Confessions of a banker

12th September 2012

In one of those accidental/on purpose/accidentally on purpose juxtapositions, the Financial Times places a story about Barclays' plan "to cut back tax unit in ethics push" on page one next to a photo of Kweku Adoboli, the former UBS trader who faces charges at Southwark crown court of two counts of fraud and two of false accounting, causing the bank to lose $2.25bn. He denies the charges.

Barclays, now under new chief executive Antony Jenkins who has a retail banking background, told an investor conference that it intends on axing much of its tax structuring unit which at one time was a prime driver of investment banking profits.  But it also led to adverse publicity – in March 2009, the bank succeeded in obtaining an injunction against The Guardian after it attempted to publish documents obtained from a whistle-blower showing how Barclays had created a number of seemingly artificial arrangements in tax havens involving billions of pounds. The documents were almost immediately republished by WikiLeaks. Earlier this year, it was told by the Treasury to hand over £500m in unpaid tax.

Rich Ricci, who now heads Barclays Capital, the investment banking arm, told the Barclays Global Financial Services Conference, that "we have have to take a fresh look to see if there are products and services ….we no longer deem it appropriate to do business, irrespective of financial return."  He continued: "For example, elements of our tax advisory business have generated negative media and political attention." He promised a "likely withdrawal" from selling derivatives to consumers.

Serious mistakes

Jenkins, his boss, vowed "activities will be screened for reputational impact" as well as profitability. Conceding Barclays had made "serious mistakes" he added: "Our ability to build a franchise over time depends on our reputation."

It could be, that during a torrid six months where no major banking institution has been free from scandal and fines, banks are finally waking up and, as they would have put it a decade or so ago, smelling the regulatory coffee.  Using an equally vintage business expression, could it be that investors have kicked the tyres and found they needed pumping up with ethics?

It is hard to imagine an industry so far down on its knees would want to descend further. Or is it?

The speeches from the Barclays bosses come with caveats. There are words like "likely" and "as well as" while "cut back" is far from the trust-building that would come from "shut down".

Pay packets ten times thicker

The American Scholar website carries a long commentary by William J. Quirk, a professor of law at the University of South Carolina and a former contributing editor of The New Republic.

He points out that US bank CEO average salary package increased tenfold to $26m from 1989 to 2007.

Stating that "four years after the 2008 financial crisis, banks are behaving more recklessly than ever," he points to the massive disconnect between what Planet Bank and Planet Earth.  "The ordinary citizen might believe that this is grotesque overcompensation, but the financial sector found the pay perfectly reasonable."

These compensation deals led us to the brink of complete financial collapse. The financial crisis of 2008 now looks more and more like a defining moment, a crisis of capitalism. Globally, it has produced, in addition to a crippling recession, an unending debt crisis. Our own escalating, unpayable debt makes the future of U.S. power increasingly uncertain. Government borrowing and spending policies have failed to stimulate growth in the economy."

Business as usual

But, in a red flag warning for investors, he states that four years later, for the bankers, it is still business as usual. He cites, Bailout, written by Neil Barofsky, the former special inspector general in charge of oversight of TARP (the $700 billion Troubled Asset Relief Program), who said a major cost of the bailout is the perpetuation of the existing financial system: Paulson and his successor, Timothy Geithner, "hadn't just saved the banks, they'd also preserved a status quo that was dangerously broken, and in so doing they might have actually increased the danger lurking in our financial architecture."

Comparing the banks to the fixing of the World Series in The Great Gatsby, he says: The British bank Barclays routinely altered its submitted rates to push the LIBOR high or low to benefit bets it had made on interest rate derivatives. That is, it was fixing the result of its outstanding bets. One Barclays executive was recorded as saying, "We're clean but we're dirty-clean, rather than clean-clean."

And of course it was not just Barclays. Most of the others were at it as well.

Democrats and Republicans stay silent

Now with the US presidential election eight weeks away, "neither party proposes that the too-big-to-fail banks be broken up or that some competition replace the oligopoly. Neither party proposes a reasonable plan to get rid of the national debt. The current system gives bankers incentives to take excessive risks, since profits are private and losses are socialized. Any reform has to start with changing those perverse incentives.

Quirk quotes Bank of England executive Donald Kohn who testified on July 17 to the UK Parliament:

"The banks on both sides of the Atlantic need to rebuild public confidence that their pursuit of profits is consistent with and conforms to the public good-that they are allocating capital, using savings safely, not exploiting a particular advantage or exploiting to take advantage of others and that they are doing so in an honest and upright way-as has been raised in the LIBOR thing. There is a long way to go."

He concludes: "Gamblers should gamble with their own money and keep their losses as well as their profits. We have," as Lord Turner says, "some very wide cultural issues that need to be strongly addressed." The banking leaders who broke the rules should be prosecuted. A return to Glass-Steagall would help. Otherwise, as Jamie Dimon tells us, we should expect a crisis every five to seven years. We are about due."

Following the faith

In the original "Apologia Pro Vita Sua", written in 1864, John Henry, Cardinal Newman defends his religious opinions against attacks. Earlier this month, Emanuel Derman, the director of the financial engineering programme at Columbia University, New York, published his own Apologia. It's a lot shorter than Newman's work and rather than re-affirm his faith against doubters and gainsayers, Derman attempts to justify his life in financial modelling.

onfessing that "the great financial crisis that began  in 2007 has been an embarrassment for anyone who works in finance and is still capable of having scruples," he adds "for two decades now, the United States has seen the ballooning of the financial sector; that sector's capture of the regulatory system; ceaseless stimulus whenever the economy has wavered; taxpayer-funded bailouts of large corporations; crony capitalism; private profits and socialised losses; the poor  and weak as redeemers of the rich and powerful; companies that shorted stock for a living  being legally protected from the shorting of  their own stock; compromised rating agencies;  and government policies that tried to cure  insolvency by branding it as illiquidity.

He adds: "Models of all kinds, ethical and quantitative too, have been behaving very badly. In  the face of the travesties described above, how can one justify, to others and oneself, having  worked and continuing to work in the financial sector?"

This could be seen as, similar to so many confessions including banks caught in malfeasance, pleading guilty in return for a 30 per cent cut in their FSA fines, wisdom after the event.

The one sinner that repenteth

But as it says in the book of Luke, "say unto you, that likewise joy shall be in heaven over one sinner that repenteth, more than over ninety and nine just persons, which need no repentance." 

Still, even if this Apologia has no other value, it could be worth reading it for Derman's "Financial Modeller's Hippocratic Oath."

~ I will remember that I didn't make the world, and it doesn't satisfy my equations.

Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.

I will never sacrifice reality for elegance without explaining why I have done so.

Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.

I understand that my work may have enormous effects on society and the economy, many of them beyond  my comprehension.

This is not as elegant as the real Hippocratic Oath. But in the absence of a re-write, it will more than serve to remind the banking world that it exists to enrich society, not that society exists to enrich bankers. It could bring back the ethics now visibly still absent.


More on Mindful Money:

The Ordinary Madness of Markets: Inside the minds of traders (video)

Is Finance immoral? – Mindful Money’s response to The Guardian

What goes on in the minds of bankers?

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