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The perverse consequences of punishing the banks

Lloyds Banking Group is to pay fines of £218 million for fixing interest rates including Libor (the rate at which banks lend to one another) the Financial Conduct Authority and US Commodities and Futures Trading Commission have announced. The FCA described the behaviour as ‘serious misconduct’, and Bank of England Governor Mark Carney said the rigging was ‘reprehensible’. Lloyds follows in the footsteps of Barclays and RBS which have also been fined for market manipulation. But should the banks be punished for their transgressions? In February, The Spectator‘s business editor, Martin Vander Weyer, asked whether fines might weaken the banks we want strengthened, and whether they might hit us rather than the banks. Here’s what he said:-

As with allegations against elderly celebrities of groping long ago, there must come a point when it is counterproductive to go on pursuing banks for every last instance of market abuse during the decade of folly. The tally of penalties on both sides of the Atlantic for Libor-fixing and product mis-selling continues to grow, as attention now turns to allegations of collusion and manipulation in foreign exchange markets by at least nine major banks. Martin Wheatley, head of the Financial Conduct Authority, has said that the forex scandal is ‘every bit as bad as Libor’, and another multi-billion round of fines is expected.

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Of course wrongdoing must be chased, and no one has yet made a case for an amnesty to draw a line under a past era — because no one believes it can’t happen again. But some of the consequences are perverse. On the positive side, £10 billion of compensation for mis-sold ‘payment protection insurance’ boosted consumer spending last year. On the negative, money paid in fines is a deduction to bank capital that might otherwise be available, suitably multiplied, for lending to businesses — and relentless investigative zeal makes it tough for the sector as a whole to regain trust and play a positive role in a recovering economy.

Most perverse of all, as Spectator reader Andrew Fraser pointed out in a recent letter to the FT, fines are borne by bank shareholders but not by executives, who continue collecting giant bonuses. ‘If [fines were] properly assigned to the individuals responsible,’ wrote Mr Fraser, ‘no other measure could assure more responsible behaviour more quickly.’ An important point — and one that should be part of a wider review of how better to build an honest, productive financial community for the future.

This is an extract from Martin Vander Weyer’s ‘Any Other Business’ column in the 22 February 2014 issue of The Spectator. 

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  • ConstablePlod

    Clearly, we need to fine the bank execs, the sum total of all their perks and bonuses (minus a “living wage” equal to the OAP) during the years they indulged in these swindles. And there needs to be some system of marking these greedy (mostly) men by naming and shaming them in public.

  • Des Demona

    I think this article sums up the banker mentality. ”Yeah so we broke the law and lined our pockets at the taxpayers expense but hey look at the amount of taxes we pay so that’s ok right?”


  • Fraser Bailey

    Vander Weyer supporting an industry that is criminal and fraudulent from top to bottom.

    In the right-wing, City-loving Spectator.

    Who’d have thought it?

  • Baron

    In a sane society not liable to bouts of sporadic collective madness those individuals doing wrong in banks would be punished, possible with the loss of freedom.

    To fine the banks, hope nothing similar ever happens again, goes beyond the comprehensible, the banks will get the money back, they’ve always had, what’s the point of hitting their capital at a time it’s needed most? Lunacy.

  • Reconstruct

    Actually, I’m not sure Martin is right about this. The first thing to ask is whether these banks, even if left in judicial peace, would be likely to perform a socially useful function – ie, allocate savings in a way which improves the efficiency of the economy.
    i honestly don’t think they perform this task well, not least since they are seem incapable of lending on any security except real estate. Perhaps it is time to encourage competition in the savings business. I would suggest taxing deposits rather heavily, in order to discourage saving by this particular method. If you are adverse to tax (and who isn’t?) perhaps there could be some other way of discouraging saving by bank deposits – tax-advantaging money market mutuals perhaps, or possibly making income from peer-to-peer lending tax free?

    If we continue to encourage savings to be put into banks, then we must share some of the blame for their predictably poor behaviour across a number of fronts.

    • Baron

      And the evidence the mutuals would perform the ‘socially useful function’ better is what?

      More to the point, it’s when the banks, both here and in the Republic, were asked to ‘perform the social function’ better that the rot that led to the near financial meltdown set in. It’s the club of the rainless, of which you seem to be a member, that keeps fugging things up, and not only for the banks.

