This week our City Diarists discuss the sell-off of Royal Bank of Scotland subsidiaries, the UK and US policies on banking bail-outs and the real meaning of economic growth.
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.
"The emasculation of RBS is staggering"
If a week is a long time in politics the same can definitely be said for banking. The expected scale of the Royal Bank of Scotland emasculation is staggering. There are seven relatively recognisable brands under RBS ownership - RBS, Natwest, Direct Line, Churchill Insurance, Lombard, Coutts and Green Flag. Of these, RBS will disappear in England, and Churchill, Greenflag and Direct Line will be sold.
Asset finance has been cut back across the financial sector as the return on lending is often low and the rate of default over the last 18 months is high. So that leaves just Natwest, Coutts and a reduced Lombard standing - not counting the other RBS brands, which few consumers have ever heard of.
Commercial business lending is quite active in part as customers of RBS and Lloyds have been running for the hills (ie other banks) due to uncertainty over their long-term funding. The announcements from the EU on their break up will inevitably spook business owners even more and this doesn't bode well for their eventual sale price.
A few weeks ago an RBS bank manager commented to me that all of a sudden no business lending deals were being approved for more than a five year term - whether it be a secured loan or interest rate hedge. The reason given to staff was that it was something to do with their balance sheet. As usual, the staff had been told complete rubbish and had to give patsy answers to deflect any questions from customers. But now all becomes clear: the bank knew that it would be given five years by the EU to 'dispose' of RBS business banking in England following the announcement this week, and it was trying to tie up potential loose ends early.
Yet again the drivers of the bank's misfortune get away virtually scot-free
I love my job most of the time. I get to meet interesting businesses and help them fund growth and create new ideas and employment. However, what makes me sick is the complete lack of honesty by the powers that be in RBS and two other banks in particular who shall remain nameless. The 3,700 staff losing their jobs in the latest cull by RBS had nothing to do with their paymasters' mistakes and yet again we see the drivers of the bank's misfortune getting away virtually scot-free.
It doesn't make you feel good when the black sheep of the family have taken over the asylum.
Whilst I'm in a feisty mood - HBOS in 2007-08 tried to grow their market share by launching the now laughably named 'Hero' product. This effectively offered over the odds business funding for one year fee-free at a level that other banks refused to compete with, all with the aim of buying business. The fact that someone in management didn't work out that lending more money than you could probably get back for no fees and minimal interest rates was a rubbish idea is testament to the monolithic arrogance which unfortunately still pervades so many of our high street names.
There is also a poignant circle of life lesson to the break up of RBS. In marketing they used to refer to the RBS v Virgin method of branding; RBS being a company which had many distinct brands while Virgin had all of their companies strongly marked with the same brand. Virgin may soon own large chunks of RBS and potentially win the marketing strategy debate with it.
"Anthony" (not his real name) works for an investment bank in the City.
Guarantees against potential Lehman losses were not given.
The A30 is a picturesque drive from Cornwall that takes you across Dartmoor before connecting with the M5 at Exeter. Sleepy villages are dotted amongst the wild, rolling moors. It is an unlikely location for a series of frantic telephone calls which were made to avert the financial disaster which followed the collapse of Lehman Brothers.
The calls were made by Hector Sants, head of the Financial Services Authority, while he tried to find a solution to the request by the US Treasury to wave regulatory concerns and allow Barclays to buy Lehmans. The scene is described in Andrew Ross Sorkin's book Too Big To Fail: Inside the Battle to Save Wall Street.
The FSA wanted assurances that the US government would provide guarantees against potential losses in Lehmans. These guarantees were not given and so the FSA on orders from Gordon Brown would not sanction the Barclays proposal.
In the UK, all banks are too big to fail. In the US, it is quite the opposite.
Nobody would blame the PM for turning down the deal. If the US government would not stand by their man then why should we? However, one of the UK grievances was that insufficient due diligence had been carried out and therefore it was impossible to quantify the extent of Lehmans' losses. If that was so then why did the prime minister nod through the disastrous acquisition of HBOS by Lloyds Bank with a similar lack of due diligence?
