Parliamentary Connections

The first tentative steps in the government's long trek to recover its credibility were announced this morning when the Chancellor, the beleaguered Alistair Darling, announced plans about plans for tackling the next banking crisis. The trouble is they haven't solved the last one yet.
Northern Rock still looks like one huge financial black hole with billions of public money being poured into it but no plan in place to recover it. The attempts to engineer a private sector sale seem to be running into the sand because of opposition from shareholders. It still looks to me as if the only sensible option is to nationalise it, strip it down to its components and then sell off those that are viable, using the proceeds to repay the huge sums that have been required to prop up this lame duck.
Why the reluctance to do this? Shareholder power seems the common excuse. But are these the most important people? I would argue no. First and foremost are the savers whose money is with the bank and these, at least, now look safe. Then, there is a careful juggling act between the needs to look after the staff and repay the loans. Only after that should shareholders get a look in.
Is this harsh? Investing in the stockmarket is a risky investment with potentially high rewards - but investors have no right to expect all the upside and then be sheltered from the downside. Northern Rock shares were a hot buy a year ago as its "too good to be true" story seduced people, many of whom should have known better.
It will be interesting to see the detail of the government's plans when they come out next month but unless they stop pussyfooting around the problem of what to do about shareholders they won't solve the current crisis let alone create a viable plan for dealing with the next one.

I have often wondered at the informal hierarchy of the City and its financial institutions which always seems to put bankers at the top of the tree. Do they deserve to be there? The case for such pre-eminence looks very shaky to me.
It seems that the live on the edge of the fool’s paradise of power without responsibility. Is that abit harsh? Just look at the current economic crisis gripping the developed world and ask yourself where does the responsibility really lie?
Bankers have been at the forefront of persuading governments to adopt a light touch in regulating them and to hand over to(central) banks control over a lot of the central levels of economic policy. Have they used that freedom and control well? The answer has to be a resounding no. Irresponsible lending, the growth of financial instruments that are little more than gambling and a dreadful track record in running their own businesses – the charge sheet is very long and very serious.
Will they be punished? Far from it. At the slightest hint of real trouble the banks have looked for state handouts and have largely been given them for the simple reason governments know they cannot afford a collapse in the banking system. Just look what happened in the UK when a relatively modest bank, Northern Rock, got into trouble and the government hesitated before stepping in.
Bankers know that they are immune from the consequences of their decisions which is why they constantly make such bad decisions. It is a pity that they don’t display a little more humility and awareness of their responsibility for the pain other business and ordinary people are now experiencing.

Up until late last night it looked as if AIG was a dead man walking. Then the US government stepped in and effectively nationalised it, the second time in a fortnight that the right wing Bush administration has played the public ownership card, following the bale out of Fannie Mae and Freddie Mac. It is a measure of the chaos in financial markets that both moves have been greeted with big upswings on the world's stock markets.
It used to be part of the mantra of the left of the Labour Party when socialism was still alive that it would nationalise the "commanding heights of the economy", including banks and insurance companies. Now that is a reality in the country that always liked to paint itself as the home of free markets and unfettered capitalism.
But, as we know all too well, state ownership of commercial businesses does not work. I am sure the US government knows that too which is why it is totally mistaken to paint this move as the saving of AIG. It is far from it. It will be dismembered and parts sold off as quickly as is decent and practical. It is also hard to see how its revenues, certainly from insurance business, will stand up. How can any broker recommend placing business with an insurer that would be bust if it wasn't for a huge state subsidy? Surely, its new premium income will nosedive? At best, AIG is living on a life support machine that, one day, will be turned off. At worst, it is a dead man in chains.
There is, however, something rather fitting about governments having to dig deep into public funds to prop up the financial services sector – we mustn't forget that the UK government nationalised Northern Rock last year too. For the best part of 20 years, governments around the world have allowed themselves to be mesmerised by to so-called Masters of the Universe that run (ran) the major financial institutions and passed far too much responsibility for the running of financial markets to them. Now they are having to pick up the tab for that reckless abdication of political responsibility as the one time masters are revealed as the Muppets of the Universe.

