Framing nationalisation

Via S&M I came across this. Interesting to see how framing has become part of policy (it always has been, of course, but Lakoff seems to have given it more emphasis).

Bits n bobs

The news on bonuses at RBS seems to be a reasonable development, although, much as I don't want to see bankers getting performance pay from the taxpayer, I can't help feeling this is a bit of a side-show. There's a danger that all the hot air about bonuses distracts from bigger questions about how the banks on taxpayer life support should be run. Interesting comment at the end of the Beeb piece though:

"These short-term cash bonuses have been so terribly destructive," said Ruth Lea at Arbuthnot Banking Group.
"If the taxpayer hadn't bailed out this bank in the early part of October, this bank would have been bust and these people would have been out of a job," she added.

Yep, that Ruth Lea - ex-IoD head of policy and TPA supporter - who only last year was saying that remuneration was an issue for companies and shareholders and the Government should keep out (although of course she could argue that she is being consistent as now the Government is the controlling shareholder). Is it a sign of the times that she is also bashing bonuses, or does the bonus issue simply serve as a useful lightning rod?

Meanwhile John Gray has a news bit about Unison capital stewardship activity.

On an unrelated point I recently read Black Mass by the other John Gray. I found it a bit disappointing actually, especially having enjoyed Straw Dogs so much. While I enjoyed the stuff about how utopian belief systems seek to fit a narrative to history (be it historical dialectics, the 'end of history', the second coming, whatever) it wasn't quite what I was expecting. There is some good stuff in there though and I'll try and post a couple of chunks.

Finally, I am (saddo that I am) really excited about the imminent arrival of this book which I ordered ages ago, and which Amazon have told me is in the post.

Nationalisation? No thanks!

We're being given the clear steer now that the Government really doesn't want to nationalise the banking sector. Paul Myners' piece in the FT (one of the sources for this interpretation) does say the Government would rather not nationlise, and both the Pink 'Un and Pesto infer that's what we are sposed to read into recent events, so I'm assuming that this is the party line.

A state-run banking sector...

It's hard not reach the conclusion that greater public ownership of the UK's banking sector is on the cards, and with it may come a change in emphasis in what banks do. If some of the stories around today are on the money we might not only see RBS taken wholly into public ownership (an outcome many people expect now), Lloyds/HBOS might need more money, Barclays may also need to come back for taxpayers' money (and surely this will mean someone on the board has to go), and Northern Rock might be used as a people's bank to get lending going again. Add to this the Government's planned insurance scheme to (as far as I understand it) effectively put a floor under the value of the banks' toxic assets if necessary.

Now, as other have pointed out, the banking system always ultimately has the state as a back-up. But in today's UK the state is heavily involved in many aspects of what banks would normally be expected to do. This ranges from mortage product design (the idea of allowing people payment holidays), to lending policy, to valuation of toxic assets, to deciding on key senior bank personnel. How much further would outright nationalisation (though with the likes of HSBC and Standard Chartered presumably staying independent) really push things?

People will argue that the state will lack the skills to run banks effectively but a) I don't think HMT is going to avoid drawing on experienced private sector people to make a political point and b) anyway, look at where we got to leaving private sector genius to itself - a system that has almost destroyed itself. So we are in the bizarre situation now where what would have been regarded as a far left fantasy (a socialised banking system) is looking not only a possibility, but also an outcome which many 'reasonable' people would consider a fair one.

As I've argued a bit before, this kind of shift has serious implications in other areas. I'm already busily arguing with various people that if we have this level of radicalism in economic policy, why pussyfoot around in financial reform. For example, in the bit of the world that I inhabit the idea that shareholders are the primary constituency to be considered in corporate governance has been dominant for a very long time. But given the many flaws in an approach based solely on this way of looking at things, surely the current environment will see this reappraised? This is one of those times where you try and drag the boundaries of debate as far as possible in your direction.

Another bank nationalisation

Anglo Irish this time, from the Beeb:

Anglo Irish Bank is nationalised

The Irish Government has said it is to nationalise the Anglo Irish Bank.
The state had planned on pumping 1.5bn euros (£1.4bn) into the bank, but decided that recapitalisation was not the way to secure its future.
Ministers had been due to hand over the money in return for 75% shares with an annual fixed dividend being paid to the government of 10%.
A lack of liquidity has made it increasingly difficult for the banks to lend money to their customers.
The Bank of Ireland and the Allied Irish Bank are still set to get help.

