If you are new to this blog, you are invited to read first “The Largest Heist in History” which was accepted as evidence and published by the British Parliament, House of Commons, Treasury Committee.

"It is typically characterised by strong, compelling, logic. I loosely use the term 'pyramid selling' to describe the activities of the City but you explain in crystal clear terms why this is so." commented Dr Vincent Cable MP to the author.

This blog demonstrates that:

- the financial system was turned into a pyramid scheme in a technical, legal sense (not just proverbial);

- the current crisis was easily predictable (without any benefit of hindsight) by any competent financier, i.e. with rudimentary knowledge of mathematics, hence avoidable.

It is up to readers to draw their own conclusions. Whether this crisis is a result of a conspiracy to defraud taxpayers, or a massive negligence, or it is just a misfortune, or maybe a Swedish count, Axel Oxenstierna, was right when he said to his son in the 17th century: "Do you not know, my son, with how little wisdom the world is governed?".

Friday, 14 August 2009

Curbing City pay will give it competitive advantage



In the wake of financial collapse in autumn last year, after the British government pumped in massive amounts of taxpayers' monies into the financial system to prevent a complete meltdown (and the government became a large shareholder in the banks), the government (and the regulator, FSA) promised to curb huge salaries and bonuses of financiers. As the time passed, these promises have not materialised. Quite the contrary, in terms of bankers pay, it is business as usual. FSA published a proposal which is a grotesque version of the original promises. Assuming that taxpayers are half-intelligent, it looks like a deliberate insult to them.

The reason given why bankers' pay packages cannot be drastically reduced is that this would drive the top banking talent out of the City; that the best bankers will be poached to work abroad.

Behind such reasoning, there is an underlying assumption that the most talented people's choice of career is only financially driven. It is clearly not the case. If it were the case specific to the financial industry, it would also be true across the industries. Yet whilst some clever young scientist, doctors, analysts move to financial industry, this brain-drain is very limited. Top research institutions and universities, health service, civil service, oil and gas industry and so on, do not lament that the market is short of top talent as it is drained by the banking sector. There is no attempt of others, including very rich sectors like oil and gas, to match City salaries and bonuses.

This is no different to sport: we do not observe a lack of top talent in cycling and rowing, because football and golf pays much better. The lack of success in some sports is simply down to lack of tradition, infrastructure and resources to develop talent.

Huge majority of young people choose their career path based not only on financial reward, but also on what they like to do. Their interests, ambitions, prestige and a mission they sense play a big part. In any profession with a reasonably good pay and career prospects there is no shortage of young and talented newcomers. Only a small number of youngsters, very often not very talented or lacking clear interests, cynically decide on their career path based on financial rewards. In effect, perversely, astronomically paid banking jobs do not attract the top talent suitable for finance, but the greediest with loose morals, determined to do what it takes to make a lot of money for themselves. The pathology of that situation reached such a high point that stating this openly has been in vogue amongst the City "highfliers".

There is also evidence that it is not the most talented that get promoted to top jobs in finance, but the most greedy, aggressive, who know how to play company politics. It is enough to go to professional fora to realise that there were banking industry insiders, who were warning that a crisis such as the one that is happening was only a matter of time, since the business model became unsustainable. They were professionals but not the ones that were fast-tracked on their career ladder. The scale and character of the current financial crisis has shown that, to a massive degree, so called "financial professionals", especially on the top level, are unable to distinguish between taking a legitimate commercial risk and acting fraudulently or, worse, some of them choose to act fraudulently but use "taking a commercial risk" argument as an excuse for their actions. There is evidence that the CEO of one of the largest banks in the world does not understand such basics as mechanisms that govern balance sheets dynamics. Yet somehow he became a CEO.

Indeed it looks that big pay packets in finance attract the top talent: but not the one that banking really needs. It is a talent to use greed, skills in company politics, arrogance, posturing to cover monumental incompetence in climbing a corporate ladder. This ilk of people has hijacked the financial industry. No wonder the current crisis was caused by a criminally engineered pyramid scheme (as it was described in the first article on this blog "The largest heist in history") which is exactly the same in mechanics as Albanian pyramid schemes in 1996 - 1997.