It is hard to judge whether the massive rises on the financial markets on Friday (not so far continued this morning) were driven by anything other than a naive sense of relief. The huge, unprecedented lifeline thrown to the rapidly sinking banking sector by the US government possibly made many in the markets believe that the worst is over. In truth, for them, the worst may be yet to come.
There will be a huge price to pay for the massive support from public funds that has been made available to the financial services sector around the world ever since the Labour government in the UK took Northern Rock under its wing. These massive subsides will screw up public finances for years, leading to cuts in public expenditure and increases in taxation, most likely a combination of both. Electorates will simply not stand for that unless they feel the incompetence, greed and sheer lunacy of the financial markets have been purged and brought under control. That means regulation on a scale that hasn't been contemplated before. It is isn't about transparency - what is the point of being transparent about hedge fund and derivative products so complex that only a handful of people understand them, and certainly not very many of the people selling them?
It will be a different sort of regulation. It may even see the abandonment of the regulation by solvency and a move towards the strict regulation of products. This should be looked at as the financial services sector has an appalling record when it comes to creating the right products for the right people in the right circumstances. On the retail side in the UK we have pretty much had 20 years of product-related scandals and now, across the globe, the wholesale markets have proved themselves catastrophically inept too.
May be this morning's cautious opening on the European markets is a the start of the realisation that the world has changed forever and that the immediate future will not be very rosy for those who plunged us all into this crisis.

The financial chaos around the world is obviously going to dominate the first few weeks of the new Parliamentary session. I noticed a few commentators wondering why Parliament wasn’t recalled early – maybe yesterday’s response to the Chancellor’s statement provides sufficient answer.
The markets are so very jittery – nervous wrecks might be a more apt description – that any word out of place by the wrong person and calamity follows almost immediately in its wake. In the case of Alistair Darling’s statement yesterday it seemed to be more about which words didn’t find a place in his statement, rather than any that did. The markets wanted to hear that the government had found a magic wand, one wave of which would solve all their problems. In practical terms they were probably looking for a huge injection of capital with as few strings as possible attached. They really were in fairyland.
It looks ever more likely that there will be a further offer of public funds to shore up British banks but it will have tough conditions attached to it. These may come in the form of high dividend expectations, profit shares that guarantee and eventual benefit to the public purse and tough restrictions on the levels of pay for executives and traders. It is simply impossible to imagine anything less getting through Parliament. After all, the political centre of gravity of our Parliament is several paces to the left of that of the US Congress and they extracted a heavy price for backing the $700bn bail out package
Another parallel with the US that we can expect to experience here is a severe grilling of anyone with any taint of guilt when it comes to causing the crisis by any Parliamentary committee that can get its hands on them. Yesterday’s grilling by House of Representatives oversight committee of ex-Lehman boss Richard Fuld gives a very appetising taste of what is to come on both sides of the Atlantic: it certainly won’t be for the squeamish.
I relish the prospect of John McFall’s Treasury Select Committee sinking its teeth deep into assorted regulators, bankers and traders during the autumn; it will be real political blood sport. Given the recent record of that committee, it should also be quite revealing and give us some idea whether any of them have a clue as to what they have unleashed, let alone ideas for controlling it.

The cataclysm sweeping across global financial markets is moving so fast that no-one can keep up. That includes readers of this blog.
I was chided last night for my comment of a few weeks ago that AIG was a dead man in chains. A few weeks ago that is what is honestly looked like. The nationalisation of AIG by the US government looked to be just a way of postponing the inevitable demise, of managing its departure from the scene. Who, it did not seem unreasonable to ask, would want to be insured by AIG? State owned insurers simply had no place in the financial firmament.
Now state owned financial institutions are almost commonplace. We have woken up this morning in the UK to the news that many of our banks are going to join Northern Rock and Bradford & Bingley on the list of banks wholly or partially owned by the taxpayer, a solution that seems not to have ended the panic on the markets – perhaps we should close the markets down for a few days and throw a bucket of cold water over the lot of them.
Anyway, where does that now leave AIG? I still think it is in chains - just look at the exchanges over its jolly for top salespeople in Congress yesterday if you think it can just carrying on as before. But it is alive and will be kept alive simply because the alternatives are unthinkable.

