Let's Play Hunt The Scapegoat

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Some of the more reviled professions are populated by people who entered them for the noblest of motives: many new law students imagined  themselves defending hopeless but worthy cases in court or using arcane points of law to fend unfriendly corporate attention away from weak  communities; journalists joined their first newspapers ready for the big scoop that would bring down the politician who himself had set out on his chosen career path with a mission to improve the world; even some baby estate agents must have thought that they could spend at least part of their lives bringing joy to new homeowners.


The fact that they almost all eventually turn out variously as reptiles, lizards, scum and thieves is an unfortunate result of the corrupting effects of money.

However, even I can’t think of any noble purpose in becoming a banker. As far as I can see they just seem to be motivated by greed right from the start.

 


But even bankers deserve fair play.

 

This week has seen two of the most high-profile bankers in the UK mugged by a political “class” desperate to find scapegoats for their own failures and inadequacies. Stephen Hester has been harassed and pressured into giving up a contractual right and Sir Fred Goodwin will soon once again be known to his (estranged) wife as Fred Goodwin. (Does that also mean that Lady Goodwin is once again just a Mrs.?)

Both of these unlucky bankers are linked by a single institution: The Royal Bank of Scotland. Fred flew it into the ground, Stephen was handed the task of making it fly again.

Fred (“Fred the Shred”) was the wünderkind of British banking. Admired, feared and respected in almost equal proportion, he doesn’t seem to have ever been much liked. He rose through the ranks, first at Touche Ross (where he cleaned up another major bank crash, that of BCCI), then Clydesdale Bank and finally RBS. He obviously has an extremely astute financial brain but, surprisingly, no banking qualifications.

RBS grew very quickly after Fred’s arrival, briefly becoming the world’s largest company. Fred’s ambition seemingly knew no bounds, and it was the purchase of parts of the Dutch bank ABN Amro that really brought him to the attention of the general public in 2007. The reason for the (probably gratefully received) attention was the amount of money involved – the total value of the buy-out was £71Bn. A lot of money, but that was OK because as we all knew, the financial industry was the powerhouse of the British economy and the major taxpayer in the country and it had to speculate to accumulate.

And for Fred’s shrewd business sense and the value and prestige it had brought to the banking industry, a grateful nation bestowed upon Mr Fred Goodwin the honour of a knighthood, elevating him to Sir Fred. Fêted by his business peers and by our very grandest politicians, the man was at the top of his industry and was set to take over the world. Or so it seemed.

Unfortunately what RBS accumulated with ABN, as it had done with NatWest a few years before, was an exposure to the mad American market in CDOs, those impenetrable derivative financial instruments that few understood and even less could value well. When the sky fell on the world’s banking system in 2008 RBS was particularly badly positioned to ride out the storm. Short of cash after buying ABN it found itself liable for the cash losses incurred by the sliced and diced sub-prime mortgages that constituted large proportions of the CDOs.

It can be argued that RBS did not perform a sufficiently good due diligence on buying ABN and that if the true value of the CDOs had been known the deal would not have been countenanced. Two things count against that argument. Firstly, CDOs were designed to be opaque: it was known that the encumbered debts were of variable quality because that was how CDOs worked. Even worse, the original CDOs had then been further processed by the witchcraft of financial engineering until no-one had any idea what constituted the real value of any of these “derivative products”. However, as long as someone was prepared to buy them, who cared? The due diligence would likely have taken the current market value of all derivatives rather than their intrinsic worth and everyone would have been happy.

And secondly - who could lose? At that time anything financial could find a ready buyer. Prices kept going up, just as fast as the growing mountain of commercial and personal debt.

Well RBS did buy ABN Amro, Fred was a hero in the banking world and the Queen tapped him on the shoulder. And then the world imploded and RBS couldn’t cover its cash losses. Not the first bank in the world, or even the UK to encounter problems then, but definitely the biggest in these parts.

Having mismanaged the Northern Rock and Bradford & Bingley crises, the politicians must have thought that yet another high profile bank failure would not be a good advert for a country that had little other revenue-earning industry left, so that paragon of fiscal prudence, Dr Gordon Brown, did what any good socialist would when faced with a private enterprise in difficulty – he threw enormous amounts of our money at it so it wouldn’t go bust. You know the rest.

The upshot was that Fred got found out. His business wasn’t as good as it had seemed and was built on a sea of debt, much like the rest of British society. As long as the prices for his worthless derivatives kept going up Fred was going to be OK but as soon as someone called for value the house of cards fell down. Eventually this gross mismanagement led to his removal as CEO of RBS. His argument to preserve his contractual pension rights played out in public and he eventually lost some of his annual payment in return for an early withdrawal of £2.7M. He’s not going to starve.

Our beloved leaders then implored one Stephen Hester to step into Fred’s shoes and try to salvage RBS, now largely owned by the British taxpayer via UKFI and upon which Gordon and Alistair Darling had lavished upwards of about £40Bn of our money. Hester was employed by the RBS board – a contract that included a performance-related element to his "compensation" package.

Stephen did what Fred would have done – he slashed jobs and squeezed value out of the business as hard as he could. The result is that RBS is now operating almost adequately, although still a long way from being able to repay the taxpayer by buying back its own shares.

So, having worked hard and at least not made the situation any worse, Hester must have expected his contract to be honoured and the bonus paid. But the newspapers realised that a banker was about to be paid a £1M bonus and promptly went off on one.

Lacking anything of real substance to worry themselves, our beloved politicians joined in and tried to outdo each other in indignation. Especially unedifying has been the behaviour of Ed Miliband, whose synthetic outrage at a situation brought about by the ill-considered actions of a government of which he was a member has been little short of sickening. Almost as bad has been the chorus of government ministers telling us that they wanted to see “no reward for failure”, as if a parliamentary salary was itself no such thing.

Hester’s bonus was confirmed at £963,000, although this seems to have been in shares or share options to be exercised at some point in the future. If the government strategy/hope was successful and the RBS share price rose, this could have easily turned out to be worth several million pounds. In the event, the concerted screeching of the third and fourth estates have worn Mr Hester down and he has declined his bonus.

The consequential self-congratulatory praise of our opinion-makers is sickening.

What this tells us is that contracts with government agencies must be considered as good as worthless. You can forget your rights, if the government changes its mind you’ll be hounded until you give in. That offends me - the government is my representative in these matters, and I don’t want my word to be considered as worthless.

And it’s not as if it was about the money – it’s a fraction of the pile of cash we shovel towards the EU each day, or will spend on the Trident missiles that won’t be used in any case because there won’t be anywhere to keep the submarines in a few years. It’s all about keeping the chattering classes happy.

And just so that Fred wouldn’t feel left out, a couple of weeks ago a request was made by “Downing Street” that he would be stripped of his knighthood. Now this is really quite special treatment, accorded to only a chosen few. Fred Goodwin now finds himself in the company of Anthony Blunt (spy), Roger Casement (shot for treason) and Nicolae Ceaucescu (megalomaniacal murdering dictator). Having done nothing illegal or even particularly out of the ordinary for his industry, Fred Goodwin now finds himself reduced to the level of thee and me just to boost David Cameron’s chances in a willy-waving contest.

I don’t know either of these gentlemen, and I don’t think I would like either of them personally. But I do know that I really don’t like spiteful behaviour from people who really should know better. And I don’t want people that think this is proper behaviour running my country.

Roll on the referendum!!

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