Why are bankers rich, and the rest of us poor?
Before the financial crisis, the generally accepted answer was that bankers are cleverer and more talented than everyone else. They were risk-takers, achievers, and wealth creators. Bankers were paid more because success needed to be rewarded and failure had to be punished. Therefore, it seemed reasonable that the CEO of High Street bank should take home uncountable millions, while the rest of us should make do on 1500 quid a month.
Then came the crisis. One after another, banks and building societies collapsed. To prevent the complete annihilation of the financial system, the government and the Bank of England had to step in with guarantees, capital injections and emergency liquidity schemes. Who ponied up the cash? It was of course the taxpayer. Take for example RBS; the British government injected £45 billion into RBS. Today that investment is worth only £20 billion.
With billions of pounds on the line, a few taxpayers wondered how that extraordinary talent pool running RBS generated such a massive financial loss. They were so clever wise and wonderful, why did RBS go down in flames?
Yesterday, the Financial Services Agency published a report on the failure of the Royal Bank of Scotland. There are three striking things about report.
First, the report castigates the banks management. It describes a litany of poor management decisions, excessive risk-taking, and utter incompetence. In short, RBS management didn't know what they were doing. They were not up to the job of running a large financial institution. They simply didn't understand the risks inherent in banking.
Second, the magnitude of the risks that RBS took before the crisis was simply breathtaking. A year or so before RBS failed, the management decided to buy out ABN Amro. They financed this operation by a massive borrowing binge, exhausting bank capital, and rendering the institution vulnerable to the slightest perturbation in market conditions. The FSA report states that at the end of 2007 RBS had a Tier 1 capital adequacy ratio of just two percent.
In other words, the bank had no buffers to absorb any losses. The RBS management had used the bank to place a massive bet. Whichever way it turned out, they would win. Despite the fact that RBS failed, they walked away with their takeover bonuses intact, and left the losses to the rest of us.
The RBS management also exhausted the ban's liquidity. To illustrate this point, RBS did an interesting calculation. Recently, there has been some regulatory changes designed to strengthen commercial bank liquidity. In future, banks will need to maintain something called liquidity coverage ratio - the LCR. The FSA report wondered what the RBS would need to do to meet this requirement:
RBS would,therefore, have had to increase by between £125bn and £166bn its stock of high-quality unencumbered liquid assets or, alternatively, reduce its reliance on short-term wholesale funding in order to comply with the LCR standard.
Ordinary people, understandably, get a little perplexed when numbers like £166 billion are thrown around. Is that a big number or a very big number? Well, it's about 11 to 12 percent of GDP, or approximately the size of the UK fiscal deficit. How could the financial services agency allow such an important bank to become so illiquid and so under-capitalised?
This brings us onto the third and most depressing observation about this report; the scandalous lack of accountability. The chairman of the FSA - Adair Turner provided a cute quote which addresses the tricky question why no one will be held accountable for this disaster":
“People want to know why RBS failed and why no-one has been punished. This Report aims to answer those questions. It describes the errors of judgement and execution made by RBS executive management which, in combination, resulted in RBS being one of the banks which failed amid the global crisis. These were decisions for whose commercial consequences the RBS executive and Board were ultimately responsible. It describes, however, why the FSA’s Enforcement Division concluded that there was not sufficient evidence to bring enforcement action which has a reasonable chance of success in Tribunal or court proceedings."
So there you have it, there wasn't sufficient evidence and there wasn't a reasonable chance of success in holding anyone accountable for the collapse of RBS.
Adair, why don't you give it a go. Why don't you take the risk and haul in the RBS board and management into a court and see if you can put together a reasonable case against them. These people walked away with millions and left the rest of us with a massive £25 billion debt.
The RBS debacle provides scant evidence of talent and the concomitant need for it to be rewarded. Instead, RBS exposed the rotten heart of the UK financial system and its repugnant culture of impunity. Why are bankers rich? Because they can rob the rest of us and get away with it.