21 Dec 2017

The causes of the financial crisis have not been properly addressed. In particular, the perpetrators are widely and correctly seen as having got away with it. This, in my view, lies behind the populist behaviour that keeps giving us “anti-establishment” election results like Brexit, Trump and Corbyn. That’s the conclusion of this essay. Here are my arguments, looking at what happened in the US, the EU and the UK and the common failures of leadership in all three territories. WALL STREET AND THE FINANCIAL CRISIS I think we all know that the financial crisis involved junk debts being packaged by rogues as AAA and sold to idiots. Faults on both sides, no doubt. US officials are relatively good at hammering those considered dispensable. (Bernie Madoff was sentenced to 150 years at the age of 71. That showed him). But the biggest banks were considered “too big to fail”. They operated with an implicit guarantee that, no matter what, they would be bailed out by the state. This was extended to the claim that they were “too big to jail”. It has been said that it would be destabilizing to the financial system if the senior management of a major institution were taken on the “perp walk”, handcuffed in front of a global TV audience. At the same time, the alumni of US investment banks seem to penetrate government at the highest levels. The original bailout was presided over by the Treasury secretary Hank Paulson, once of Goldman Sachs. Also from a Goldman career is the current Treasury secretary, Steve Mnuchin (there are limits to President Trump’s populism). You can read plenty about Goldman Sachs here. US politicians who complain about the big banks tend to stand out because they are unusual. Bernie Saunders and Elizabeth Warren are portrayed as “progressive liberals” (that’s an insult in establishment parlance) and possibly anti-capitalist or un-American. It is estimated that the US banking lobby spends more than $100 million a year fighting attempts to regulate it.    In 2011 the Occupy Wall Street movement claimed to represent “the 99%” against income inequality and corporate influence. President Obama said perceptively that: “I think it expresses the frustrations the American...

28 Aug 2015

Like many people, I hoped and almost believed that the financial services industry would reform itself after the global disaster for which it was largely responsible. Sadly, there is plenty of evidence that the “leaders” of the financial community are merely waiting to resume their old behaviour. No one appears to be trying very hard to stop them and, if one can stay out jail (and almost everyone does!), taking advantage of stupid but solvent people is very lucrative. As that schoolboy joke goes: “Why does a dog lick its own private parts?” “Because it can”. And so to this week’s story about the giant asset management firm Pimco.  A story on Bloomberg states that Pimco’s assets under management peaked at $2.04 trillion in March 2013 but subsequently declined by almost 25 percent. Pimco’s funds have not performed as well in the last two or three years as they did in the past and its two most high profile names, Mohamed El-Erian and Bill Gross, both left in 2014, with rumours that they had fallen out (with each other). Senior staff at Pimco were partly paid (in cashable internal currency known as “M shares”) on the basis of the firm’s profitability which is dependent on fee income which naturally rises and falls with funds under management. According to Bloomberg, Bill Gross “took home” $290 million in 2013 (a real hunter-gatherer of the 21st century). As the funds’ performances have faltered and the funds under management have declined the group’s profitability has fallen and the performance award has turned south. This is how capitalism works you might justifiably say to yourself: and these financial superstars must understand and even appreciate that: this, surely, is the game they have chosen to play. But wait! Not so fast there! According to the impressively well-informed Bloomberg reporter, “clients are very nervous”. Are they nervous because they are paying top performance fees for mediocre performance? No! They are scared that the threat of lower rewards will motivate their money managers to take their talents elsewhere. According to Mary Childs (she’s the journalist in the pink cocktail dress if you watch the video), it is too much to expect that...