Morts Musings

While I’m not about to go into an in-depth analysis of this week’s pre budget report, there are a few of the Chancellors announcements which I feel the need to comment (& maybe even rant) about.

If you’re interested a summary of the the Report’s main points can be found here.

The much speculated upon moves to curb the bonus culture of banks is probably one of the biggest events of this PBR, but in the end were Darlings moves about encouraging the bankers to live in the real world, which most of us mere mortals inhabit, or was it more of a move to placate the public?
There wasn’t a windfall tax on the banks themselves, but bankers’ bonuses over £25k are to be subject to a one off tax of 50%. Yeah, sock it to them Darling!

Actually for all that it sounds good, not to mention fair, when one considers how much of tax payers’ money has been used to aid the banks over the past year or so, the bankers don’t seem to be taking it with good grace. There’s been the predictable wailing and whinging, and threats of taking their business abroad, from some in the industry. I do understand that, to an extent, we have to be careful not to drive the banks overseas; it’s undeniable that the sector does contribute substantially to the UK economy, but at the same time it’s clearly neither sustainable, nor acceptable, to have a system where the bankers run around making risky investments and creaming the profits ’til it all goes wrong, at which point that make contrite noises and go cap in hand to the tax payer.
That can’t be allowed to happen again, and frankly any bank which hasn’t the good grace, to recognise that being based in the UK is to their overall advantage, and engage in a little give and take, is welcome to run off to some unregulated banana republic; Let’s see how willing such countries are to support the banks when it all goes wrong again! Good riddance to bad rubbish!

Even those who are staying are desperately looking for loopholes to try and avoid the bonus tax; apparently the “Investment banking boutiques” are trying to argue that they’re not technically banks, even though some of their bankers are amongst the best rewarded, in terms of bonuses. Well guess what guys, somantics aside, you are exactly the guys that helped kick off the financial crisis, & who the public are pee’d off with! You can argue technicalities all you want, but you’re distinctly “banker flavoured” and you’re precisiely the people that this tax is designed to hit, live with it!
I hope the treasury takes the same attitude. Although full guidelines on the tax are still being ironed out, it at least appears that the treasury’s intent is to prevent the exploitation of such loopholes; lets hope thats how it pans out!

Other tax measures in the PBR include a 0.5% rise in NI, and the basic rate of VAT returning to 17.5%, although on the positive side there is to be a 2% drop in Bingo duty, so it’s not all take, take, take!
Actually, in fairness, there are also to be changes to the NI system so that those earning less than £20k won’t end up paying more due to the announced hike. I do like this move, a lot, it’s almost as if the Labour party have remembered that they’re meant to be the party that doesn’t screw the poor.

There was also some encouraging green measures in the PBR too. There’s to be a “scrappage” scheme for outdated household boilers, as well as £200m of govt money set aside to assist home owners with improving energy efficiency. There are also incentives for green vehicles too, electric company cars are to get a 5 year exemption from road tax, while electric vans are to receive a 100% first year capital allowance. A piece of news which will no doubt make Sainburys, who have recently announced an increase in the size of their fleet of electric delivery vans, very happy; “Every little helps,” as one of their competitors might say.
Any regular reader will know that I’m a fan of the concept of electric vans and cars, so it’s good to see the govt taking steps to encourage their use, even if, so far, those measures only apply to businesses.

Obviously that’s by no means all that the PBR contained, but it’s tone overall seemed to be one of trying to juggle the need for austerity alongside doing enough “headline” stuff to make people happy. Indeed, opposition have already called it a “pre election report”, rather than a “pre budget report, a label which is undoubtedly politically motivated in itself, but which also, probably, isn’t too far from the truth.

The news from Dubai World, last Wedsnesday, that they were seeking to delay the repayments on £36bn worth of loans, has raised anxieties both in the Middle East’s financial markets and around the world. Many investors had assumed that, because the investment company was run by the Dubai Govt, any debts which Dubai World accrued would be secured. However todays announcement by the Dubai Finance Minister made the position, that the Dubai Govt wouldn’t be guaranteeing these debts, absolutely clear.

To try and stem the fears of a new global financial crisis becoming a reality, the UAE’s central bank has announced the implementation of a fund to provide extra liquidity to both UAE based banks, & foreign banks which operate in the country; a move which appears to have calmed the fears of the financial markets somewhat, at least based on the performance of the Asian markets today.

Closer to home Dubai’s financial woes are cause for concern for a number of UK banks, including HSBC, RBS, Barclays & Lloyds, who viewed the Emirate as a safe financial bet & invested heavily; RBS is the biggest underwriter of Dubai Worlds’ loans, so nervous times in Gogarburn no doubt. Whether they’ll be covered by the UAE Central Bank’s bail out fund, and if so, to what extent, is unclear at the moment, but these must be worrying times for a few big wigs in the British financial sector. (Unless, of course, they’re expecting that they’ll just get bailed out by the British tax payer, again.)

Flight from Dubai?

Still, in the longer term, the decision by the Dubai Govt not to back Dubai World’s debts may come back to haunt them. Although they insist that the company has always been a seperate entity, many investors assumed that, because it’s state run, it would be bailed out by Govt if there were any problems. Many investors may feel that they’ve been mislead, and, if so, it could make it significantly more difficult for Dubai to attract investors in future; at the very least future investors will want to know exactly what terms they’re lending on.

Well, the above was written yesterday, but it seems the story has moved on overnight, so no need to cancel your flights to Dubai just yet!
Dubai world is now in talks with its creditors and is seeking to restructure just £26bn of its total (£59bn) liabilities. Although that still sounds like a huge sum to the average person, apparently the move has greatly calmed fears in the banking world. I guess it sends signals that the company isn’t on the verge of collapse, and with the economic system being so reliant on the confidence, it might be enough to prevent Dubai Worlds’ problems spreading & precipitating another dip in the world’s, still recovering, financial markets.

