This weekend, finance ministers from the Group of Seven most advanced nations will gather in the town of Iqualit, just South of the Canadian Arctic Circle, to try to put some order into the chaos of banking regulation. The return to fat profits, bonuses and greed at the global banks, just 15 months after the ‘Great Panic’ of 2008 has been so swift that it has left politicians and policy-makers in the starting traps.
The spirit of co-operation that Gordon Brown sought to engender at the first G20 London summit in April 2009 has quickly fractured and ideas for regulation and taxation of the banks have spun off in a dozen directions.
President Obama, having made healthcare reform his domestic focus in his first year in office, suddenly discovered last month — after the defeat of the Democrats in the Massachusetts special Senate election — that what is really worrying Americans is the state of economy and the greed of Wall Street.
In a pair of rapid fire actions, which left most advanced countries in the dust, he first imposed a savage levy on bank assets designed to recoup every “last dime” of the $700bn of bailout assistance provided to the banks through the troubled asset relief plan (TARP). Secondly, on the eve of this year’s State of the Union address, he appeared at the White House accompanied by the mountainous figure of Paul Volcker (Federal Reserve chairman in the 1980s) and unveiled his plans to defenestrate the super-banks.
No longer should banks, insured by the federal government, engage in “proprietary trading” on the financial markets. Nor should they be supporting hedge fund or private equity activities. The “Volcker rule” would seek to separate ordinary retail banking — the process of taking deposits and lending to individuals and businesses — from high-risk, casino banking which brought the world to the edge of a precipice in 2008-09.
Ideas for regulation and taxation of the banks have spun off in a dozen directions
In effect, Obama was embracing a new form of Glass-Steagall, the 1930s depression-era law which forced American banks to separate investment/merchant banking activities from retail banking.
The global banks might have avoided such heavy-handed intervention so late in the day were it not for the role played by Goldman Sachs.
Throughout 2009, the New York bank proved itself to be a money-making machine, taking advantage of the lack of competition in the market place, a surge in share prices and huge spreads — the difference in cost between borrowing money and lending it — to spin record profits and bonus payments.
Had it decided to turn the bonuses all into capital, distribute them to shareholders or put them into a Bill Gates-style charitable trust, it might have escaped opprobrium.
But the decision to allocate 40 per cent of income to bonuses (a figure eventually reduced to 33 per cent) set off a bonus arms race with other financial houses (including nationalised banks like Royal Bank of Scotland). Bankers such as Stephen Green, the chairman of HSBC, openly blamed Goldman Sachs for creating the conditions which brought a full panoply of taxation rules down on the industry.
It is extraordinary how rapidly matters have moved. When in early September 2009 Lord (Adair) Turner, chairman of Britain’s Financial Services Authority, casually threw out the idea of a “transactions tax” on the banks, it was dismissed as preposterous.
In November, Gordon Brown paid a surprise call on G20 finance ministers meeting in St Andrews and took up the same cudgels to widespread disdain.
And when Alistair Darling imposed a 50 per cent windfall tax on bank bonuses in his Pre-Budget Report — aiming to raise £500m; the actual amount is likely to be closer to £3bn — cries of anguish went up and there were threats by bankers to move critical trading operations out of Britain to lower tax centres.
By last week at Davos, after the intervention by Obama, the defiant mood in the banking parlours had changed.
Josef Ackermann of Deutsche Bank, a key figure in the global bankers’ organisation, the Institute of International Finance, declared his full support for “insurance fund” to deal with the “too big too fail” scenario.
He was joined by Bob Diamond, Britain’s highest-paid banker, who heads BarCap — the investment banking arm of Barclays. The defiance has now gone and it is now the politicians and regulators that are back in the driving seat.
The job of the G7 will be to forge some common ground on the kind of taxes and regulations that they wish to see.
If gaps are left in the net and some regimes continue to offer “light touch” regulation, then despite all the tough talk, the genie will not be put back in the bottle.
In the past, Britain has sought to benefit from tougher regulatory and tax rules in the US and on the continent.
Amid the current public furore about the behaviour of the banks and the support for Obama, such as rules from George Osborne for the Tories and Vince Cable for the Lib Dems, it looks as if this time the City’s aim of competitive advantage could be consigned to the scrap-heap.