First posted on the original Lobby Group blog by contributor OldNick666-
As a result of childhood psychological problems I have a heightened sensitivity to dishonesty. Although with age I seem to be dealing with this thus enabling me to live in this world more comfortably.
Maybe to live in the post depression world we need some more honesty. Reading Peston’s blog about bonuses it emerges that a 10% bonus seems to be regarded as part of salary for many bank staff. On looking a little further it becomes apparent that the reason behind this is not any form of reward for performance but a device to artificially suppress final salary with the intention to reduce pension payout. To my mind this is dishonesty. Others may say it is it is a legitimate fiddle. Why can the bank not be honest and say that the pension is based on 91% of final salary?
My answer to this is that a culture of dishonesty has crept into the culture of banking. Maybe it was only a pretence that bankers used to be honest. I do believe that in days gone by there was indeed a culture of probity and honesty and any dishonesty was firmly dealt with.
Much of the present woes can, in my opinion, be put down to dishonesty by government. If one looks in detail at the way the inflation figures are calculated one finds many fiddles to artificially understate the true situation. This led to interest rates being set too low thus creating the credit bubble based on artificially low interest rates.
These artificially low rates also led indirectly to demand for higher returns on capital which could only be achieved by dishonestly masking the real risk in highly synthesised products.
Bring back HONESTY.
Contact your local elected officials - for free
by Spin Doctor
07 Feb 2009 at 04:36
A culture of dishonesty has crept into banking? Was it ever honest?
One of the main problems with interest rates has been that they were pretty low. Based on the BofE policy of inflation targeting they have been kept at levels which as you say contributed to the credit boom and then bust.
First point – Why was inflation so low? Couple of answers in my opinion –
1) China – Producing and exporting cheap goods. This kept prices low on a lot of products around the world. The goods were also cheap because of China keeping the currency undervalued. This should have been addressed about 4 years ago.
2). Inflation not measured correctly – The basket of goods includes staples etc. While this may give some sense of what the cost of living is like for the average person, it seems a sham that one of the biggest contributors to the basket of expenditure of the average person is housing is not taken into account. The fact that Asset price inflation is not taken into account and targeted is one of the contributors to keeping rates low even when the BofE should probably have been trying to take the steam out of the housing bubble instead of fuelling it.
by OldNick666
07 Feb 2009 at 05:01
Maybe banking was never honest.
Fractional reserve banking does not seem particularly honest. Can we do without it? Must we do without it? It all seems a bit dodgy if we want to rely on money as a means of exchange.
by Spin Doctor
07 Feb 2009 at 06:03
FRB – not entirely honest no. Major holes in this system and I have major doubts about it. However I can’t say that there is a cleare alternative either Again I think this would make a great discussion topic once the forum is up and running.
by kooltidings
07 Feb 2009 at 07:17
Honesty, may be we could also use Ethical, it looks like all are scared of commiting to anythings and sticking with their decision, it is everyone for themselves and screws the rest we can see who the approach to Africa is, take Zimbabwe for example I could have told the United Nations the result of the elections back in March, same for the proposed setup for power sharing. He keeps 100% gives nothing to the rest.
I am sometime very dismayed when I was the news on any type of topics. Very often I ending think, either they are so naive it is beyond laughable or I am too cynical, (and I have some scope for improvement here)
by kooltidings
07 Feb 2009 at 07:20
I watch the news of course have not been the news yet (although I took part in a programme a few years ago)
Sadly more often than I would want I ending asking myself ‘do they think that the ordinary person is stupid or what?’
by Jericoa
07 Feb 2009 at 17:24
I think there is far more temptation for dishonesty in banking because they work with the very thing we use to exchange goods and services as Nick666 says. It has been and always will be a primed powder keg ready to go off if the guardian falls asleep.
People who are drawn by the prospect of ‘something for nothing’ or disproportionate reward compared to useful skill are drawn to the banks, particularly if they think they will get away with it. They have to be kept in check by regulation. The failure has been one of regulation on a massive scale and the development of a ‘something for nothing’ culture that has become acceptable.
On an immediate practical level there has to be a response of ‘over- regulation’ to correct the im-balance in the short term. To me I think the point of nationalisation has already passed for the banking industry. That can be un-done later but for now, given the scale of the deception the banks have to answer directly to the electorate is my view.
I just wish there was abit of honesty and courage out there to do the bold things that are necesarry.
