Wednesday, 8 October 2008

Bank nationalisation

I'll be honest, I've thought in the cases of B&B and Northern Rock that the use of the term 'nationalisation' overstretched the point. But with the latest extension of part public ownership to the UK's biggest banks I think we are much closer to the real deal. In addition I think this has the potential to have significant ramifications in terms attitudes towards forms of ownership more generally.

First consider this sentence in the Treasury statement on the bail-out:

In reaching agreement on capital investment the Government will need to take into account dividend policies and executive compensation practices and will require a full commitment to support lending to small businesses and home buyers.

This potentially gives the Government significant influence over governance and strategy issues at the banks. And this is only what is made explicit. Why wouldn't the Government consider whether it could use its ownership stake as a way to knock on the head some of the more annoying consumer rip-offs of recent years? Paul Mason thinks the Government may indeed be thinking this way. Is his Trot past leading to some wishful thinking or is that on the cards? Surely it's worth the Left pushing this agenda in any case.

More broadly I am leaning towards the view that this bailout will pose some questions for the public company model as a whole. Check out these lines in the Beeb's blog on the debate in Parliament -

1215: Mr Cameron raises the question of big bank bonuses and "rewards for failure". Mr Brown says he wants to reward responsible risk taking and end irresponsible risk taking. The FSA will shortly publish proposals on regulating bonuses, he says.

1220: More on executive bonuses. David Cameron says there should no bonuses this year for executives at banks who have taken the most risks. Gordon Brown says financial regulators will take bonus policy into account when setting new guidelines for how much capital banks need.

The FSA is going to have a significant role then in remuneration policy. So what does this say about the role of existing shareholders, both in the past and in the future? Looking back the implication is that they failed to play the ownership role effectively, looking forward it appears that they get to vote on FSA-approved structures.

Let's remember what Kitty Ussher said about this just a few months back -

"We will resist the calls that have been made for direct regulation of executive pay," Ms Ussher will say in her speech. "Of course, remuneration packages should be strongly linked to effective performance, and incentives should be aligned with the long-term interests of the business and shareholders, and we don't support rewards for failure."

But she adds: "I'm clear that executive pay is a matter for boards and shareholders, not for governments and regulators."

That is all out of the window now, with all the politicos wanting pay amongst banks to be regulated. But if shareholders don't/can't/won't be allowed to be responsible for policing for pay in the banks, what about other listed companies? Does anyone seriously believe that the track record of shareholders in respect of executive pay is uniquely bad in the financial sector? Another can of worms has just been opened up.

And inevitably, someone has asked the obvious question. If we can bail out the banks, why not other bits of the economy? I'm not suggesting that this would be a good thing, just pointing out that such arguments have been strengthened by today's news.

Ultimately my innate scepticism leads me to the view that actually there won't be a significant change in direction. But I'm less sure of that than I was.


Nick Drew said...

delighted to see the curbs on comp will be via the Capital Adequacy calculation, as advocated in your little interview ...

wot I want to know is, what % will be demanded on the Prefs ? (and why no warrants ??) Look at RBS prefs yesterday - trading @ 31.4% yield ! If it's all to be done on 'commercial' terms ...

Tom P said...

Hi Nick

yes I spotted that your suggestion was in there - maybe you should work for the FSA!

Nick Drew said...

I'd have some other pertinent suggestions to make