How the competent bankers can be assisted


No one wants bank managers to be replaced by civil servants. But there are a lot of perfectly competent bank managers out there, even if there are a lot of incompetent bank executives.

There is a lot of talk about bank nationalisation. But the word is used in two different senses. Sometimes people mean state ownership. Government has, explicitly or implicitly, the primary equity interest in the future performance of banks.

In this sense, government now owns many large banks. Not just institutions such as Northern Rock or Anglo Irish Bank, in which it is the only shareholder. For other banks, the combination of capital provision, insurance and guarantees means that most future losses, and a significant though smaller part of future profits, will be assumed by the public. At Royal Bank of Scotland, Fortis, Lloyds and Citigroup, the government holds a dominant equity interest, whether or not it owns a majority of the ordinary shares. Perhaps government is the substantive owner of Bank of Ireland, Barclays and Deutsche Bank: these organisations could not trade as they do today in the absence of market expectation of government support.

The second component of nationalisation is strategic direction. Governments have attempted to impose the first element of nationalisation (ownership) without the second (ultimate control and accountability). But such a separation is neither desirable nor workable for long. The wrangling over Sir Fred Goodwin’s RBS pension is an immediate, if trivial, illustration of problems that arise when the government, in effect, owns an institution but maintains ambiguity about authority. So is the far more substantive issue of who implements lending obligations of publicly supported banks.

Vikram Pandit, Citigroup’s chief executive, poses the issue in stark terms. When the US government announced further support last week, he was reported as telling analysts: “We completely remain in day-to-day charge of the company. We are going to run Citi for shareholders.” But if I were a US taxpayer, I would ask why I had provided $45bn (€36bn, £32bn) to a business that was going to be run for shareholders, especially when the current value of outside equity is barely 10 per cent of my own contribution. I can think of no good answer. The US government has not given Citigroup $45bn because it thinks such support is a good financial investment. Most experience shows the situation of struggling banks gets worse much more often than it improves. The US government has given Citigroup $45bn because it fears, rightly, that its collapse would have devastating consequences for the US financial system.

The first objective of Citigroup’s management should be to put the bank in a state in which it can operate without government support. The second should be to ensure that the organisation is structured in a way that can never again jeopardise the stability of the world economy. The interests of shareholders must be entirely secondary.

So when Mr Pandit says that the government’s injection of capital will not change strategy, operations or governance, I would e-mail my congressman to ask why on earth not, and tell that congressman what changes I did expect. The company should divest or close activities not related to its essential public function. If Citigroup wants to continue to engage in proprietary trading, it should raise capital for the purpose from private sources.

No one wants bank managers to be replaced by civil servants. But there are a lot of perfectly competent bank managers out there, even if there are a lot of incompetent bank executives.

If only the failed managers such as Sir Fred and Mr Pandit would get out of the way. They should take with them traders and financial innovators who have brought great institutions to the point of collapse, and the grandstanding politicians and regulators who, with little idea of what they are doing, are determined to claim credit for every initiative and disclaim responsibility for every problem.

An interlude of nationalisation, followed by the reflotation of narrowly focused retail banks, is now the least bad route to the principal public objective – allowing real bankers to get on with their real jobs.

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