David Stevenson (MoneyWeek, UK):

It’s not been a great week for British bankers.

There’s the ongoing spat between RBS and HM Government over how much the former’s heavy hitters can pay themselves in bonuses. Then there’s the embarrassing yet somehow inevitable revelation that our banks are the ones most exposed to Dubai – with RBS top of the pile, naturally.

Meanwhile, French President Nicolas Sarkozy has been unable to disguise his glee that Europe’s new finance minister is a Frenchman, who he clearly believes will take the City down a peg or two.

But these are just niggles compared to the real dangers the banking system faces.

The cheap money that the UK’s lenders have been enjoying is about to dry up, for one thing. But worse still, while central banks have been flooding the world with money, a dangerous imbalance has been building up in the banking sector…

Click here for the rest of Mr. Stevenson’s insightful article at MoneyWeek, UK.

The fur is flying in the City.

The heavyweights are pulling no punches. In the blue corner is Bank of England Governor Mervyn King. In a blistering tirade against his City colleagues he roared, ‘Banks have come to realize they are paying the price for having designed compensation packages which provide incentives that are not, in the long run, in the interests of the banks themselves.’

Well, bankers were not standing for that! So into the ring stepped their representative Angela Knight.

The fair Knight is the Chief Executive of the Banking Association, and would speak up for the industry even if the banks were to take all our money and fire it into outer space. Pouring scorn upon the central banker she blasted him with the following withering words. ‘This is a financial services industry on which a lot of jobs are hanging. I don’t think we should have the luxury of public squabbles.’

Wow! Strong stuff, eh? And not to be left out of a good scrap Doug McWilliams, the chief executive of the Centre for Economic and Business Research has also lambasted the reeling banking industry.

‘It does look,’ he blazed, ‘as if bonuses got paid on the basis of risks which turned out not to be justified.’ Phew! All we need now is for the Archbishop of Canterbury to weigh in with his views and the very foundations of our financial system could shake.

But what is this! He has done just that! Dr Rowan Williams has jumped over the ropes with fists flying. ‘Ministers,’ he snarled, ‘should be a little more worried about the disproportionate salaries enjoyed by City high-fliers.’

‘A little more worried’. Ouch! Steady on!

Who would be a City banker now, attacked on all sides by the Bank of England, by the economics profession and now by the Church itself?

Has the banker been left with any self-respect? How can he face his family, pilloried by the community, held in contempt by the highest moral authority, and accused by one and all of destroying the dreams of house buyers?

After kissing the tears from the cheeks of his sobbing children, does he crawl upstairs to the spare bedroom and count his money? Does he vow to buy a pearl necklace for his poor wife, ashamed and unable as she is to meet the damning gaze of her neighbours?

 Change is unlikely

I doubt it. Because he knows that nothing much is likely to change. The moral lectures of the great and good will make no difference. Although the City is not quite the cosy club it once was, Mervyn King may still find himself sitting next to Angela Knight at a Mansion House dinner. And neither of them would want the atmosphere to be too frosty.

Whatever they might say for public consumption there is not much these leaders can do about bankers’ pay. And anyway, as Angela Knight has kindly reminded us, it is not really the fault of British bankers who, in the true national spirit of self-restraint and service, would gladly work for much less. It is all the fault of the foreigners.

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I am not thankful for any of this. And I agree with two other comments of Mervyn King.

He told the Treasury Select Committee ‘There was a lot of hubris around in thinking that the expansion of financial services was a good in itself. It is not; it is a means to an end.’ Exactly. The financial services industry should serve. It should serve savers, borrowers, and business. It is not there to profit from exotic trading and to find ever more inventive ways of ripping money out of the hands of the rest of us.

And the second comment with which I agree is this. ‘I do think it is rather unattractive that so many young people when contemplating careers look at the compensation packages available in the City and think that these dominate almost any other kind of career.’

Too right.

We need our best and brightest people in industry, in medicine, in teaching, in the arts – in fact in anything other than what should be the humdrum business of looking after people’s spare cash and lending to government and industry.

The big question is – how can this be achieved? No doubt bankers will issue a little humility in the next few months. But unless there is some radical change in the system, once the engine of economic expansion has been cranked up again the City greed machine will be up and running and a whole new generation of thrusting number-crunchers will be chasing City riches instead of doing something useful.

What can be done? Next Tuesday, in this column, I’ll give you some ideas.

Regards,

Tom Bulford
for The Penny Sleuth

Swiss bank UBS makes front-page news on The Wall Street Journal for its thumping quarterly loss of more than $12 billion on write-downs of $19 billion. The losses have claimed chairman Marc Ospel.

– USA 2008: The Great Depression

Brit newspaper The Independent leads with “dismal projections” that in the fiscal year starting in October, 28 million people in the US will rely on government food stamps to survive, the highest level since the food assistance programme was introduced in the 1960s.

– Paulson plan will be DOA

Paulson plan will be “dead on arrival”, according to The New York Times, as “lawmakers and lobbyists from an array of industries” oppose to the plan to create a new financial regulatory system in the US.

– London stocks lift despite UBS writedowns

Shares in UBS and British banks Barclays, Royal Bank of Scotland and Alliance & Leicester rise in London, despite heavy writedowns for the Swiss banking giant.

– Worst month for hedge funds since LTCM collapse

Figures from Chicago-based Hedge Fund Research show that the average fund tracked by its HFRX index was down 2.4% in March, its worst month since the collapse of Long Term Capital Management in 1998.

– Gas prices at record high

High crude oil prices are being passed on to US consumers. From Rueters: “The U.S. retail price for gasoline set a new high of $3.29 a gallon after rising 3.1 cents over the last week, the federal Energy Information Administration said on Monday.”

– Oil slides, dollar climbs

Oil is back at $101 a barrel as the euro fell to a six-day low against the greenback.

– Gold falls for fourth day

The yellow metal fell for the fourth consecutive day to $896.75 a troy ounce.