Bashing the Bankers is wrong

I’m possibly one of the few people in Britain, if not the world, that is sympathetic towards Bob Diamond.

OK, he hasn’t helped his case by his recent appearance before the Commons Select Committee, not so much for being evasive and giving answers that were possibly somewhat liberal with the truth, but more for his smarmy and condescending attitude in calling the MPs by their Christian names rather than Mr Something or Mrs Something Else.  But then he’s an American, and an American banker to boot, a Master of the Universe, so I wouldn’t expect anything more from the bloke.

But I can’t help feeling he is being rather hung out to dry over this latest “financial crisis” to visit itself upon the Great British Public – the LIBOR Scandal.

                                                                      *          *          *

The London Interbank Borrowing Rate, to give it its full title, is essentially the rate at which banks are prepared to lend money to each other.  The rate is fixed – in this context possibly not the best term – at 11:00 every morning, essentially by someone contacting about 50 major banks to get their proposed rate, then averaging out the responses to arrive at the agreed LIBOR rate.  It is then published to The Market, using all the tools available – the Reuters and Bloomberg trading systems, Telekurs, the Financial Times, the internet, everything – anyone in the financial markets will have access to this rate within minutes of the decision.  The rate is fixed for various terms – overnight, a week, a month, quarterly, six months, and out to a year - and for various currencies.

But the point is, it’s a reference rate, no more and no less – nobody ever borrows or lends money at that rate.  There is always a small adjustment agreed between any two parties concluding a deal, that can be based on any number of criteria – the amount of cash being exchanged, the creditworthiness of the borrower, and so on. 

Now then, as far as the general public are concerned, the rate they pay on their mortgage, or overdraft, or receive on their credit balances, or whatever, is NOT LIBOR – it’s another rate entirely, one that is fixed solely by their bank and not by the syndicate of banks that decide the LIBOR rate, and this rate is not necessarily even pegged to LIBOR or affected by it in any way.  Anything that is being written in the newspapers or spouted by MPs or Talking Heads on the television is simply not true and designed solely to discredit Diamond in particular and bankers more generally – essentially to improve the copy or gain votes by scare mongering and pandering to the uninformed masses – that’s you, Dear Reader.

                                                                  *          *          *

As far as I can gather, back in the dark early days of this God-awful global financial crisis that no-one seems to be able to agree about (never mind solve) Barclays Bank, as one of the LIBOR-fixing syndicate – as they quite properly are, given their size, reputation and strength of business – managed to cut a deal or deals with other banks that allowed them to arrive at a better rate for themselves.  If that’s the case, then it’s a classic case of You Scratch My Back And I’ll Scratch Yours – the sort of thing that goes on in every market every single day – not only in banking. 

The fundamental rule in any trading environment is to buy cheap and sell dear – that’s how you make your money.  An example – say you want to buy a new tv.  You look at Curry’s, Dixons, your local electrical goods store, ASDA….wherever the things are sold.  Then, if you’re sensible, you buy the cheapest option that gives you what you want (and that may include after sales services, finance terms, delivery and so on).  Or a car – if you’ve bought from one dealership previously who gave you a good trade-in on your old model, decent warranty and after sales service, then you’re more likely to go back to him next time.  There is absolutely nothing wrong with that – all you are doing is protecting your own interests.  The dealer selling to you is doing exactly the same – the tv guy has bought the set in bulk, probably from the manufacturer, and knows exactly how much of a discount he can give you before the trade becomes uneconomical for him.  Likewise the guy in the motor trade knows how much he’s paid for the car you want to buy, and he knows what the re-sale value of your current car is too, and factors it all in to ensure he makes a living and a profit.

Nobody complains about this.  In fact everyone is essentially praised for their prudence.  But all that is happening is that Backs are being Scratched.

Now back to Barclays.  Let’s just assume for the sake of argument that they spoke to Credit Suisse and Citibank.  Let’s say they wanted to borrow 5billion quid.  Let’s further say that Credit Suisse say sure, we’ll do that and charge you 4.5%.  Citibank, meanwhile, say ok we’ll do that and charge you 4.45%.  It’s a very small rate difference – but on 5billion it comes out to a decent saving to Barclays.  So who will get the deal?  Citibank.  Because Barclays are being prudent. 

Now, same scenario.  But in this case, Barclays says to Credit Suisse look, can you knock that down to 4.40 please?  We’re trying to re-structure our balance sheet without going cap in hand to the Government here, and we’ve got some friends in the Middle East who are prepared to help us out but we need to pay them a fee – that’s why we need this 5billion – and frankly 4.5 is a bit rich.  Now if you can knock off a bit this time, so we can re-finance and get the kudos for solving our problems without government intervention, we’ll give it back to you next month when that outstanding deal we have maturing with you comes up for renewal….. 