The state's fund manager

There's an interesting piece in the Telegraph today about UK Financial Investments, the company set up by the Treasury to manage its shareholdings in the banks. There's a bi of speculation over the likely non-exec appointments, and it looks like the potential candidates are pretty much traditional City types, plus an HMT representative. They are also planning to flesh out the details of UKFI's role:

UKFI is expected within the next month to publish a framework document that will formally set out its responsibilities. The document will outline the regulatory distance that will need to be maintained between UKFI and Government departments including the Treasury to avoid any potential conflicts of interest.
Alistair Darling, the Chancellor, has pledged that the UKFI will manage the bank stakes on an "arm's-length" basis, although that claim has already invited scepticism from bank executives who have seen the Government turning the screw in an effort to force them to restart lending to homeowners and business customers. The framework document will define exactly what is meant by the "arm's length" description.
UKFI also plans to publish a manifesto aimed at defining its role to taxpayers, as well as details of its contract with the Treasury to outline its formal asset management mandate.

Government as shareowner

Here's a great line from a journo mate of mine writing in Financial News (you'll need a sub to read the whole thing) that hammers home the point about the failure of shareholders as owners -

"The Government achieved the ousting of RBS chief executive Sir Fred Goodwin, who took advantage of lax market conditions to purchase Dutch bank ABN Amro at the top of the market. Despite his mistake, shareholders had failed to achieve Goodwin’s ousting, despite consistently grumbling about the deal. You cannot get a better example of a Government forcing a solution on a market that cannot achieve results on its own."

And here's a bit of commentary from the TUC in the same territory -

In RBS at least, the Government is now the majority owner, and in other banks it will be by far the biggest shareholder. It now has major responsibilities as an owner that cannot be passed to an arms-length body. The lack of proper control by the owners of banks - shareholders and investment funds - has been a key cause of the crisis.

The banks today have received as much cash as the annual defence budget. Tax payers will want to see big changes in return. It is not enough to limit cash boardroom bonuses for a year and accept a few ritual resignations. There cannot be big pay-offs for those who go, as was the case with Northern Rock. There needs to be a wholesale review of bonuses and pay throughout the upper levels of these banks, not just a year long ban on boardroom cash bonuses.

Reverse Clause 4 moment?

So, we own the banks then, at least in part, and in the in the case of RBS we're the majority shareholder. The Government is, understandably, to some extent downplaying the significance of part-nationalisation of the banking sector. But let's not lose sight of the enormous failure of private sector management that this represents.

Already the Government has used its ownership to bring up some changes in behaviour. No cash bonuses this year, a shift to share-based bonuses in future (I'm not sure this is the right answer actually, but anyway...), and Pesto says that the banks also have to maintain 2007 levels of lending to individuals and small businesses (nice idea, but how does that work?). State direction of what the banks can and can't do may yet go further.

In political terms it's way too early to tell what the impact of these events will be. Certainly opinion within the Labour party is, rightly or wrongly, turning Left. And - so far - the crisis has brought the party back into line behind Brown and even reinvigorated some disillusioned supporters. (As a side point personally I think the whole crisis has also exposed George Osborne as a real lightweight and I'd like to see us direct a lot more fire in his direction.)

More broadly the obvious failure in the City is going to bring lots of ideas that had been off limits back into play. It may be that all that occurs as a result of all this is a minor tweak, and then the reconstruction of the financial system pretty much as it was. But there is a temporary opportunity to push for something a bit different (if you have any ideas as to what this 'a bit different system' is). If you don't ask you don't get.

PS. Here is the HMT statement. Here's what the Govt gets to do -

As part of its investment, the Government has agreed with the banks supported by the recapitalisation scheme a range of commitments covering:

maintaining, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels;

support for schemes to help people struggling with mortgage payments to stay in their homes, and to support the expansion of financial capability initiatives;

remuneration of senior executives - both for 2008 (when the Government expects no cash bonuses to be paid to board members) and for remuneration policy going forward (where incentive schemes will be reviewed and linked to long-term value creation, taking account of risk; and restricting the potential for "rewards for failure");

the right for the Government to agree with boards the appointment of new independent non-executive directors; and

dividend policy.

FSA on pay

The FSA has released an initial statement on pay which you can download here (PDF).

Why bank nationalisation isn't radical

Because Simon Heffer says it is. I suspect Heffer's Law is at play again.

