One hundred people, mostly pale male and stale, met tonight at Manchester Business School to take part in an ‘attack’ on capitalism that fell somewhere between Rooseveltian reform and a savaging by a dead sheep.
The event, organised by “Manchester Capitalism” and co-sponsored by Manchester University Press and the Business School (full disclosure: imma student there) asked the question “Have banks finally got the message?” and consisted of wine, olives and chat followed by a half hour very erudite and polished keynote by Philip Augar, and some very succinct and probing questions. This write-up is a blow by blow account, with hyperlinks, a riff on how “Multi-Level Perspective” developed by Frank Geels (full disclosure: he’s one of my supervisors) might help in thinking about possible transition to the sunny uplands of banking reform, and a mini-rant about the baby and big Elephants in the Room. On the way there will be links to movies and books (some of which I’ve even seen and read!), a shout-out to George Monbiot and various slapped-down digressions and crap puns…
The tl;dr. We’re more than waist deep in the big muddy. We are the big fool telling ourselves to push on, and we are not the ones we have been waiting for. And there is (no) hope, but not for us…
Who the man is: “Philip Augar has been commenting on banking and other topical issues since 2000, the year he left Schroders plc in order to write. During his twenty year career in the City, he led NatWest’s global equity and fixed income division and was Group Managing Director at Schroders with responsibility for the securities business.”
What the man said: [square brackets means I am editorialising]
Augur worked in the roaring 90s for a Big Bank [Natwest, but he was too coy to say], flying around the world making sure the trading floors were profitable [if not actually ‘creating value’]. He wondered occasionally where the money for the trading had come from, did the depositing customers know? Did the other banks from whom his bank had borrowed know? How could they repay if everyone asked for the money a once [It wouldn’t be a wonderful life]. Did the bank’s shareholders know?
Then he moved to an investment bank called Schroders which was small enough not to suffer from the size problem (“size conceals sins; introduces conflicts of interest, often means a bad culture, anonymity decreases responsibility, stock market listing can lead to [short-term] shareholder pressure.”)
But this was the era of deregulation, of all boats being lifted (which is fine if you have a boat), and Schroders’ owners sold out. Augar got out and wrote some books about how it would all go wrong. In 2007, as the boom went on and on, he told his publisher he’d been wrong and wanted to write a book explaining why. While researching the book, the human fecal matter started making contact with the blades of the air-circulation device.
From 2007 to 2010 there was ‘mayhem’ with banks almost failing, being bailed out by ‘governments’ [i.e. taxpayers and – ultimately – the natural world, ever more intensively exploited].
By the end of 2010 the worst seemed over(to quote Bob Diamond – “the time for remorse is over” as various minor reforms around liquidity and reserves had been pushed through.
Then in 2012 the unexpected twist – lots of scandals
- Libor manipulation
- Forex rigging
- PPI “mis”-selling [If you or I did it, we’d be banged up for fraud, absent an expensive lawyer.]
- Small businesses getting mis-sold (see above) interest rate swaps
- Mexican drug barons being helped to launder money [but it’s okay, because HSBC said ‘sorry’]
- Sanctions-breaking activity [for example this, this, this and this]
Then the authorities “got tough”;
- Banks had to beef up balance sheets, hold more capital
- Prohibited US proprietary trading, UK ring-fencing of retail arms,
- Bonuses deferred, fines levied
So, folks were asking “Is this a new era or will banks return to business as usual/”
Augar first talked about investment banks [the kind that does corporate finance,
murders and inquisitions, sorry “mergers and acquisitions”] like Goldman Sachs, JP Morgan. You know, the “shock troops of shareholder value”.
These seemed more stable, less highly leveraged, and Augar’s various contacts assured him, to his satisfaction, that investment banks had cleaned up their act, there was more compliance, that the new rules were making a difference and that there was a new mood at the top of the business….