To me, as a banker, Barclays here are still being prudent in trying to reduce the cost of their borrowing and sorting out a problem without having to resort to a government loan – and we all know the absolute mayhem that would hit the press and the markets if Barclays had to do that.  What Barclays is NOT doing, by offering the trade off, is trying to “fix the LIBOR rate”. 

                                                               *          *          *

I wrote here some time ago an article about the Occupy Movement that was then camped at London’s St. Paul’s Cathedral, Wall Street in New York and elsewhere.  I basically said then that they were wrong because there was at present no viable alternative to Capitalism, and in the same article decried the fact that Investment Banking was no longer a sought after occupation.  I still believe that.  In the nine months or so since then, little seems to have changed, and this LIBOR crisis (which frankly isn’t a crisis at all, except in the minds of the people who write the news and govern us) is another example of the misinformation that is flying around.

I said then that bankers are not evil people.  They do not set out to hurt and damage other people, nor create hardship for their customers.  In investment banking particularly, they work very hard indeed, under an immense amount of pressure, to achieve results that justify the admittedly exceptional salary packages they earn, and that, generally speaking, they deserve every penny of those rewards.  I stand by those comments as well.

And yet the banker bashing continues unabated – and if anything gets worse.  Certainly Diamond has been hammered over the past week or so.   He has been dubbed greedy, arrogant, incompetent, a liar, a cheat and various equally derogatory terms.  There may be some truth in there, but I cannot believe that anyone who is an incompetent liar can rise to the respected level of running a bank like Barclays – they would be found out much much earlier and get nowhere near that kind of position.  About the only criticism leveled at him that seems to me fair is that he was exceptionally – one might say excessively – well paid, but that is a legacy of his past performance earning him the right to be offered the kind of package that until recently was quite common at the top of the banking industry.  Whether any executive is worth a salary of 2 million quid plus a bonus in deferred stock options ten times that is of course open to question, but I know of no-one who would turn it down if it were offered to them.  That is human nature – call it greed if you like – and Diamond is a normal human being with all the character flaws of the rest of us.  To vilify him for that is patently unfair.   Remember too that neither he nor the bank's management were resposible for that salary package.  In any major company, the pay package for the senior executives such as the CEO (Diamond's position at Barclays) is decided by a Compensation Committee that is made up of senior executives who are not employed by the bank, and the awards are invariably subject to very strict performance criteria - usually relating to business growth, profitability and other measurable drivers.  The fact that Diamond had been receiving his full whack for a number of years suggests to me that he was actually doing a very good job of running the bank in perhaps the most difficult market conditions ever experienced.   No incompetent liar would be able to do that.

That charge of incompetence also seems to be more than a little unreasonable.  Barclays employs getting on for 150,000 people globally.  To expect the CEO to know at any given time what they are all up to, or even what a relatively small portion of them are up to, is a little optimistic.  Like all CEOs, I’m sure he relied on contact with and regular reports from a team of senior executives across all areas of the business, and they in turn would be reliant on similar reports from their subordinates, and so on down the line.  With a long reporting chain through several layers of management, even in the most streamlined of organizations (and it could be argued that Barclays’ management structure was a bit more cumbersome than some) there are going to be misunderstandings, lost in translation moments and perhaps important information overlooked.  There is likely also to be deliberate misinformation.  That too is human nature.  So his protestations that he was not fully aware of what was going on, rather than an indication of professional incompetence or lying, could quite well be no more than the truth.  Clearly an internal investigation is required to identify what exactly he did know, what kind of communications failures occurred, and if that shows that he is a liar then by all means tell the world – but until then back off: he is innocent until proven guilty, surely?  Is that not a core pillar of any reasonable justice system?

                                                                 *          *          *

Amid all of this, there are the usual widespread calls for a major overhaul in the banking and regulatory environment to rid the world of this “culture of excessive greed”.  The calls have come from newspaper columnists, from tv pundits, from Members of Parliament, the Chancellor of the Exchequer, the Prime Minister, the Leader of the Opposition and Uncle Tom Cobley and all.  The problem is that very few of the people demanding change in this manner have worked in the industry, or have any clue about how things actually do work.  The charge of “fixing the LIBOR rate” in itself demonstrates this lack of knowledge as does the accompanying claim that millions of people have been “cheated into paying higher interest rates” as a result of this “collusion”.  Now it seems the Met Police’s Serious Fraud Squad has become involved and criminal charges are likely.  Probably the FBI will stick their noses in, since there are US banks involved in the LIBOR syndicate, and various other European forces will also join the party to investigate the likes of Deutsche Bank, Societe Generale, Bank Santander and so on.  Where will it all end, I ask myself?  No doubt in tears.

