Friday, 20 November 2009

A Damascene Conversion

Interesting article in today’s FT by Martin Wolf which can be found HERE. Martin, arch-proponent of capitalism, is proposing a windfall tax on bank bonuses. This is the economic equivalent of Sir Alex Ferguson announcing at a pre-match press conference: “Premiership referees are the best in the world. I will never question them again.”

Much of what Martin says has been heard before, but it is worth revisiting, if for no other reason than to marvel at the sheer audacity of the global investment banking institutions. The banker argument, most recently espoused by Lloyd Blankfein, CEO of Goldman Sachs (who memorably told the Sunday Times a few weeks ago “I’m doing God’s work”) is as follows: “Yes, we took the money, but now we’ve paid it back so we can do what we want”. Blankfein is of course referring to the $10 billion of Federal Government money which kept the firm from going bankrupt in October 2008.

Of course, as Martin points out, this is a gross over-simplification. The institutions now making these enormous profits are effectively being underwritten by Governments around the world (the “too big to fail” argument). Secondly, the enormous profits are in large part due to the unprecedented amount of public money that has been pumped into the financial system, which investment banks are now happily, trading and hedging and collateralising. Thirdly, those making the enormous bonuses are exactly those who almost destroyed the financial system in the first place. Four, ordinary chaps (you and me) are hurting most and will be paying the bill for the bail-out for the next 20 years.

As Martin says “windfall support should be matched by windfall taxes.” However, he does miss out one other key factor in the investment bank re-birth, namely lack of competition. The banking crisis effectively narrowed the field considerably as Bear Stearns, Lehman Brothers, Citigroup and others, for different reasons, are no longer playing. So, in short, the likes of Goldman’s has a bigger, better playing field to play on and fewer opposing teams. Not bad is it?

In the past, the banks have been able to defend themselves against this sort of attack by shooting the messenger, but Wolf is highly respected. They might struggle with that strategy this time.


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