Opinion

Hugo Dixon

Can EU defend supranational interests?

Hugo Dixon
Sep 17, 2012 09:56 UTC

European integration tends to advance first with squabbling then with fudge. Every country has its national interest to defend. Some politicians appreciate the need to create a strong bloc that can compete effectively with the United States, China and other powers. But that imperative typically plays second fiddle to more parochial concerns with the result that time is lost and suboptimal solutions are chosen.

Amidst the europhoria unleashed by the European Central Bank’s bond-buying plan, it is easy to miss the immense challenges posed by two complex dossiers that have just landed on leaders’ desks: the proposed EADS/BAE merger; and a planned single banking supervisor.

Look first at the plan to create a defence and aerospace giant to rival America’s Boeing. This has been under discussion since at least 1997 when the UK’s Tony Blair, France’s Jacques Chirac and Germany’s Helmut Kohl called on the industry to unify in the face of U.S. competition. London, Paris and Berlin are the key players in this game because they have the major assets.

Since 1997, progress has been patchy. Airbus, previously an awkward Franco-German-British consortium, was gradually turned into a proper company wholly owned by EADS – and EADS itself was created by the merger of France’s Aerospatiale and Germany’s Dasa. But Paris and Berlin insisted on a dysfunctional governance structure designed to balance their respective power rather than promote an effective organisation and EADS’ early years were bedevilled by scandal. What’s more, BAE opted to stay out of European integration, instead merging with Britain’s Marconi and going on a U.S. acquisition spree.

The cost of developing new products, such as fighter aeroplanes, is huge: Europe’s last major initiative in this area, the Eurofighter, was developed through another suboptimal consortium. If Europe can’t get its act together, BAE may eventually find itself swept into the arms of a large U.S. group and governments may ultimately be forced to buy American. Being dependent on even such a close ally should not be their first choice. So there is a strategic benefit in creating a streamlined European defence and aerospace group.

How to clean the banking cesspit

Hugo Dixon
Aug 6, 2012 08:29 UTC

Five years after the credit crunch erupted in August 2007, banking still looks like an industry running amok. Scandals keep tumbling out of the closet: an alleged ring of banks including Barclays that attempted to rig interest rates; money laundering by HSBC; insider tips passed by Nomura to its clients; and terrible risk management by JPMorgan, where traders have so far lost $5.8 billion.

True, some of these scandals date from the rip-roaring days of the bubble. And the industry is now being reformed. But the public is growing impatient with the slow pace of change, especially as recession bites in large parts of the industrialised world. Some observers therefore want to clear out the entire old guard. The idea is that only new teams can clean the cesspit. There are also increasing calls to break up banks into supposedly low-risk retail banks and casino-style investment banks. Even Sandy Weill, the man who created Citigroup, now advocates splitting up financial conglomerates.

Something must be done. The financial industry has made a mockery of capitalism. Despite endless bailouts, bankers are still paid far too much. Profits are privatised, while losses get socialised.

Who will watch the Bank of England?

Hugo Dixon
Jul 16, 2012 08:19 UTC

A year ago Rupert Murdoch was probably the most powerful unelected person operating in Britain. The media baron could seemingly choose prime ministers. Then came the phone hacking and police bribery scandal, after which politicians sought to distance themselves from him.

The title of most powerful unelected Briton now probably belongs to Mervyn King, the governor of the Bank of England. Witness the way he dispatched Barclays’ chief executive Bob Diamond two weeks ago in connection with the Libor rate-rigging scandal. Whoever succeeds King next year will have even greater powers. After all, responsibility for financial stability and banking supervision is about to be added to the central bank’s main task of running monetary policy. It’s vital for democracy that this authority is exercised effectively, transparently and fairly.

Who will be King’s successor when he steps down? And how will the new governor be made accountable? These questions have been brought into sharp relief by the Libor scandal. The front runner for King’s job has seen his chances knocked, while doubts have been raised about the central bank’s effectiveness and transparency.

The perils of an indispensable boss

Hugo Dixon
Jul 9, 2012 09:59 UTC

Was Bob Diamond really irreplaceable? Barclays’ board operated for 15 years on the assumption that he was. As a result, the UK bank’s chief executive became more powerful – and ever harder to replace. Now that he has been kicked out in the wake of the Libor rate-rigging scandal, Barclays is struggling to find new leadership.

This is an object lesson for all companies, not just banks. Think of two other UK-listed groups which have recently provoked shareholder anger over their bosses’ high pay packages: WPP, the advertising giant; and miner Xstrata. In both cases, the boards paid their chief executives so much because they thought they were indispensable.

Barclays is now in a mess. Not only has Diamond quit, his chairman, Marcus Agius, has also said he will resign. Both men ultimately had to go: Diamond had come to epitomise the worst of the City of London’s greed, while Agius seemed unable to hold his chief executive in check. Neither man responded to requests for comment.

Euro banking union won’t come fast

Hugo Dixon
Jun 18, 2012 08:58 UTC

Some European policymakers are talking about a “banking union” for the euro zone as if it was around the corner. Jose Manuel Barroso, the European Commission president, for example, told the Financial Times last week that such a union – which would involve euro-wide supervision, bailouts and deposit insurance for the banking industry – could be achieved next year.

But this is not remotely likely. Parts of the zone’s banking industry are so rotten that taxpayers elsewhere can’t reasonably be asked to bear the burden of bailing them out. A massive cleanup is required first. The crisis in Greece, Spain and other countries may provide the impetus. But even then, as Germany suggests, banking union should proceed in stages.

