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Govt should treat banks differently from Woods, Jolie
(China Daily)
Updated: 2009-09-11 08:11 The Group of 20 proclamation suggesting remedies for what ails finance is a tale told by an idiot, full of sound and fury, signifying nothing. Its proposed solutions are not only flawed, they are impossible to implement - especially with regard to the thorny issue of remuneration and bonuses.
Here are some of the key elements of the policy measures prescribed by the G20 nations, along with their faults. 1) "We will develop cooperative and coordinated exit strategies, recognizing that the scale, timing and sequencing of actions will vary across countries and across the types of policy measures." The G20 hasn't got a hope of persuading its members to stick to a coordinated plan to halt and reverse the $12 trillion cash transfusion that's keeping the global economy alive. There won't be an orderly unwinding on a collectively agreed schedule; instead, selfish nationalism will dictate a beggar-thy-neighbor approach that goes, "You first." "No, you first." "No, I insist, YOU first." No nation will want to risk anemia and a competitive disadvantage by being first to turn off the money taps that have flooded the economic system with liquidity. And the futures market is telling us any rate increases are way, way in the future; the three-month dollar contract for settlement in the middle of next year has dived below 1 percent, from 1.7 percent just a month ago and more than 2 percent at mid-year. Moves in euros and pounds paint a similar picture of central banks in no hurry to end the sugar rush of free money. The shoe is likely to pinch hardest in the foreign-exchange market, where the US is a past master at using the pretense of a "strong dollar" policy to devalue its way to renewed prosperity. That helps explain why Bank of France Governor Christian Noyer said this week it's "very important" for currencies to be stable; it also sets the scene for a humdinger of a currency battle between the US and China next year. 2) "More stringent capital requirements for risky trading activities, off-balance sheet items, and securitized products."
Everyone, including the banks themselves, acknowledges that the inverted pyramid of leverage that the financial community erected in the past decade was resting on a slender tip of too-little capital. Use of the words "more stringent" dodges the so-far-unresolved question, though: How much capital is enough? The answer is very different in so-called normal times, versus the chaotic aftermath of a Black Swan-inspired maelstrom. Sometimes, it's impossible to build your cash bulwarks high enough. Moreover, different jurisdictions are likely to reach different conclusions, not least to tilt the playing field a bit in favor of their domestic banks versus overseas competitors. 3) "Prevent excessive short-term risk taking and mitigate systemic risk, on a globally consistent basis." One of the beautiful side-effects of so-called quantitative easing - beautiful if you are a bank in the bond market, anyway - is that governments are now selling more bonds to pay for their stimulus programs, and buying more bonds to funnel liquidity into the banking system. In other words, there's a new patsy bringing a big stake to the fixed-income poker game. Provided your traders are skilful at steering prices in both the auctions and the buybacks, there's free money to be made. Other markets aren't quite so sympathetic to the need for banks to restore their balance sheets - and the way to make money in finance is to take risks. Can regulators really determine what is "excessive" and what is justifiable? And how do they expect to ensure that the regulator next door agrees with them, rather than taking a more relaxed view that will encourage banks to shift their trading activities over the border to where the frowns are less severe? 4) "Greater disclosure and transparency of the level and structure of remuneration for those whose actions have a material impact on risk taking. Global standards on pay structure, including on deferral, effective clawback, the relationship between fixed and variable remuneration, and guaranteed bonuses, to ensure compensation practices are aligned with long-term value creation and financial stability."
The problem with the banking industry's bonus system isn't size, or the relationship between salary and bonus, or the existence of guarantees. The issue is that private gains become public losses when the bets go awry. Imagine how ridiculous it would be if governments imposed pay scales for Angelina Jolie, Tiger Woods, or the guys at Google Inc who built the world's best Internet mousetrap. If Sergey Brin and Larry Page had failed, they would be garage-trapped geeks, not billionaires. If Woods starts finding the rough rather than the fairway, he'll lose his endorsements. If Jolie's movies are box-office duds, her earnings power will melt faster than a moviegoer's ice cream. The same should apply to banking. Long-term risk-taking that plants financial landmines for the future shouldn't produce short-term mega-bonuses that let traders skip away unscathed before their trading lemons ripen. Building claw-backs into the process so that today's payment can be recouped if it turns out to be based on phantom profit is one solution. So is paying bankers in the same products they foist on their clients. Allowing governments to apply spurious numerical limits to how much star traders earn, though, is as random, capricious and unwarranted as asking Jolie to set your bonus - albeit a lot less fun. Mark Gilbert is a columnist for Bloomberg News. The opinions expressed are his own. (China Daily 09/11/2009 page16) |
