A year or two ago, when asked what I do for a living, I would have joked and said I am an investment w@nker. Up there with divorce lawyers and used car salesmen we were disliked but we were nothing more than something to be avoided or joked about. Over the last year this has changed and I have been fascinated by the vitriol Joe Schmo has shown toward bankers. So severe is the distaste for the banking profession and so complete the media coverage that I have stopped answering that same question. I would rather say I am unemployed or deliver some meaningless answer like I work in finance and hope that my response is boring enough to move us onto another topic.
This campaign of anger climaxed when every mainstream news service rejoiced in the fact that RBS bankers had received no bonus. The moral high ground had succeeded and the corrupt money grabbing bankers had felt the firm hand of justice. I couldn’t help but give a bitter sweet smile.
Maybe I shouldn’t be surprised that Joe Schmo believes the media; where else would he get his consensus opinion and know who this week’s common enemy is? If it is self serving then it is easier to accept than to question. If everybody agrees with you then you must be right. If ‘City Boy’ hints that all investment bankers are aggressive, greedy, morally corrupt, drug users then it must be true, after all he worked in the industry. We live in a society where sensation is prized over fact and small observations are generalized as common behaviour.
Maybe I’m equally guilty, every accountant has a lack of personality, every lawyer loves to see you in pain and every used car dealer is a snake. So I don’t seriously object when we do it. I am an investment w@nker. I can live with that fact and I don’t normally get upset.
But I am upset. The truth is that media opinion drives public opinion which in turn will influence our government and therefore our economy. We consider that a good thing, and often it is, but at the moment this angry, revenge seeking, consensus is pushing us in the wrong direction.
I can hear Joe Schmo scoffing at me, ‘this is just another banker trying to justify his bonus’. Please keep on reading Joe, keep an open mind, I’m going to try and convince you otherwise because your financial future, not just mine, depends on it. If I have no luck you can have the pleasure of telling me where to stick my blog and my arguments while I pack my bags and decide where to move.
1) Bankers caused this recession!
What me? This argument now seems to be taken for granted. Politicians talk as though this is a well established fact and our obscene bonus culture was the major driver. We have US senate hearings and UK government enquiries which move ahead on this assumption, intent on fixing the banking ‘problem’. It is so convincing that for a while I almost believed it.
The problem is that when you weed through the complex products, the banking terminology, the media headlines and economic jargon, you can whittle down banking failure to a simple economic fact. Banks lend money to borrowers and a large number of those borrowers stopped paying back their loans. So why are the bankers to blame? Shouldn’t we be hunting down the people that stopped paying their mortgages?
The mortgage community, Joe Schmo, borrowed money to buy a bigger house and for good measure a second investment property. So did his friends, John Smith and Kenny Dud. Unfortunately a lot of the Dud’s were given mortgages that they couldn’t afford. Normally this isn’t a big problem. Banks make provisions for the Kenny Duds of the world who might not repay their mortgages, so it didn’t come as a big surprise when they didn’t. What did come as a surprise was the number of Duds in the Dud community.
So who is to blame? Being a banker myself I am pretty upset that my colleagues chose to lend to so many members of the Dud clan. If I’m honest with myself I can’t in good conscience say that the banks were blameless but all this finger pointing is so singular. We all find ourselves living in a new blame based culture where the person who slips on a banana peel does not blame himself for being inattentive but pathetically looks around for a banana eater to sue. The fact Kenny couldn’t manage his own finances appears irrelevant. Instead Joe is blaming his bank for lending money to Kenny in the first place.
What about the credit rating agencies, why did they give so many of these products high credit rankings? Where were the shareholders of the banks in all of this? Did they look at those financial statements and big loans and raise questions? Weren’t these banks audited, regulated and risk managed and aren’t these groups also paid bonuses? I’ll probably be shot down for mentioning the media is to blame. Yes those objective purveyors of factual information. I watch people furiously biting their nails and tapping their feet while they read the latest scare about job losses, recessions and falling market prices. As a result we all go on fewer holidays, buy fewer cars, spend less on birthday presents and stop eating out. Fear contributes to a failing economy. The net effect of all this fear is the loss of trillions in a lack of consumer normality, which dwarfs the billions lost by banks.
Government has taken some media abuse and nobody in government is feeling the heat more than our esteemed prime minister and ex chancellor. He is blamed for encouraging an economy built on debt. It wasn’t just Gordon though, the US administration, under Clinton and Bush, together with the U.S. Department of Housing and Urban Development put pressure on banks to lend so that more people could buy homes. Who do these governments serve? Well the Schmos, the Smiths and the Duds of course and this group of people were putting a lot of pressure on governments and banks to lend more money.
What are the Schmos and the politicians doing to solve the problem now? They are blaming banks for ceasing their lending programs and for not lending them more money. The irony is perfect in its idiocy.
2) Banks are being supported by your hard earned taxes!
Your taxes? Alistair Darling unveiled his £500bn bank bailout package in Oct 2008 and tax payers were suddenly very upset that their hard earned taxes were being used to prop up banks. Well how much is that £500bn going to cost the taxpayer anyway? Potentially nothing. £50bn has been used to buy bank shares. If those banks perform well then the tax payer could actually benefit. The remaining £450bn is guarantees and liquidity injections. These cause no short term pain for the tax payer and may cause no long term pain.
