“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness.” So begins Dickens’ Tale of Two Cities. I want to focus on the tale of one City and, perhaps more appropriately, the tall tales of that City.
Let us be clear - there has been a wholesale failure of the financial sector at all levels. Mortgages worth 500% of someone’s salary dealt out on our High Streets almost regardless of circumstance; bankers trading in colossal monies in their glass towers, yet clouding those deals with such complex instruments as to make them devoid of transparency; a Financial Services Authority unable to oversee the reckless actions in those markets; and a Government so chummy with the City that it placed too much power in their clammy hands, but has latterly washed its own of responsibility.
No-one escapes this debacle with an ounce of credibility, except the small business community which will pay the price!
As the Champagne overflowed for the select few at the top who celebrated their inflated bonuses it was the best of times. But that success was rooted in unfallow ground on flimsy foundations of financial gimmickry, which included the dubious activities of betting on options, short-selling and packaging derivatives. Perhaps bankers and traders believed too much in the hubris of a Prime Minister who proudly boasted the end to ‘bust.’
The International Monetary Fund now projects our economy to shrink by 2.8% next year, revised from their initial 1.3% forecast. Gordon Brown has glossed over the last six IMF warnings, but surely he cannot ignore this one. If accurate, Britain will endure the worst downturn of any advanced economy and the worst year for the economy since 1948. This week, and for the first time, the Prime Minister has admitted we are in a ‘deep’ recession. But he has been dragged, kicking and screaming, out of his deep denial. And you can’t correct the mistakes unless you first admit them.
So, who is at fault for the mess? Well, at the top of the tree, alongside the former Chancellor, sit the bankers whose recklessness created the initial situation. And there is a long list in this ‘fourth circle of hell.’
Sir Fred Goodwin, former chief executive of Royal Bank of Scotland, who pursued an overly ambitious expansion of the bank, took on debts he could not afford, issued loans without adequate security and ended up overseeing the biggest loss in British corporate history. Adam Applegarth, the former chief executive of Northern Rock, increased lending between the end of 2003 and the summer of 2007 from £42 billion to £113 billion. Andy Hornby and Steven Crawshaw, chief executives of HBOS and Bradford and Bingley respectively, presided over similar unsustainable and irresponsible expansions, much of it based on self-assessment and the buy-to-let market.
Were they, as individuals, punished for these colossal mistakes? No. Goodwin received £4m annually and a pension pot worth £500,000 a year. Applegarth received a £760,000 pay-off and pension pot of £2.5m. Last week The Sunday Times reported the new contract of Eric Daniels, Chief Executive of Lloyds Banking Group. Despite the bank being 43% owned by the taxpayer Daniels is entitled to a bonus each year worth up to 225% of his annual £1.03m salary. He can also get free shares worth up to three times his salary each year.
So have these institutions, which acted so recklessly, paid the price of going bust, as any small business would if they went to the wall? No. The banks have used the initial government support to shore up their own positions, especially in the face of further big losses on earlier lending. Northern Rock, despite being nationalised, has seen itself reward staff throughout their organisation with bonuses of 10%, an average of £2,000 each.
Then we have the bank regulators. Both Mervyn King, the Governor of the Bank of England, and Sir Callum McCarthy, the Chairman of the FSA, have categorically failed in their supervisory roles. Although neither caused the crisis both could have taken action more decisively and sooner to prevent an escalation of the problems. Sir Callum is particularly at fault here. The FSA failed to spot the unsupportable expansion of Northern Rock, just one of a number of major errors. It makes you wonder just what they thought their job was.
Then we have the non-executive directors, who slotted into the ‘jobs for the boys’, reaping sizeable reward but not even knowing what questions they should ask. Surely the whole of the derivative business must have demanded enormous interrogation from the outset, and surely the massive increase in ‘lending to asset ratios’ might equally have rung alarm bells in their mind but they clearly didn’t have the power or the ability to stop the madness. What were they paid for?
And where were the accountants? Many reaped massive commissions which increased year after year but they failed to spot the obvious shortcomings. I am told they didn’t even know what to look for. What an indictment!
Finally, we have the Government. Of course we all know this is a global crisis that started in the US trailer parks rather than the lush pastures of the Cotswolds but that does not release a Government from its own responsibilities with regard to an over excess of personal debt, to too much public sector spending which didn’t produce the results and to a failure to proper monitor its own regulatory structures. They thereafter dithered, delayed taking firm action and when eventually they did they broadcast proposal after proposal in the hope that one or two of them might shore up declining public confidence. And at the centre sits one massively culpable man, the Prime Minister.
