable as cost cutting is not popular and it seems that inaction is as voters have actually polled in favour of the Government in recent months. Perhaps it is 'Denial', my age old theme - put your head in the sand and the problem will somehow right itself. Gordon Brown may be foolish to start believing in free market economics at the wrong time, especially as he believes it's what got us into this mess. The issue here is that the longer we delay and not tackle the problem, the worse the problem gets and the cure will need to be more drastic - in both spending cuts and tax rises.

2) Hand in hand with this comes the mood of the people. We have just had a dramatic illustration of how voters can change Government policy as Iceland has refused to back its Government in paying our Government compensation for those who lost savings in Icelandic banks. I have a great deal of sympathy with the Icelandic people - while they had many good years, by the end of this year they will have lost almost a third of their take home pay due to the banking disasters, and they are not a rich people. Besides, it was our Government's decision to repay the losses to individuals, not theirs. What it means is that there is a breaking point and people will have a finite limit as to how much they believe they can pay in taxes which is fair, while the same may not apply for spending cuts as they can be far more localised or general. The clear learning point is that if there had been a referendum on the bank bailout beforehand, it is suggested we would have all voted against it.

The outside world will watch closely as to what our breaking point will be. Astutely, Lord Mandelson has understood that there is a limit that people will pay in taxes but I don't think he was referring to us but to bankers who are royally miffed about the windfall tax, on top of the announced 'super tax' on those who earn £150,000 or more plus the new curbs on City bonuses. In a microcosm what bankers do about it will illustrate a wider reaction. Let's face it, if bankers get cheesed off their employers will relocate them and they will rise again elsewhere to earn their money. For real people like you and I, we will have to pick up their share of the tax burden and the rest.

So the question arises, how much will we all tolerate in Britain? How much are we prepared to sacrifice in order to keep bankers here and London as one of the biggest and most influential of financial centres? Are we prepared, as Iceland is, to say, 'Up yours, take your Casino banking elsewhere and the fools that play it' or are we realistic enough to know that we cannot have a Britain without the support of the City, its earnings and influence?

I am sure there is a line that we all cannot cross. I am also certain that the later we leave that 'stress test' the worse it will be. I do believe that part of the attempted and almost farcical leadership coup at Labour was fuelled by the PM's inaction on the whole matter. While it is nice to talk about halving the budget deficit and talk generally about the numbers, the reality is that every voter in the country would like to know what it means before they vote. Yes, it's true we are stupid lot - we think we are still relatively prosperous and that if house prices rise again, boomtime will be back - Christmas and new year sales spending shows we are that daft. It seems we have no idea what really may happen after the election or we are just in denial that it will not deteriorate.

The reality is that after the election, when the economic mire hits the fan, there will be pressure on two sides - 1) to impress the markets that Britain is doing more than enough to reduce its budget deficit and pay its debts and 2) the people will not like the bitter medicine we will have to follow to cure us of the years of excess.

It's at that point that my 'Social Economics' will kick in. Hubris and hiatus are two funny words but we have both to contend with right now and both are all about manipulating our minds and votes. Personally, I would rather know how much all this £1.3 trillion of bailout will cost me in real terms before, not after the election, and how parties are going to give us cast iron guarantees it will not happen again.

I see nothing of it from any party right now - which means we will cast our vote once again, as at the last election over Iraq, without any of the real facts at our fingertips. Some things never change.

Vote Winning Taxes

I heard a radio interview with Junior Minister for the HMRC, Stephen Timms, this morning who was carping on about the Government stopping the 'amnesty' for offshore accounts.

This is where wealthy people store their money offshore and avoid tax. In a similar previous amnesty about £450m was raised. Now, if these people admit they have offshore funds then the penalty for declaring will only be 10% of the tax bill - whereas if they do not admit it, the penalty could be as high as 100%. This is expected to raise a further few hundred million.

Along with the windfall tax on bankers which is expected to raise £550m this year, this offshore clampdown is seen as a real vote winner by the Government as it targets the rich. Fine - they should definitely all pay their way.

However, when Stephen Timms was pressured by Mickey Clarke of Five Live on how to tackle the Budget Deficit there was a drawn out defence on tackling 'inefficiencies' in the public sector but no mention of real cuts or job losses. Naturally, such talk is seen as non-vote winning yet the reality is that if we actually raise £1bn or more by taxing the rich, it does not even help much on just paying the interest on our National Debt. Interest payments alone will be £30bn+ this year, rising to £44bn next year. And that is not even helping bring the deficit down.

The longer the Government deny the problem on public sector spending and focus solely on vote-winning activities like taxing the bankers and the rich, then we are deferring a problem that is only ever going to get bigger. In the next year, unemployment is set to peak at 2.8m, but having created 1m extra jobs in the public sector in the last 12 years, this may be way off the mark when cuts are made. And I think the cuts will have to be far deeper and more disrupting the longer it is left and the Government view is to leave it all until after the election.

