As banking bosses are grilled by the Treasury select committee on their role in the financial crisis, our city diarists give their views on the latest financial developments.
Our City 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 will be giving 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.
In early 2007 one of the partly-nationalised banks had a spate of fraud losses on specialist business lending over a period of 10 days. These were not the figures that would generate a headline, but enough money to generate a knee jerk credit reaction to almost shut the unit down, until the quality of the lending book had been reviewed.
The root causes of these losses (apart from borrowers deciding to defraud the bank) were as follows: 1) relaxing of lending criteria in the pursuit of market share and sales targets; 2) a perceived requirement to achieve double digit returns each year for shareholders; and 3) rampant cost squeezing on the client management and risk side, with staffing levels not keeping pace with customer numbers. The net result was not exactly a shocker to most of us - if you keep setting unrealistic sales targets then the quality of lending will deteriorate over time.
This incident was in just one sector of the bank, and took place two years ago. In reality what the bonus furore and qualified apologies we have seen this week show is that they, and others, have learnt nothing. Believe me when I say that the staff were pointing out the bleeding obvious two years ago, but were either paid lip service by their line managers as they were never going to challenge the bank's top brass, or pushed out when they finally admitted defeat and questioned the impossible targets they had been set.
When the 2006 RBS results were presented internally Sir Fred Goodwin said that the market was getting concerned that RBS could only grow by acquisition and that the business hadn't shown they could grow organically. The 'vision' therefore was that in 2007 RBS would show the market they could achieve double digit growth without any acquisitions being made - to you and me that means even more ridiculous sales targets and even less investment in credit and client management to bolster margins. There was therefore a degree of scepticism from staff that all was well with the RBS business model when suddenly we were abandoning the organic growth project and buying ABN Amro.
The Treasury Select Committee failed to get at the root cause of decisions like these which have led to our current position. The bailed out banks did not just make a series of bad decisions their whole ethos was wrong. The finger of blame should also be pointed at the institutional investors who have 'managed' our pension funds into a slump in the last year. They were the biggest bank shareholders and they were the ones pushing for double digit growth from their investments. The Government's 'hands-off' management of the banks is just replicating the exact same approach as the last shareholders - i.e. make us money and we don't care how you do it.
The markets are now asking for the 'best' capitalisation/funding ratios rather than the 'best' growth figures. There is no incentive to a bank to lend money, rather only to get more deposits, in the pursuit of market approval. Institutional investors (public and private) are yet again driving the industry, although this time it is the would-be borrowers and 'cash cow' savers who are suffering.
Denying low and mid-level bank staff their couple of thousand pound bonuses is like punishing the children for the sins of their fathers. If you are employed to do a job and you do it then you should get the pay you were told you would get for doing so. The Government may be up in arms over RBS, Lloyds and HBOS but they were the ones that set a contract for Northern Rock staff that led to their bonuses this year - what is the difference? The staff at the Treasury and the FSA who have been working on the crisis are also getting a bonus, despite being asleep at the wheel regulating our financial services. Not a peep from the Government on that either.
Tom (not his real name) works in the investment industry.
What a wonderful start to last week. Despite so many people moaning, both myself and my colleagues thought that the blanket of snow which covered much of the country was great news. Yes, it was a bit late, however we felt that it would at least take our minds off regular bad news that we seem to be getting.
There were only not that many of us in our office last Monday. At least that meant that we did not see the usual caustic office politics that we are used to from some of the management here. And I could write an article on this, believe me. However, something had to spoil it - and this was a sign of the times - calculations of just how much the adverse weather had cost the country. My personal opinion is that a billion or two doesn't make much of a difference in our current downward slide. Besides, people need to lighten up a bit - winter magic never really hurt anyone. It was, however, quite amusing to hear our manager trying to spin us a story about why he couldn't make it to work - we found it really enjoyable to see him squirm, considering the dirty tricks used to force people out of a job in the past.
Not much change from the week before. The pound is still pretty much in the doldrums vs other currencies.There's been a further rate cut, which probably won't do much good. The Davos meeing ended in disaster (unless you happen to be the Turkish PM). However, the FTSE hasn't fallen below the 4000-mark...yet, which is at least something. Looking at some of the books that I am familiar with, I can see that some have lost half their value and these are not even toxic assets.
It's very easy to detach oneself from the implications of this, because this is all screen-based. However, this is real money. Someone's pension, education fund, life's savings, home, medical bills could be jeopardised by this and that is something that I constantly think about. It's making me think about doing something completely different and more worthwhile and the only thing that is stopping me from a complete career-change is the fact that I have a family to support. I understand people who keep their money under a mattress. At least we can hope for better times and a different, safer financial system at the end of it all. Barack Obama and our own government plan an overhaul of executive pay - had this happened a few years ago, then could all have been so much more bearable and much less catastrophic.
Mark (not his real name) works for a stockbroker outside London.
There has been a lot of emphasis placed on bonuses in the last few days. Indeed, sitting next to a woman in her mid 40's on a train recently, she commented that if firms had not paid bonuses, we would not be in the trouble we are now. That was her assessment, not that bonus levels were too high, not that they rewarded short-term decisions, just that bonuses were wrong. I enquired as to what she based her conclusion on and to be honest, there was no substance to the argument. It was simply along the lines of "those bankers got bonuses and look what happened". So bonuses have become a dirty word and anyone in an industry where bonuses are paid suddenly gets a suspicious look.
Catching up with some old school friends recently, the subject of bonuses came up. I tried to stay out of the conversation. A friend was paid a substantial bonus in 2007, it had been a good year for her in recruitment. I was pleased, it was, after all, a reward for success. She asked if I got bonuses and I replied in the affirmative. Two other friends, delighted at her success, suddenly looked at me with what can only be described as a scornful look. I suddenly found myself on a five minute rant trying to justify the bonus I worked very hard for. One of the guys commented "this is the problem, rewards for failure". A general nodding occured. I try to reason that my firm had done well, it had certainly not been a failure, my division had done well and I personally had done very well yet this, seemingly, failed to justify the bonus I received. In percentage terms, my recruitment consultant friend had earned more than me and although I pointed this out, again, it was not enough. When asked now, I gloss over the situation.
My bonus is non-contractual. If my division, firm and I failed to perform, a bonus would not to be paid. Equally, it is not based on a single transaction but sound, long-term success and I am proud that I have been able to earn a bonus in each year I have been employed. I can however, see the reasons why people have come to regard financial services bonuses as bad. Sir Fred Goodwin earned an incredible £2.9m in 2007 as a bonus, this was on top of his £1.3m salary. Sir Fred commented that he "could not be more sorry". I too am sorry, sorry for the 2,300 workers at RBS likely to lose their jobs while Sir Fred sits on more money than most of us can ever dream of. Bonuses can be a strong incentive for achievement and success but there is no doubt that a change has to be made. Maybe the UK's current predicament will foster an important change.
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