Naked Capitalism 18 Dicembre 2009

Well, because he is a man of probity and is writing in the UK, where the standards for libel are much lower than in the US, former Barclays CEO Martin Taylor does not use the F (fraud) word, but that is precisely the behavior he describes.

I know it is fashionable to depict the investment banking industry as ever and always dishonest (as former SEC chairman Arthur Levitt pretty much does today in the New York Times, indirectly), but differences in degree are differences in kind. It is one thing to nick your clients occasionally, when they might not notice, or when they are making so much money they wouldn’t mind all that much if they did figure out the bankster had arranged for a bigger cut than usual. It is quite another to take every one every way you can at every available instance. While neither is honest, one is petty cheating and pilferage, the other is rape and looting.

This is the nut of Taylor’s piece in the Financial Times, which is worth reading in its entirety:

City people have always been paid well relative to others, but megabonuses are quite new. From my own experience, in the mid-1990s no more than four or five employees of Barclays’ then investment bank were paid more than £1m, and no one got near £2m. Around the turn of the millennium across the market things began to take off, and accelerated rapidly – after a pause in 2001-03 – so that exceptionally high remuneration, not just individually, but in total, was paid out between 2004 and 2007.

Observers of financial services saw unbelievable prosperity and apparently immense value added. Yet two years later the whole industry was bankrupt. A simple reason underlies this: any industry that pays out in cash colossal accounting profits that are largely imaginary will go bust quickly. Not only has the industry – and by extension societies that depend on it – been spending money that is no longer there, it has been giving away money that it only imagined it had in the first place. Worse, it seems to want to do it all again.

What were the sources of this imaginary wealth? First, spreads on credit that took no account of default probabilities (bankers have been doing this for centuries, but not on this scale). Second, unrealised mark-to-market profits on the trading book, especially in illiquid instruments. Third, profits conjured up by taking the net present value of streams of income stretching into the future, on derivative issuance for example. In the last two of these the bank was not receiving any income, merely “booking revenues”. How could they pay this non-existent wealth out in cash to their employees? Because they had no measure of cash flow to tell them they were idiots, and because everyone else was doing it. Paying out 50 per cent of revenues to staff had become the rule, even when the “revenues” did not actually consist of money.

Now the real question is: why is anyone indulging this “talent” myth, the idea that the banksters ever deserved their outsized pay? And worse, they insist on their fraudlenty level of compensation as a new normal that must continue. Now I know some like the Epicurean Dealmaker get angry, and insist that Some Were Honorable, but let us face it: a credit tsumani lifted ALL boats, and people in fee businesses like M&A would have gotten far fewer deals done, and at far lower prices, were it not for the mania on the funding side.

We all need to start using the F word a lot more, because a great deal of what went on was criminal and needs to be described in those terms.

Source >  Naked Capitalism | dec 16