Have just read Robert Peston’s column over at the BBC site, and thought it was such a good, simple, explanation of the what went wrong with the banking system over the last decade that it was worth highlighting for any readers who might be interested in these kinds of things (& really everybody should be concerned about this issue, because unless there are significant changes in the way that the banks are regulated we’re probably going to see a similar “boom and bust” happen all over again in a couple of decades!)


As Peston explains, the miraculous growth which the banks saw, over the last decade or so, was very much the result of smoke and mirrors, and rash gambles, rather than because our bankers are financial geniuses with a previously unknown level of insight into the ways the markets work. In short, their stroke of genius was simply to lend more than the banks could afford to based on their levels of real assets, a strategy that worked fine, up until the point that the bubble burst.


To my mind, coming up with, and following, this irresponsible business strategy in no way merited the high wages, and ludicrous bonuses, the bankers paid themselves. We could have just grabbed a few gambling addicts, put them in charge of our financial institutions, and would probably have ended up with the same net result in the end, and for much lower wages in the mean time.
Anyway Robert Peston says it all a lot better, and with more clarity than I can manage, so go read his piece here: Why bankers aren’t worth it

So, while the economy’s going down the pan, & thousands are loosing their jobs, it would seem that being a banker is still rather lucrative.

Yesterdays Govt announcement that RBS executives are still to get their contractual bonuses is, to my mind, completely unbelievable!

I understand the principle that the bonuses are guaranteed by the bankers’ contracts of employment, & that not paying would certainly lead to court action which the bankers would quite likely win.

What bugs me though is that these guys are essentially being paid out of tax payer’s money; we bailed their bloody bank out! Without state help there’s a good chance that these guys wouldn’t have jobs anymore, let alone bonuses!

Surely common sense and decency would suggest that maybe, just maybe, in a spirit of contrition, for being at least partly to blame for the current economic troubles, the bankers might forego their bonuses this year.

After all it hardly seems like they’ve earned them!

If nothing else, this is something that the govt should have thought about when they were offering the bailout; not paying out bonuses should have been a condition of getting tax payer support in the first place, even if it meant altering the bankers’ contracts, & even if that meant making the whole bloody lot of them re-apply for their jobs. Jobs they should be thankful to have at all, given their performance, & the general state of the jobs market!

What I would like to see is the govt adopting a “hard-ball” position along the lines of “Sure, you can pay those bonuses, but if you do we want our money back, now”.

I know, I know, that’s just a fantasy- we can’t let the banks go under for the good of the economy, but it seems to me that the govt could have got a better deal out of the banks when the bailout was being agreed, if they’d tried at all.

I’m relatively lucky, I still have a job, but I didn’t get a pay rise this year, which, taking inflation into account, amounts to a pay cut, & yet the people that caused this mess are still getting their bonuses, &, to really rub salt into the wound, are being paid out of my tax pounds!

That might be legal, but it’s certainly not right, & I have to think that a legal system which would support the bankers, if they didn’t get their bonuses, is far removed from anything resembling justice or common sense!

I believe I’m far from being alone at being slightly irritated by the amount of UK tax payers’ money that’s been lent to the banks to help bail them out of a mess which they got themselves into, but on the other hand, as much as it grates, I have to accept the pragmatism of the move. Letting the British banking system fail would be a disaster for the country as a whole!

Still, I can’t help but feel that, to an extent, I’ve been bent over a desk and soundly violated. The bosses at these big banks have been creaming all the profits off during the good times, in the form of bonuses, share pay outs and the like, and now when things go bad they haven’t got anything left in their businesses pot, and so come to the govt cap in hand, knowing that the govt will have to step in. It seems totally wrong!

Annoyed though I am, my biggest concern is how we avoid a repeat of this farce the next time there’s an economic crash? The immediate instinct is to impose regulations on our banks to limit “fat cat” bonuses, and incorporate some level of legal liability for those responsible for making the kind of reckless business decisions that have lead us to our current state, but sadly it’s just not that simple. It would all be fine if we operated in a closed market, but with today’s globalised world it’s very hard to control big business, if you impose regulations that are too stringent upon them they’ll just relocate and base their business in some tiny nation that’s willing to impose far looser regulations in exchange for the cash that international business of this magnitude would bring to their economy.

So, for govt it’s a balancing act, when these big businesses are doing well they are good for our economy, and since there’s obviously a demand for banking services in this country we need a banking system, of some sort. At the same time though it’s clearly not acceptable to have a situation, like the one we’re currently experiencing, where the banks are effectively holding the govt, and tax payer, to ransom.

It strikes me that if ever the UK govt is going to be able to get away with imposing regulations on the banks which they might be less than happy with, it’s going to be at the point where they’re being lent an awful lot of tax payers money to bail them out. So my questions to Mr Brown are, “just what have you got for our money, and what steps have you taken to stop this happening all over again, in another 10-20 years, when the economy enters it’s next big down turn?”

So far I’ve not seen much in the way of details of the deal between the govt and the banks, but the fact that not all the banks have bothered to follow the Bank of England’s cut in interest rates doesn’t give me much hope that the govt negotiated sharply on our behalf.

Realistically, all I can do is wait, and see how things pan out. I’ll hope for a pleasant surprise, I’ll hope that the govt has had the guts to make some demands of the banking system, and will give the FSA a well deserved kick up the rear, but the fact that, as of lunchtime today, Northern Rock and Bradford & Bingley (two banks which the govt owns!) haven’t bothered to cut their standard variable rate yet, doesn’t give me a lot of hope!