The only logic that can support this is that cutting would disrupt the potential for getting growth as we exit recession and so pull us back into the mire. That is flawed thinking - all businesses know that while investing in growth you look for efficiencies in parallel - not doing so only buys worse problems later and i reality you are not really 'investing' but supporting the status quo.

I think delaying cuts is a grave, grave error.

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.

Purge The Soul

He's only gone and done it.

Alistair Darling has bared his teeth and swiped with his mighty paws at the City bankers to assuage the public's anger and try to win some votes. In doing so, he claimed it was not about the money but was a deterrent to stop banks paying excessive bonuses.

That's certainly going to work, right? Certainly, our souls are purged - not only can we feel satisfied that bankers have suffered for their follies, but we now see that the Government has distanced itself so far from the greedy City spivs that we can no longer believe that ministers had any culpability for our financial mess as surely they would not have punished them if they had endorsed what they were doing? Believe that and you believe I am Tiger Woods - let's not go there.

So the banks will have to pay 50% of any individual bonus over £25,000 as a levy - not the individual, and there are anti-avoidance measures already in place. Indeed, there must be as Mr. Darling has told us there are.

Curiously, among all the £billions contained in bonus pools, it is alleged the tax will only raise £550m which can go toward unemployment. Just as well, because in the great scheme of things £550m is hardly going to make a dent in the damage the bankers caused. The chances that it will deter them from doing the same thing again are about the same as for me surviving 5 rounds with Frank Bruno.

This is headline grabbing tosh. Bankers will be laughing all the way to new pay packets and bonuses.

Meanwhile, down here below Wonderland, National Insurance goes up 0.5% which probably raises more than the tax on bankers - shows that headline - grabbing taxes are just that.

Grim Reading

If you want to really make yourself angry ready for a showdown with the boss or to get in the mood for a hard game of rugby, please read the attached description of the Asset Protection Scheme as pertaining to our wonderful investment, RBS.

On the face of it, there is nothing new in there. We have known for some time that as taxpayers we would be underwriting about £280bn of toxic assets accumulated by the bank. In many respects we were led to believe that the grimmest story was contained within ABN AMRO bank, the ill fated and disastrous acquisition made by RBS just prior to its demise. How glad we must be to find that in fact half of the stupid lending at RBS was plain old loans to the UK public, small businesses and property companies - what may be described as banking basics. There are quite a few derivatives in there too but not half as many as you might think.

Now, cast your mind back to when our glorious leader said boldly that it was sub-prime mortgages in the US that precipitated the Credit Crunch. How wrong he indeed was. His good friend, the man he knighted, Fred Goodwin was hard at getting the very basics of banking wrong. Fred 'The Shred' was well known for acquiring companies and then shredding costs and getting supposed 'value' for the assets, but he wasn't actually much good at banking per se, it appears. The risk assessments and controls at RBS must have been pitiful because most of the assets we are now underwriting, frankly, should not be there.

Where, oh where, was the FSA when all this was going on? Where, oh where, was the Government? The problems stemmed from the basic, basic rules of banking, and knowing that RBS was leveraging money on the wholesale money markets to finance his business big time, could we not see that this was a company doomed to fail? Yet even up to the wire, the Government and regulator reckoned RBS was a company with enough capital to survive.

It is a story of incompetence and hubris that runs through the entire credit crunch story. We only needed sub-prime to expose the rottenness underneath - it was merely the bit that was showing at the time. RBS was doing its own 'sub-prime' right here under our noses - the US had very little to do with it as it may as well have started right here.

I read the grim details of what I am insuring this morning and while I got very angry with RBS, I was more angry with the fact that people in senior positions did not know what was going on - like at the FSA and Government. It really reflects how little our most senior and supposedly intelligent people know about how the Credit Crunch actually came about and therefore casts more than my major doubt on the measures they have taken to get us out of it.

To be precise about that - Alistair Darling is now bickering about introducing a windfall tax on bonuses and excess profits at banks. However, the problems that were created were right at the very heart of the banks - the basics. That is where the real flaws exist and the whole ability to trade poorly assessed debt is where the money is made. Any debt was good as it could be traded many, many times for vast profits and no one ever cared about the original debt itself or the assets it financed or the ability of the person or company to service it. It did not matter - the money was in the trading of the debt, not the debt itself. The money to buy more debt was cheap and plentiful and no need to get deposits to pay for it - the world was perfect and still is. This is a basic but subtle difference in semantics but it's where the whole problem originated.

The crisis was about what banks do, not about the money they and their employees make. Taxing them may help purge the soul and win votes, however impractical it will be to implement if at all, but it will not stop it all happening again.