The UK tax payer has suddenly become a shareholder in UK Banks Plc and is upset by the fact that his company is paying banking bonuses. According to national statistics around 20% of UK jobs are in banking, finance and insurance, so perhaps only 80% of tax payers were actually upset by this development, maybe fewer when you factor in bankers’ wives and husbands. However, this is just a statistic which ignores how much tax the financial services contributed to the government coffers in the first place. In a paper published by the IFS in 2004 they point to higher corporate taxation earnings from the financial sector of around 30%. In another paper published by the IFSL referring to financial services in 2006 they estimate that income tax payments of people employed in financial services was £11.8bn in 2004. We can probably assume that these numbers have not varied much between 2000 and 2007 so that aggregate tax revenue, just from banking staff, over the 7 years is more than £70bn. Even if the entire £50bn investment in bank shares was lost then the UK tax coffers would still have a 7 year surplus of £20bn.
Yes I am doing a bit of creative accounting with these numbers but I’m doing it to prove a point. The financial services and in particular the staff who work in financial services contribute huge sums of money to the UK economy. They don’t do this just by paying taxes, they contribute by bringing a flow of money to the city of London which draws ancillary industries including the sandwich shops that feed them, trains and taxis that transport them, travel agents that book their holidays and real estate businesses that house them. The ISFL survey estimated that 42% of UK’s GDP is earned in London. The next time John Smith the tradesmen moans about his taxes he shouldn’t forget the last job where he was paid in cash so that he can keep his earnings off the books. Or should Mary Smith moan just before she claims benefits. Lets be honest, whose tax money is it really?
3) Nationalise all banks and cap bonuses!
Are you serious? Yes David I was going to vote for you but you have proven yourself unworthy of a capitalist vote. I made more than £2,000 on my IG Index betting account last year. £2,000 is hardly going to give your staff an incentive to work a 60 hour week. How much did you claim on your ‘expenses’ last year? While you are on your populist, vote winning crusade why stop at the banks? Why don’t you nationalise all companies who have highly paid staff and cap everybody’s salary? Everybody will be equal, we’ll never have financially driven risk takers and entrepreneurs or a snooty rich upper class, and we will all be equal! I think you forgot two things, firstly bankers are still allowed to vote and secondly politicians still get paid by the taxpayer.
When did we all start getting concerned about people who make lots of money? Doesn’t anybody recognize the signs of socialism? If popular politics makes the UK a country where it is not profitable to transact in financial services then those services will just move somewhere else. The banking community is not averse to moving to New York, Hong Kong, Singapore, Paris, Montreal or any other large financial centre, and those cities are not averse to having bigger banking services? I may not agree with Obama either but if my bonus is going to be capped at $500k in New York and £2k in London then I know where I’m going to go and work. Most of the people I work with have already moved cities once and a lot of them speak a second language. If bankers move their jobs and consequently their bonuses, so their taxes will follow.
4) Bankers earn obscene bonuses!
Do we? I’m not going to sit here and argue that bankers earn an average national wage. Bankers earn good salaries but so do accountants, lawyers and doctors. We have all seen the headlines about bankers being paid £20m bonuses but in reality these are truly abnormal events in abnormal years. Most bankers earn far more sensible salaries and don’t run off to buy Ferraris and expensive champagne as soon as they are paid. Bonuses in the billions look huge and make sensational headlines but banks have huge numbers of staff, many of whom will earn bonuses that are less than £20k.
At the end of the day whether you pay a salary in monthly increments or in one lump some at the end of the year and call it a bonus, its all part of a pay packet and it is the total pay packet that really matters. I wonder how many people would be willing to put 50% or more of their salary at risk. I also wonder how many people would be pleased when someone in a completely unrelated division caused their salary to fall. According to most banks a banker’s incentive is based on personal performance, division performance and overall bank performance. So someone who had a very good year and made a lot of money, who worked in a division that had a good year and made a lot of money but worked in a bank that lost money, would expect their bonus to be down, a lot, perhaps even down to zero?
I’m not an economic idiot and I’m not proposing that loss making banks should be obliged to pay bonuses, especially when they have to be rescued. I also hate the idea of golden handshakes where bonuses are guaranteed or not linked to performance. However, the UK shareholders of nationalized banks are forgetting a few key facts. Firstly, the people left at the banks may not be the ones who put it in trouble in the first place. They are just the poor sods left to clean up the mess and deal with the anger after the others were fired or resigned. Secondly, they are not the extremely well paid elite because if they were they could probably walk away and go live on a beach until the economy improves and the media frenzy ends. Finally, they need those staff to help the bank make money in the future. Do they really want to be left with a £50bn investment in Dud Bank Plc staffed with the motivation of civil servants?
Banking is not some Elite club that restricts its members. It is not a casino where the chips are other people’s money. It is an industry that is accessible to all where the first priority is making money for investors. If you think that you would make a good banker then apply for a job, climb the ranks and work your way towards a big pay day. It’s a tough industry, the hours are long, the work is complex, and there are a large number of people competing for those high paid jobs at the top. It takes intelligence, tenacity and staying power to get to the top. I find it laughable that politicians go on about an existing bonus culture that doesn’t prize longevity. Most top bankers have invested 10 to 20 years of their lives to get to where they are. They didn’t walk straight into a managing director role earning a huge salary. They worked late nights, thought about trading strategies in their spare time and socialized with clients on their weekends. Furthermore most of them are paid in stocks in their own banks with 3 year lock-up clauses, not cash. Why would they purposefully risk the value of their own stock after working so hard to earn it? Some of the biggest losers in this sad economy are the bankers themselves.
So Joe, the next time you catch one of those newspaper selling headlines or watch a politician winning votes by bashing bankers just ask yourself why is it that you believe the banker is a w@nker?
