Heads I win, tails you lose

The credit crunch was due to an orgy of reckless lending by the world's banks. But for the people wh

You don't have to be a financial genius to understand where responsibility lies for the credit crunch. The main culprits are the world's banks and their managers. Driven to accumulate ever-higher profits, which translate into mega-bonuses for senior executives and traders, the bankers embarked on an orgy of reckless lending.

In the first instance, the current crisis began soon after 9/11 when interest rates fell to 1 per cent in the United States, and the banks went on a desperate search for yield or higher returns. The worse the credit risk of the borrower, the higher the interest rate charged.

The bankers then wrapped the loans up in neat packages, gave them exotic names like collateralised debt obligations, and sold them on. But as the great liberal economist John Kenneth Galbraith famously noted: "All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy by real assets."

In the case of the packages created out of sub-prime, the assets were horribly inadequate. The result is a toxic mountain of an estimated £250bn of debt, which every individual or firm seeking a mortgage or loan is having to pay for. Among the reasons that such bubbles arise is the way in which financial players are incentivised.

The bonus system rewards the princelings in the City and on Wall Street on the volume of exotic instruments sold and the number of deals struck - not on the quality of the transactions. So even in a year like 2007, when so much went wrong for shareholders and investors, the people who brought us this mess walked away with fabulous rewards.

In Britain the most conspicuous example of an executive escaping with a bag of swag, despite horrendous mistakes on the part of the bank concerned, is Bob Diamond, the American president of Barclays Capital. In 2007, Barclays was required to write down £2.8bn of loans because of sub-prime and related debt. This was not all. The bank's just-released annual report reveals that exposure to exotic instruments (of the kind Galbraith skewers) climbed from £138bn to £248bn and its loan exposure to the sinking US economy climbed from £17.5bn to £29.3bn. Indeed, the Barclays balance sheet is so overwhelmingly complex that there is some doubt as to whether anyone understands what its business model might be.

Yet despite all this and an horrendous fall in the Barclays share price, Diamond was virtually unaffected. The Chelsea-supporting tycoon carried off a remuneration package of £21m, only marginally down on the previous year. He also collected a cheque for a further £14.8m in cash and share bonuses for his brilliance in previous years.

But why should we be surprised by the insouciance of Diamond and the Barclays remuneration committee? Adam Applegarth, the chief executive who drove Northern Rock so hard it fell over a precipice, received a pay-off of £760,000 for his trouble. He also has a pension pot of £2.6m, which could pay him benefits of up to £305,000 a year when the 45-year-old banking pariah reaches retirement age at 55.

Yet this is the bank which through its reckless lending model did immeasurable damage to new Labour's reputation. It has gobbled up to £55bn of government money in the shape of deposits and guarantees, it has been nationalised and has damaged the reputation of the City. The government seems to have learnt nothing from the experience. The Rock's Alistair Darling-anointed executive chairman, Ron Sandler, is being paid £90,000 a month to clear up the mess. And despite this role, Sandler remains non-domiciled for tax purposes.

Much the same has been the experience on the other side of the Atlantic. Stan O'Neal, the boss of the brokerage house Merrill Lynch, who did eventually fall on his sword after unveiling nearly £5bn of sub-prime losses, cried all the way to the bank with his pay-off of £80m. At Morgan Stanley the chief executive, John Mack, is hanging on by his fingertips. He won some plaudits when he waived his 2007 pay of £20m because of the firm's losses. But he showed no willingness to repay any of his bonuses, built on the shifting sands of past earnings.

For the bank bosses who brought us the credit crunch it is a case of "heads I win, tails you lose". The connection between rewards and taking responsibility for past mistakes is tenuous. Payment for failure is as widespread as ever. The banks live in fear that their best deal-makers will be poached by competitors and refuse to end the short-term bonus culture.

So while in the UK homeowners struggle to refinance their mortgages and 74 per cent of small firms complain of tighter loan conditions, those who created the post-2001 financial euphoria can spend more time on their yachts without fear or conscience. Nice work if you can get it.

Alex Brummer is City editor of the Daily Mail

This article first appeared in the 07 April 2008 issue of the New Statesman, British jihad

Photo: Getty Images
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What's to be done about racial inequality?

David Cameron's words on equal opportunities are to be welcomed - now for some action, says Sunder Katwala.

David Cameron made the strongest, clearest and most high profile statement about ethnic inequalities and the need to tackle discrimination ever yet offered by a British Prime Minister in his leader’s speech to the Conservative Party conference in Manchester.
“Picture this. You’ve graduated with a good degree. You send out your CV far and wide. But you get rejection after rejection. What’s wrong? It’s not the qualifications or the previous experience. It’s just two words at the top: first name, surname. Do you know that in our country today: even if they have exactly the same qualifications, people with white-sounding names are nearly twice as likely to get call backs for jobs than people with ethnic-sounding names? … That, in 21st century Britain, is disgraceful. We can talk all we want about opportunity, but it’s meaningless unless people are really judged equally”, said Cameron.
While the proof of the pudding will be in the eating, this was a powerfully argued Prime Ministerial intervention – and a particularly well-timed one, for three reasons.