But why did it happen that the bankers are paid so much? They are the first in the pecking order of financial management of a value creation. They manage billions and trillions of pounds, so only a tiny fraction of a percent of such amounts makes them millionaires. But this does not give them an automatic right to such a "tiny" fraction of the funds under their management. Interestingly bankers are not unique. Tax officials also collect and manage a huge number of billions of pounds. Yet no one argues that their pay should be based upon a revenue of their tax collection in such a direct way as the bankers', although they are the first in the pecking order of a state tax revenue collection and state finances depend heavily on their performance. However historically, in Biblical times as well as more recently (like in France in the 18th century) tax officials’ pay was also based, like bankers, directly upon the revenue under their management. Indeed, in those days, tax collectors had gained the same notoriety as the bankers did in the last few decades, since "greed is good" philosophy became an acceptable moral standard in finance. History proved that such approach was massively inefficient and, quite often downright fraudulent, as tax collectors were working, like today’s bankers, for their own benefit. There was also an argument, like today, that if their rights to pay had been curbed they would have been able to collect even less for a state. However modern states reasserted their authority in that respect and tax officials are paid now very decent salaries (even with some performance related pay), but in line with top professional jobs. This is how should be with the bankers as well.

And if, what is called, "top talent" leaves the City, it will be a great and desirable result of such policy. It will, hopefully, cleanse the City of greed, criminal incompetence and downright criminality that drove the banking industry to fraudulent activities (like pyramid schemes referred to above). If they get jobs in different financial centres, it will give the City competitive advantage: let them wreck competitors.

The financial sector will not be short of top talent. Assuming that top bankers' pay will be on a level, say, of top geologists' or economists' in the oil and gas industry, or brain surgeons, there will be plenty of very clever people with integrity, not driven by a sheer greed, that will develop their talents as real top financiers, not pyramid purveyors. This approach is not egalitarian or driven by some kind of equality: this is about eradicating pathology and restoring commercial sense to the financial industry.

PS. Cityboy on City bonus culture: "A banker's guide to bonus day".

7 comments:

  1. Adam Smith's invisible hand might deliver the City shake-out regulations or no. Given a possible toxic pyramid-asset tally of US$3 quadrillion (as explained in your other blogs) and about 2 billion households in the world (everything from a Dhaka shanty to Chez Gates in Seattle), this global debt load comes to US$1.5 million per household - against an average income of about US$20,000. Would our financiers lump each home with debt that would take 75 years to pay off, assuming no spending on anything else? Of course, if they could. But this is impossible. Our bankers' only way out is massive price inflation (delivered through quantitative easing by their central bank friends), until US$1.5 million becomes manageable. But on the way to that exit the world will abandon the US dollar and other pyramid units (sterling, lek), turning them into monopoly money. Then your bankers' bonuses will be worth as much as that red plastic hotel on Mayfair.

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  2. I agree, it clearly looks that the purpose of quantitative easing is to achieve balance between the notional value of cash available on the market and banks' balance sheets through printing money. As this printed money supply is not to be matched by growth (productivity improvements, etc), quite the contrary production falls, it seems very likely that quantitative easing might trigger off hyperinflation turning global credit crunch into global Zimbabwe. We are running a very dangerous experiment...

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  3. Looks like this is all going to end in conflict

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  4. But this is no drama: even for a petty criminal, facing a magistrate is conflict. So what? If we look into history beyond our direct experience, it is really an account of conflicts and periods between conflicts.

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  5. I think this quote of my blog "Economic crisis – impaired brain function a major cause?" has some relevance here:

    "It seems reasonable to suggest, that brain dysfunction due to stress has been a major reason why top political and financial leaders have developed and upheld a fraudulent financial system that was doomed to failure in the end.

    Defense mechanisms and bad judgment may be the reason why severe and well founded warnings from competent experts like William R White, Chief economist at the Bank for International Settlements (BIS) since the beginning of this decade (for example Securing sustainable price stability: should credit come back from the wilderness? - July 2004) the economist Michael Hudson in 2003 (The Coming Financial Reality) and Nouriel Roubini in 2006 (New York Times, Dr Doom).

    Especially remarkable is the neglect of Mr White's warnings. As the chief economist of BIS, the "Bank of central banks" Mr. White was the topmost authority in the international banking world. His warnings about an imminent crisis and his demands for increased regulation grew increasingly sharp since the beginning of this decade and were repeated with increasing emphasis every year. They were very well underpinned as BIS had statistics directly available from all central banks. Yet he was ignored by the leaders of the financial and banking world. Afterwards it has been noted that his predictions of the crisis were stunningly correct.

