Wednesday, February 6, 2013

British Public Pays for the Sins of its Bankers


Modern Banking
It appears that before the financial crisis a few years ago the Royal bank of Scotland was indulging itself in risky investment gambling. It is a really fun game where bankers in nice white shirts and bright ties play on a computer screen for huge profits. Mind you there is no stress of risk. They gamble with our money. They are smart and talented at the game and therefore win most times. The winnings are distributed under the name of a bonus that is on top of their already hefty salaries for coming in every day to the bank to play the game.

But guess what, gambling is gambling and does involve the risk of losing. When they lost heavily before the financial crisis the poor fellows were consoled by their bosses by giving them a bonus anyway, albeit a smaller one. The losses suffered by the bank as a whole were made up by the British Public. The government as a result has ended up with a bigger deficit that they are making up by cutting public programs leading to a loss of Job for many. Any way, the homeless guy on the street or the poor wife who consoled her children that meat would be back on the table soon after papa finds a new job were consoled by the government that they were now owners of eighty percent or so of RBS, the royal bank of Scotland, and it was sure to help them in future.

Guess what, this year the bank profited at gambling again and the bankers are sharing a big chunk of the profits again. Some of them need to refurbish their holiday homes and yachts with new trappings. The old brocade ones get tiresome after a season or two. In the meantime the government has found that the bank was rigging something called Libor rate and has asked the British Public who own the bank, 600 million or so for the offence, No, no, bonuses or salaries of the banking executives will not be cut. How can they, when perhaps some of them can help encourage campaign contributions from industry for the elections and facilitate it by advancing loans to those industries. In any case what is the need for these smart bankers to suffer when we have the public to bail them out?

I am not a banker and perhaps I have figured all this out wrong, I shall refer an economic correspondent and friend to it in case I have got it wrong so that he may point out any correction as a comment to this post if he or anyone else who knows more about this fun game finds the time to oblige.

While the preceding post is written in a satirical side after a heady glass of wine in the evening and indignation at  recent news about LIBOR fines, the  remaining section that will also appear as a seperate post is written the following morning after a good nights sleep and careful analysis,


THE SIMPLEST ROUTE TO RESTORING ECONOMY AND GOOD BANKING

Organizations are run by people and building good organizations requires honest, talented and dedicated workers who value their work and whose judgment is not impaired by baser human instincts such as pride, greed etc. This is as true for the banking industry as it is for any other industry. Creating a good banking structure and therefore also improving the economy by implication requires excellent talent. However, this statement needs to be understood properly with respect to the modern banking industry before it can be implemented.

The talent required for running banks is of two types. It is absolutely essential to understand these two types of talents. A confusion between the two is at the root of the present economic woes of most developed countries and therefore also the rest of the world.  

The first is the straight forward traditional honest banking that requires specialized training, education and experience. There is really no dearth of financial services professionals possessing these skills, especially now with lay offs in the sector.

However, there is a second aspect to modern banking that involves risky investment banking and use of complex financial dealings.  Talent in this latter area is severely limited. There are only a few professionals who can do this skillfully and profitably most of the time. There are other associated skills too, such as, lobbying with media and legislators, creating rationale for hefty compensations and bonuses, even rigging things like LIBOR rate while attempting to stay within the limits of law. These latter skills that someone might even informally classify as wheeling and dealing or casino style banking with other people’s money are severely limited in the industry. Persons possessing these latter skills perhaps head  many modern banks and draw millions in compensation for their services from these banks.

In case a government of any country passes a legislation that limits  total compensation ( that includes salary, bonuses and any other benefits) of senior banking executives to say a quarter of million dollars a year, this latter talent and expertise in wheeling and dealing banking will fly away. They will go to other countries that are still paying millions in compensation. The banking industry of the country from which the talented wheeler dealers fly away will be left in the hand of traditional bankers. Their profitability will be restored and it will be left in the hands of the sincere straight forward bankers drawing handsome but not exorbitant benefits. The health of the banking industry of such a country would then be restored. By implication the economy of such a country will also get a boost since much depends on how banks operate. In short it will be good if the so called present banking talent flies away to other destinations and the quickest way to do it is limit their salaries and bonuses.
It is the simplest route to restoring banks and the first logical step to restoring economy; but are the persons who have the power to make such changes interested in giving up their present advantages?



2 comments:

हरि चंद said...

Public is the poor lamb who has to pay for the sins of wolfs and also for their appetite... And the so called custodians of the rights the lamb work for safeguarding the Wolfs.

ashok said...

Well said Hari Chand ji. Very correctly analyzed. Here the wolf is perhaps of the kind whose teeth are made out of greed and deceit.I am adding another section to this post since it is so critical to the world and will also add the new section as a seperate post.