There was a useful bit of scene setting yesterday by John McFall, the combative chairman of the Treasury Select Committee as it prepares for its first foray into the violent storms gripping the financial markets.
Showing a perceptive awareness of his reputation, he said financial stability should be everyone’s number one priority, adding: “We could all have fun and games but it might only add to instability”. This dampening down of the expectation that the select committee’s sessions this autumn could be akin to a political fireworks display will be welcome news to the senior figures from the housing and mortgage markets invited to appear before Mr McFall and his fellow interrogators on Tuesday.
If those giving evidence on behalf of the markets play it right on Tuesday they should be able to illicit more sympathy than hostility by shifting the blame to the wholesale markets and regulators for creating the conditions that led the chronic overheating of the housing market. I retain a healthy degree of scepticism, however, about the ability of the Treasury Select Committee to refrain from going for the jugular when it gets senior bankers and regulators in front of it later in the month.

When the dust finally settles on the wreckage of the financial system once the current storms have subsided one area the spotlight of scrutiny and blame will fall on will be the ratings agencies.
Listening to several well informed MPs and peers talking last night it is clear that they are getting a little tetchy at hearing the very tired refrain "But the ratings agencies said they were AAA". They are entitled to feel this way.
How many times have we heard people hide behind the ratings agencies when financial institutions hit the rocks? And how many times have the ratings agencies failed to do their jobs adequately? I struggle to recall the collapse of an insurer, bank or savings fund clearly predicted by the ratings agencies. Yet, people have continued to put their faith in them, a faith that for so many has now proved cruelly misplaced suspect many politicians.
Should they be regulated? Should they be expected to contribute to the compensation of people who have lost money investing in the Icelandic banks festooned with those once comforting 'A's? Should their role be taken over totally by a regulator? These are some of the questions that MPs of all parties are asking.
The agencies need to reassess urgently what their role is going to be in the future and how they are going to perform it better because these questions - and the grave doubts about the competence and adequacy of the current system that lie behind them - will not go away.

‘Bonus’ has become a dirty word, certainly when mentioned in the same breath as banks and in the earshot of some Labour MPs.
Last night Lloyds TSB met around 20 Parliamentarians over dinner (arranged many months previously) to share its views on the state of financial services sectors, especially mortgages, pensions and small business banking. Inevitably, the news that chief executive Eric Daniels had on Monday reassured staff that their bonuses would be paid came up.
Lloyds TSB explained patiently that this internal announcement had been aimed at call centre, branch and back office staff on relatively low salaries who have an element of performance related pay or who have reasonable expectation of receiving some very modest bonuses based on reaching certain targets, even though they do not strictly speaking have performance related pay deals. To me the shocking fact was not that these people were going to be paid bonuses of a few hundred pounds but that the basic salaries quoted for some of the people covered by the announcement were as low as £11,000, with £15,000 apparently being a fairly typical figure.
You might have expected the more left wing Labour MPs and Labour peers with strong trade union connections to have been shocked by the base level salaries Lloyds TSB pays – but not a peep on that front. They remained angry at the thought that anyone working for a bank in the current climate might qualify for a bonus. You could sense the resigned exasperation among the Lloyds TSB management at the dinner at the realisation that this was an argument that they simply couldn’t win despite the more understanding noises made by the Tories around the table.
This argument has to be put into the context of the very low esteem in which the banks are held at the moment. Recent opinion polls have suggested that the overwhelming majority of ordinary citizens on both sides of the Atlantic lay the blame for the recent financial turmoil and our present economic woes firmly at the door of the banks. They want them punished and hackles rise from Detriot to Durham at the suggestion that any bonuses should be paid. This crude, knee-jerk reaction is understandable. To carry it through to wanting to punish low paid bank staff as far removed as my paper boy from the decisions that nearly brought the entire global banking system to it knees defies reasonable commonsense. This is not the fat cats of Wall Street trying to maintain their luxury lifestyles by paying themselves huge discretionary bonuses, as revealed over the weekend.
I am all for showing those at the top of financial institutions that gambled their fortunes and our future well-being the way to the dole queues without a penny of compensation. They should have known what they were doing and shouldn’t be surprised if they have to carry the can for corporate incompetence on an unprecedented scale. Many of their staff will have to share the pain anyway as banks struggle to cut their cost base, without denying them a few hundred pounds extra in their wage packets at Christmas. That would just be spiteful.