    Ignoring serious and repeated warnings of the world's foremost banking expert indicates that the world top financial leaders had pronounced defense mechanisms, seriously bad judgment and a serious degree of irresponsibility - that is, signs of pronounced chronic stress-induced Survival-Oriented-Behavior (SOB).

    Therefore, all present and future political and financial leaders in the world must be tested for the presence of SOB, so that only persons are selected who are free from this serious disturbance. Only so can we ensure that key leaders will be able to sustain intelligent, responsible, empathic, realistic and foresightful leadership even under the severe stress of the now evolving very serious world crisis.

    URL of the whole blog: http://drgrandville.wordpress.com/2008/10/21/financial-crisis-impaired-brain-function-a-major-cause/


    Jean Grandville, M.D.

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  6. Jean, it is really interesting. But may I encourage you to read an article:

    http://gregpytel.blogspot.com/2009/08/lord-mandelson-pointed-out-that-bankers.html

    and study exchange of comments below it. It seems to me that the guys who were benefiting from scam had a really good survival instinct (and still have got it successfully defending their bonuses). Therefore my question would be where in our society it all went so wrong? I will appreciate your opinion on that.

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  7. WHY IT WENT WRONG

    Why are people today generally in a state of chronic stress? You may be surprised to hear that, but it is a statistical fact that 70% of older americans have high blood pressure, in most cases a chronic stress disease. In reality, most probably the rate is even higher, perhaps over 80%, as it has been established that 20-30% of hypertension cases go undiagnosed.

    So we need to find out why the society has devolved to a high-stress society. I think a key factor here is that our civilization is primarily economy-oriented. Quality of life and health has, in practice, been of secondary importance compared to economic factors. Therefore the living conditions have been inadequate for preventing stress.

    A society that is primarily economy-centered inevitably devolves, as it seems, to become increasingly stress-generating as economic mechanisms call for more and more of effectiveness, which inevitably leads to escalating demands on high job performance - which, when surpassing a certain level, leads to stress (being a mechanism for mobilizing the reserve powers of the physiology when the normal resources are not sufficient).

    Stress brings about proneness for negative behaviors, including aggressiveness, emotional instability and irritability. Such behaviors harm small children especially. These are by nature very emotional and may get traumatized from even fairly modestly aggressive parental behavior.

    So stressed parents are prone to traumatize their children and this leads to a low level of inner security, which increases the proneness for chronic stress (see "An especially problematic disturbance" at http://drgrandville.wordpress.com/most-problematic/).

    Thus a stress-generating materialistic economy creates a vicious circle that increases the stress level in following generations leading to an increasingly violent, criminality- and conflict-ridden society where people use drugs to be able to tolerate uncomfortable, if not intolerable life conditions.

    Stressful societal leaders will further enhance the vicious circle because of their stress-induced shortsightedness, lack of responsibility, corruption, if not outright criminality, lack of good judgment and empathy.

    So the crisis of today is from this perspective the expression of a fundamental crisis of our civilization that clearly demonstrates that it is fundamentally wrong to prioritize materialistic needs before life quality, security and wellbeing of people. Only by prioritizing these values can a humane and stress-free civilization evolve.

    This requires a focus on ensuring the development of Prefrontal-Brain-Dominance that brings about what I call "Balanced empathic behavior (BEB)". It is activated when the person feels secure. It is orchestrated by the forebrain, which integrates the function of the whole brain cortex and optimizes its functioning so that the person can make full use of his intellectual and creative resources. This ensures clear thinking and an excellent judgment. Self-confidence and emotional security is a basic precondition for this pattern to predominate.

    To fundamentally remedy the present crisis we need to use effective methods for reducing stress and to increase confidence and basic inner security.

    The most advanced, effective and best documented technique for this purpose comes from an ancient civilization where said values where highly prioritized and where the society was characterized by a high level of life quality and harmony.

    This technique is called Transcendental Meditation (TM) and brain research indicates that it develops a unique highly integrated brain function pattern that is correlated with high tolerance to stress.

    Fortunately this technique is easy to learn and gives rapid results. So a general application of it would rapidly improve the situation at all levels of the society.

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