Wednesday, 29 April 2009

After casino capitalism ...

'During the years of the boom, the values that underpinned trust have gone out of the window', Rachel Reeves, Labour candidate for Leeds West and a former Bank of England economist told tonight's Fabian Trust and the City debate.

The values of honesty, integrity and ethics had been lost, said Reeves, agreeing with John McFall that 'compliance' and 'ethics' were not the same thing.

'In place of the casino capitalism we have had, we have to create a more principled capitalism', said Reeves, arguing that banks should no longer ask what they can get away with.

This required a wide-ranging reform agenda, and Reeves set out several measures for a reform agenda - from paying a fair share of taxes - as institutions and for the individuals within them.

Other reforms Reeves proposed to rebuild trust included the publication of the minutes of renumeration committees, shareholder votes not simply being indicative, credit ratings agencies being reformed so that those investing rather than lenders were paying the fees to avoid clear conflicts of interest in the current system.

'The onus has to be on the banks, not the government', said Reeves, as the financial services industry had created many of the problems and needed to get its act together. But there was also an important role for regulation if enlightened self-interest was not enough, she said.

'If it looks like a bank, it probably is, even if it calls itself a hedge-fund'. The shadow banking system needed to be brought within an integrated system, she suggested.

Anthony Jenkins of Barclaycard said that more important than publishing renumeration committee minutes would be financial institutions articulating the principles which underpinned their pay policies in a way which 'meets the smell test for the public: is this fair?'

1 comment:

Eyes Only said...

[spelling pedant]Rachael, it's remuneration, not renumeration[/spelling pedant]

As a further pedantic point, all commerce is casino capitalism, in that risks must be borne in order to get reward. This is true even in the most conservative businesses and institutions. It just depends which side of the table the banks want to sit.

The "house" creates for itself a mathematical positive expectancy; this is where the bankers used to sit. It is almost scientifically impossible to lose with the right expectancy.

The problem with the banks is that they trimmed the expectancy too close to the bone, with insufficient padding for an adverse run. Some would say (including me) they created an almost certain negative expectancy with sub-prime lending, where de-faults were always going to overwhelm profit once the property bubble halted... fancy structures notwithstanding.

In doing so, they became the punter.

There was a reason for conservative deposits, LVRs and income multiples at the basic level, and similar safeguards on up the food-chain.

Remuneration should reflect these realities. Reward for creating cast iron positive expectancies, the sack for casino mentality.