British banks

Coverage of the appearance of three UK bank chief executives before the Treasury Select Committee on Tuesday has focused once again on bonuses. But this focus has once again obscured other equally important issues aired on TUesday. Eric Daniels of Lloyds did his own version of Alastair Campbell’s “I stand by every word”, telling the committee that he thought due diligence around the disasterous takeover of HBOS had been “thorough”.  Asked why the size of support for HBOS from the Bank of England was not disclosed to shareholders when they were asked to vote on the deal, Mr Daniels told the incredulous committee “It was not felt to be necessary”. And then to general consternation he repeated that due diligence and disclosure were “thorough”. Take a look at the testimony on the Parliament website.

Also intriguing was Mr Daniels affirmation that Lloyds had worked  to avoid participation in the Government’s Asset Protection Scheme partly because it feared that accessing more government support would precipitate more onerous directives from the European Union’s competition directorate.

It was fascinating to observe the contrast between the styles of the three protagonists. Stephen Hester of RBS arguably batting on the stickiest wicket was assured, open and businesslike. Shame that one or two throw away self-deprecating remarks “my parents think I get paid too much” have been taken out of context.  What he had to say about the underlying business of RBS was also encouraging, as was Gary Hoffman’s account of the situation at Northern Rock. But Mr Daniels’ style, in turn defensive, stiffly formal, superficially polite then acidly hostile only served to antagonise the committee.

Related links:
MPs grill bank executives on bonus policies

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.

For the second time in a year Gordon Brown has demonstrated decisive leadership on an issue of import, making an unpopular, mould-breaking decision, and then had the satisfaction of seeing others follow him.

In the spring he “saved the world” by rejecting the complex US approach to bailing out the banking system in favour of straightforward and direct state-backed recapitalisation.  “I saved the world” is poignant because it is only a small exaggeration of the reality.

No wonder the UK prime minister feels righteous indignation that bankers plan to cash big bonuses riding the bailout wave that he created, and no wonder that he feels he has the moral authority to tax them.

For the second time others seem to be following Gordon’s lead. France plans a copycat measure on bank bonus tax and Goldman Sachs and the German banking industry (of about equal import in the global banking industry) appear to be planning preemptive measures.

It must be very hard being Gordon Brown.  Sometime master of the universe, a hero to his wife, but those pesky voters just don’t seem grateful.

Related reading:

Pre-Budget report 2009 FT

Investment banking industry FT

Westminster blog FT

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.

“The art of taxation consists in so plucking the goose to obtain the largest amount of feathers with the least possible amount of hissing”. So said Colbert. Judging by the amount of hissing and clucking from the broad-shouldered golden geese of the City of London yesterday we can safely conclude that Alistair Darling’s banker tax is categorically not artful. The Treasury estimates that the tax will raise £500m. With some seemingly simple expedients (delaying payments?) the tax take will be much lower, and if a couple of Goldman Sachs bankers do choose to relocate the long term revenue impact will be negative.

But the banker tax was never meant to be a revenue-raising exercise. It is a message to taxpayers outside finance; “we are making the guilty bankers pay”. This is artful politics. In fact “middle England” may be so pleased that evil bankers are being squeezed that they may not notice the £3bn national insurance bill hit the mat.

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.

The UK’s Chancellor of the Exchequor, Alistair Darling, justifies his putative plans for a windfall tax on banks with the expression “we would expect the broadest shoulders to bear the greatest burden”.

Banquo will let others get into a lather about the negative consequences of capricious, retrospective taxes. What is most striking is the language that the chancellor chose to use. Isn’t it poetic? Doesn’t it make you want to do a Stanley Baldwin, call your tax office and make a voluntary payment? But also doesn’t it strike you as faintly sexist and old manual?  Shouldn’t wealthy women, narrow shoulders and all, pay too?

Maybe the chancellor has noticed that the Carringtons are back on TV and Joan Collins has the broadest shoulders of all. Or maybe the chancellor’s vision of the City of London is of sweating, muscular bodies hewing glistening lodes of gold from a mine deep below Threadneedle Street.  Harold Wilson’s “gnomes of Zurich”, but with broad shoulders.

Related reading:

Robert Peston: A bonus super-tax BBC

UK pre-Budget report 2009 FT

Westminster blog FT

Money Supply blog FT

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.

A few thoughts on paying our RBS brethren.  The best thing the board can do for all the shareholders at RBS is to reduce the government’s stake as quickly as possible,  à la Bank of America.  Diverting some portion of the bonus pool to repay the government or to reduce the size of the asset protection scheme might be tokenistic, but it would be good politics, and like it or not the board needs to be political.

Second, Banquo is on the board of a company that has an outsize compensation structure. This compensation structure needs to change, we know that. But wrenching, confrontational change will destroy equity value. There has to be a period of transition.

The alternative to managed adjustment of compensation processes is the painful, rudderless search for executive leadership now increasingly experienced (for different reasons) by ITVGeneral Motors and the aforementioned Bank of America.

The government knows that if Hester and co resign then the headhunters will draw up a shortlist with names like  Chris Flowers, Archie Norman, Howard Davies and Callum McCarthy, all competent in their own way, but better the devil you know…

Related reading:

Would RBS directors really resign? FT Westminster blog

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.

Banquo

This blog is no longer updated but it remains open as an archive.

Banquo has spent more than 20 years in investment banking and the hedge fund industry, splitting his time between London, New York and Geneva.

Why is Banquo anonymous? Because he operates at a senior level across the financial markets, advising and investing, buying and selling, hiring and firing. He's still in the game but if he has a relevant financial interest in the subject of his posts, you'll know about it. Being anonymous keeps things simple. Banquo will never betray a confidence although he is privy to many.

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