And to his immense credit Augar admits he believed them and was going to change tack in his criticism. And then…
In December ten investment banks paid a fine of $43m (chump change, but the symbolism is what matters) for having played around with the share issue for Toys R Us. [“To liquidity and beyond”?]
The rules these banks broke had been put in place in 2003, after the dotcom crash had led Elliot Spitzer to launch an investigation/prosecution, that had led to a £1.4bn [not chump change] settlement. As Augar points out, it took the investment banks not even 7 years to start circumventing the rules they had signed up to. He rethought about and asked the obvious question – why is it different this time? Why won’t they game the rules again? He think they will and they indeed are. They are lobbing to soften the rules on derivatives and on capital requirements. He thinks (and has written in the Financial Times) that banks are like alcoholics, they simply can’t help themselves. Here’s the article, not behind a paywall.
So then, onto retail banking [the ones where wage slaves like us go to get ripped off]. At this point Augar reiterated the chair’s disclaimer that he was speaking in a purely personal capacity.
He asked the audience how many thought the banks were doing a good job/bad job, and then took two photos. [There was one hand that I saw for good job. Everyone else said “bad”.]
As Augar says, the public assessment is that they overpay themselves, overcharge, their IT systems suck and they don’t support small business.
Is this fair? Augar says the “industry seems to be trying harder” and that the tone at the top seems different [he repeatedly gave the example of Bob Diamond being replaced by Anthony Jenkins as Barclays boss, derided as “Saint Antony”]
He pointed to the Banking Standards Review Council, voluntarily funded by the banks [Augar doesn’t mention Goldman Sachs snubbing it] , and the regulators’ involvement in forcing banks to be properly capitalised, ring-fence investment from retail banking and increased management accountability.
But… there was another big but…
The reforms don’t tackle the problem that the “market isn’t working.”
He asked the audience again. Given everyone’s assessment that the banks are not doing well, who had changed their bank in the last 12 months. About 6 or 7 hands went up.
Why so few? In Augur’s opinion, that’s because it’s hard to do and because it’s largely pointless since they offer largely identical services that are “free” if you’re in credit and steep if you’re not.
He pointed out that the return on equity for retail banking is 30%, a very very high number compared to utilities.
So, in Augar’s opinion “radical” action is required. The Government [he used the term government and state interchangeably, which is a pet peeve of mine] will have to step in and Do Something. Government is well-placed to do so at present, but won’t be forever. There are three reasons;
1. The Digital Revolution means that the normal high barriers to entry (it costs money to have physical branches everywhere) is becoming lower. Mobile banking is gradually (and quicker and quicker) making branches less important.
Augur thinks that government should therefore make sure the payments system is opened up and that there is a centrally-owned banking network that is open to challenger banks. He suggested the audience google “bank in a box”
2.The State currently owns an unusually large portfolio of banking assets
- 85% of RBS
- Because of the collapse of Northern Rock and Bradford and Bingley, a large book of mortgages
- National Savings Investment Bank and the Post Office Bank
Augar said that RBS could be broken up into regional banks that had a mission to grow regional economies, and that challenger banks could get seed capital?
3. Competitions and Markets Authority report pending
It will probably suggest investment/retail split, a cap on market share, a price cap on certain products. These are potentially worth, but it would be really radical to open up the bang infrastructure to everyone, with the underlying system state owned. This would allow “mobility, flexibility and genuinely competitive” [challengers].
Augar made the point that change is coming anyway (from Google, Amazon, Paypal and its peer-to-peer lending) and at the moment the government could change things, ending banking monopoly and increasing genuine customer competition.
Right, at this point it’s time for the MLP digression
The Multi-level Perspective doesn’t just have to be about “socio-technical transitions” (from sail to steamships, from horse and cart to cars). It might also help us think about “political/economic” transitions (the line is very fuzzy of course!! Here is a very short and crude version of MLP;
The short version is that you have a “landscape” of long-term changes or stability (war, population, technology etc) a “regime” where the big beasts try to keep big, eating other beasts and smaller beasts as needed – also known as ‘vested interests’ and the experimental “niches” where little organisations run around trying stuff out, in order to get rich and powerful and/or save the world.