I am looking forward to giving those g20 guys a hard time already.
by OldNick666
08 Feb 2009 at 00:45
Our greed in wanting free banking for retail customers may have helped the banks on their way to moneymaking scams to finance the simple storage and movement of money that we need for everyday life.
Surely Joe public need to be able to walk down the high street and choose between going into a bank, an insurance broker or a betting shop.
If the functions are separated they will be much easier to understand and regulate. Forget “Chinese Walls” in big companies. The temptations are too great.
Maybe we need to lobby for the banks to be split up into separate businesses. Given he present public antipathy to the present banks, now would be an ideal time for a government to take action and be seen to be doing something which I am sure would be popular.
Maybe we need to start a new topic to sort out our ideas on bank split up so that we can put forward a well reasoned argument. The devil will be in the detail.
by wharfgirl
08 Feb 2009 at 12:20
You are onto something with this emphasis on honesty. Yes banking contains the seeds of its own destruction. But our society cannot do without it. To serve us, it ust be a) sturctured carefully, b) policed rigorously and c) practised with the greatest possible integrity.
Retail banking has to be separated from investment banking, so that ordinary savers and mortgage payers are not caught up in the same institutions that invest in complicated high risk derivatives. If this had been the case, the investment banks could have been left to go bust – as Barings once was – without ruining ordinary savers and companies and bringing the country to its knees.
We probably need to reinvent the mutuals. They worked just fine till we let them get privatised.
As far as investment banking is concerned , let them do what they want and take the consequences. It’s mostly rich people playing silly gamlbing games. If it goes wrong, the world won’t end.
As for retail banking, first they need to rediscover their purpose. It is not to make profit from their customers but to SERVE their customers and care for their money. To this end there should be NO BONUSES AT ALL. Bank employees should not have their pay split between very low basics and discretionary add ons, which have to be earned mostly by flogging us accounts, insurances and other products we don’t want or need. The union representing counter staff etc should be campaigning for a basic living wage.
I’d rather this gtroup were lobbying for reinvention of the mutuals than for some kind of Peoples Bank run by the state. Do we really think a bunch of politicians and civil servants will do it right?
by rahere
08 Feb 2009 at 12:24
The model you should be following is the Indian microcredit system based on a mutual foundation. The problem still remains whether a broken community can ever trust anyone.
by Albion
08 Feb 2009 at 13:11
rahere – yes, that’s the biggest hurdle to overcome, and the cause behind the ‘credit crunch’, inside and outside of the banking ‘industry’ Bankers don’t trust each other, and now the population don’t trust them either… Mutual is the way forward.
Wharfgirl – Retail banking does need to be separated from investment banking. What the majority of people rely upon for their savings etc needs to be safe and boring. Absolutely the mutuals need to be re-invented – I can’t help but feel that building societies will be more popular once the dust settles. I certainly hope so, I don’t want my money anywhere near a bank run by Govt/civil servants.
FRB is another interesting point – I think it’s essential, but not at the ratios that have been seen just before everything went wrong. The slightest drop in asset values has a massive effect on the balance sheet. Returning to 100% reserve, or the gold standard is probably out of the equation, being realistic.
The key to sorting the banking problem is regulation. Not of the variety we’ve had (ie virtually non-existent), but a regulator that has teeth. Somehow the regulatory authority needs to be divorced from the banking industry, yet able to understand it enough to regulate effectively. That’s going to be something very tricky to achieve.
Bonuses, if at all, need to be linked to longer term performance, not front loaded. Perhaps have them linked to the performance of a pot of assets, with the bonus being 2 years or so behind?
by OldNick666
09 Feb 2009 at 01:23
Albion
I strongly disagree with you about bonuses. Bonuses are unnecessary for employees. They only discourage dishonesty.
Salaries are for employees.
Bonuses (dividends) are for shareholders.
As I have said elsewhere on this blog, bonuses are a flawed form of motivator. If employees are managed competently they are not necessary. Some would say that employees should hold shares in the company they work for. Whilst this may be considered a motivator it is very poor investment advice for the employee as they should be diversifying risk. Their job and shareholding are highly correlated risks.
by OldNick666
09 Feb 2009 at 01:57
Fractional Reserve Banking
I have not yet seen a good argument for FRB. The mutual building societies only lent money savers had put with them. Savers were told where their money was going and were told that they may not be able to take money out if too many people wanted money at once. Honest and straightforward. Savers were investors in property.