US and UK policies differ on banking bail-outs
There is a clear distinction in US and UK policy in this area. In the UK, all banks are too big to fail. In the US, it is quite the opposite. This week, US lender CIT filed for bankruptcy. It is the fifth largest bankruptcy in US history. There have been 115 bank closures in the US this year alone. But in the UK we rescued the Dunfermline Building Society.
Despite allowing banks to fail, the US economy is recovering while the UK economy is still floundering with the prospect that the UK government needs an additional £40 billion to fund the restructuring of Lloyds, RBS and Northern Rock. The question to ask is that if the government had allowed Northern Rock to fail and had paid out protection on all depositors up to £50,000 under the Government Asset Protection Scheme, would that have been cheaper than rescuing Northern Rock?
My investment bank is recruiting which illustrates the level of optimism returning
I think the US was wrong not to rescue Lehmans because it was too big to fail. The other small banks that have been allowed to fail have not had quite such an impact and so in the long run it is better that they were allowed to fail. The too big to fail rule applies to RBS and Lloyds but not Northern Rock.
The case for Lehmans survival is reinforced by the record performance of the investment banks in 2009. In my investment bank we have been recruiting which illustrates the level of optimism that is returning. If Lehmans had continued, profits would have risen. By allowing it to fail, losses became self-fulfilling.
The governor of the Bank of England, Mervyn King supported the principle in a recent speech saying that banks which were too big to fail should be broken up. Indeed, this is starting to happen to UK banks. RBS will sell Churchill Insurance and Direct Line while Lloyds will sell Cheltenham and Gloucester. In complete contrast there seems to be no pressure to break up J P Morgan Chase or Citibank in the US.
Only time will tell which country got its policies right.
Stephen (not his real name) has worked in the City of London for over a decade.
"Unless growth is positive, we feel deprived"
This week I'd like to reflect on what exactly is meant by "growth".
Growth of two to three per cent remains the perennial policy objective of western governments in the modern era. Our modern digital world makes quantity even easier to determine than quality. "Life is poetry," as a wise soul said to me recently, "but we have tried to make it mathematics".
Focus on positive "growth" in headline figures means that growth of any kind and any quality will do. No need to understand exactly what that growth involves. Just keep the numbers climbing and throw money at it if we have to.
When growth is not positive, we believe we are being deprived. So if the numbers stop climbing, then we just print money to make the fandango continue.
Ever wondered what this sense of entitlement leads to? I've often wondered that if there was neither growth nor decline and we just trod water for a bit, how life would be. It would probably be quite enjoyable. My grandparents spoke of the Great Depression as a time they just made do and enjoyed each other's company.
"We have witnessed gravity-defying growth"
There may be ever more mathematics in life, but if the maths stops working then we just fudge it. From growth rates, to employment statistics, house prices and even exam pass rates, the modern era has witnessed both gravity-defying growth and quite shameless goalpost moving.
Excessive focus on headline growth statistics, however, causes dangerous distension as the cycle matures. As the cycle nears the end, increasingly untenable growth occurs. Our quest for endless growth, paradoxically, amplifies boom and bust even as we earnestly seek the opposite.
On a recent trip around Asia, I was startled at the difference not in the amount of growth, but its quality. In Asia, there are millions of poor and often starving people desperate for subsistence and security, not growth. Foreign holidays and buy-to-let portfolios are not part of this economic wave - not in the same way as in the West. And the demographic patterns across the generations mean that there is endless, natural demand for the basics: infrastructure, housing, simple staples.
In the West, growth in the mid-part of this decade was increasingly removed from the basic underpinnings of life. It was more about house prices than house quantities and more about the "service economy" and consumption than making hard goods. Now we are faced with the fallout from that burst bubble, despite countless warnings which our leaders chose to reject.
If you are poor, homeless and starving in a developing country, the solution to your problems involves gaining ownership or tenancy of a house. If you are over-borrowed and own two or more properties in the West, the solution to your problems probably involves losing at least one of those houses and starting again once the dust has cleared. But that message will always remain politically unacceptable and will not be discussed by the vested interests that inhabit our public life.
So the rise of the developing world poses a rather grounding lesson to the West. If life is mathematics, then decline is death and stagnation is near-death. But if life is poetry, lean times and the rise of developing countries make us reassess and learn to enjoy what we have while we wait for better days.
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