Bankers must take long-term view of their reputation

The word banker never used to be an insult. It once stood for a pillar of the community, a captain of capitalism. But bankers’ reputations have soured as their bonuses have bloated.

You cannot condemn an entire industry on the reputation of one rogue trader. But the £3.7 billion hit to Soc Gen from Jérôme Kerviel’s bad bets comes at an extraordinary time for the banking world. That hit pales beside the £67 billion writedowns that the banks have taken on their exposure to sub-prime debt so far.

There is something rotten in the state of banking, and the smell isn’t just coming from France.

Roger Steare, Professor of Organisational Ethics at Cass Business School, has completed some intriguing research into the banking industry’s morals. He put more than 700 executives working in financial services firms through integrity tests. These financiers were as a group less honest, less loyal and had less self-discipline than the average British worker. Professor Steare believes that the lack of self-discipline in the profession indicates a culture of greed and short-termism.

In the midst of the biggest banking crisis in years bonuses are only 16 per cent down in London. Payouts are likely to top £7 billion in total, still the second best year on record.

The extraordinary size of the bonuses sloshing round the banking system are well documented, as are tales of excess. Over the past year, the FTSE has fallen nearly 10 per cent, as the sub-prime fallout takes its toll on the markets. As investors, we are long-term players. That number flipping from red to black and back again on traders’ screens represents our pensions and our savings.

The market is suffering from the short-termist gambles of bonus-chasing bankers using ever more complicated investment vehicles to package and repackage the mortgage debt of poor working class Americans.

Meanwhile, yesterday a London restaurant unveiled its special £1,000 a head menu for the bonus season. Diners at Vivat Bacchus will eat caviar, lobster, rare Wagyu cattle steak, washed down by wines costing £650 a bottle. The bonus season is alive and well for some. If your bit of the outfit has outperformed this year, no matter that the guys on a different floor are bringing the West’s banks to their knees. Bring on the Crystal.

Banks must address the mismatch between the desire from investors for the captains of capitalism to take a long view, and the short-termist hustler mentality that the banks’ cultures and reward systems foster. Some greed is good; but it needs to be tempered by other values. Honesty, loyalty and self-discipline perhaps?

A little bit of each of these may have stopped the sale of sub-prime mortgages snowballing into a catastrophic crisis. It may be difficult to stop a rogue trader with none of these qualities from punching a black hole in a bank’s finances. But surely it should not be beyond the wit of these well-paid and clever bankers to regulate their affairs as corporate entities with more integrity than that shown by one renegade?

The reputational damage engendered by the sub-prime crisis, not to mention the forced sale of assets to a variety of sovereign wealth funds, ought to be incentive enough for a little fundamental navel-gazing at the banks. After all, their spectacular gamble on arcane structured debt products will be remembered with shudders when Jérôme Kerviel’s name is just a pub quiz answer.

After being exposed to a sustained boom, people start to fool themselves a short-term pattern(extended boom) has become the permanent pattern, fundamentally changing the market dynamic forever. That is, we are in the financial utopia.

A kind of temptation which crept into many socialists of the last century. They deluded themselves that the dynamic of human history will change forever after their revolution, ushering in socialist utopia.

Behind the two developments, we have common denominator: utopia junkies. Those who chased socialist utopia in their youth are now chasing financial utopia in their middle-to-old age. To them, the reality have always been stuffy unimpressive burden. It is something to be denied, opposed, and dismantled forever. If it cannot be dismantled, at least they have to fool themselves that it was.

Most local banks and S&Ls, have very little exposure to the sub-prime mortgage problem. This is because of two notable reasons.

1) most small banks do NOT include an investment banking arm that buys mortgage securities and derivatives

2) most small banks do NOT WRITE sub-prime loans on houses.

Right you are. I have a friend who is a loan officer at a community bank. He told me that the bank's management saw this coming years ago, and decided to stay out of the sub-prime market entirely. In all these years, he says he has made only one loan that was not rated A or A-minus. They hold most of the loans they write. They are very profitable and expect to remain so.

-ccm

Exactly. The big commercial / industrial banks who are the arms of governments and big corporations used to control domestic and the global economy. The music stopped and some were left not having a chair to sit in. Unless one's personal income(s) is consistently matching 10% per year gain, that person's material quality of life (standard of living) is backing up. Most Americans are not seeing that at this time and haven't since the mid-late '90's.

Loan sharking on a global scale with the markers being called in.

The world knows of the uncertainty of US because of the upcoming election cycle, the number of personal and commercial defaults, the housing bust, the sub-prime sham, etc. The world is watching and trying to hedge their bets.

We just keep borrowing personal and private. It's acceptance of knowing the realities of the housing and economic cycles, acceptance of the fact we're heading towards the bottom of those 2 cycles, and the only argument is how far. There's not enough money to cover our debt at this time in real value, however, those in control are working hard to cook the books.

"The market is suffering from the short-termist gambles of bonus-chasing bankers"

Having been in the banking business since 1971 I can verify this statement.

The industry has long since sacrificed its fundamental values on the blood-soaked altar of conventional wisdom. Banks used to think in terms of five and ten years out; now it's quarter to quarter.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.