When you held a current bank account the bank became a common debtor and was obliged to pay you back on demand.
When you held a deposit account the bank paid interest and like the building society it lent the money out so there was no obligation to pay on demand.
We really need to consider what loans the bank should make.
At a company level there are two sources of funds. Issue of shares and borrowing. In my view it is legitimate to borrow to fund working capital but not to buy capital items. These should come from share capital. If these principles are not observed then we get into the problem of gearing where risks to shareholders are multiplied. Often the shareholder has his risk increased to unacceptable levels. This risk leads to potential instability. After the present debacle we should be looking towards a more stable system.
Whereas FRB is very good for bank profits in normal times I do not think we should expose society to the risks for the sake of the profits of a few. Many people are prepared to take the risk without fully appreciating the consequences. It is well known that human beings are generally very poor at assessing risk so it may be necessary for the mathematically aware to influence legislation to protect the majority from their ignorance. I think that there is a good case for eliminating FRB.
by OldNick666
09 Feb 2009 at 02:04
Regulators don’t work. We need strong laws that prevent over complexity and are easy to understand. We then only need police and courts to enforce these laws.
We will probably need to say goodbye to the city as we know it and move into other areas to make us prosper.
by asymetric
09 Feb 2009 at 02:16
With reference to Wharfgirl’s comment above, I did a consultancy job for one of the ‘big four’ in the 1990s and they insisted on calling everything a ‘product’. I kept on pointing out that their customers see them as ‘services’. Even in the mid 1990s they had already lost the relationship that the public thought they had with them.
by asymetric
09 Feb 2009 at 02:35
Another, minor, idea is to establish separate credit rating agencies for bonds. Such an agency would charge BEFORE issuing a rating regardless of the rating given. It would also not do anything else. Also, any bank issuing a bond MUST have a rating through this agency and no UK bank could purchase such a bond which did not have a rating through this agency.
On the subject of risk, has anyone read Benoit Mandelbrot & Nassim Taleb on this subject. Rightly they identify financial markets as non-linear systems and the risk profiling that's been used historically is, in effect, a total waste of time and effort – it's just 'ticking boxes'.
by Spin Doctor
09 Feb 2009 at 03:01
Albion – I think you are right about the current ratios in FRB being wrong rather than some inherent problem with the system itself. A lot of the arguements surrounding FRB are conspiracy theories about alternate world orders and secret governments.
rahere – of all the microcredit institutions in the world barely 5% are sustianable on their own. The majority get by on aid money. Also the experience of Indian microcredit is that some farmers who borrowed from them ended of commiting suicide for various reasons but one among them being interest rates being too high.
asymetric – the problem is not when the rating agency charges for the ratings they undertake. The problem is more that these organisations are private profit making enterprises. They should act purely as an arm of the regulator and a fee is payable by the issuer of the debt regardless of rating received. The situation at the moment is that a fundamental pillar or the system is unregulated.
I have read both of Taleb’s books and am aware of Mandelbrots theories. Taleb is right to an extent but he overstaes the point. First of all parts of the financial markets are non-linear in their risk profile – not all. The risk management methods used in financial markets have their weaknesses and people have been aware of these for years. So Taleb is not identifying anything new – he is merely shouting about it the loudest. I would be inclined to listen to him if he actually had any ideas about an alternate system, but he has not proposed any. The ‘box ticking exercise’ in the absence of anything else provides some level of appreciation of the risks trading operations run in banks, not perfect by any means but a step in the right direction. Taleb’s extereme risk by their very nature cannot be measured through any logical methodology.
by OldNick666
09 Feb 2009 at 07:01
wharfgirl
You said that the mutuals worked fine till privatised. They changed into banks in two stages. The first change was to allow them to raise money on the money markets. The second was the demutualisation into banks.
In my opinion the first change was fundamentally flawed as it allowed them to borrow short and lend long. Although I am unaware of the terms of their moneymarket borrowing I would guess that it was structured to give the markets preference over the savers. This would have increased the risk to savers without them being aware of it or if aware unable to quantify it for themselves. This form of borrowing allowed the managers to increase the size of the society financially and thus demand and get more pay. I think that this increase in risk to the unwitting savers was fundamentally dishonest.
