– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –
By Peter Thal Larsen
Investment banks have reined in their worst pay excesses. But inconsistent enforcement of bonus rules in the United States and Europe means some are still getting away with bad behaviour. If banks and regulators can’t agree common standards, they risk another political backlash.
Michel Barnier wants Europe to be better prepared for the next financial crisis. But the EU’s financial market chief’s plan for bank taxes seems to miss the point. Timothy Geithner’s push for EU-wide stress tests raises questions of its own. But at least the U.S. Treasury Secretary has identified the core problem facing Europe’s financial sector.
The current euro zone crisis has its roots in sovereign debt. But concerns about banks’ exposure to risky sovereign debt have led to strain in the European inter-bank funding markets. There are also signs that U.S. money-market funds, which hold more than $500 billion of euro zone financial assets, are drawing back.
Germany’s short-selling ban misses the point. The country’s plan to stop naked shorting of some financial stocks and European government bonds — as well as related credit default swaps — may score political points. But it sows confusion, and will hardly help tackle the causes of Europe’s financial woes.
The German ban appears to apply to three types of securities: shares of the country’s 10 largest financial institutions, European government bonds, and European sovereign CDS. The first is fairly harmless, the second seemingly pointless, and the third downright confusing.
Embarrassing emails aren’t new to Wall Street. After the dotcom bubble, star tech analysts were condemned for sending messages mocking the same stocks they urged investors to buy. Now Goldman Sachs is in the spotlight after Senate investigators uncovered correspondence from current and former executives which suggest they were anticipating the collapse of the mortgage market even as they flogged related products to clients.
What’s most striking about the messages, however, is who wrote them. Goldman’s senior executives have long preferred voicemail over email for confidential communication. Indeed, some Goldman bankers believe it was this technological difference that helped the bank to dodge the Internet-related scandals that tainted rivals Merrill Lynch and Citigroup: voicemails are harder for investigators to scan.
The global banking industry resembles an obese teenager. All the relatives agree that drastic weight loss is necessary, but each has a different diet plan. The International Monetary Fund’s splendidly named FAT tax would slim down the banking sector by targeting profits and pay.
The Financial Activities Tax comes in two varieties. The simple version is a straight tax on a bank’s gross profits — before deducting compensation. A low rate could raise significant sums: the IMF reckons a FAT tax of just 2 percent on UK banks would raise 1.4-2.8 billion pounds.
– Peter Thal Larsen is a Reuters Breakingviews columnist. The opinions expressed are his own –
Britain’s bankers were already braced for an uncomfortable election. But the U.S. fraud allegations against Goldman Sachs, combined with the rise of the Liberal Democrats, have given bank-bashing renewed impetus. The popularity of the attacks means they could resonate well beyond the current campaign.
Central bankers’ speeches tend to be dry affairs. For this reason alone, Andrew Haldane’s latest thoughts on the financial crisis deserve attention. In a discussion about size in banking, the Bank of England’s executive director in charge of financial stability makes reference to the structure of al Qaeda, the limits of Facebook friendship, and the world domino-toppling record. Rhetorical flourishes aside, Haldane’s comments contain a serious message: regulators are thinking increasingly radical thoughts about tackling big banks.
Haldane is not in an academic ivory tower. If the Conservative opposition wins Britain’s general election, the Bank of England will become directly responsible for regulating the country’s lenders. Moreover, he has come up with some startling numbers. Using credit ratings to help quantify the implicit support that banks enjoy from the government, Haldane estimates that the UK’s largest lenders benefited from an average taxpayer subsidy of 55 billion pounds a year over the past three years. An alternative approach, looking at the relative funding costs of big and small banks, suggests the annual subsidy is worth 30 billion pounds.
Regulators and bankers rarely see eye to eye. But at the World Economic Forum in Davos, the two sides were in surprising agreement about creating a global fund, financed by a tax on banks, to deal with future bailouts.
Mario Draghi, head of the Financial Stability Board, which is spearheading a new global financial regulatory regime under the auspices of the G20, floated the idea of a cross-border body to manage this fund. Surprisingly, several big European banks — including Barclays and Deutsche Bank — support it.
What is an acceptable return on equity (ROE) for a bank? That question is likely to dominate the debate among executives, investors and regulators in the coming year. After the spectacular losses of the crash, there is no doubt that banks’ future returns should be lower than the super-charged profits earned during the credit boom. But if ROEs fall too far, the consequences could be severe.
Returns are already on the way down: just look at Goldman Sachs. Between November 2007 and September 2009, the Wall Street bank’s tangible common equity swelled by 74 percent. In 2007, its best-ever year, Goldman earned a 38 percent return on that equity. This year the bank is expected to report the second-highest profit figure in its history. But its ROE is likely to be just half its level of two years ago.
A windfall tax should meet two tests. It should raise a meaningful amount of cash, and be clearly viewed as a one-off. The UK government’s new levy – 50pc of bank bonus pools for bonuses over £25,000 – fails on both counts.
True, banks and bankers have invited some sort of punishment. Governments and central banks committed trillions of dollars to help stabilize them after their reckless behavior helped cause the financial crisis. Huge compensation pools seem like rank ingratitude.