The Problem with Investment Banking (Part 2)


Waiting for Gord-ot

Once in a generation or possibly once in a lifetime, we have an opportunity to change the fundamental rules of the game. To look beyond what is merely achievable towards what may be possible and to make changes that only yesterday seemed impossible. All too often, such opportunities have arisen as the result of some significant social, political or economic crisis.

It took Keynes some seven years to publish his General Theory after the onset of the Great Depression and his ideas became the major influence on the economic policy for western economies for half a century. His ideas on governmental economic intervention laid the foundation for the policies of governments of all colours in the West and paved the way for the creation of the welfare state.

There is little doubt that we are in the throes of one of the worst recessions for a century. There is even less doubt about what has caused the mess and who is to blame – unfettered greed and financial institutions. A year ago, as we entered what we hope was the nadir of this particular crisis (from the perspective of the financial system), we were effectively blackmailed by the banks into mortgaging the wealth of the nation for a generation, in order to bail out these greedy institutions and individuals. This is because we were persuaded, probably correctly, that if the global financial system collapsed the consequences for the wider economy would be disastrous.

Now, a year down the line, when trillions of dollars have been committed to supporting the financial system we find that the banks are setting aside tens of billions of dollars of our money to pay themselves bonuses this winter. How can this be? They argue that they have to pay themselves sums of money unimaginable in almost every other walk of life because, if they do not, their best employees will leave to work for their competitors. Furthermore, they argue vociferously that tighter regulation and higher taxation will kill the goose that laid the golden egg and cut their income and therefore the taxes that they pay. This amounts to little more than a bare-faced second attempt at holding society to ransom; this time attempting to press us into supporting superficial reform and allowing them to get away with using taxpayers’ money to pay for their undeserved bonuses.

I have argued elsewhere that the banks exhibit the most important of the features of a monopolistic utility and, as consequence, are anti-competitive and abusers of the efficiency of the market on a grand scale. This anti-competitive behaviour and market-abuse allows banks to charge outrageous levels of fees and it is these excessive fee levels that provide the income that allows them to show such largesse to employees come bonus time.

Cap in hand

There has been increasing speculation that new regulation may be introduced to cap bonuses or to make them payable over a longer period – certainly Gordon and the Badger like to hint at this from time to time (although their threats become weaker with each retelling). Well I for one do not believe that the governments in the UK or US, in particular, have the political will or capability to formulate and introduce such reform. But I have good news for politicians on both sides of the pond because legislation already exists that will do the job for them in the form of the competition rules in the UK and anti-trust regulations in the US.

In the UK two sets of competition rules apply in parallel. Anti-competitive behaviour which may affect trade within the UK is specifically prohibited by the Competition Act and the Enterprise Act. Where the effect of anti-competitive behaviour extends beyond the UK to other EU-member states, it is prohibited by the EC Treaty. The regulations prohibit anti-competitive behaviour and market abuse and specifically address price-fixing and cartels among other things.

UK competition authorities, principally the OFT, and courts are empowered to apply and enforce the entirety of the EC Treaty in respect of competition, in addition to their existing powers to enforce the Competition Act 1998. The UK competition authorities have significant powers to investigate suspected anti-competitive behaviour and to impose significant fines on businesses found to have infringed competition law. Criminal sanctions are also possible for the most serious breaches of competition law.

“Can you spare any change?

New legislation may ultimately be necessary to make real and lasting change; yet where is Gordon Brown’s political will to enforce the legislation that we already have on the statute books? Why is it that banks have been allowed to make what economists euphemistically call “super-normal” profits for decades whilst simultaneously claiming that they operate in an industry characterised by extraordinary levels of competition? In any other industry such profiteering would, quite rightly, come under regular and detailed scrutiny by the authorities.

Once in a lifetime an opportunity to make meaningful change arises. Ultimately, it seems, it may come down to the people. This was the case in 1945 when the Atlee government introduced the welfare state in the UK after the global carnage of the Second World War and having been elected on the crest of a wave of overwhelming public support. Are we going to need a disaster on that scale before we can garner the political will to become, in the words of Obama, the change we are waiting for?

Wednesday 7 October 2009

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