The fragility of the belief in laissez faire economics can be seen by the readiness of almost all of the supposedly big bad free marketeers to rush for the support of the State when things go wrong. As the Government almost invariably steps in when it is a bank going bust, being a banker is a one way bet: the bank makes money you get the vast remuneration: the bank fails the taxpayer steps in and you do not suffer any punishment such as summary dismissal, the removal of limited liability if you are a director or criminal proceedings, but are dismissed with a massive pay-off at worst and continue to be employed on the same outrageous remuneration terms as you were before the taxpayer had to bail out the banks.
There is existing law which could be applied to culpable bank directors but never is. Section 174 of the 2006 Companies Act details the duties of the directors as follows :
(1) A director of a company must exercise reasonable care, skill and
(2) This means the care, skill and diligence that would be exercised by a
reasonably diligent person with—
(a) the general knowledge, skill and experience that may reasonably be
expected of a person carrying out the functions carried out by the director
in relation to the company, and
(b) the general knowledge, skill and experience that the director has.
How can the directors of RBS, HBOS, Lloyds TSB and Northern Rock be said to have met these requirements? Lloyds TSB have even admitted that inadequate due diligence was done before the takeover of HBOS.
There is also the question of general competence. The alarming truth is that the executive directors of banks almost certainly did not understand the complex financial packages being devised by their investment arms which led to the crisis. On 10 February 2009 the recently removed executive directors of the RBS and the HBOS appeared before the Commons Treasury Select Committee: Sir Fred Goodwin (ex-RBS chief executive) and Sir Tom McKillop (ex-RBS Chairman),e Andy Hornby (ex-HBOS chief executive) and Lord Steveson of Conandsham (ex-HBOS Chairman).
During their examination by the committee, each of the four directors on show was asked to detail their formal banking qualifications. All four had to admit that they had none. I am generally an enemy of credentialitis, but in this case technical qualifications are necessary to ensure that the directors understand the very complex financial instruments being used and the exotic accounting practices employed by large corporations. If failure to understand such things does not amount to gross negligence what does?
The Companies Act allows shareholders, subject to the agreement of a court, to sue directors for negligence, default, breach of duty or breach of trust. No attempt has been made to removed their limited liability to allow this to happen. Nor, as far as I can discover, has any attempt has been made to get bank directors banned from holding directorships in the future. Why have the institutional shareholders not started such legal action to remove limited liability from directors so they can be sued? Why has no politician raised the possibility of banning ex-bank directors from being directors in the future? The only plausible reason is the tacit class interest encompassing politicians, bankers and large institutional investors, the last being the only non-governmental people generally with the financial muscle to fund actions to remove the limited liability of directors. There is a simple legal way to stop them enjoying the fruits of their ill-gotten gains: remove their limited liability and ban them from holding directorships for life.
As for criminal charges, I wonder if something could not be done under the laws relating to fraud. There must come a point where recklessness behaviour becomes fraud because the director knows they are taking chances which will most probably not come off. For the future we need a law of reckless endangerment which would make any director who endangered a bank or allied institution through their criminally reckless behaviour to be punished by the criminal law.
The culpable bankers should be punished both from common decency and to deter others in the future. Those who are saying “we must move on” are arguing a nonsense. Let’s try that argument with a few other scenarios: X murdered Y but there is no point in recriminations: we must move forward; X stole £50 million from his employer but that was in the past: we must move on. Doesn’t really work does it? The argument politicians and bankers both employ promiscuously that to concentrate on bankers’ pay is to distract from the real issue of what is to be done about the economy is simply special pleading: reforming bankers’ pay is part of dealing with the economic mess because if they have the same incentives to misbehave in the future and no penalty is paid by those who have misbehaved in the past there will be no reason not to misbehave once more. .
