A senior banker for 40 years, Gordon Sharpe says the well-respected traditional model of finance which put the customer first has vanished and even the financial crisis has not brought it back. He explains how all we need to focus on changing is the ‘GRAB’ mindset.
I held a range of director roles in a 40-year career at a major clearing bank to 2004, when bankers were afforded much greater respect than is the case today.
On retiring, I took up a part-time role at a renowned university where my research into the causes of financial crises made it clear that the “buy now, pay later” consumer society that emerged in the 1990s, was leading us into the Perfect Storm.
The banks had mixed a lethal cocktail of rapidly rising debt fuelled by easy access to low-cost credit designed to enhance immediate living standards. This model pushed global asset values to unprecedented highs and attracted more and more short-term investors seeking quick returns on free funds. Momentum was gathering for the most severe debt crisis in economic history.
By 2006, I had bored several ex-colleagues to death with warnings to dispose of their assets whilst prices were driven by an over-supply of investors, to hold their sales proceeds in fast realizable liquid funds and await fresh opportunities to buy low in the depression to follow the crash.
I was, of course, afforded lunatic status by everyone as bankers continued to focus on what I called the GRAB factor (Greed Reaping Astronomic Bonuses).
Greed and fear are the emotions driving financial markets and more than seven years have now elapsed since the fear factor came into play when BNP Paribas declined to allow withdrawals from its investment funds on hearing of the collapse of complex US sub-prime derivative instruments. The failure of Lehmann Brothers would trigger the crash which has destroyed many centuries-old financial institutions in Wall Street, London and beyond.
The experience of the past seven years has proved financially disastrous for many, with the banking sector carrying most of the blame. In my view, this was predictable, but no financial regulator could dare to intervene to stop the bandwagon rolling when huge taxation income was being reaped from banks and their highly paid employees on their highest ever profits.
Added to this, senior lending teams were fired up by a lucrative bonus culture aimed at achieving aggressive sales targets. They spurned trustworthy old banking traditions which had hitherto prescribed strict debt to capital restrictions based upon actual shareholders’ funds, retained reserves and customer deposits held. Instead they took advantage of a huge over-supply of short-term funding made instantly available on the international money markets to gear up well beyond their ability to repay at short notice.
Banks make promises
Without exception, lending institutions suffered massive debt write-offs and they shook up their boards with new management teams embarking on extensive cost-cutting programmes. In the face of public and investor outrage, they promised to change their ways, introduce more ethical working practices and eradicate high-risk investment banking under the vigilance of the re-vamped regulatory authorities.
Not surprisingly, two former Goldman Sachs investment bankers have taken the helm to try to ensure the banks clean up their act urgently. The two men are Mark Carney, now Governor of The Bank of England and Bill Dudley, now President of The Federal Reserve Bank in New York. But they are finding that they cannot quickly change cultures which promote sales drives to achieve excessive bonuses. Although attempts to restrict limits through legislation have been made, the GRAB factor remains. It seems the customer no longer comes first, and has not done for many years.
‘As an ex-banker of the traditional era, I share the feeling of angst at the proven involvement of the major banks in almost every form of malpractice exposed by the new regulatory authorities,’ Gordon Sharpe
In the US, complex Ponzi schemes, financial derivatives and securitisation of mortgage debts have led to unscrupulous misselling and financial ruin for many investors and householders, whilst in the UK, there has been an array of widely publicized misselling rip-offs. For example, endowment and pension misselling, non-compliance with anti-money laundering regulations, addition of non-beneficial Payment Protection Insurance (PPI) and widespread rigging of London Inter-Bank Offered Rates (Libor).
All of these scandals have resulted in the major banks being publicly fined and having to provide billions of pounds to meet customer compensation claims. Lloyds Banking Group, which is still 25% owned by the UK Government, has provided £10 billion to cover PPI claims, whilst Barclays Bank continues to battle against allegations of impropriety in its US trading operations. Meanwhile, US regulators have imposed their own massive fines on various UK-based banks. Many of these offences have taken place since the start of the recession, despite Government restrictions being enacted through new legislation. Tightening of capital ratios under subsequently agreed Basel Accord International Banking Standards have had little effect. Neither have measures aimed at introducing much more banking competition into the industry. New banks have been formed, but their growth is likely to be a lengthy process.
Meanwhile, the banks’ customer bases and the general public are increasingly angry at the apparent lack of remorse and the ongoing bonus-driven cultures, in some cases partly funded by Government bail-outs. There appears to be little appetite within the banks to enforce much-needed reforms to clean up their acts, despite the well-vented wrath of shareholders, governments and regulators. Instead, they have publicly opposed many of the suggestions of Government commissions.
As an ex-banker of the traditional era, I share this feeling of angst at their proven involvement in almost every form of malpractice exposed by the new regulatory authorities. It seems that long-established goals of achieving the highest possible standards of efficiency in customer service have effectively disappeared only to be replaced by short-term individual GRAB which pervades the industry.
‘No financial regulator could dare to intervene to stop the bandwagon rolling when huge taxation income was being reaped from banks on their highest ever profits,’ Gordon Sharpe
The key issue today is for financial strategists to agree the best way forward to create an honest, open trading environment for all. This must entail a full review across all financial services providers with the aim of developing a uniform code of ethical standards worldwide, rigidly adhered to and actively policed by all domestic regulatory authorities.
Now is a crucial time for Wall Street and The City of London, the world’s leading financial centres. By now, all surviving international banks have gone through restructuring programmes and re-capitalized their businesses in preparation for the next round of capital allocations to be imposed under new Basel Accord requirements. Their share values have recovered to some extent and are beginning to rise in more favourable economic conditions.
But misselling scandals continue to emerge and the GRAB culture remains. Who could say that a fresh debt-driven economic crisis will not occur again in the future? After all, many preventative measures were taken after The Crash of 1929 to eliminate margin trading in investments, but we still allowed it to happen.
We owe it to future generations to ensure that a strict code of uniform ethical standards is agreed, with severe individual and corporate penalties to be immediately imposed publicly for any breech. There should be no hiding place or delay.
It is in the best interests of all to have full restoration in public confidence and trust in our international banks. This will never happen in the short term unless the deepest roots of healthy recovery are identified and nurtured whilst meticulously careful weeding eliminates all obstacles to healthy long-term growth.
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PHOTO CREDIT: David Kujas from flickr