Page last updated at 22:58 GMT, Wednesday, 23 September 2009 23:58 UK

City Diaries: 24 September

Man looking at a falling graph

This week our diarists look ahead to the G20 summit in Pittsburgh. Bankers bonuses and financial regulation will be on the agenda. So what lead would the City Diarists like to see our politicians take?

These diaries are written by people who work in finance and have had a front row seat as their industry goes through the biggest changes in decades.

They give us regular insiders' updates on the mood in the City of London and the dramatic changes in the world of finance.


Laura (not her real name) works for a commercial bank in London.

Allegedly our telecoms, energy and water supplies are overseen by state regulatory bodies to ensure that the consumer is not being ripped off and that necessary industry investment takes place. Would this be something that could be extended to financial services? The basic answer is that it is already. We have the financial ombudsmen for complaints, the FSA and international organisations regulating how we communicate information, the structure of our charges and the amount of money we hold in reserve to support our lending.

So what else could be done? The upcoming G20 will look to make grand gestures and snappy sound bites about bank profits and rewards for staff and shareholders. Most likely these will be predominantly recycled and repackaged existing initiatives with the bulk of the statements agreed before any of the national representatives pull up to the opening dinner.

The primary purpose of government is to protect the citizen and provide those services which would otherwise not be provided by the market or those which are considered universally 'good' such as healthcare, education, police and the military.

Even at its worst the open market is the best 'incentivisor' for innovation and good customer service in financial services. It is not possible to nationalise money as money is an international and intangible entity. Projects such as the massively over budget, unfinished and underperforming NHS computer system should provide clear warning against government trying to do something which the private sector is already doing better. Even National Savings and Investments isn't truly state run as the products and services are predominantly rebranded Bank of Ireland facilities.

In banking it's the front line and not the puppet masters which has suffered.

If we run ourselves so badly that our customers move to another bank then we won't make a profit and will ultimately stare a performance review or a P45 in the face. So many in our industry have experienced this over the last 18 months and predominantly it's the front line, not the puppet masters which has suffered.

The vast majority of the civil service is unaccountable to their end users - note the periodic shambles at the Passport Office and the underwhelming lack of response you get to your growing frustrations. If the state was our source of loans, direct debit set-ups and mortgage one can only imagine the nightmare when the unions decide to down tools for days over public sector pay settlements or attempts at change - yes Post Office this means you too.

The government needs to realise that they are doomed to fail in their quest to turn financial services into a sackcloth and ashes wearing charitable concern. What would be the point in lending money to a start-up business if you couldn't make a return while carrying all of the risk of default by your customer? As with most things government related - do the minimum you need to protect the public and beyond that leave it alone.

Special mention this week goes to the Liberal Democrats for their poll tax throwback million pound property tax - Vince Cable has undone a lot of the goodwill from business he had accrued by coming up with a pernicious and spiteful tax on aspiration and that is a shame.


"Mark" (not his real name) works for a stockbroker outside London.

Are bankers facing a witch-hunt over excessive salaries?

I am not usually a Daily Telegraph reader but having stayed away on business last night, I found the paper outside of my door as I rose this morning. As it was a freebie, I thought it would be rude not to read it. Immediately, the business sections headline "G20 bonus agreement in the works". This was immediately next to an article relating to ITV's impending appointment of Tony Ball and a graphical illustration of the "Top FTSE 100 Compensation Packages". Perhaps this is why I don't read the Telegraph. Compensation? Does this mean Tony Ball will be employed on a no win, no fee basis?

I found it very interesting that both articles were next to each. We are told "frantic" negotiations are taking place within the G20 to stop excessive salaries. It is a clear message to the banking industry that this will no longer be tolerated.

Switching back to the ITV article, we are told Tony Ball will earn a basic salary of £1m a year with his total package set to be an estimated £21m over five years. I looked, but there was no reference to the G20 trying to stop excessive payment to media executives. Hmmm, strange. Perhaps £21m over five years is not considered excessive? It is to me!