Far from being punished, bankers who have left the banks they have helped ruin have received gigantic pay-offs to reward them for their incompetence. The case best known to the public is that of Sir Fred Goodwin of RBS who originally was to receive an immediately payable pension of more than £700,000 per annum,(since reduced to a more modest £400,000 odd ) but he does not stand alone. To take a couple of other examples, according to the Telegraph (27 Feb 2009) “Eric Daniels, the chief executive of Lloyds Bank, which has accepted tens of billions of pounds from the Government, could receive almost £10 million in pay, perks and bonuses this year”, while Adam Applegarth, the chief executive of Northern Rock when it failed, a bank so badly damaged that it is now wholly owned by the British taxpayer, reportedly trousered £760.000 (Northern Rock boss to get £760,000 payoff Telegraph Tony Undercastle 31/03/2008).
Nor is it only bankers who have been so lucky. viz: “Clive Briault, the official in charge of supervising Northern Rock when it collapsed, received a payoff of almost £530,000 after parting ways with the Financial Services Authority, it emerged yesterday. The payoff took Mr Briault’s total remuneration for the year to almost £884,000. FSA chief executive Hectors Sants collected cash, bonuses and other benefits totalling £662,000, compared with the £652,577 received by his predecessor John Tiner, despite the FSA’s own critical report into regulatory failings that culminated in the Northern Rock fiasco. “ (£530,000 farewell for FSA official who watched over Northern Rock Peter Taylor Telegraph 01/07/2008).
As for politicians. not a single person responsible for the mess has taken any responsibility. The person most at fault is of course Gordon Brown, who in more then ten years as chancellor debauched the British economy through massively expanded public spending and his role as cheerleader-in-chief for the excesses of the financial sector.
Since the development of this economic crisis the Government has been advocating what they represent as a Keynsian solution. The problem is that they are only giving us half of Keynes,. There are two parts to his theory: the prudence of government in reducing public debt in good economic times and the use of public money to boost aggregate consumption in bad economic times. In fact, even that does not do Keynes justice, because he advocated public spending to boost demand only as a very last resort after time had shown that the self-righting corrective of the market had failed. Gordon Brown as Chancellor neglected the prudent part of Keynes with the consequence that we arrived at the credit crunch is unprepared to carry out the second part of Keynes.
As for the independent economic “experts” who supported laissez faire , have they suffered from their failure to predict what was happening? Not a bit of it. They still occupy their posts in the media, think tanks, private consultancies and academia, drawing their pay and pontificating as if their misjudgement and misunderstanding of economics had never happened.
There is no excuse for the failure to predict the financial collapse. It was of course impossible to predict the detail of the crash but it really wasn’t that difficult to see what was coming in general terms. Some of us, myself included, picked the disaster before it happened, in my case in July 2007 before even Northern Rock had collapsed. My decision to make such a prediction came when the housing bubble which was driving the economic boom became so extreme that first time buyers on average earnings could not afford to buy a property in most parts of Britain, despite mortgages of five and six times earnings and up to 125% of the value of the property being on offer. As first time buyers support the entire housing market, that could only have one result: a severe fall in house prices which in turn would topple the boom into bust. It was not, as they say, rocket science.
The cost of the current banking failure
The extent of the obligations which the taxpayer has taken on is impossible to calculate with any precision for two reasons. First, it is not known how much of the money pushed into British banks (RBS, HBOS, Northern Rock, Bradford and Bingley) will be recouped when and if they are sold. Second, the extent to which the loans guaranteed by the taxpayer (both for the banks which are now part owned by the taxpayer and those which are still technically impendent like HBSC and Barclays) are subject to default is not known. That the “experts” are groping in the dark can be seen from the fact that the Governor of the Bank of England has refused to even estimate how much money will have to be put into the banks. (Mervyn King: ‘Impossible to say’ how much capital needed to shore up banking system By James Kirkup, Telegraph 26 Feb 2009)
There is also the possibility that if the Lloyds Group is successfully sued by institutional shareholders on the grounds that they were misled by the management before the takeover of HBOS by Lloyds TSB or because of Lloyds TSB e failure to do due diligence before completing the deal, then the taxpayer might have to foot at further colossal bill, especially if the company is still part-state owned when a suit is successful.
