Martina Devlin: Bankers without rules like Wild West without sheriff
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When Oliver Stone made his 1987 film 'Wall Street', he believed it to be an expose of the financial sector's underbelly. Audiences reacted to corporate raider Michael Douglas's "greed is good" speech by stampeding to sign on the dotted line.
So much for Stone's att- empt to communicate a social message.
While we digest the final cost of the Anglo bailout, a crucial figure for our economy's capacity to borrow, it's worth considering the role of banks in society -- a society that's desperately bewildered.
As an indication of that confusion, some stock market traders are now in agreement with union leaders, arguing against deeper cuts because they would siphon money out of the economy and inflame the downturn.
Twenty-three years on from 'Wall Street', it seems safe to presume some lessons have been learned at last, not because humanity suddenly saw the light but because a devastating international collapse brought clarity.
One of the central messages is that regulation can no longer be counted an optional extra.
We know now that the downside to excessive controls -- commerce is strangled -- is preferable to the downside of light-touch regulation. The latter led to Dodge City in the banks, with no Wyatt Earp to clean things up.
Banks have become synonymous with the root of all evil, but banks are not wicked, per se. They are not greedy or reckless, although some of the people who ran them were. And probably remain so, because despite the baptism by fire of the past two years, greed has not vanished. It is not a condition that can be cured or abolished.
We can make it tougher to surrender to greedy urges, however. Tighter regulation reins in greed. "We cannot control ourselves. You have to step in and control (Wall) Street," said John Mack, former chief executive of Morgan Stanley.
It was an acknowledgement that financiers don't enquire whether they are doing the right thing. They ask: "Can we get away with this?" Anything not pinned down by law is viewed as fair game.
Despite all the hand-wringing, there has been a lack of public debate about the purpose of banking. We know we're vexed with the banks. But most of us also realise we can't manage easily without them.
A bank's primary purpose is to make money for its shareholders. That's not unique to banks -- it's the aim of any business. But banking can and does have other functions. For example, it serves as an intermediary bringing together those with excess funds, i.e. savers, and those in need of funds, i.e. borrowers.
In addition, banks have the capacity to create money by continually lending and re-lending. Money used by borrowers flows back into the banking system: goods are purchased, and funds are subsequently deposited by vendors who benefit from those sales. This is known as the multiplier effect, and while it profits the bank, it also benefits the community.
Banks do perform a valuable social function in the same way as police, healthcare and education systems. That's not to suggest bankers do "God's work" -- a controversial claim advanced by Goldman Sachs chairman and chief executive Lloyd Blankfein last year.
"Banks have a social purpose," he said. "We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth."
He was making the case for retaining Incredible Hulk salaries and bonuses. But the bonus culture was a mistake -- especially such enormous top-ups as became the norm -- and we have to guard against it creeping back in. Few banks currently pay bonuses, but they have not been abandoned.
When Brian Lenihan introduced the government guarantee, he set up a committee to examine bankers' pay. Its recommendations included that bonuses should be discretionary rather than contractual; they should not be pensionable; they ought not to exceed 80pc of basic pay (Former Anglo chief executive David Drumm's bonus was double his basic pay).
But 80pc of pay still sounds excessively generous. Bonuses reward short-term goals and do nothing to encourage responsible behaviour. Quite the reverse. By eliminating them from bankers' packages, an incentive for recklessness would be removed.
We also need to consider whether banks should have their investment and retail divisions split. Small businesses and mortgage-holders are lumped in with international trading arms, an uncomfortable mix. There is an argument for separating out the two.
Admittedly, the infamous Lehman Brothers dealt with investment only, yet when it toppled there was a fear other banks would crumble. But divorcing retail from investment could mean bondholders might be burned, where necessary, without causing havoc elsewhere in the financial system.
There has been some discussion about moral profiling -- checking out people before they enter banking, because the current crop of senior bankers is regarded as morally bankrupt. Students at Harvard Business School have even suggested a Hippocratic oath for bankers.
While we could certainly have fun with a competition to devise the wording, requiring financiers to take vows would be as useful as teaching parrots to sing 'Money Makes The World Go Round'.
Besides, Sean FitzPatrick (known for charity work) and Michael Fingleton (a former seminarian) would both have passed moral profiling with flying colours.
Let's just accept that nobody enters the financial sphere on a mission to end world hunger. People do it to make money. And money-making hasn't been discredited, nor will it ever be.
After all, anyone who sold up at the height of the boom is seen as the next best thing to a rock god -- an accolade awarded to top bankers during the boom years.
mdevlin@independent.ie
- Martina Devlin
Irish Independent
