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UK financial regulator rejects avalanche of criticism on proposal to curb “swollen” financial sector
By Michael Hennigan, Founder and Editor of Finfacts
Aug 31, 2009 - 3:48:09 AM
The UK financial regulator Lord Adair Turner, on Sunday rejected the avalanche of criticism, which was prompted by his suggestion of a global tax to curb the “swollen” financial sector.
Last week, bankers and the mayor of London reacted with fury to the report of the chairman of the Financial Services Authority's (FSA) comments at a round-table debate held by Prospect magazine.
Lord Turner was reported to have said that if banks’ behaviour could not be curbed by higher capital requirements, governments could consider taxes on financial transactions - - similar to what is referred to to as a Tobin tax - - in 1978, James Tobin, Yale economist and Nobel laureate, first proposed the idea of a tax on foreign exchange transactions that would be applied uniformly by all major countries. A tiny amount (less than 0.5%) would be levied on all foreign currency exchange transactions to deter speculation on currency fluctuations.
Lord Turner had also said that the City had grown “beyond a socially reasonable size,” accounting for too much of national output and sucking in too many of Britain’s brightest graduates.
“I think some of it is socially useless activity,” he said, adding that the financial sector had “swollen beyond its socially useful size” and seemed to make excessively large profits.
On Sunday, Lord Turner said on Sky News, that it was “ridiculous” to suggest he wanted to impose the tax unilaterally in London without it being levied in the rest of the world. “Nobody who read the original article would ever have suggested that.”
He also said that it would not have been within the FSA’s remit to carry out such a policy. “I don’t regret any of the things I said in the Prospect article,” he said. “I did not propose specifically introducing a tax and it’s certainly not the role of the FSA to introduce a tax.”
The FSA chairman said it had never really been in the powers of the regulator to stop bankers being paid so much.
“My message was . . . stop telling the FSA to go beyond its remit and to start imposing limitations on the level of bonuses, which it is neither within our legal power or our practical ability to do,”he said.
He said it was one thing to influence remuneration structures at companies or to encourage them not to take excessive risk, but staff could still earn “large amounts of money” even from doing low-risk activities.
He added:"What most people would say is as long as they are satisfied that what the financial sector is doing is truly valuable economic activity they will accept it - - that some people get paid a lot of money and some get paid less.
"The legitimate area for concern is that there is something about some categories of financial activity which can grow to a very large scale without us being confident that it is socially useful activity.
"And I think that is the case with some of the very complicated securitisation structures and derivative trading structures which have developed over the last 15 years."
He also said: "I think ordinary people are right to have a suspicion of saying 'well hang on these people are getting paid a lot of money for that, is it really valuable?'"
On Wednesday, the London mayor Boris Johnson will meet the European Commission's internal market commissioner Charlie McCreevy, to seek changes in the draft directive on alternative investment funds, which he says could damage London’s financial services industry.
What is interesting about the comments of Lord Turner, an ex-McKinsey consultant and former vice-chairman of US bank Merrill Lynch in Europe, is that an insider is willing to rattle a few cages.
Looking at the US finance sector, where the economic contagion began, what the Joe Sixpack on the street sees is a sector which grew from 8% of S&P 500 market cap in 1990 to almost 25% at the height of the housing boom when the Fed’s federal funds rate was 1%; which owns Congress in the words of Senator Dick Durbin (“frankly own the place”), Obama’s former Illinois colleague - - an estimated $5 billion spent in lobbying and campaign contributions over a decade; gigantic payouts when even in a recovery, the real incomes of most American workers were falling; and Uncle Sam acting as a backstop to even for the likes of Goldman Sachs when it makes most of its money from hedge fund type operations.
Wall Streeter James Grant has written in The Wall Street Journal, that Wall Street is usually described as an industry, but it shares precious few characteristics with the metal-fasteners business or the auto-parts trade. The big brokerage firms are not in business so much to make a product or even to earn a competitive return for their stockholders. Rather, they open their doors to pay their employees -- specifically, to maximize employee compensation in the short run. How best to do that? Why, to bear more risk by taking on more leverage.
Grant cites Morgan Stanley, which had a ratio of assets to equity of 33 times at year-end 2007 from 26.5 times at the close of 2004. In 2007, Morgan Stanley paid out 59% of its revenues in employee compensation, up from 46% in 2004.
“They borrow to the eyes and pay themselves lordly bonuses. Naturally — eventually — they drive themselves, and the economy, into a crisis. And to the scene of this inevitable accident rush the government’s first responders — the Fed, the Treasury or the government-sponsored enterprises — bearing the people’s money,”he said.
Last July, when Nymex crude hit an all-time record high of above $147 a barrel, investors had about $300 billion outstanding on energy indexes, roughly four times the level in January 2006, according to the International Energy Agency.
DB chief Dr. Josef Ackermann, told analysts that to earn a $1.5 billion profit from proprietary trading the bank needed to risk several times that amount in capital. “You can easily lose two to three billion. That’s what we have seen in 2008 and something we don’t want to see again,” he said.
