Wednesday 11 February 2009

Re: A plan to separate buccaneers from the meticulous

Dear Sir,

This is a very good article on the cause & the actions of the present crisis explained in a very simple language.

But I would like to point out one step ahead of that. Why was the Glass & Steagall act repealed in US? Why were derivatives allowed to grow and trade without even basic trading desk? Why were hedge & private equity funds allowed to grow with no regulation?

The answer lies in one simple word - Bribery (for third world countries) = Lobbying (for Western world). Mr. Obama's first act as President was to rein in lobbyists. But again, it was not comprehensive enough. That is why, no matter what the govt. does now, in few years time all that will be forgotten and rules will be relaxed so that it can be business as usual. Infact, it took a good 50 years to repeal the Glass & Steagall act after it was created. The new Obama rules will take less than 10 to be repealed.

That is why Mr. Obama should act while he has public support and keeping the long-term prosperity in mind, he should set up comprehensive political reforms including COMPLETE BAN ON LOBBYING, GOVT. FUNDING FOR ELECTIONS ETC., Other countries can follow on similar lines.

Only then one can expect to have a society which rewards hard-work, creation & innovation and which punishes the speculators, looters and cheats. Only then one can expect to put the financial world in its rightful place of being the back-bone of an economy which helps in diverting finance efficiently to right people at the right time. Only then one can expect long-term equitable prosperity across the world.

This is where US under Mr. Obama has a chance to lead the world and show some leadership. Mr. Obama sold the concept of 'change' to get elected. Didn't he?

He had successfully talked-the-talk. Now he should demonstrate that he can walk-the-walk!!!

Regards,

Pradeep Kabra


A plan to separate buccaneers from the meticulous
in Financial Times, 11-Feb-2009
John Kay / www.johnkay.com

The Obama administration’s plan to limit the remuneration of employees of publicly supported financial institutions to $500,000 has the simplicity of genius. A limit on pay is an effective way to reinstate the Glass-Steagall Act’s separation of commercial and investment banking.

The proposal sets the cap at about the right level. Retail banking is administered by people who earn less, mostly much less, than that. But no professional would join an investment bank unless he or she expected to earn far more. So the present dispute over pay and bonuses is more than a focus for populist anger about the cost of taxpayer bail-outs. Fundamental questions about the future structure of the financial services industry lie behind the controversy.

Some believe that conflicts of interest in financial conglomerates were at the heart of both the financial follies of the past decade: the new economy bubble of 1998-2000 and the credit expansion of 2003-2007. For such people it is essential to revisit the issues raised by Senators Glass and Steagall in the Great Depression.

Others claim that a basically sound structure of wholesale finance was upset by rogue mortgage brokers in America’s inner cities and the public’s love affair with housing and credit cards. Those who hold this view think it is important to keep top executives and traders in their posts. Only by doing so can failed banks be restored to their healthy state and weaned from dependence on the public purse.

The latter view was expressed last week by Deutsche Bank’s Josef
Ackermann, who explained that it was necessary to pay the going rate for talent even as his bank reported substantial losses. But German shareholders, taxpayers and depositors might take the alternative position. They might want such talent to be kept well away from their savings.

The growth of financial conglomerates in the past two decades followed different paths. In the US, the route was the successive relaxation and final repeal in 1999 of the Glass-Steagall Act. In Britain, restrictions on the activities of banking institutions disappeared as a result of market liberalisation and the regulatory “Big Bang” of 1986. Continental Europe always had universal banks, but only recently did they become aggressive in wholesale markets and securities trading in imitation of Anglo-American models. Globalisation of capital markets led to the convergence of institutional arrangements around the world.

But the good senators of 1933 were right. Diversified financial conglomerates are a bad idea. They are bad for their shareholders, victims of the organisational tensions that follow. The culmination of Sandy Weill’s aspirations at Citibank was a behemoth that neither he, nor anyone else, was capable of running. They are a bad idea for those who work in them. Tension between the buccaneering culture appropriate to trading and investment banking and the meticulous processing and caution needed for retail banking is perpetual.

Diversified financial conglomerates are a bad idea for customers because they are riddled with conflicts of interest. Most of all, they are a bad idea for taxpayers. Banks used the retail deposit base, with its effective government guarantee, as collateral for speculative trading. They created internal hedge funds, with fabulous leverage relative to their own capital.

The failure of these businesses has proved costly to shareholders and to innocent employees who have discovered that the apparently rock solid institutions they joined must eliminate their jobs to survive. Bank failure has proved costly to customers caught up in the collapse, and above all to the public purse. The growth of financial conglomerates served only the ambitions of the greedy men who ran them and the financial interests of traders, who were allowed to play with sums of money that should never have come into their hands.

These are the issues which President Barack Obama and Tim Geithner, the US Treasury secretary, seem willing to face – and which Gordon Brown and Alistair Darling in the UK, by setting up an inquiry, are desperate to kick into the long grass.

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