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Friday, July 13, 2012

Bankers face a run on trust in how they make decisions

Special to The Japan Times

HONG KONG — It was fascinating and yet very depressing to watch the televised hearings of the freshly resigned boss of Barclays, Robert E. Diamond Jr., before the British House of Commons Treasury Select Committee.

The exchanges between bankers and lawmakers show that the bankers are still riding high and resisting any attempts to cut them down to size. It is a far cry from what happened centuries ago when bankers routinely lost their fortunes when they dared to tangle with the state.

The British members of Parliament tried to get information from Diamond about the bid-rigging for which the big British bank paid a record £290 million fine to U.K. and U.S. authorities. But Diamond played the MPs: He called each of them by their names, Jesse, David, John and Andrea — like old family retainers — and responded patronizingly as if they were.

Diamond conceded that the behavior was "reprehensible" but wriggled away from personal responsibility, claiming that the bid-rigging was done by 14 traders and their "immediate supervisor" and that he only knew about "the full extent" a month ago and had immediately spent £100 million investigating it. Former senior bankers at Barclays said it was hardly credible that the CEO — if he were doing his job properly — did not know what was going on.

John Mann, a Labour MP, lost his cool and asked Diamond to remember the principles of the Quaker bankers who had set up Barclays in 1896 from several smaller banks. Members of the Barclay, Buxton, Bevan, Tukes founding families indeed still ran the bank until recently. Their principles were "honesty, integrity and fair-dealing," said Mann, suggesting that Diamond should "tattoo them on your knuckles". The ex-CEO barely blinked and declared that they were his own principles.

Diamond also rebuffed all suggestions that he should hand over his golden farewell variously estimated to be between £16 and £25 million. But public opinion has a powerful voice. A week later Barclays Chairman Marcus Agius told the same parliamentary committee that Diamond had "voluntarily decided" to give up deferred bonuses that could be worth £20 million. So, he will get a year's salary and pension as payoff, about £2 million.

The British MPs however were lions with their claws freshly sharpened and ready for a tasty meal when compared with their U.S. Senate counterparts who questioned Jamie Dimon, CEO of JPMorgan Chase. One of the Republican senators cooed to him: "Mr Dimon, it occurs to me that an enterprise as big and powerful as yours has got a lot of firepower and you're — you're just huge."

Another Republican joined the love-in: "You're obviously renowned, rightfully so, I think, as being one of the best CEOs in the country." Another senator gushingly told Dimon, "You guys know the industry better than anybody sitting up here."

Indeed, the tables were turned so ridiculously that Dimon was arguing for support of financial reforms such as the Dodd-Frank Act, while the senators were suggesting that the banksters should be freed from any restrictions.

Some fatuous commentators have tried to make light of the issue of bid-rigging over the London Inter-Bank Offered Rate (Libor), claiming that no one was hurt and few people suffered material damage.

On the latter point, we will have to watch the progress of the billions of dollars of claims. Libor directly governs the rates charged daily on $10 trillion in mortgages, loans and credit card rates, and is the rate against which up to $800 trillion of derivatives are set.

Even if no one was hurt, there is a key question of trust. The banksters have betrayed public trust, which is surely the most important attribute. As Martin Wolf of the Financial Times put it: "Banks, as presently constituted and managed, cannot be trusted to perform any publicly important function, against the perceived interests of their staff. Today's banks represent the incarnation of profit-seeking behavior taken to its logical limits, in which the only question asked by senior staff is not what is their duty or responsibility, but what can they get away with."

That should be damning enough. Bankers in the modern age were supposed to be paragons of virtue — able, along with lawyers and priests, to countersign important documents because their word was their bond.

In the bad old Dark Ages, bankers supported kings and took their risks. As professor Michael Hudson recounts in an essay on the development of banking, in 1307, Philip IV of France, also known as "The Fair", seized the wealth of the Knights Templar and put many of them to death, not on financial charges but [for] "devil-worshipping and satanic sexual practices. The Peruzzi and Bardi banks went bust for unsecured loans to England's Edward III.

Later, in the classic era of modern banking, bankers took deposits and lent them, paying depositors less than they charged for loaning money to whom they hoped were budding entrepreneurs.

In some countries, bankers took a stake in the entrepreneur's enterprise, hoping to share the profits. But as Hudson points out, the risks were borne by the bankers, not the depositors or the government.

These days, the financial business has gotten out of hand. Banks' major customers are not industrialists, nor is the pursuit of economic growth the main focus of their lending. The FIRE sector — meaning financial institutions, insurance and real estate — are banks' leading customers.

Hudson charges: "Today, bank loans are increasingly made to speculators in recklessly large amounts for in-and-out trading. Financial crashes have become deeper and affect a wider swath of the population as debt pyramiding has soared and credit quality plunged into the toxic category of 'liars' loans.' "

Just how out of hand banking shenanigans have gotten has been shown by leaked suggestions that the so-called "hedging" losses in the JPMorgan trades by its chief investment office (CIO) may reach $8 billion to $9 billion. No way was this some small topiary event or hedge. After all, hedges are supposed to limit possible losses. This was a highly speculative gamble, something that too-big-to-fail banks should not be doing if they believe they may be protected by public money.

It will not be easy to change the financial culture of gambling. But it is important to protect the public, and the public purse, from banksters' speculation. One has to wonder and worry about politicians' close involvement with bankers, especially in the United States.

Governments should at least ring-fence and protect commercial banking and depositors' money from investment banking, which banks must be left to do at their own peril, and governments should let them go if they gamble and lose. If banksters have to learn the lessons the hard way, that is their problem.

Kevin Rafferty is editor in chief of PlainWords Media.

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