We all know the consequences of the second change. Money from no-where and then poof it was all gone.
by Albion
09 Feb 2009 at 13:40
OldNick – I think we’re going to have to agree to disagree on bonuses. I believe they have their place, but need to be assigned to well defined targets and outcomes for the long term good of the business. Take a used car salesman, for example. Should he not be rewarded for selling 15 more cars in a month than his target? As long as the rules in which he can operate are laid down clearly, and the bonus is paid out of realised profits, I can’t see the problem. What is wrong is excessive bonuses that are expected no matter what, that are based on spurious profit figures based on notional asset values.
Regulators can work, they just need to be given the tools to do the job (the laws that you mention), and be independent enough to avoid cosy relationships. The police alone couldn’t do that – is your average officer clued up enough on to spot a transgression of the law and prosecute accordingly? I’d be surprised – you need someone who understands the subject to be regulated, be that banking or any other industry to spot these things before they become over complicated.
FRB cannot be eliminated – certainly in the short term. What we see today is a shortage of liquidity caused by the disappearance of ‘money’. Eliminating FRB is only going to exacerbate that, unless it is done over a long period of time, and co-ordinated with other methods of increasing the money supply.
The FRB system served us well for many years, until the ratios got so badly skewed. Wind them back a bit, and it becomes less of a problem.
asymetric – That is idea of significant importance, it just needs to be applied to all credit markets, not just the bond markets. I’m with Spin Doctor, in addition they need to be truly independent, if a regulator can be such.
Spin Doctor – You’re right, a lot of of the myths surrounding FRB are a lot of conspiracy theories. I used to think that maybe things like the New World Order and the like were possible. Since all this has been going on Governments around the world have shown incompetence on so many levels, I now believe it’s simply not possible – they’d never be able to organise it!
by OldNick666
09 Feb 2009 at 17:16
Albion
I am convinced that the last people who should be paid bonuses are salesmen. Their push for sales at all costs can do untold damage to a company. They make promises to customers that can be cripplingly expensive to fulfil. They do not have the companies interest at heart only their own bonus.
Have you read Hertzberg and Maslow? Google will provide some quick summaries. I would be glad to hear your reasons to disagree with these theories on motivation.
How can you set a realistic target for car sales? Sales will depend on the quality of the offering and the mood of customers. Incompetent selling should be dealt with by training or dismissal.
As it happens I have just bought a replacement car and have encountered quite a few incompetent salesmen/women. I have been taught to sell so I am able to make a fairly realistic assessment. Their bonuses would have been better spent on proper training.
I agree that FRB cannot be eliminated at a stroke but as a long term objective it may give a better world. Many good ideas fail because of the difficulty of the transition. Maybe they can only arise from complete failure and don’t think we have reached that yet.
by Albion
10 Feb 2009 at 11:30
Old Nick,
Like I say, I think we’re going to have to agree to disagree on the bonus issue. I understand where you’re coming from with the over zealous salesman promising what cannot be deilvered – I’ve seen it myself. I firmly believe the problem is not with the bonus system itself, but the way it is applied. Managers are not creative enough with their targets, nor do they consider all the potential outcomes. For the example you quote above, you tie the bonus to not only the headline figure, but the cost of fulfilling the sale.
Yes, I have read a little Maslow – incidentally with regard to the motivation of salesmen. If I remember that correctly, the biggest motivator was respect from their superior and an ability to make their own decisions (to a certain level) without having to make reference to anyone. Money was some way down the list.
I’m not saying bonuses are the single most important tool – they do have their place. However, if used, they have to be well thought out, which comes down to the management that sets the targets. Ineffective management is a whole different topic!
Incompetence at any level should be dealt by with training, and demotion/dismissal if the training doesn’t work.
by asymetric
10 Feb 2009 at 16:57
Spin doctor & Albion
Your responses re rating agencies agrees with the point I was making (or trying to make). Existing ratings agencies are arms of businesses with other relationships with the 'clients' who they are rating thus they are not going to refuse a good rating. Same principle applies to auditors.
Separation must occur and the fee charged then becomes independent of the firm seeking a rating – i.e. it is not part of the on-going financial arrangements between those companies.
Yes, it would also be a good idea for other assets as well as bonds but a singluar agency cannot be expected to cover all forms so I was considering the current significant situation. We also know house prices (particularly new builds) have also been manipulated via the entries in the Land Registry.
