Britain’s major banks are too big to manage

Britain remains hostage to the health of banks over which it has limited control

By Joris Luyendijk  /  The Guardian, LONDON

Fri, Mar 08, 2013 - Page 9

Hearing the chief executives of Britain’s “too big to fail” banks talk up their annual results in the past few days, it was difficult not to feel a mixture of pity, respect and fear.

In particular, the heads of the partly state-owned Lloyds Bank and Royal Bank of Scotland (RBS) face demands that are logically impossible to meet and to see them trying to be everything to everyone almost produces compassion. They still put on a pretty good show, but then you realize what they cannot tell us, how their bank’s failure would be the financial equivalent of a nuclear meltdown, and you shudder.

Announcements of annual results — Lloyds and RBS last week, HSBC on Monday — come with conference calls for financial journalists in the morning and, sometimes, press conferences for lunch. The two banks dependent on the government made their top people available for informal chats in the margins of a press conference, while HSBC, which is not, made do with a conference call at which almost half the time was taken up by the heads reading out a prepared text.

The Lloyds and RBS press conferences were strikingly similar. On one side of the table were men (Lloyds had one woman, who said nothing) in suits projecting an image of control. Yes, they were presiding over banks with tens of thousands of employees engaged in very different and often wildly complex activities across the globe. Yes, they had been caught out by scandal after scandal somewhere in their vast empires, and yes, in the past their books had given a wildly inaccurate picture of the risks they were running.

However, all of this was now in the past and firmly under control, they implied, as they fired off endless numbers, percentages and ratios, and said things like: “We remain very confident of our capital position,” or “Our strategy remains centered on taking into account the interests of all of our stakeholders,” or some other cardboard public relations phrase intended to deflect a question.

Their vocabulary had been sanitized to a startling degree, with payment protection insurance and other schemes that cheated tens of thousands of trusting Britons out of their money becoming “legacy issues” requiring “customer redress.” (HSBC referred to its huge fines in the US for massive money-laundering as “regulatory and law enforcement matters.”)

On the other side of the table were the financial journalists, most of them distinctly less well-dressed. What to ask when you have only just been given a telephone book of numbers and tables?

Excluding three appendices, the RBS annual results came to 289 pages. HSBC produced 550 pages and Lloyds 165 pages. Finding the hidden risks therein was not a puzzle in which you look for an answer to a question. These annual reports, and the huge organizations they purport to cover, constitute a mystery, where the question itself is unknown.

“What was that £250 million [US$377 million] for?” asked one journalist. How was the chief executive’s pay structured? What did Lloyds think of the EU cap on bonuses?

The chief executives would address most reporters by their first names, then give a meaningless answer. About a third of the questions focused on the terms and timetable of Lloyds’ and RBS’ return into private hands — would taxpayers get their money back?

This was where it quickly became clear that Lloyds and RBS are asked to do the impossible. The holes in their books are caused mostly by toxic loans, but they are told to increase lending, that is to lend to parties they would otherwise prefer not to lend to. At the same time, they must increase their capital buffers, so hold on to the same capital they are told to lend.

RBS and Lloyds must increase profits, but are crucified when they pay bonuses to the very bankers who bring in those profits. The banks must also be ethical, so stop the profitable practice of ripping off their clients. Also, Lloyds and RBS must focus on Britain, even though it is almost impossible for a bank to make profits in an economy that is flatlining (HSBC lost money in its UK and US operations, but was saved by its activities in emerging markets).

To boot, the British government intends to increase competition between banks on the high street — a move that ought to decrease margins.

In short, Lloyds and RBS are told to increase profits so they can be privatized as soon as possible, while at the same time being told to stop doing many of the things that traditionally brought in those very profits.

It almost felt as if the chief executives’ job was to maintain the illusion that this could be done, while providing a lightning rod to all those who do not want to look beyond bonuses and the question of whether taxpayers get their money back.

What if bonuses and privatization are diversions, and the real issue is “too big to fail” in combination with too big to manage?

If you believe that the chief executives knew nothing about the scandals taking place under their watch, what reason is there to believe they are on top of things now?

Over the past 18 months, I have interviewed more than 150 people working in finance in London, most of them in junior functions. Many of them believe that the top of their organization has no idea what is really going on. They are equally scathing about the regulators.

This is the debate Britain refuses to have. The timing and conditions of the privatization of Lloyds and RBS are vital to the British government’s financial health, and it makes for powerful and simple-to-produce stories, especially if these banks continue to pay high salaries and bonuses, but Lloyds’ and RBS’ return to private ownership is ultimately a question of secondary importance when both banks effectively remain a public liability.

While this idea persists, Britain remains hostage to the health of banks over which it has very limited influence. Knowing your vital interests are affected by factors beyond your control has become the new normal.

The big issue today is not whether British taxpayers get their money back. It is whether British citizens get their sovereignty back.