Margareta Pagano: The new reality and the nuclear option for banks

Dabbling in investment and broking has to stop
Click to follow
The Independent Online

Just when you thought bonus-seekers couldn't get any greedier, along comes a smacker that knocks you for six.

While our politicians were niggling about million-pound payments to RBS bankers, law-enforcers across the Atlantic had subpoenaed documents from Merrill Lynch which showed that in 2008 staff were paid $3.6bn (£2.5bn) in bonuses – even though it lost $27bn. Merrill's John Thain spread the bounty between 700 of the 39,000 employees, with the lucky top four sharing $121m. Another 20 people were paid more than $8m each and 53 got more than $5m each.

The bombshell was lobbed by Andrew Cuomo, the New York Attorney General, in a letter to the House Financial Services Committee meeting to assess the Tarp (Troubled asset relief program) bailout. Cuomo's letter sparked seven hours of remorseless questioning of eight chief executives of banks and securities firms. Sitting alphabetically like children in school, they looked more miserable by the second as the inquisition turned to their pay, forcing them to recite the pay, bonus and share options they took home last year while accepting the bailout – the eight were paid $401m between them over the past two years.

Two things struck me listening to the US hearings. First, the intensity and intelligence of the grilling made the Westminster session look like a chat over tea at a gentlemen's club. Sure, RBS's new boss, Stephen Hester, admitted that bankers have been paid too much, that pay must come down, but said nothing about how. In contrast, Vikram Pandit, boss of Citigroup, which received $45bn in taxpayer-funded capital, has volunteered to work for $1 a year until the bank gets back to profits.

Second, you could see how tough the US legal system is when it decides to go on the attack as Cuomo is now looking to claw back the bonuses from Merrill Lynch. Over here, Gordon Brown capitulated to RBS, despite being its biggest shareholder, and agreed that bonuses can go ahead.

What is clear from both sessions is that neither Wall Street nor the City can be trusted to change their culture.

But let's stop bashing the bankers and put pressure on the politicians and regulators to figure out what the "new reality", as Pandit describes it, looks like. I have a brutal solution which no one will like. This is to look at legislation similar to the Glass-Steagall Act which banned retail/ commercial banks from working together with brokerage firms or dabbling in investment banks. Introduced in 1933 during the Great Depression, after 5,000 banks went bust, it was repealed by President Clinton in 1999. Along with Monica Lewinsky, this must go down as one of his more catastrophic mistakes. Much of the blame for the highly leveraged world which the bankers created can be associated with the Act's abolition.

Looking at how to introduce stricter separation between the two violently opposed activities must be the most sensible way to return banking to its traditional function of safe deposit-taking and lending. If bankers want their Hermès pillows, let them risk their cash in private equity or hedge funds, not ours. Then the word bonus can return to its original meaning, coming as it does from the Latin for "good".

Let's blow the full-time whistle on lending that digs people deep into debt

One of the more telling details to emerge from the explosive account presented by HBOS whistleblower Paul Moore to the Treasury Select Committee last week was his anecdote about Charles Dunstone, the Carphone Warehouse founder.

Moore recalled how Dunstone was made chairman of the retail risk-control committee as well as being appointed a non-executive director. According to Moore, who was then head of group regulatory risk, Dunstone admitted to him that he had no real idea how to be chairman of such an important committee.

If this is true then it was a poor appointment. No one disputes Dunstone's retail genius, but nor does it take a genius to see that overseeing such a key risk-governance position was hardly going to be his strength. Time and time again, we are seeing how the boom years led to some extraordinary board appointments, with far too many non-executives who were unsuitable. That was not just because they came from the "male, pale and stale" brigade; they simply weren't up to the job.

Also in his testimony, Moore set out many pertinent suggestions for improving risk governance that can be applied to all banks – not only HBOS – and should be looked at closely by the regulators. He would like to see regular and tougher independent audits for risk management, risk managers reporting directly to a non-executive to give them more back-up, and a way found of getting tougher non-executives.

But the most relevant argument was his call for tighter scrutiny in regulating the sale of credit products, to prevent the man in the street from taking on so much debt.

I would go further and say the Government should look at imposing credit controls for individual lending. The banks will hate it but right now they don't have any legs to stand on.

Roots of success Barclays judges it right on small firms

It's great news that Barclays has chosen the lively Levi Roots, the Reggae Reggae Sauce entrepreneur, to head its hunt to find Britain's most enterprising family business. Roots is a good example – with him at Reggae Reggae are his mother, brother, sister and seven children, and, of course, the sauce came from his grandmother's recipe. He's to be the leading judge of a Barclays panel of experts, and they have £17,500 of prize money to give away. Deadline for entry is the end of March and applications are on www.barclays.co.uk/familyaffair. If Roots can help put the zest back into our small businesses as well as Jamie Oliver has renewed our taste for food, then I might even say something nice about Barclays bankers.

Comments