Regarding risk, we come back to a comment I made on another subject – asset value. With asset values based on supply/demand while the banks supply long term loans financed by short term borrowing – particularly in the mortgage market where house prices have risen ridiculously. Such a financing model 'backed' by a bubbling valuation of the assets did not go unnoticed but was dismissed because it didn't fit the model – hence they had created a linear model from a non-linear system.
This is not the first time such a situation has happened and, though it may not be possible to quantify the risk exactly reference to previous situations would have provided a very good approximation.
by OldNick666
12 Feb 2009 at 02:52
Albion
I think we are getting nearer to agreement on bonuses. Your acknowledgement that money is pretty low down the motivator list is not all of the story. Usually bonuses do not just represent money. They are presented as a large part of status which is much higher up the list.
I believe that this coupling is expensive to the company. If bonuses were kept confidential between the company and the recipient on pain of repayment on disclosure then they would be much less of a motivator.
I first encountered targets when a young manager looking at the effects of the now discredited Management by Objectives scheme. The creativity used to fiddle the figures was wonderful to behold. I would really look up to a manager who could set watertight targets. Unfortunately in this real world we are stuck with managers who are not exceptionally clever. Maybe this is part of the argument against bonuses.
by John Bray
12 Feb 2009 at 10:02
Nick,
Like yourself I was also once a manager of people. The guy who owned the company once asked me, “John, you were in the Army, how do they manage to motivate people so well?” To which I replied. “It’s quite simple they cheat. People sign up and the Army finds out is they are self-motivated. It finds out if they will put their own interests ahead of the team in times of difficulty. Otherwise it sends them back to be civilians.”
“But how can the Army tell if they are bluffing?”, he asked. Easy peasy: don’t let them sleep for at least 48 hours, get them wet and cold, don’t feed them and f**! them about solidly doing stupid things. Very few people can keep a bluff going under these circumstances. And after another 24 hours of it your soul is laid bare for all to see. You are who you are and cannot fool anyone. And of course these periods of “stress-testing” are only part of on ongoing process.
In my experience the average sales rep was a total dickhead. These morons simply bulshitted their way through an interview, got a job, took the piss, realised they could never make any bonus because they were useless and then moved on to some other poor company. I thought of them as turds – ie: just passing through. In the end I gave up on them and went to talk to customers myself.
by OldNick666
12 Feb 2009 at 14:57
Yes John. Most sales reps are just brash young man with a personality problem. They use bullshit in an attempt to cover their ignorance. Others are highly educated, and well trained. These command respect and are usually very effective. I expect these are expensive. As usual pay peanuts etc.
The army have centuries of experience. As I understand it they choose the vulnerable, take them apart, put them together again as they want them. They then parent them for the first time in their lives. Unfortunately we do not have the luxury of being able/allowed to brainwash employees. This makes motivation much more difficult particularly when they know they can walk out and live on the state.
Are we getting off topic or is this question of motivation of vital importance in putting together whatever rises from the ashes?
by John Bray
13 Feb 2009 at 00:21
Nick, I think there is a correlation between what motivates someone and their tendency towards honesty so I don’t think it’s completely off topic.
I’m sure you’ve seen adverts (and matching CVs) for highly-motivated, self-starters, good team players etc, etc. I can see that such attributes would be valuable in certain roles. But it will take months or years (if ever) to find out whether or not they are bluffing. I suspect (and have done for years) that most of our leaders and high-flyers (whether in business or politics) are bluffing.
I was just pointing out that the forces have the luxury of being able to shorten this discovery process to a matter of days or weeks. Though I don’t have any good suggestions for how it could be done fr other organisations.
I don’t see how you can conflate a selection process (that you can walk away from at any time) with brainwashing but that’s a subject for another topic
)
by marilyn
19 Jan 2010 at 00:37
Honesty.
Barclays bank are a dishonest and corrupt bank. They committed several counts of identity fraud in my name and the british courts let them get scott clean away with fraud because they are are a bank. If anyone knows anything about their bank manager TONY ASHPLANT please get in touch.
by admin
19 Jan 2010 at 18:20
Marilyn, here’s a link to get you started.
Some other things you might try…
Q & A: Reporting Identity Theft
Prosecuting Identity Fraud
Identity Fraud and Identity Theft from CIFAS – the UK’s Fraud Prevention Service
Tech and Law Blog
legalday.com
or try a search.