Regulatory Failure: Temporary or Permanent?


What shall we make of the recently announced profit surges by US international banks Goldman Sachs, Morgan Stanley, JP Morgan Chase, Bank of America? JP Morgan Chase announced a 23% increase in its remuneration pool, according to the Wall Street Journal average salary there is projected to be 134.000 $ in 2009, a little less than at Goldman Sachs (whose bonus pool could reach 22 bill $) with 743.000$, but more than at Citigroup with only 71.000 $. Some European banks are announcing similar new records, while others are struggling.

Bank shares are on their way up, the Dow Jones Index has once again broken 10.000. Many banks are raising capital to get out of government schemes – which in some cases also means restrictions on bonus payments. Of course, we remember that the recent G-20 meeting in Pittsburgh has grandly announced that in the future bonus payments would have to rely on medium-term success and be “commensurate”, so we can be sure that the Banks’ end-of-year financial statements will all fall into this category.

Now: does all this mean that the crisis is over? Somehow, the jubilations of bankers do not jive with the dismal news we hear about unemployment rising, poverty increasing, government budgets exploding, export figures tumbling. We also hear from the “real sector”, which the banks are supposed to be serving, that they cannot get credit, or if, that the interest rates are very high. We also hear from Continental European banks that they are fully engaged with restructuring their balance sheets, de-leveraging and restructuring loan terms of their clients who cannot pay.

Where do these renewed profits of the large American and English banks come from? Obviously not from commercial lending – because this is lower than in previous years. Rather they come from trading activities, from bond issues, from organizing the snapping up of rock-bottom firms, from renewed speculation (viz. the recent surge in sugar prices), from arranging securitizations, etc.

The unbundling of universal banks has not happened, even tough it had been seen as a major cause of the crisis. Separating – à la Glass-Steagall Act – commercial from trading activities, prohibiting all off-shore banking activities, i.e. branching out into non-regulated activities, and tackling the “too-big-to-fail” syndrome which made banks so large and opaque that nobody saw through them – all these have remained moot promises in the aftermath of the crisis.

The honourable Financial Stability Board is diligently working out new rules, but in the meantime the banks have gone back to their previous ways: the economies are stagnating, the banks are flourishing. It is high time that we saw a causal connection between these two phenomena. The exorbitant high growth rates of the financial sectors during the last years before the crisis can only be explained as exploitation of the real economy. The exorbitant bonuses and salaries and pensions of financial managers are the result of 25% plus- mantras from the CEOs of the large banks. The re-emergence of obscene bonus pools amounting to half of banks’ revenues reveal an astounding callousness of bank managers and their supervisors about the recent rescue mechanisms.

It is very clear that gratitude is not a business category. To expect bankers to be grateful to overstretched taxpayers for saving their banks, would be naïve. But what do we have supervisors for? Are they not supposed to protect consumers, clients, taxpayers? What role do ministers of finance who raised these large sums of money to bail out banks – an important activity to prevent meltdown – play in the relations between taxpayers and saved banks?

It seems that a singular window of opportunity is closing, or has already closed. At the height of the crisis, there might have been the momentum to radically change size and behaviour of the financial sector. When banks were teetering on the brink of bankruptcy, when they came to the governments and central banks for rescue, decisive steps should have been taken to relegate them to their essential economic functions, i.e. transform savings into investments. These moments were filled with G-20 and G-7 and individual governments’ statements and proposals – instead of with decisive actions. From Washington to London to Pittsburgh we heard commitments and announcements and “yes, we can’s” – instead of “this is what we do”.

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Filed under Crisis Response, Financial Market Regulation

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