The partly state owned banks are in theory to be sold reasonably quickly, probably within the next five years, but that assumes they will be in a state which will attract buyers and the world economy will have recovered enough in that time to create circumstances in which plausible buyers will come forward. There is a further fly in the ointment. The EU competition commissioner has already insisted that subsidiary parts of RBS and Lloyds are sold off, with the added proviso that they must not be sold to buyers who would then have too large a market share in Britain. If that ruling is extended to the sale of the main bank assets it would create very grave difficulties because no British bank would be able to make such a purchase and the number of foreign banks able to do so would be very limited. That could result in the banks being broken up clumsily just for the sake of reducing size rather than for good commercial reasons or sold for a song.
In addition to the problem of finding buyers, there is a very real possibility that nothing like the full extent of sub-prime debt has been admitted to by the banks, whatever their ownership status, and only a fool would bank on both Britain and the world’s economy recovering fully within five years. The fact that RBS had to be bailed out again with mind-boggling sums so soon after the first gigantic cash injection is strong indicator of the massive hidden bad debt still lurking within banks.
The hard figures for taxpayer’s cash being spent to prop up the banks are mind boggling. To date RBS has received £45.5 billion – with another £8 billion earmarked if it is needed. Of that approximately £27 billion has already disappeared through the toxic debt trapdoor (as at November 2009). . Through a series of complicated loans and repayments, Lloyds Banking Group has received £14.7 billion net. Northern Rock received £27 billion in September 2007, although this has been reduced as the less toxic mortgages have been redeemed (Daily Telegraph High Risk gambling in record bank bailout 4 11 2009).
As for estimates of future obligations, even the government anticipate a long term cost to the taxpayer of the bailout to be £20-50 billion, but it could rise to over £1 trillion if all the government insurance and other guarantees are called in – the amount underwritten in the governments Asset Protection Scheme currently stands at £282 billion (ibib). In July 2009 the IMF estimated the cost of British taxpayer support for the banks to that date as £1,227 billion (IMF puts UK banking bail-outs at £1,227bn Telegraph 31 Jul 2009 Edmund Conway).
Then there is the national debt. The Office for National Statistics (ONS) projects a national debt of £792 billion by the end of the 2009/10 financial year with another possible £1.5 trillion being added before the crisis is over. (Independent 5 11 2009 1.5 trillion could be added to national debt). This would leave Britain with a national debt of £2.3 trillion, substantially more than current GDP which is around £1.5 trillion. Before Northern Rock was nationalised, the National Debt was officially less than £600 billion. ( It should also be borne in mind that the National Debt is substantially larger than the current official figure because Brown’s Enron-style accounting has kept the true cost of PPP and PFI off the books, most of the ongoing debt not being included in the National Debt.)
In addition to the direct costs of this banking fiasco, there are the vast sums of money, loss of expertise and human misery caused by a severe recession to be set against the politicians and bankers’ account. There is now, as there has always been, a signal failure amongst the laissez faire believers to acknowledge the true economic costs of their religion in terms of lost wages, lost tax, higher benefit payments and increased anti-social behaviour when people are put out of work. A prime example of such behaviour was that of Margaret Thatcher when she exulted in the destruction of Britain’s heavy engineering and extractive industries without seemingly having any concern about the structural unemployment she was causing or its human and economic costs. .
There obviously have to be limits to public service employment, but it is clearly better, for both moral and economic reasons, having people employed in useful – and I stress the useful – public service than unemployed, provided their wages can be met without radically destabilising the economy. At least that provides people with purposeful lives and the public with something for their taxes. Moreover where enterprises such as coal mining and the railways and the energy utilities are in public hands strategically important economic capacity is being maintained. Nor is it simply a case of defending public service provision for important private industries can be defended through protectionist measures. This mixture of public and private protection of employment opportunities could be further bolstered by a refusal to permit further mass immigration.