For a few months twenty five years ago I had the opportunity to work alongside the newly chosen Archbishop of Canterbury, Justin Welby, in his days as the corporate treasurer of Enterprise Oil. Like everyone else who worked with him at the time, I retain a vivid memory of a smart, humorous and clued up individual who, while blinking owlishly behind his spectacles, never appeared phased by any question thrown at him. I certainly do not recognise his own self-deprecatory description that he is a bit “thick”.
His meteoric rise through the ranks of the Church of England does not therefore come as any surprise, although I very much doubt whether the thought that he might one day succeed the top job in his new employer occurred to him for one moment when he made the decision to give up his corporate career and join the Church. It seems to me however to be a first class appointment and one that has potential ramifications well beyond the specific remit and demands of his venerable and weathered organisation.
Bishop Welby’s appearances at the Parliamentary commission on banking standards have shown how important it is that those seeking retribution and penance from the banks which led us into the great financial crisis of 2008 should know – to a profound level of technical understanding – what it is that they are talking about. No amount of generalised moral outrage can make up for the detailed technical knowledge of exactly what it is that most bankers get up to in their day to day activities to justify their handsome standard of living. (Answer, in truth: not much).
Last week’s public spat between the bishop and Stephen Hester, the hapless CEO of Royal Bank of Scotland, over the social purpose of banks seems to me to have been both an important and a timely demonstration of the gulf that still separates the leaders of the banking industry from mainstream public opinion. Their exchanges, which will be published in due course on the website of the Parliamentary Commission on Banking Standards, resulted in a clear victory on points for my former colleague.
At bottom this is because a judgment on the value of banks has become, however you care to dress it up, a moral, not a financial, issue. The fact that banks make profits cannot, and should not be, taken seriously as objectionable in itself. The important issue is how and where those profits derive, and whether the activity which produces those profits can be said to have a valid social purpose. I have yet to meet a professional in the City of London who has offered a convincing explanation of why so many senior bankers are paid as much as they are.
The truth is that most of the profits that the banking sector has reported over the last twenty years have come from three sources, for neither of which can bankers claim much personal credit. One is the secular decline in interest rates that has been in place since the 1980s, which has given all banks what is in effect a ready source of cheap funding. The second rests on their ability to access customer retail deposits to fund the pursuit of trading profits. The third stems from their ability to sell financial products, many of them unsuitable, to a financially illiterate customer base.
Or as the bishop chose to phrase it, in his speech in Zurich back in October, banks before the financial crisis in 2008 were “exponents of anarchy” in the sense of “activity without purpose”..”They involved wild and frantic activity, often by exceptionally intelligent people, working very long hours, but they had no socially useful purpose”. This critique, although anything but original, has the great merit of being true. But it resonates with force precisely because it comes from someone who knows from practical experience how banks operate and can pass authoritative judgment on the true value of the service that they in practice provide.
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Scanning analyst reports each week, you would be forgiven for thinking that the Eurozone crisis has passed its worst. When forced to pass a verdict on the fate of the single currency, most professional investors would much prefer it if the problem would simply go away. Analysing the complex social and political cross-currents that define the parameters of the crisis, you can’t help feeling, is just too difficult to justify the time involved.
My interpretation, reluctantly, is different. The single currency is finally reaching its day of reckoning. The contortions that the EU’s political leaders and bureaucrats are now having to go through in order to rationalise the release of additional funds to Greece – money that any sane person knows cannot realistically be expected to be recovered – is further evidence of how even the best intentioned institutions can come to lost sight of their purpose when faced with an existential threat to their own survival. The road to hell, as we know, is paved with good intentions.
The future of the single currency, dare I say it, has also now become a moral issue, one on which it now behoves the exponents of “moving forwards at any cost” to justify the economic misery which they are needlessly inflicting on millions of their fellow citizens for the sake of an ill-defined and illusory greater benefit. The economist Rudi Dornbusch once noted that, while economic crises typically take longer to arrive than most observers expect, when they break they do so with frightening speed, just at the point when majority opinion least expects it. As the true cost of saving the euro bears in on Germany and other leaders of the grand project, Europe is getting close to that point today. But few fund managers, I fear, are yet allowing for such an outcome.
Jonathan Davis 