Is it possible that Barclays Bank wants the UK government to break up the banking system? Based on the bank's decision to appoint Bob Diamond as its new CEO, you have to wonder. According to Robert Peston on the BBC website, the immediate reaction of "a senior member of the Government" (does Pesto talk to any other kind??) was "bank taken over by casino".
Diamond is a career investment banker. He is currently head of the bank's Barclays Capital unit, which has grown exponentially in terms of assets and profitability since Diamond picked up the ruins of Lehman Brothers' fixed income business in the depths of the financial crisis. Based on how much Diamond earns -- his new job will involve a pay cut to £11.5 mil' per year! -- Barclays obviously think he's good at what he does.
Which is what, exactly? The heady growth of investment banking in the two decades or so before the 2007/8 crash was fed partly by loopy deregulation, especially in the US and the UK, but even more by the ultra-lax monetary policies pursued by the major central banks in that period. Low interest rates triggered investor demand for new ways of boosting returns, a demand that investment bankers, armed with the massive computing power of the PC, were happy to meet n increasingly abstruse ways. Low rates also led to the underpricing of risk, something that was further encouraged by the evident willingness of central banks to cut rates whenever trouble loomed -- the so-called "Greenspan put".
And what exactly did all of this financial innovation do for us? It's not necessary to be quite as sceptical as Paul Volcker ("the only beneficial financial innovation has been the ATM") to think that the answer is "not very much". In the UK, for example, the growth in securitisation allowed banks to increase mortgage availability, massively boosting house prices. Yet this did very little to finance the construction of new homes; rather, it provided existing homeowners with a new means of financing consumption. Or, to put it another way, it resulted in a transfer of wealth from the young to the baby boom generation, a development which is almost entirely negative from a societal viewpoint.
Diamond's appointment suggests that Barclays, at least, thinks that the key lesson of the financial crisis was not the fact that Lehman was allowed to fail, but the fact that almost every other major financial institution was bailed out by the taxpayer. Barclays can, of course, point out that it was one of the few banks in the UK (HSBC was another) not to receive a direct capital injection from the government. But it has benefited enormously from the cheap, indeed almost free funding provided under the auspices of the Bank of England since the crisis. With spreads between funding costs and lending rates at record levels, it's not surprising that well-run Barclays has seen a surge in profits in recent quarters. Then again, former basket cases like RBS have also posted a dizzying turnaround, so you might be entitled to wonder whether all the credit (and the big bonuses) should really accrue to Diamond and his management buddies.
The quid pro quo for taxpayer support was always supposed to be that the banks would (a) rebuild their balance sheets and (b) step up their lending activities in support of the economic recovery. Balance sheets are in much better shape, but lending remains subdued. The banks argue that loan demand remains weak, which may be true. Still, you can't help thinking that Diamond's elevation is a signal of how Barclays intends to deploy its rebuilt balance sheet. It doesn't look as if iit will be doing anything to reward the taxpayers who have been subsidising it for the past two years.
Hey, Vince Cable! Still want to separate "casino" banking from utility banking? Barclays just made the case for you.
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