      • Reconstruct

        Thank you for picking me up on this – as written, the comment might seem like a naive and sentimental hankering after ‘old-fashioned building societies’. I do not mean to suggest building society managers would do a better job of allocating your savings than bank managers (though, let’s face it, they are probably less keen to get involved in the derivatives end of the market – which is what did for the commercial banks).

        What I meant to suggest is that you personally would probably do a better job at allocating your savings than your bank manager (or building society manager). What I would envisage would be a whole range of money market mutuals (fluctuating in value to reflect the underlying performance) which would allow you to choose your own place on the risk/reward curve. Thus, you might want to assign a large proportion of your savings to ‘ultra-safe’ investments, ie, govt paper. Alternatively, you might (who knows?) choose to go high risk/high reward for a portion of your savings – ie, yup, sub-prime.

        My contention is that were we encouraged to take responsibility for these choices, rather than fob them off to ‘the professionals’, we’d almost certainly get a more efficient allocation of capital. And in turn that would increase growth and wealth etc etc.

        By now, I’m sure you’ll realize that I agree completely about your second point: the structure of the banking industry enabled politicians to force the commercial banks into their own prioritised areas of dumb lending. This sort of political leverage would be much more difficult to impose on a reluctant populace (which would include you and me).

        What seems to be ‘clueless’ to me, is to carry on supporting the same structure of the financial industry and expect an improved outcome in the future. Fortunately, since distribution costs of information are virtually zero, there’s no technical reason why we should put up with commercial banks (and their politician allies) imposing these disastrous outcomes on us. Hope that explains where I’m coming from.

  • Frank

    All of these banks had Boards of Directors full of non-execs composed of the great and good, who had all been approved by the FSA / FCA, and yet none of these non-execs seems to have had the slightest interest in delving into their particular bank’s standard business practices (eg miss-selling X, or Y), or their bank’s over-leveraged balance sheet, etc. It reminds me of the BBC Trust’s, or the NHS’s propensity to hire “appropriate” senior people who won’t rock the boat, or ask awkward questions (even though that is specifically why you have independent non-execs). It is all very well attacking the Chairman and the CEO, but the non-execs below them also carry a significant responsibility to the staff and shareholders for not doing their non-exec jobs properly (as an example, who on the RBS Board attempted to stop Fred the Shred from doing his mad takeover of ABN Amro?). The top head hunters could significantly assist matters if they widened the search from just the standard pool of City talent. If you look at all the directorships held by Marcus Agius, you would think that there was a shortage of talent!

  • ohforheavensake

    So it’s ok to break the law, if you’re a banker?

    • HookesLaw

      Well thats what he just wrote. Fixing LIBOR was a disgrace and given the scale of it we must really ask what was going on in the treasury at the time. The BoE hardly look good.

      The photograph accompanying this BTW is a crass example of the meanest sensationalism.

  • dado_trunking

    I love Britain. Everyone is forever innocent until proven guilty.

  • the baracus

    If there was criminal behaviour then why are there not criminal proceedings and where guilty custodial sentences? Fines punish the wrong people. Prison is the only option.

    • HookesLaw

      Thats true. Was it criminal? I don’t know. The actual activity as I understand it was by the lower level barrow boys masquerading as ‘bankers’.

      • P_S_W

        Doesn’t matter who did it so long as the actions are punished and not repeated.

    • David Cooper

      Why should the taxpayer keep bankers fed and watered in prison? Hanging would be cheaper.

  • Alexsandr

    its not shareholders who will pay
    its the customers who will get lower interest rates, or get charged higher interest or fees to recoup the fines.
    nice back door tax really, cos the treasury get the cash.

    • dado_trunking

      You can’t win. Until justice is served.

  • Spandavia

    I think the perverse consequences to society of allowing bankers to continue to flaunt the law is getting beyond ridiculous. Here is an extract from a forthcoming book about HBOS that sums it up:

    Dear Alien,

    In reply to your main question, I’m afraid I don’t have an answer but with regard to the other points you’ve raised: Yes, I’m afraid it is true our some of our bankers commit criminal acts on a fairly regular basis including laundering huge amounts of money for drug cartels. And no, they don’t go to jail, they just get their shareholders to pay enormous fines as a penalty while they (the bankers) keep getting bonuses. Sadly, the rumours you’ve heard about traces of cocaine being rife across the toilets of Westminster would also appear to be true. And I totally agree with you, the idea any of our elected representatives might be busy shoving cocaine up their noses when the public are still smarting from the fact some MPs were fiddling their expenses (drugs are quite expensive here), is extremely worrying.

