Page last updated at 21:19 GMT, Wednesday, 8 July 2009 22:19 UK

City Diaries: 8 July

Man looking at a falling graph

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.

MARK

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

Today, I read a story that really annoyed me. It was off the back of Alistair Darling's comments about bankers, yes, it is still the bankers' fault, and it referred to public sector workers. The general gist was that there may have to be a pay freeze in the sector, which would save billions, rather than look at cutting vital services.

This is something many in private firms have already endured. In the very next article, the militant public sector may suddenly strike if pay is frozen. Now the recession has not been good for anyone; people have lost homes, businesses and probably most importantly for some, their self-respect. Yet those in the public sector have, in the main, come out the other side relatively unscathed. Yes, I am sure there are those that have lost their jobs but on the whole, there has not been a widespread cull that has hit the private sector as firms cut costs.

Why should a newly qualified school teacher on £20k share the pain with the head of an effectively nationalised and failed bank on a potential £8m?
Ross, Stoke

Indeed, a relative who works for local government recently described her job as "recession proof". She received a pay rise a few months ago (backdated to April) after it had finally been agreed. OK, it was just the cost of living but it was still nearly 3% more than I received, and the pension is better. A friend who also works for the local government, says her team is overstaffed. However, if they did not fill the position, they would potentially lose funding for that post. So, rather than lose the funding, they fill the post. Let's not worry about the person employed with nothing to do! Try telling that to the former bank cashier looking through the jobs paper after they have lost their job.

I was not around when any of the World Wars took place, to which I believe I am fortunate, but one thing you cannot take away from that era is the camaraderie that existed.  I feel very unfortunate to live in a time, often a troubled time, when this sense of 'in it together' has completely gone. We do, completely, live for oneself.

It is also a blame culture. It doesn't matter what has happen, as long as you can blame it on someone else. That's why we walk down the high street and are attacked by vultures that shout "had any injuries at work?", "had any car accidents?" or "had any accidents in the last five years?" Clearly, they don't understand the definition of an accident! That is why anyone outside of financial services feels they have a right to be angry, a right to vent their spleen because it was someone else's fault. Let's forget that while the banks might have been guilty with cheap credit, they did not exactly force consumers at gun point to take out mortgages, loans or overdrafts!

The world lost a music legend last week, in his words, "if you want to make a world a better place, take a look at yourself and make that change"*. A lesson for us all perhaps.

*Man in the Mirror, Bad, Michael Jackson

LAURA

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

Stop Press! The RBS is getting close to telling their staff what their targets are for this year - which is excellent news given we are now in the seventh month of their financial year. The only reason I mention this is that I think it highlights what a state much of the banking sector is still in. Expected write-offs, write-downs, capital constraints and the like are such uncertain targets it renders setting all other targets impossible.


What makes an entrepreneur, company director or business great is when they are structured in such a way that their risk from outside sources like currency, customer strength and interest rates is well managed

If you had a business which had been operating without a plan for your sales team for that long how would you know where you are? Are you on track, or are you just setting your plan late in the day so you will know you will hit it and can say to the world "taa-daa! we are on budget"?

There has been much talk of fairness over the last week with "bankers" getting another blasting from union leaders determined to shield our massively bloated public sector from pay freezes. Apparently it isn't fair to penalise public sector workers for the mistakes of regulators and bankers - it has obviously escaped them that regulators are staffed by public sector workers and that some of our banks are now owned to such a degree by the state that they too may become state employees sooner rather than later.

Unless you live in a bubble every single person is affected by recession, regardless of cause - sometimes in a positive way, mostly negative. If you are a homeowner your house is worth less, while renters have more choice and potentially lower rates. If you are a shareholder of airline stocks you will have lost out, if you are invested in tobacco you will be doing ok.

Is it fair that we are now only lending to companies with better financial strength than a year ago while restricting money to others? It depends on how you look at it. You could argue that we are 'rewarding' people who have managed themselves well during the downturn and made the most of the opportunities in their sector with access to cash and decent rates. On the other hand, you could say that we are penalising people who were "unlucky" to be in the wrong sector when the market turned or had been "victims of circumstance" when they over-borrowed before the recession.

What makes an entrepreneur, company director or business great is when they are structured in such a way that their risk from outside sources like currency, customer strength and interest rates is well managed. They are flexible enough to be able to adapt. Darwin's often repeated "survival of the fittest" actually referred to the animal or person most able to adapt to the changing environment, not just brute force. Two of our high street banks may have had a lot of brute force but in the evolution and revolution of the markets they were proved to be unfit.

All this leads us back to the question of fairness. In my opinion, what is fair in bank lending as well as in pay awards is that those who have shown themselves to be deserving get the lion's share of diminished resources - the days where everyone could expect to be lifted up by the wave are over.

STEPHEN
People cross the road at Poultry in the City of London, with the Royal Exchange in the background
"Stephen" reflects on his career on the City.

"Stephen" (not his real name) has worked in the City of London for over a decade.

Writing this blog has been a curiously self-exploratory process. I grew up surrounded by politics, journalism and public service - and a general disdain of the world of big money and finance.

It was not exactly a true rebellion - I mean I'm hardly Trotsky - but I entered the world of finance because I wanted to find out for myself, first-hand, whether it really was worthy of such nose-pinching contempt.

I entered the City as a young graduate expecting to find figurative sacks of cash lying around waiting to be doled out to the army of bankers.

