“When I arrived in Amsterdam recently I took a taxi to my hotel. Over the radio came this uplifting and heartfelt lyric: ‘I’ve had a s**t day and I’ve had enough’ (having gone through airport security I knew exactly how the singer felt). The following day, in the taxi on the way back, there came another lyric over the airwaves: ‘I know what I want, and I want it now.’
“Could it be, I wondered, there was what some people might call a dialectical relationship between knowing what you want and wanting it now, on the one hand, and having a s**t day on the other? That dwelling on your desires and regarding them as imperative was a sovereign path to dissatisfaction?
“I was reminded of the advertising slogan for the launch of a new credit card, Access: Access takes the waiting out of wanting.
“I was insensibly led, then, by an association of ideas and a chain of reasoning, to the causes of our current economic crisis. For is it not the case that one of those causes is that, on a gargantuan scale, we took the waiting out of wanting? Not only consumer credit but government deficit spending, largely to underwrite a standard of living that we did not go to the trouble of having earned, is at the root of our financial difficulties. The demand that our desires should be satisfied immediately, before we can pay for them, is a sure way eventually to have a s**t day, just as drinking too much leads to a hangover.”
From Theodore Dalrymple’s ‘The Hilarious Pessimist’.
Difficult, really, to see how the banks could possibly make themselves any less popular. Perhaps it will emerge that the late Sir Jimmy Savile was also responsible for syndicated lending at RBS. Certainly, the revelations over UK PPI (payment protection insurance) mis-selling as revealed in the Financial Times last week make for depressingly consistent reading for bank haters. JP Morgan reckon that the final cost of the PPI debacle will reach £15 billion (more than triple the FSA’s initial estimates); PPI would apparently often add 20% to the cost of a personal loan; some banks made a profit margin of 90% on selling PPI; PPI looks set to become “the most aggressively mis-sold retail product in UK banking history”; at the peak of the market in the mid-2000s, more than half of banks’ retail profits were derived from PPI alone. Just so that someone could distract the market from Barclays’ latest alleged fraud (in the US energy market), Lloyds pitched in on Thursday with a further £1 billion provision against previous PPI transgressions. “In some ways people miss the days of PPI,” said one sales manager at a big bank to the FT; “It was very rewarding at the time.” Hypothetically, some people might also miss the glory days of the Black Death, but that’s an insufficiently strong reason to want to bring them back.
No sooner had the FT reported PPI mis-selling in all its gory details than it was on to the week’s next big banking story: how UBS had treated some of its (now former) City staff when giving them the sack. Let us not pretend that investment banks have ever been paragons of virtue in the realm of dismissing employees humanely. From personal experience, the most notorious employee ejection this writer has seen was during his time at Merrill Lynch in the 1990s, when a colleague in the fixed income department was summarily fired in one of the firm’s regular convulsive purges whilst away on a business trip. He managed to make it back into the office none the wiser, and only discovered that he was persona non grata when, engaged on a business call to one of his institutional clients in Luxembourg, the facilities staff arrived at his desk and proceeded to dismantle his Bloomberg terminal. While he was still using it. Classy. Which rather gave the lie to the Merrill Lynch commitment to ‘Respect for the individual’ which was one of five variously absurd tokenistic commitments to a notionally happy workplace – as opposed to a feral pit of total war.
But that’s kind of the point. The investment banking mythology always held that grotesquely inflated pay came at the price of job insecurity. The reality is that until the financial crisis broke five years ago, the grotesquely inflated pay persisted whereas the job insecurity was both completely hypothetical and, like so many things in today’s world, hideously mispriced. The industry is now making up for lost time. The pay / job insecurity arbitrage is now being resolved – by a free market, for once – from both sides simultaneously.
As ever, Gillian Tett, perhaps the FT’s finest columnist, nailed the problem in her piece from Thursday, ‘Banking may lose its allure for the best and brightest’. Her point, in essence, was that the banking industry is now reverting to the type last seen during the Great Depression. In the years running up to the Great Crash of 1929, finance’s share of (US) GDP rose from 2% to 6%. Banker pay rose from parity with non-banker pay to a 1.7 times multiple. After the Crash, finance shrank sharply (as one would expect) and banking jobs disappeared. But there was a lag then, just as there seems to have been one in the aftermath of the Financial Crisis that exploded in 2007 and which is still ongoing because our economies are in thrall to central banking and political idiots. As Ms Tett observes,
“Back in the 1930s, bankers’ relative wages did not start falling until the mid 1930s and the size of the financial sector, relative to GDP, peaked in 1932, not 1929. That was partly because the entire economy was shrinking after the Wall Street Crash. But another factor was that the Glass Steagall reforms [which separated commercial from investment banking] were not implemented until 1933. Arguably, it took even longer until bankers finally realised that the nature of finance had changed: it was no longer purely a profit-seeking, speculative game but was shaped by more of a utility mentality, thanks to government pressure and deleveraging (and, subsequently, the Second World War).”
Her conclusion is sobering for anyone still toiling in the banking hinterlands:
“According to recent calculations… the relative size of finance in the US economy did not even peak until 2010, not 2007; as in the 1930s, the really stark relative shrinkage might lie ahead.”
So UBS may be structurally unable to treat its London bond-trading staff with anything approximating to respect, but it is arguably ahead of the curve. The real Stalinist blood-letting purges in the banking sector may be still to come.
The bigger problems remain – and are nicely discussed in this piece by Ingolf Eide at the Cobden Centre. It is not just investment bankers who are in the process of falling nastily from grace. The central bankers who have overseen this disaster and to whom many look with desperate eagerness to solve it somehow – the central bankers will surely be the next high-profile financiers to be revealed as flying with feathers insufficiently strongly attached.
Tim Price is Director of Investment, PFP Wealth Mangement, London.