Wednesday, February 11, 2009

Strings and Arrows

Bankers on both sides of the Atlantic are having second thoughts about public involvement, mostly because they're facing tough questions about how they do business.

In the US, several TARP recipients are looking into returning the bailout funds. Not that they don't need the capital, mind you: they just don't like Washington watch them carry on business as usual.
“We just think that operating our business without the government capital would be an easier thing to do,” said David A. Viniar, the chief financial officer of Goldman. “We’d be under less scrutiny, and under less pressure."

It was in large part a lack of oversight that brought us to this point. Now the oversight is being applied, the big players not unsurprisingly are squirming in the spotlight. It's little wonder that they'd prefer less scrutiny: it's a lot harder to buy that sixth jet for your fleet or host a lavish conference when you have the government looking over your shoulder. With appearances before Congress only days away the discomfort must be substantial.

It's unlikely that they have much choice, though: none of the TARP recipients are in a particularly good position to simply hand the money back, and the TARP programme specified that recipients repay Washington in stock before cash.

Across the pond, the UK is looking at similar stringent constraints on the banking sector, and are already holding inquiries. Royal Bank of Scotland and Halifax Bank (the latter now part of Lloyds Group) were grilled unmercifully by Parliament yesterday for continuing to pay bonuses following government assistance. At least the Brits are willing to state outright that substantial public assistance to an enterprise equates to substantial public ownership, and are seeking to exercise governance over what is now public property.
The British member of Parliament fixed a withering eye on Frederick A. Goodwin, the former chief executive of the Royal Bank of Scotland, now government-owned, and put the question to him: “Do you have a different moral compass from other bankers?” he asked.

...[The bank executives'] defense drew angry responses from lawmakers, who accused them of blaming their problems on the collapse of the markets.

“But are you culpable?” asked Nicholas R. Ainger, a Labor representative who interrupted a meandering explanation by Mr. Goodwin.

“It’s just too simple to blame it all on me,” Mr. Goodwin replied.

The sad thing is that, in a way, Goodwin was right, and the MP posing the ethical question was wrong. From all appearances the problem has become systemic, which of course means that the behaviour shows a common - and misdirected - moral compass among finance professionals. The crisis as it has unfolded indicates it is the entire banking culture that suffers from this malaise, which makes blaming key players and ignoring the industry as a whole perilous. After all, the current woes weren't created by a single business unit or a single institution: they were the product of the entire finance industry and were sanctioned by the regulators (themselves largely industry insiders), which makes the sudden demands for propriety and accountability for the executives sound dangerously close to scapegoating. On the other hand, following the old models for doing business while the current crisis continues to deepen appears more and more like lemmings following their leaders over a cliff: this hardly qualifies as effective leadership in today's business climate.

I'm waiting until someone in one of these hearings has the audacity to claim that it's all those people who died owing a balance on their credit cards that's really the root of the problem.

UPDATE: It seems Congress is taking its turn at having grilled Big Cheese sandwich for lunch.

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