KEY POINTS:
Not so long ago, bankers were the very model of propriety. Worldwide, the conservative nature of their dress was matched only by the risk-averse nature of their business dealings, which broadly encompassed taking deposits from some customers and lending to others. In terms of image, the banking profession's account was hugely in credit. Now, that same group is the target of almost universal vilification. Rarely has there been such a catastrophic fall from grace. Rarely, however, has the world found itself in such straitened circumstances.
The reasons for this transformation are obvious enough. The globalisation of finance flows led to the rapid development of new wholesale markets in derivatives, mortgage-backed securities and other exotic instruments. Bankers took to these with gusto because of their huge profitability. Few stopped to ponder whether the profits were illusory or even to consider a more stringent exercise in risk analysis. Most were seduced by the huge bonuses and other incentives that encouraged them to play on the margins. Gigantic pay packets, corporate jets, country club memberships and lavish junkets were the hallmarks of the new banking culture.
The reluctance to renounce that culture, especially in the United States and Britain, underpins much of the current public anger. So calamitous was the banking sector's failure that people who worked there would have been looking for another job had they been employed in any other business. Yet governments had no alternative but to bail out those same banks. Economic meltdown was the only other option. This seemed only to imbue bankers with an even richer strain of hubris. At its most extreme, this has produced the likes of the New York Attorney-General's investigation into why Merrill Lynch paid executives billions of dollars of bonuses a month ahead of schedule last December, just before a multibillion-dollar quarterly loss was announced and its sale to Bank of America was completed.
Some banks have tried to mount feeble arguments to defend the continued payment of bonuses and absurd salaries, even after they have been rescued by the state. They maintain that any bank that tried to move away from that culture risked losing staff and, therefore, business, to rivals. That speaks volumes for the refusal to acknowledge that the days when money showered down like confetti are over. Such blinkered responses have been grist to the politicians' mill. They are clambering over each other to deliver the strongest censure. In Britain and the US, leading bankers have effectively been forced to offer apologies. Even then, the degree of conviction has not always appeared total.
The most concrete political action has been taken by President Barack Obama, who has imposed a pay cap of US$500,000 on executives of banks that need more bailout money. In Britain, board members at several banks that received state cash have been forced to do without bonuses. Few of the taxpayers providing the bailout funding have quibbled with this calling of the shots. Yet, in many ways, this is a distraction from the key issue. Globalised financial flow is now a fact of life and a key ingredient for growth. It cannot be put back in the bottle. As much as some politicians wish for banks to return to their traditional low-risk deposits-loan base, it is highly unlikely to happen.
The primary task, therefore, is to draw up a regulatory framework that discourages flagrant risk-taking while recognising the new international environment. Bankers can help themselves here. A global code of conduct to stop bonus and incentive schemes that encourage the taking of excessive risk is one option. If the bankers do not act, politicians will have the ammunition to administer harsher medicine.