    I know you have found your stay here disappointing and like me and thousands of others, you were particularly disappointed to realise, after all your retail loyalty,
    you wouldn’t be getting your small but useful dividend from the Co-Op because of that nasty business about its former Chairman, Paul Flowers, and his predilection for Crystal Meth and Ketamine. And yes I know your travel brochures said that crack heads or people who take horse tranquilliser recreationally are very poor and live in well concealed Ghetto’s – I’m afraid that was just a very commonal garden example of what we on earth call spin or PR. You may call it blatant
    misrepresentation or lies on your planet but we’ve all got so used to it here, we hardly notice. I can only apologise and point out the establishment has been consistently trying to pull the wool over everyone’s eyes for so long, they are finding it almost impossible to break the habit – especially with an election coming up. But please don’t think too harshly of them – it’s just in their nature. After
    all, it’s not easy running a democracy. It’s a stressful job and we all need our little ‘pick me ups.’

    To finish on a more cheerful note, I think I’m right in saying none of the
    establishment have indulged in recreational glue sniffing or plant food yet. Nor will they as long as we keep their bonuses big, wages high and continue to turn a
    blind eye to a bit of expense fiddling. So that’s good news but, as to your main question, “is there anywhere left on the planet that isn’t rife with corruption and also has good spa’s?” As I said – I have no answer. Sorry.
    With best wishes

  • Ordinaryman

    If the shareholders suffer because of the fines imposed on the banks, then they have the power to do something about it. So let’s stop the whinging and get on with dealing with the third rate card-sharps, tinpot gamblers and carpet baggers that have been running the financial system.

    • McRobbie

      No, the shareholders dont have the option of doing anything meaningful in practice. They can stamp and shout but its up to the boards in the end. A bankers oath as per the medical profession (which doesn’t stop them all that much from abusing their position!!) and criminal charges for criminal acts..prison and then kicked out of their profession….. and then fined

      • Adam Carter

        Certainly punish the offenders, fine the directors or send them to jail. But there shlouldn’t be any need to make people swear an oath that they won’t commit crimes.
        If they do commit crimes, punish them. And leave those who don’t commit crimes alone.

    • Andy

      McRobbie is right: the shareholders do not have the power to do very much. However I do think that what we are seeing in the banking sector is a looting of the bank by the executives to the disadvantage of the shareholders who are actually being robbed. If you look at say Barclays the amount paid out on bonuses for traders and executives makes the amount paid in dividends to the shareholders (who own the f*cking bank) look like chicken feed. That is unacceptable and if necessary the law should be altered to give power back to shareholders who are the owners.

      • HookesLaw

        what you have just said may be wrong – but on the face of it its difficult to disagree. Banks seem to exist for the purpose of paying loud bonuses to various people who hardly seem worthy of it.
        I do wonder who is actually ‘losing’ the money that these barrow boys ‘make’ in order to earn their ludicrous bonuses.

        • Baron

          If the banks were not here, HookesLaw, you amongst others would still live in caves, pick roots for dinner.

  • Peter Stroud

    Who is suggesting fines? Prison is the much preferred option.

    • Aberrant_Apostrophe

      Why should the taxpayer pay for their holidays? Fine them personally three times the amount they stole.

    • telemachus

      And not just for the greedy criminal bankers
      Vander Weyer seems to be saying that we should ignore paedophiles like Harris and Clifford
      I suspect he also wants us to ignore the school and hospital bombers

      • Inverted Meniscus

        Do you like that everybody? This idiot has used an article on banking regulation to have a dig at Israel. Of course, It may well be that he is using the term ‘bombing’ in respect of schools and hospitals as a metaphor for the preposterous policies of those two monumental idiots Andy ‘it didn’t happen on my watch’ Burnham and Tristram whatshisname.

        • ReefKnot

          Please do not respond to Telemachus. He is a well practiced troll who likes nothing more than to deflect the thread onto his own agenda.
          Please do not respond to him.

          • Inverted Meniscus

            Quite right but sometimes his utter nonsense becomes too much to stand.

        • Portendorfer

          Free world.
          Even for idiots.

      • Field Marshal

        Bankers create the wealth to fund your nefarious pursuits.

        • Aberrant_Apostrophe

          I thought the people they lent money to at usury rates created the wealth?

      • Baron

        But not the brain diseased obviously since you still around, telemachus.

    • Baron

      Better still, Peter, string them up.

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