Chancellor for over a decade, Gordon Brown claimed to have abolished bust. Latterly he seems psychologically unable to even accept the error of that statement. As in Dicken’s description of the French aristocracy, it seems “the leprosy of unreality disfigured every human creature in (his) attendance”. Why else would he have splurged so much money on public sector services? Why else would he have decimated private pensions? Why else would he not have set aside money for more difficult economic times?
The very fact the Bank of England had less influence on the situation than it previously had was because as Chancellor he decreased the Bank’s regulatory capacity. And yet, despite presiding over all of these decisions, he still refuses to accept any responsibility for the current situation. Gordon Brown tells us it is dangerous to talk down the pound. I tell him it is more dangerous to deny the truth.
Government action, when it eventually came, failed, not least because due diligence was not undertaken and the Government had no idea of the level of toxic debt it was expected to counter. The very fact that we had a second bailout is proof of that failure.
And this latest package certainly didn’t get off to the most auspicious start, launched as it was on the same day that RBS disclosed their monumental losses to the stock market, which completely overshadowed the rescue package, whilst sending shares in other banks plunging downwards and reducing Sterling to its lowest level against the dollar for 23 years. What a PR coup!
The Government is totally complicit in the lending of money in the great personal borrowing boom in order to sustain its own growth figures, and therein lies the truth.
Of course we are bemused as to how to deal with this situation and some caution is forgivable. What is inexcusable is that the rescue packages have not been visibly monitored by the Government to ensure the help given to banks is passed on by the consumer and more crucially to businesses in need.
As individuals each one of us shoulders a massive share of government debt, reputed to total £26,000 per person. But of course that does not take into account our commitment to public pension liability, our responsibility for PFI repayments and of course the cost of the bailout itself.
But for the business sector the problems are worse. Many business entrepreneurs face the loss of all they have created in their business and many additionally run the risk of losing their own homes through no fault of their own. This is a financial crisis created by financiers.
Small and medium enterprises are particularly vulnerable because they typically lack cash reserves and do not have the resources of their larger cousins. As the economic situation worsens they face a minefield of increased costs, late payments, falling revenues, bad debt and an inability to get working capital. And all this on top of £66 billion of extra regulation placed on them by this government in the last eleven years, including 14 new regulations every working day and a doubling of the size of the tax code they are forced to deal with. In other words the bankers continue to draw their bonuses whilst the SME sector, the small private investor and the home owner pay the price. I am told it was ever thus but I find that unacceptable.
The SME sector accounts for 99.9 per cent of all enterprises, 59.2 per cent of private sector employment and 51.5 per cent of private sector turnover. In fact, in 2007 SMEs employed 13.5 million people and turned over £1,440 billion. Their value to the economy is plain to see but they are the ones suffering. The sector that was creating all the jobs and producing 70% of the nation’s creativity is paying the price again.
So what should we do? Firstly this Government has got to honestly recognise its own involvement in the creation of the situation, for no one will have confidence until it does, and the restoration of confidence is a vital requirement to the restoration of the country’s wellbeing.
Secondly they have got to get money flowing again and especially to the SME sector. Many companies tell me that they have listened constantly to the fine words of the Prime Minister and his Chancellor but tell me those words are not translated into action at the sharp end, and credit is simply not flowing, despite the Government’s assurances. All my enquiries suggest they are not even monitoring the effectiveness of their schemes.
In the longer term we need to review our regulatory structures, restore power to the Bank of England and separate the ‘bookie shop’ element of financial options and trading from the personal banking services which are so vital to Britain’s business sector.
The financial sector itself should review the concept of non-executive directors and ensure that their role is redefined, especially with regard to scrutiny, and if that means training then so be it.
Finally we have to review the role of accountants and ensure that they are technically equipped to do the job they are paid to do.
Britain faces a long, hard road back to financial and commercial wellbeing and many well established small businesses will fall by the wayside, as will many homeowners and small investors. Parliament has the responsibility to learn the lessons and act upon them, to ensure that they don’t pay the price again.
Dickens wrote so effectively against the unacceptable by-products of the industrial revolution which caused such hardship to many of the less well off in urban, Victorian Britain. If he were alive today he might be writing equally effectively about a greedy financial sector which overpaid itself, thought itself too clever by half and now stands by while the Government bails it out. What a wealth of characterisation he might have drawn from that scenario.