Confessions first. I am one of those high-flying corporate bankers who’ve done reasonably well out of the boom times. There have been deals I’ve done, and deals I haven’t done, all in the property sector. Since I took up my current role 2.5 years ago, giving me the opportunity to influence the structure and content of transactions, I have been involved in a number of complex and high-value deals. Not one of them I regret, in fact, there’s one I continue to be extremely proud of and it will bring huge economic benefit in a particular place for a number of years to come.
I’ve worked hard and, so far as I am concerned, I’ve earned my rewards. What I did for my employer was not some of the scary, highly-leveraged stuff you might have read about recently. I’ve gone about my business in a manner that adheres closely to the Biblical morality I ascribe to – though nobody is perfect.
As I said, I don’t have any regrets about the business I’ve been involved with, despite everything else said about this sector. At this time, however, life is difficult. The credit crunch and wider economic circumstances mean that people like me are going to spend a lot of time taking care of leveraged situations. This will not be news to anyone. It’s going to be stressful and I don’t expect to see the light at the end of the tunnel (taking care to ensure it’s not an oncoming train) for a good while yet.
Today’s news should means that the critical stresses in the financial system will ease in the short- to medium-term. It is unlikely to mean that we will avoid a recession in the UK and certainly will not stop the global economy going backwards for a while. At this moment in time, however, it should get things going again and the bank’s involved have undertaken to return mortgages and small-business lending to 2007 levels – whatever that is – which should, and I repeat should, halt the steep decline in the housing market.
That’s basic economics – there is still massive latent demand for housing in the UK and, given the number of housebuilding sites that have ground to a halt in the last 6 months, a likely substantial shortage of product coming forward in the next 2 years – simple supply and demand theory. Personally, I don’t foresee a sharp recovery given that the credit crunch is now having substantial impact in the real economy – the time lag is running at about 6 months.
The upshot of the current situation is that the bank that will be created out of my employers, and the employers of one of my best mates, will be approximately 40% owned by the UK Government. By translation, owned by you and I, as taxpayers, due to our effective ownership of the machinery of government. This has stopped the rot now, but rather than discuss how we got here and why this is the best course of action, I am much more interested in considering what this means for the UK financial system, and banking in particular. I should add, for the avoidance of doubt, that I will not (cannot) enter into any debate that criticises the actions of my employer or its peers
What is clear to me is that we entering an incredible new era, one that has metamorphed from the last one in an amazingly short period of time. The banks have been recapitalised in order to protect the health of the wider UK economy and, by extension, to ensure that taxes continue to flow into HM Treasury. This will, in turn, continue to provide public infrastructure and the necessary altruistic services – health, education etc. Banking will function for the good of the many, rather than purely for the benefit of shareholders.
One of the terms of the deal is that, while the preference shares owned by the state – £5bn in RBS, £4bn in the combined Lloyds/HBOS group – are outsanding, no cash dividends can be paid to ordinary shareholders. In effect, any remaining shareholders will have to take a minimum 5-year view, which is when the prefs are due to be repaid. This type of constraint will see the banks work to a public agenda for this period, and possibly longer given that the government will own substantial ordinary equity as well.
However, in order for this to work, for the banking system to restore the flow of credit and public income-stream, needs the individuals working in the sector to be allowed to employ their residual entrepreneurial flair. They will need to know that, in that medium-term horizon, there will be rewards for them. Executive bonuses are being encouraged, mandated if anyone oversteps the line, to be paid in shares. This will provide motivation to the people that the country needs to retain, rather than follow the money train east.
To this end, I believe we could entering into a new form of capitalism. Given that the death of Thatcherite economics has been called, this is a strain of capitalism that is strongly influenced to “do good”. I am calling this sociacapitalism, though that this is a bit clunky and I’m open to other suggestions.
This is a conversation I want to start and I’m not sure where it’s going to go. Banking is fundamentally changing and I want to be in on it. My own thoughts and aspirations for the new era are necessarily going to be informed by my faith, but I am intrigued as to how other people see the new settlement working out. Start talking….I’ll be back again soon.
This does not represent the views, published or unpublished, of …….ach, you know the rest.