The appeal of a euro zone banking union is understandable. Governments and lenders are currently roped together in what has been dubbed the sovereign-bank doom loop. Weak banks – for example those in Spain, Ireland and Cyprus – can drag down their governments when they need a bailout. Equally, weak governments, such as Greece’s, can drag down their banks when those are stuffed with their own sovereigns’ bonds. By shifting responsibility for bailouts to the euro zone as a whole, the loop could be cut. Or, at least, that is the hope.

Does Europe need a banking union?

Hugo Dixon
Apr 30, 2012 08:34 UTC

Does Europe need a “banking union” to shore up its struggling monetary union? And is it going to get one?

These questions are raised by the increasingly lively debate over how to break the link between troubled states in the euro zone periphery and their equally troubled banks. In some countries, such as Ireland, the lenders have made so many bad loans that they have had to be bailed out – in turn, dragging down their governments. In Greece and Italy, the banks have gorged on so many government bonds that they have been damaged by their state’s deteriorating creditworthiness. And, in Spain, the current focus of the euro crisis, a bit of both has been happening: banks made too many bad loans – and then bought too many government bonds.

One proposed solution to this incestuous relationship, advocated among others by the International Monetary Fund, involves creating a centralised Europe-wide system for regulating banks and, if necessary, closing them down and paying off their depositors. The idea is that the region’s lenders would be viewed as European banks rather than Spanish, Greek or Italian ones. If they got into trouble, they wouldn’t infect their governments; and vice versa. That would make the whole euro crisis easier to manage.

LTRO was a necessary evil

Hugo Dixon
Mar 5, 2012 09:48 UTC

Bailout may not be a four-letter word. But many of the rescue operations mounted to save banks and governments in the past few years have been four-letter acronyms. Think of the TARP and TALF programmes that were used to bail out the U.S. banking system after Lehman Brothers went bust. Or the European Central Bank’s LTRO, the longer-term refinancing operation. This has involved lending European banks 1 trillion euros for three years at an extraordinarily low interest rate of 1 percent.

The markets and the banks have jumped for joy in response to all this liquidity being sprayed around. So have Italy and Spain, whose borrowing costs have dropped because their banks have been able to take cheap cash from the ECB and recycle it into their governments’ bonds — making a profit on the round trip. But as has been the case with other four-letter bailouts, the LTRO has come in for criticism — most of it a variation on the theme that the way to treat debt junkies isn’t to give them another heroin injection.

One problem is that European governments could now feel less pressure to reform their labour laws and do the other painful things that are needed to get their economies fit. Another is that banks may delay actions that are required to let them stand on their own two feet: such as rebuilding their capital buffers and raising their own longer-term funds on the markets.

How to end the banker backlash

Hugo Dixon
Feb 6, 2012 09:47 UTC

There was a whiff of the lynch mob in the UK last week. Stephen Hester, the current Royal Bank of Scotland boss, was bludgeoned by politicians and the media into foregoing his bonus even though he was brought in to clean up the largely state-owned bank. Two days later his predecessor, Fred Goodwin, was stripped of his knighthood. While Goodwin bore much of the responsibility for RBS’s near-bankruptcy, removing his title flouted normal procedures. Not only is such a dressing down traditionally reserved for criminals; the prime minister, David Cameron, prejudged the verdict of the committee which reviewed the knighthood. The week was capped off by the leader of the opposition, Ed Miliband, calling for a tax on bankers’ bonuses.

While the UK is currently the epicentre of the backlash against financiers, the phenomenon is widespread across the Western world. Francois Hollande, who is likely to be France’s next president, has said that his main adversary isn’t Nicolas Sarkozy but a faceless, nameless, opponent – the world of finance. And across the Atlantic, the only serious setback in Mitt Romney’s presidential campaign so far came when he revealed that in 2010 he had paid only 13.9 percent tax on his $21.7 million of income, most of which came from his time as a private equity baron.

There is certainly something ugly about the way politicians – who themselves bear some responsibility for the economic mess – have turned bankers into a scapegoats. But the public isn’t in the mood to show sympathy to bankers these days. The issue is not so much the amounts they are paid. In the same week that the banker backlash was gathering force in the UK, Facebook announced its initial public offering. Nobody batted an eyelid at the prospect of Mark Zuckerberg, the founder, being worth over $20 billion. The difference is that people think Zuckerberg deserves his billions but the bankers don’t deserve their millions.

Bankers issue nostra culpa for economic crisis

Hugo Dixon
Oct 24, 2011 11:17 UTC

To: Barack Obama
From: Humboldt Pye, Chairman of First Reform Bank

Dear Mr. President:

I’m writing an open letter to you and other G20 leaders on behalf of the chairmen of the world’s leading banks to say sorry.

We do not think banks are to blame for every ill the world currently faces, as the Occupy Wall Street protests and their kin in other countries suggest. A balanced audit would attribute responsibility to policymakers too: you and your predecessors set the rules of the game that we so craftily exploited. Even the public had a hand in the current mess: excess spending in some countries and inadequate taxpaying in others allowed people to consume too much.

But we are not in a position to lecture the rest of society. During the bubble years, we focused first on our own pay packages and then on profits for our shareholders. Insofar as we thought about the wider interest, we comforted ourselves with the belief that financial markets were efficient and free markets were the best way of generating wealth. So, as we pursued our self-interest, the world must by definition get better.