So, thinking about banking you’d have at the “landscape” level the financial crash of 2007-8 onwards, digital technology, increased individualism, delegitimisation of the banking industry [though, frankly, if you weren’t pissed off, you hadn’t been paying attention. Who spoke of the Long Term Capital Management near-catastrophe during the boom years of the nougties?]
At the “regime” level you’d have the big five retail banks, the big investment banks and the government “regulators” (cough cough).
At the “niche” level you’d have the smaller banks, the techno-wizards and their apps etc.
But sometimes, of course, the regime actors are sock-puppeting the niche actors, or buying them (off) when they might be a threat to their business prospects. Transitions are often long, slow, intermittently bloody and frustratingly ‘fuzzy’ things.
Punctuated equilibria aside, it will be a slog…
Which- without the MLP schtick – was Augar’s opinion, as he closed out his speech.
The respondent [didn’t catch his name] pointed out that the dynamic in the speech was around the question of “patch things up or fundamental reform.”
Augar thanked him and agreed, and said he was leaning towards the latter [though of course, different people will have different metrics and definitions of the magic words ‘fundamental’ and ‘reform’…]
He declared investment banking to be “an effective oligopoly,” pointing to the work of US academic Jay Ritter on the remarkable clustering of fees, and pointed to the lack of incentives for retail banks to shift their behaviour. He also cited the example of the 2000 report by Don Cruischank that called for much of what he is calling for. Nowt happened, in large part because “banks have a very strong lobby.”
The Question and Answer session was rather unusual, in that there were no speeches, with the questions all being clear, relevant and often very incisive (and no, I didn’t ask one).
“Will there be a change (to appetite for regulation/intervention after the election?”
Augar admitted that Osborne had gone further than Augur had thought (based on Osborne’s background), but was forced to by the 2012 scandals. He didn’t see much likelihood of another Conservative government doing the same. As for Labour – “we’ll see.”
“Is peer-to-peer a big threat?”
Yes, also credit unions, crowd funding and disintermediation [cutting out the middle man/woman] generally
“Will there be an end to boom and bust?” (general laughter from audience)
We will learn to manage the busts better, how to deal with failing banks
“Don’t your proposals risk embedding the power of regulatory experts, with no more transparency for MPs etc than before. Didn’t the Diamond episode expose that Treasury is far less independent in its thinking/action than it seems?”
Augar gave a limited defence of Diamond as a ‘lightning rod’. He defended his proposals as not that difficult to explain [maybe he has met smarter MPs than I have?], and advocated a “we’re going to have a National Grid for banks” meme.” He conceded that it was unlikely that Treasury would lead on this, and said they seemed to mostly be unreconstructed free-marketeers.
“[Why] do the British have a problem with the concept of social ownership?”
Augar agreed, saying Miliband gets shouted down as a nationalizer. Augur said that business lobby is too prominent a platform and that competing voices get crowded out. Which means it’s time to give the promised shout out to George Monbiot, who recently observed;
A study by academics at the Cardiff school of journalism examined the BBC Today programme’s reporting of the bank bailouts in 2008(12). It discovered that the contributers it chose were “almost completely dominated by stockbrokers, investment bankers, hedge fund managers and other City voices. Civil society voices or commentators who questioned the benefits of having such a large finance sector were almost completely absent from coverage.” The financiers who had caused the crisis were asked to interpret it.
I’ve then got an illegible question [#oldmancramp] and then this doozy – “how will we know if/when the banks HAVE finally got the message?”
Augur said it would be when there was product differentiation for individuals, it was easier to switch banks [without having to provide grand-father’s inside leg measurement, 23 forms of photo ID etc] and when returns on retail banking shrinking from the 30% he cited to the levels of utilities [though I think one or two of the Big Six are making Big Profits, no?]