Exec pay - who needs shareholders?

Just confirmation that the FSA is going to issue a code in respect of bankers pay. Rather obviously this does not reflect well on the role of shareholders in policing executive pay in the financial sector. I don't think a single bank has even come close to losing the vote on its remuneration report over the past 5 years that mandatory pay votes have been in place. Yet now there is widespread agreement that pay was a driving factor in the mess the banks created.

Do shareholders (even the large institutional shareholders) take the wrong approach to pay, for example failing to assess the potential risk? Are they simply not that interested in pay as long as the share price is going up? If so do how do we get them to do the job properly? Have we completely messed up the way we remunerate those running businesses because we don't understand human nature? Perhaps big incentives trump intrinsic motivation to do the right thing. Maybe behavioural economics can help us get this stuff right in the future.

Whatever the case, shareholder oversight of pay in the financial sector has clearly not worked effectively and for now the job is being taken over by the regulator. But if that's right for banks, why not other public companies?

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.

Union reactions to the bailout...

TUC:

Responding to the rescue plan for UK banks, announcement today (Wednesday) by Chancellor Alistair Darling, TUC General Secretary Brendan Barber said:

'We welcome this bold package, but it is vital that the vast sums of taxpayers' money are used to change bank behaviour, not just bail them out. Fat cats must be put on a strict diet. They must start to lend to business again, and they must cut the cost of borrowing.

'Most importantly, the Government must make sure the banks can never gamble with peoples' livelihoods again. A very different banking system must emerge at the end of this.

'But more must now be done. The Chancellor must suspend the 'Golden Rule' on borrowing tonight to head off spending cuts, and must start to plug the gap by taxing those who have made millions from the asset bubble.

'And tomorrow the Bank must follow the Australian lead with deep cuts in interest rates of at least one per cent.'

Unite:

Derek Simpson, Unite joint general secretary, said: "Unite welcomes the decisive action today by the government to inject capital into the markets. The union is demanding that this financial support is tied to clear commitments to secure vital jobs in the financial services' sector. This government finance must serve to make the industry more transparent and accountable.

"It is not acceptable for the government to socialise the risks taken and continue to capitalise the rewards in the finance industry. The measures announced today must be extended to include undertakings by the banks of no job losses, no repossessions of homes, and no rewards for irresponsible risk taking or failure.

"It is imperative that the financial measures announced today marks the turning point in the world of banking and finance. Workers in the financial services industry are not the culprits of the credit crunch and we are not prepared to allow them to become the victims. The taxpayer must now get a firm assurance that the financial lifeline extended to these large organisations will be used to protect jobs and the public."

GMB:

Paul Kenny GMB General Secretary, who has been vocal since 2005 in criticising role of financial sector in the real economy, responded to the decision last night by the UK government to bail out UK banks. He said “The Government were right to bail out the UK banks as "there is no alternative" to taxpayer funding to keep the financial sector afloat. The old saying now applies with a vengeance” he who pays the piper calls the tune”. GMB members who are paying the piper want too see swift action to ensure that the bankers responsible for the crisis are held accountable and dealt with.

GMB members will want to see bankers’ heads roll. In particular Bob Diamond of Barclays should be sacked for his role in organising the £4.9billion loan to private equity in summer 2007 for elite, including Tim Parker, to walk away with £300m from AA sale. This was the last big deal done before the sub prime crisis hit. He is not the only one who should be sacked.

GMB members are not be prepared to see bankers get bonuses in 2008 paid for by taxpayers when public sector workers were denied an inflation level pay rise that across the entire public sector would have cost a mere additional £1.5 billion.

“Business as usual” is over for the City elite that organised this disaster. They will have to get used to living on normal incomes and paying their taxes now that the taxpayer is propping them up and calling the tune as result.”

Thinking big!

Robert Peston has come up with a radical suggestion for sorting out the banks - let's take a big stake in them via Personal Accounts -

My suggestion is that the Government could lend, say, £50bn to the PADA, and it could then use that cash to buy cheap stakes in banks, to help them recapitalise, and also - perhaps - to pick up other distressed assets.

He argues that it's better to do this than let the super-wealthy hoover up the bargains there might be out there.

Fascinating idea, but I thought idea was that the fund options available in the PA scheme should be run by external managers? Not sure how this would fit in. In addition it would no doubt be attacked by the Right as creeping nationalisation. Still, at least someone is thinking big.