Back to the first article and we are told the G20 will be attempting to introduce a way of clawing back bonuses when individuals have been responsible for losses and payment should be in shares to create a vested interest in long-term success. I check back to ITV but it would seem that should Tony Ball make losses at ITV, he should be OK.

Quite simply, the best talent will earn the best salaries.

Now, I completely understand why banking is such an important sector however, it has to be a complete witch-hunt to target one industry in a such way. It was not that long ago that a slovenly comic and a monkey were fronting a thing call ITV Digital, which ultimately went bust, costing numerous people their jobs and their homes. Setanta was allowed to rise and fall, with further losses, but again, no further regulation. Yet still chief execs can pick up some £21m. It would seem the message to anyone wanting a career with, in my opinion, excessive earnings should simply switch to the media sector. Pay check unchecked

Quite simply, the best talent will earn the best salaries. We operate within a free market and market forces are there to determine things such as salaries. Yet, we are suddenly allowing governments to try and regulate these markets more tightly. However, do they necessarily have the experience to make these decisions? Do we trust them to make these decisions? It seems like asking the criminals to run the jails. UK politicians for example have recently been accused of acts tantamount to fraud. Moats cleaned on expenses? I bet even the bankers would not do that!

Change needs to occur but I worry the G20 are not the group to do this...


"Anthony" (not his real name) works for an investment bank in the City.

Dollar bills
Most City workers support a responsible approach to bonuses

In previous diaries, I have said that bonuses can only be controlled if there is an international consensus and it seems likely that just such an agreement will be forthcoming at the G20 meeting in Pittsburgh. Controlling bonuses by paying a higher proportion of bonus in stock with some claw back when short term profits turn into losses in future years makes sense.

Most workers in the City will actually support a responsible approach to bonuses because they also suffered financially when the stock price of the bank that they worked for plummeted. A key part of remuneration was share options and many staff would convert these to stock. Many employees who had nothing whatsoever to do with sub prime lending lost huge amounts of their savings because they had bought shares in their bank.

Agreement on bonuses and financial regulation at the G20 will be easy because politicians love to please the voters.

Senior bankers are more worried about announcements on financial regulation which will also be made at the G20. The proposals will have an inevitable downward impact on profitability, some say by as much as 30%. The changes proposed are already being discussed in papers issued by the EU and the Basel Committee on Banking Supervision. One proposal is to restrict leverage which is the ratio of total assets to capital. This is a good thing because Lehman's allowed its leverage to grow rapidly to over 40 times capital when a more appropriate level would have been around 15. High leverage was one of the reasons why Lehman's went bust.

Agreement on bonuses and financial regulation at the G20 will be easy because politicians love to please the voters. It also deflects from the real issue which is how we begin to pay for all this.

In this regard, the G20 will make an announcement steeped in rhetoric but not much substance such as the one made by the Prime Minister that now is not the time "to switch off the life support".

Wall St workers looking at graph
Will this be a 'W' recession?

We are now reaching the most critical stage of the recovery which is why the PM has at last felt able to say the dreaded "C" word. Those who have followed my diary will know that I have always predicted that this would be a W recession. My reason was that public sector cuts would take billions out of the economy which would increase unemployment and cause a renewed fall in house prices and lead to a second dip into recession.

Many commentators share my concern but despite this markets have defied gravity. Jaime Caruana of the Bank for International Settlements said in an interview with the Financial Times this week. "It is not the right time for complacency."

Indeed, as I write Sterling was falling rapidly and the FTSE was turning red.

I hope I am not right. A double dip recession can be avoided if interest rates continue to remain low. Sterling will fall to redress the balance and enable foreign investors to reap a higher return buying enormous quantities of debt to fund our deficit.

It will make our exports cheaper and staycations more likely despite the absence of a barbecue summer this year. This will fuel growth and compensate for the cuts that are coming.

A bit of rain never did anyone any harm. At least you don't get sunburn. My staycation in Britain this year was a great success. I felt a strong sense of satisfaction that I was doing my bit to save Britain from the recession and had avoided those awful airport queues.

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