Bob Diamond, the head of British banking giant Barclays Bank, appeared before a British parliamentary committee where he boldly defended the banking system against continued attacks for their role in bringing the world’s economic system perilously close to destruction. In his testimony he stated:
Since the 2008 fall of Lehman Brothers, there have been important steps made by governments around the world to change the ways of the industry. In the United States, there was the Financial Reform Bill of 2010, which created a passage way to reforming the system (rather than being the agent of change in itself that was initially hoped for). Amongst other things, it allowed for the creation of a 10-member Financial Stability Oversight Council whose primary responsibility is to keep a watchful eye over risks in the entire financial system. A very necessary first step, considering how regulators, including the Federal Reserve, were all so oblivious to the risks being created.
The bill also allowed for the creation of the Bureau of Consumer Financial Protection, which will regulate financial products like mortgages, credit cards and student loans. A step that many hope will bring an end to some of the most predatory lending practises engineered by financial institutions in the past.
But the question of whether the time for remorse and apology from banks is over is largely dependent on how much banks have learnt from their mistakes and changed their ways.
Too Big To Fail
The preliminary evidence so far seems to indicate that the largest banks, or at least those that survived, have not taken very many lessons to heart. By some indications the financial risks posed by these institutions is as high, or even higher than it was in the period leading up to the crisis. And perhaps the biggest reason for this is that not enough has been done to eliminate the risks posed by those institutions that are too big to fail.
A recent report issued by Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, stated that Citigroup, which received multiple bailouts beginning in November 2008, continues to pose a systematic risk to the financial system. The hazards that existed prior to the crisis continue to exist at the largest financial institutions and bank bailouts in the future may continue to be required. A very sober and humbling assessment by the agency in charge of the largest industry bailout in history.
Business As Usual
In the meantime, some of the largest banks in the nation are back to business as usual, and business for some couldn't be better. On Friday, J.P. Morgan Chase got the banking industry's earnings season off to a fast start when it reported 2010 profits of $17.37 billion, up by 48% from a year earlier when it earned $11.73 billion, making 2010 its most profitable year ever.
J.P. Morgan Chase also disclosed that it had set aside $28 billion for employee remuneration and bonuses in 2010. Though this figure shrank slightly from 2009 (by 2.4%), it still equates to an average payout of $369,651 per employee (though it should be noted that the average employee is unlikely to receive that amount). And it is here that the reason why the period of remorse and apology for banks is not yet over. Banks like J.P. Morgan continue to do business today, just like they did yesterday. There has been little in the way of reason for them to change their business practises. They continue to grow in size, take large amounts of risk, and incentivize their employees in the same manner as they did prior to the crisis.
Until the risk/reward balance of the banking industry gets into closer alignment with what’s found in the rest of the economy, where businesses do not have the support of public bailouts and therefore have little reason to take undue risks or compensate their employees in a manner that encourages excessive risk taking, its likely that public outrage at banks and their leaders will continue to boil over.
“There was a period of remorse and apology for banks. I think that period is over,” Diamond told the Treasury Select Committee.Though Mr. Diamond’s statement was received with derision from all those who continue to feel the painful hangover caused by the decisions of these large financial institutions, his words got me thinking: is the time for remorse and apology over for this industry?
Since the 2008 fall of Lehman Brothers, there have been important steps made by governments around the world to change the ways of the industry. In the United States, there was the Financial Reform Bill of 2010, which created a passage way to reforming the system (rather than being the agent of change in itself that was initially hoped for). Amongst other things, it allowed for the creation of a 10-member Financial Stability Oversight Council whose primary responsibility is to keep a watchful eye over risks in the entire financial system. A very necessary first step, considering how regulators, including the Federal Reserve, were all so oblivious to the risks being created.
The bill also allowed for the creation of the Bureau of Consumer Financial Protection, which will regulate financial products like mortgages, credit cards and student loans. A step that many hope will bring an end to some of the most predatory lending practises engineered by financial institutions in the past.
But the question of whether the time for remorse and apology from banks is over is largely dependent on how much banks have learnt from their mistakes and changed their ways.
Too Big To Fail
The preliminary evidence so far seems to indicate that the largest banks, or at least those that survived, have not taken very many lessons to heart. By some indications the financial risks posed by these institutions is as high, or even higher than it was in the period leading up to the crisis. And perhaps the biggest reason for this is that not enough has been done to eliminate the risks posed by those institutions that are too big to fail.
A recent report issued by Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, stated that Citigroup, which received multiple bailouts beginning in November 2008, continues to pose a systematic risk to the financial system. The hazards that existed prior to the crisis continue to exist at the largest financial institutions and bank bailouts in the future may continue to be required. A very sober and humbling assessment by the agency in charge of the largest industry bailout in history.
Business As Usual
In the meantime, some of the largest banks in the nation are back to business as usual, and business for some couldn't be better. On Friday, J.P. Morgan Chase got the banking industry's earnings season off to a fast start when it reported 2010 profits of $17.37 billion, up by 48% from a year earlier when it earned $11.73 billion, making 2010 its most profitable year ever.
J.P. Morgan Chase also disclosed that it had set aside $28 billion for employee remuneration and bonuses in 2010. Though this figure shrank slightly from 2009 (by 2.4%), it still equates to an average payout of $369,651 per employee (though it should be noted that the average employee is unlikely to receive that amount). And it is here that the reason why the period of remorse and apology for banks is not yet over. Banks like J.P. Morgan continue to do business today, just like they did yesterday. There has been little in the way of reason for them to change their business practises. They continue to grow in size, take large amounts of risk, and incentivize their employees in the same manner as they did prior to the crisis.
Until the risk/reward balance of the banking industry gets into closer alignment with what’s found in the rest of the economy, where businesses do not have the support of public bailouts and therefore have little reason to take undue risks or compensate their employees in a manner that encourages excessive risk taking, its likely that public outrage at banks and their leaders will continue to boil over.
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