Wednesday, 5 August 2009

Investment banking simply must change!

It has emerged yesterday that Barclays Capital is set to guarantee three of its senior staff large bonuses, irrespective of profit. This obviously flies in the face of the advice given by the Financial Services Authority (FSA) to curb the excessive behaviour of the banking sector.

It has also emerged that one Barclays director has been allowed an £800,000 overdraft, with another member of management to receive a £500,000 mortgage. While the banking sector squeezes the life out of small businesses by refusing to lend to them, or doing so with sky high interest rates and charges, they have no such restrictions when offering their services to each other.

In the last twelve month period, Barclays Capital have doubled its profits to £1billion. It's 22,000 staff are now set to receive bonuses averaging £200,000. Not bad work if you can get it.

This would all be bad enough, but the fact that these very same people who have caused the current recession beggars belief. While small businesses, families and ordinary people across the country struggle to make ends meet, have lost their jobs, or face losing their jobs, it is unbelievable that the banking sector seems set to continue as if nothing has happened. The repercussions of the current recession will be felt by ordinary people for a long time, yet the instigators of their misery have come out of it unscathed. Their disregard is staggering.

We need change, and we need it now. The current recession shows beyond doubt that a lassaiz faire approach does not work in the investment banking sector.

My recommendations would include:
  • Reward structures, such as pay and bonuses to be paid *only* from profits.
  • Bonuses to be based on long term, sustainable growth, not short term reward (although personally, I would be very inclined to remove bonuses completely).
  • More women to be placed in senior positions within the investment banking sector. There is far too much testosterone in such a male dominated environment. This has led to raging egos, and attracts power hungry and self interested men. Surely the very definition of the last person you want making your investments.
  • The FSA need to be granted real powers. Proposing voluntary guidelines and best practice will carry no weight to a banker when there is the chance of securing a big enough bonus to buy an apartment in Monaco on offer.
  • The larger investment banks should be broken up to devolve their power.

It is all far too easy for investment bankers to play with their investments, when they have little to lose. At worst, they will be fired. The personal risk to themselves financially for losing huge sums of money is nil. If you have nothing to lose, and the prospect of making life changing sums of money with little effort in a very short space of time, is it any wonder that we have seen such outrageous excesses in the investment banking sector.

One thing is for sure, very serious changes need to be made. The Government and FSA need to get their heads together, and impose rules that carry heavy fines for any banks that do not follow them. The banks need to be audited and investigated to ensure they are following these rules.

If we do not learn the lessons from history, we are bound to repeat them.

1 comment:

  1. Investment Banking is occasionally misconceived as investment in the field of banking. It is actually a banking function, which commercial banks apply to help their clients acquire funds and generate wealth through prudent investment of their resources. Thanks.