The final question probed the question of culture – don’t bankers recruit people who look and think like themselves, hyper-competitive etc [or as some might say ‘shark-eyed sociopaths’].
Augar returned to the talisman of Anthony Jenkins, various behavioural programs, the Banking Standards Review Council, before saying that indeed, shareholders will seek higher returns, and there is likely to be a return to the old ways [ a regression to the mean, if you will] once memories fade and the press watches less intensely. Seven years then…
The Elephants in the Room
1. The baby elephant, which may have gotten a showing if the last questioner had had more time, is the question of whether shareholders are the only problem, or if perhaps the managers have taken over the sweetshop.
2. The big elephant – in fact the whole herd of elephants that went unheard – is… of course… the growth economy, climate change and the pending ecological debacle. What are banks for? To allocate surplus to achieve goals. And what should our purpose be, if we want our kids to have some sort of life? To stop speeding towards (over?) the cliff with a leaden foot on the accelerator. In this speech, carbon emissions didn’t get a look in. That’s deeply irresponsible, borderline autistic. I’ll close out with this from my other post from today, about what I read on the stepper.
Gosling,J. And Case, P. (2013) Social dreaming and ecocentric ethics; sources of non-rational insight in the face of climate change catastrophe. Organisation 20 (5) 705 -721.
… [The article is] better at the outset (what the Crow did) than the end, (what we do), but super-useful for thinking about how to rehearse the apocalypse without descending into zombie films and Mad Max…
The next of these “Manchester Capitalism” events is on March 12th. It will be someone else’s turn to blog.
Some stuff to (re) read
Kate Jennings (2003) Moral Hazard
Gillian Tett (2009) Fool’s Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe
John Lanchester (2010) Whoops!: Why everyone owes everyone and no one can pay
– (2014) How to Speak Money: What the Money People Say–And What It Really Means
Margin Call (2011) -early days of the financial crisis thriller. Not seen it, but good reb
Arbitrage (2012) – Richard Gere in pot-boiler. Susan Sarandon excellent
Inside Job (2010) – excellent documentary! Sequel pendin.
Concepts that didn’t get (full airing but might usefully have done so
Fractional-reserve banking is the practice whereby a bank holds reserves (to satisfy demands for withdrawals) that are less than the amount of its customers’ deposits
A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent.
Second Contradiction of Capitalism –
“This is between the forces and relations of production combined and the conditions of production, broadly speaking, between political economy and the environment:
“An ecological Marxist account of capitalism as a crisis-ridden system focuses on the way that the combined power of capitalist production relations and productive forces self-destruct by impairing or destroying rather than reproducing their own conditions.”
The tabloid version; “capitalism is turning the planet into an uninhabitable slag heap. It can’t help itself, it’s just what it does. To pick an example at random, kinda like an alcoholic….”
The banks, especially those that failed (and should have been allowed to do so (free market economics)), topped up their reserves and paid their fines, using money received through QE (Quantitative Easing). QE, basically printing more debt (when the country is already deeply in debt), to give to the banks, supposedly to lend to business. It is just lunacy and nothing will change, as most of our politicians and ex-politicians have connections with the financial services.
I thought Augar gave an interesting keynote speech relative to retail banking. His background is somewhat unusual, trader, politics, critic and now challenger bank CEO. His current re-emergence into the retail bank TSB will be watched to see how he manages to influence the industry and politics via his in-depth experience. However, whilst investment banking (“IB”) was not the main thrust of the keynote speech, I have heard the same IB story so many times now, coupled with tales of pre crisis knowledge of spotting was wrong back to when I was a young fella, free markets, Friedman, Fama, Merton the scientization of risk etc. and deregulation.