                                                           *          *          *

I find it all very very sad.  I entered banking, via stockbroking, back in 1970, and my parents and family were so proud.  My father had been, amongst other things, a gardener, wounded on active service during World War 2, a furniture removal man, a coalman, , and was then working in a factory, inhaling the dust that would eventually cause the cancer that killed him.  My mother had been in domestic service when they met, and after raising three kids was working in a tobacconists shop.  They were typical working class people.  So for their only son to enter the elevated and very desirable “upper class” stockbroking and banking industry was, to them, the most wonderful thing in the world. 

And it was pretty cool…..because the people working in the industry, at least in the support functions, were as working class as I was, from suburban London, Essex, Kent, Surrey and all points around.  The dealers were of course (at least in those days) better educated – for which read public school and university Old Boys – and we were expected to call them Mr. This and Mrs. That, and they in turn had a tendency to call us Smith or Jones.  It was like being back at school.  But the Back Scratching was still going on, still as much a part of the industry then as now, except it was done in a posh voice rather than Brooklyn, German or Essex accented English.  Oh, and the numbers were far smaller.

It all started changing with Maggie’s reforms in the early 80s, that did away with the distinction between jobbers and brokers, and threw open Stock Exchange membership to banks of all nations.  It coincided with other reforms that Reagan’s Republican administration was introducing in the US, and a period of expansion in the EU (or EEC as it still was then) that opened huge new areas of business in the industry, and introduced all kinds of new and exotic products like swaps, and futures and options, and hedging techniques that were designed to offset liabilities in one product with assets in others to protect banks and investors alike.   The markets generally were exploding, it was a licence to print money for banks and brokers and governments alike, and everyone had an enjoyable time, working hard and playing hard – I developed a liking for Moet champagne around this time, and financially was never so well rewarded (taking into account values then and now). 

But I never ever met anyone who was evil, or greedy, or a cheat.  There were some sharks out there who would do and say whatever it takes to close the deal, but that was nothing new – people like that had existed in all walks of life from time immemorial, and will always exist.  But you accepted that, counted your fingers after shaking their hands, and were wary of them.  You knew you might lose some days, but would win on others, and over the course of a year by and large it all evened out.

We were investment bankers, and we worked very hard for very long hours to earn our salaries – exactly as now.  The difference was that everyone aspired to the same thing – basically, make as much money as you can, to provide for your family and build up savings for your kids’ college funds or whatever, and enjoy life.  That was true in all walks of life (which is why there had been a history of industrial action as unions, often but not always justifiably, tried to obtain better deals and working conditions for their members), but it tended to be easier to achieve in our world even though we had no unions working for us (indeed they were frowned on to the extent that many banks refused to allow their employees to join the few white collar unions that existed on pain of dismissal).  And while everyone aspired to the same thing, people were also trying to join the investment banking world – and that included people working in the retail banks that were attached to and supported by the investment banks.  There was always movement between the two, and almost all of it was one way – retail to investment.  Chasing the dream.  That too was ok – personal aspiration was rightly encouraged and rewarded.  As it should be now.

I still don’t really understand why the world turned against bankers.  There have been financial crises of one kind or another for years – think the Wall Street crash in the 20s, hyper-inflation in between-the- wars Germany that ushered in the Nazi Party, the Asian and South American debt problems in the 70s and 80s – and none of them were directly attributable to the banking industry (which to be fair was not always blameless).  But I can’t remember ever there being this amount of fear and loathing aimed at the profession.   I can’t understand why the collapse of a (yes….) greedy and mismanaged Lehman Brothers and the knock-on effect on other slightly less greedy but no better run RBS, Fortis or whoever, should turn the entire world against the majority of well-run and efficient banks that still exist and provide an essential and efficient service.

The world cannot function without banks, just as it cannot run without electricity in some form or another, or food.  There is no better alternative for managing and caring for the wealth (in its loosest term) that people continue to earn and use to live on, and plan for the future of their children and their children’s children.  I touched on this, too, in the other blog post last year (see Casino Banking: - Why the protesters are wrong).  Make no mistake, there will always be banks.  There will be bad apples employed by them, just as there are bad apples in every other part of society.  There are bad politicians (God know’s there are bad politicians!), there are unhelpful shopkeepers and publicans, lying journalists and awful singers, cheating footballers and incompetent doctors, terrible drivers and idiotic teachers…….but they are all in the minority.  Just as the (allegedly) greedy and incompetent Bob Diamonds in my business are in the minority.

To tar us all with the same brush is not only unfair, it is also grossly offensive to each and every helpful and conscientious bank clerk at Barclays, Lloyds, Metro, Citibank or any other bank you care to name, in any country in the world.  Journalists and politicians alike would do us all a better service by cutting out the meaningless and alarmist rhetoric, and try to understand what they are talking about before they open their mouths and spread the next pile of manure on an already disillusioned and misunderstood, but nonetheless essential and dedicated, profession.

Not that I’m holding my breath……