How wrong I was.

I learned quickly that the number of people who can consistently make money over the long term through genuine insight and talent is very limited. The craft of profiting in the markets is so little understood that it's generally up to the individual to figure out if they've got this mysterious ability and how they're going to use it. The rest of the City is largely a jamboree of commissions, services, fees and interest.

My City career took me from trading to broking and back again. I learned that the paranoid disdain that traders have for brokers is mostly misplaced. Brokers are like the estate agents of the financial world. Equally, brokers operate under the unhealthy illusion that traders (the ones who move money around) are always doing business - only with other brokers. The two tribes despise each other even if their need is mutual. They learn to make do but frankly, the behaviour on both sides is at times pretty disgraceful. They have fixed opinions of each other that the facts won't change.

This had a curious echo of an earlier experience, where I saw the same between politicians and journalists. They need each other but, at times, wish they did not.

Likewise, the mutual mistrust of politicians and bankers is largely based on ignorance - the Chancellor is a lawyer and his predecessor was a historian; neither has any experience other than that learned on the job. I've been pretty scathing about politicians in earlier blogs, but bankers deserve at least as much wrath. Their mutual ignorance has become mutual distrust. But solving the current crisis requires politicians to understand more about finance and banking, not just political ideals, and bankers to accept that career politicians will always be motivated by the low horizon of the electoral cycle more than absolute truth.

At some point tomorrow becomes today and all of this spending has to be paid for - by us

We see this most clearly in the simmering stand-off between Chancellor Darling and Governor Mervyn King, although King is not strictly a banker, I have in mind to blame him for this crisis.

Milton Friedman, the late great monetarist economist, explained that there are four basic ways to spend money: I can spend my money or I can spend your money. You can spend your money or you can spend my money.

Friedman's pithy analysis needs a note of caution: the distinction between "you" and "me" blurs when dealing with public finances. When our government spends our money on bail-outs, we believe they are spending someone else's money to save us, quietly ignoring or maybe just secretly accepting that we'll pay for it later with taxes or inflation.

In a way, this is what lies at the heart of the current crisis and, indeed, its origins. Too many people are trying to spend somebody else's money, or trying to tell other people what to do with theirs. Not enough people have been thinking about their own money - that accumulating enormous debts and throwing mind-boggling sums at bail-outs will eventually be paid for by all of us. When I was a young graduate, too many of us believed that there were sacks of cash lying around, waiting for the government to hand out to solve all our problems - there aren't.

At some point tomorrow becomes today and all of this spending has to be paid for - by us. Or worse, our children and grandchildren - who might refuse.

But knowing bankers and politicians like I do, it'll be a struggle to persuade them to understand each other better.

ANTHONY

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

My hotshot colleagues in the investment banking industry have been getting carried away thinking that this recession is all over bar the shouting. Big hitters have been crossing the street for more money while "Golden Sacks", otherwise known as Goldman Sachs have been setting more money aside for another mega bonus round.

I sometimes wonder what planet these guys are on and if they continue in this vein they will ruin it for the rest of us who don't get paid anywhere near that sort of money. The regulators continue to procrastinate and while the banks agree to pay these sums the regulators are likely to come down even harder on City remuneration.

Despite all these optimistic shouts of green shoots, I must only repeat my previous comments that this may be a false dawn

So what have these guys being doing to come up with money making ideas that attract the banks to pay these huge salaries? One scheme was reported in the Financial Times this week where assets can be securitised to save other banks' capital. Previously securitisations involved pooling new assets such as mortgages, whereas this one takes existing loans which can be rated with credit protection guaranteeing the first loss. By packaging the loans, the regulatory capital charges go down under existing rules.

Nothing has really changed. It is just what is known in the business as 'regulatory capital arbitrage'. It is exploiting a loophole in the rules that the regulators will one day close. It will take at least two years to pass through European law by which time it may be too late.

I suppose my failing in the City is that I do not share their optimism about the recession. At Budget time, I said that the Chancellor's predictions for growth in the economy were improbable and I am being proved right. The Office of National Statistics has stated that the economy will shrink by 2.4% instead of 1.9% as predicted in the Budget and that the rate of decline was the worst in 50 years.

Even the Prime Minister is now saying that the worst of the recession may be yet to come. Despite all these optimistic shouts of green shoots, I must only repeat my previous comments that this may be a false dawn. The double dip recession is as I have predicted a distinct possibility.

The government is also beginning to own up to what everybody knew already. There must be massive public expenditure cuts. Reports that some government departments would need to make cuts of 20% were not denied by the Chancellor.

So here is the dilemma. The government wants to lull us all into a false sense of security, tell us the recession is over and then ask for our vote at the next election as the economic saviour. So it is in the government's interests to talk recovery up and then drop the bombshell after the election. It embarks on a policy of slash and burn now, the cuts will only make the recession worse but on the other hand while the government delays, the danger of a renewed inflation becomes a real threat.

Selling the government's debt will become increasingly difficult which will only encourage the government to print more money through its quantitative easing programme and inflation will get worse. Interest rates will have to rise, house prices will fall and the vicious spiral starts all over again. By which time those big hitter bankers will have escaped with the loot.

I sound like a stuck record because I have been saying this over and over again since I started contributing to the City Diaries. At last, I think the Chancellor and Prime Minister may be listening.


Do you work in financial services? Have you had similar experiences? What is the mood like where you work? Send us your comments using the form below.

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