Politics and finance continue to operate within the realms of continuous bouts of myocardial infarction and the industry and its affiliates refuses to face the structural reforms that we know are needed in banking and finance. I am also cynical about the industry fashioning a way out of the maze, (specialists and comitology) as is anyone that has served a serious amount of time in a mgt position within the IB / corporate finance world. Personally, I am more interested in finding a way to illustrate the current effort to regulate is an ill thought out technocratic attempt at keeping everyone happy and failing to address the cornerstones of crisis: 1. the inadequacy of Economic theory, 2. Central banks / politics are unable to control the ‘roar’ of finance on a domestic basis within an interconnected networked world of finance, 3. Shadow banking is also key threat to stability and outside the scope of technocratic regulation, and 4. shareholder value and models such CAPM employed by the City to deriving ROE ratios to achieve, that frankly are irresponsible, encourage risk taking, and breeds the utter contempt we see in the boardroom as regards pay, bonuses and benefits of state owned / controlled banks. These are just a few of the issues.
Peer to peer lending was raised, and whilst I am inspired by the innovation and inventiveness, I feel they will fall on stoney ground as attempts at progression in this type of environment. Yes we can foster these new ideas as Peter Folkman pointed out, now that technology allows ease of access to computer based credit decisions. However, Peter failed to note cybercrime and security as a key issue and these new ideas are unlikely to solve this conundrum or have the cash or capability to beat hackers or financial criminals with new technology – too much upfront investment is required from these challengers – the search continues. The only way is for a state funded bank to be promoted that feeds the ‘real’ economy (vs. QE that promotes speculation in stock markets and real estate), however we know the current view on austerity and shrinking the state – and labour are no different really, both neoliberal centre ground players, with one attempting to mask the move in becoming more right wing by the day, with their friends in finance.
Getting the economy moving is a political priority ahead of the election vs. structural change in banking. These points are one in the same problem, but unfortunately we are dealing with senior blinkered self interested politicians and central bankers with a multitude of agendas and non executive positions, that believe in moving back to the old foundations of finance that grants the current ideology a competitive advantage, via tinkering around at the edges of regulation and pointing to the changes Augar mentioned.
For me at least, this is not enough to deal with crisis. The heart needs a new way of routing the blood around the body, new bypass grafts are required to divert around the blockages, rather than the stent that has been provided and wait for the cholesterolised plaque to rebuild around vulnerable areas of circulation. The issues are complex and foundational. We have a diagnosis of a homogenous problem on an international scale, with heterogenous domestic financial institutions and politics at polemical odds with each other. To deal with these issues would indeed be painful as Augar pointed out, but it needs a co-ordinated international effort, rebuild accounting standards, review economic theory, break up banks, regulate by financial activity, make derivative based boom and bust illegal, remove the carry trade or influence with capital controls, and deal with shadow banking too rather this being a release valve for too big to fail, and another concern as regards systemic stability. Finally, and just as important, we need to weave the social back into finance by controlling financial innovation with tests of ethical / moral utility back into a capitalistic competitive environment and prioritising the social to be at least on par with shareholder value.
Ethical capitalism is possible in my opinion. But it needs political will, and we need to call for it. I suspect many of these issues are common to other fields such as climate change. Material changes need time, but I fear it will not happen any time soon, sadly. Apologies for the long post.
I really like your writing Marc. But I think as everyone is fully aware, there was no way of even scratching the surface with only a half hour speech. Some of the concerns that I had, Ian already covered above. It’s a little tiring though to well know that a lecture will end with “it will continue to happen because people are people” attitude. The description of reforms as being “easy” is fair enough, but like you said, most politicians aren’t as intelligent as the ones Augar had met. I remember that one of the things I highlighted in my notes was “political will,” which is nearly absent and not just in the UK, but for most Anglo-Saxon countries. The whole time he gave the speech I kept comparing it to the systems I know in Australia and Malaysia and much of it were identical. The UK is not in isolation in having this so-called “avert socialisation” problem. The pressing need for a globalised effort should’ve been highlighted. .