Firstly, the Prime Minister was able to root his case in an all-but-universally accepted appeal for equal opportunities. It will always prove more difficult in practice to put political energy and resources behind efforts to remedy discrimination against a minority of the population unless a convincing fairness case is made that values cherished across our whole society are at stake. Cameron’s argument, that any party which tells itself that it is the party of the ‘fair chance’ and ‘the equal shot’ must have a response when there is such clear evidence of discrimination, should prove persuasive to a Conservative Party that has not seen race inequalities as its natural territory. Cameron argued that the same principles should animate responses to discrimination when it comes to race, gender and social class. Put like that, wanting job interviews to be fair – by eradicating conscious and unconscious patterns of bias wherever possible – would strike most Britons as offering as clear a case of the values of fair play as wanting the best baker to win the Great British Bake-Off on television.
Secondly, Cameron’s intervention comes at a potential "tipping point" moment for fair opportunities across ethnic groups. Traditionally, ethnic discrimination has been discussed primarily through the lens of its impact on the most marginalised. Certainly, persistent gaps in the criminal justice system, mental health provision and unemployment rates remain stark for some minority groups. What has been less noticed is the emergence of a much more complex pattern of opportunity and disadvantage – not least as a consequence of significant ethnic minority progress.

Most strikingly of all, in educational outcomes, historic attainment gaps between ethnic minorities and their white British peers have disappeared over the last decade. In the aggregate, ethnic minorities get better GCSE results on average. Ethnic minority Britons are more likely, not less likely, to be university graduates than their fellow citizens. 

As a result of that progress, Cameron’s intervention comes at a moment of significant potential – but significant risk too. Britain’s ethnic minorities are the youngest and fastest-growing sections of British society. If that educational progress translates into economic success, it will make a significant contribution to the "Great British Take-Off" that the Prime Minister envisions. But if that does not happen, with educational convergence combined with current ‘ethnic penalties’ in employment and income persisting, then that potential could well curdle into frustration that the British promise of equal opportunities is not being kept.  Cameron also mirrored his own language in committing himself to both a ‘fight against extremism’ and a ‘fight against discrimination’: while those are distinct challenges and causes, actively pursuing both tracks simultaneously has the potential, at least, depolarise some debates about responses to extremism  - and so to help deepen the broad social coalitions we need for a more cohesive society too.

Thirdly, Cameron’s challenge could mark an important deepening in the political competition between the major parties on race issues. Many have been struck by the increase in political attention on the centre-right to race issues over the last five to ten years. The focus has been on the politics of representation. By increasing the number of non-white Conservative MPs from two to seventeen since 2005, Cameron has sent a powerful signal that Labour’s traditional claim to be ‘the party of ethnic minorities’ would now be contested. Cameron was again able to celebrate in Manchester several ways in which his Cabinet and Parliamentary benches demonstrate many successful journeys of migrant and minority integration in British society. That might perhaps help to ease the fears, about integration being impossible in an era of higher immigration, which the Home Secretary had articulated the previous day.

So symbolism can matter. But facial diversity is not enough. The politics of ethnic minority opportunity needs to be about more than visits to gurdwaras, diversity nights at the party conference fringes and unveiling statues of Mahatma Gandhi in Parliament Square. Jeremy Corbyn’s first speech as Labour leader did include one brief celebratory reference to Britain’s ethnic diversity – “as I travelled the country during the leadership campaign it was wonderful to see the diversity of all the people in our country” – and to Labour bringing in more black, Asian and ethnic minority members - but it did not include any substantial content on discrimination. Tim Farron acknowledged during his leadership campaign that the Liberal Democrats have struggled to get to the starting-line on race and diversity at all. The opposition parties too will no doubt now be challenged to match not just the Prime Minister’s rhetorical commitment to challenging inequalities but also to propose how it could be done in practice.

Non-white Britons expect substance, not just symbolism from all of the parties on race inequalites.  Survation’s large survey of ethnic minority voters for British Future showed the Conservatives winning more ethnic minority support than ever before – but just 29 per cent of non-white respondents were confident that the Conservatives are committed to treating people of every ethnic background equally, while 54 per cent said this of Labour. Respondents were twice as likely to say that the Conservatives needto do more to reach out – and the Prime Minister would seem to be committed to showing that he has got that message.  Moreover, there is evidence that ethnic inclusion could be important in broadening a party’s appeal to other younger, urban and more liberal white voters too – which is why it made sense for this issue to form part of a broader attempt by David Cameron to colonise the broad centre of British politics in his Manchester speech.

But the case for caution is that there has been limited policy attention to ethnic inequalities under the last two governments. Restaurateur Iqbal Wahhab decided to give up his role chairing an ethnic minority taskforce for successive governments, unconvinced there was a political commitment to do much more than convene a talking shop. Lib Dem equalities minister Lynne Featherstone did push the CV discrimination issue – but many Conservatives were sceptical. Cameron’s new commitment may face similar challenges from those whose instinct is to worry that more attention to discrimination or bias in the jobs market will mean more red tape for business.

Labour had a separate race inequalities manifesto in 2015, outside of its main election manifesto, while the Conservative manifesto did not contain significant commitments to racial inequality. The mid-campaign launch in Croydon of a series of race equality pledges showed an increasing awareness of the growing importance of ethnic minority votes - though the fact that they all involved aiming for increases of 20 per cent by 2020 gave them a slightly back-of-the-envelope feel. 

Prime Ministerial commitments have an important agenda-setting function. A generation ago the Stephen Lawrence case opened the eyes of middle England to racist violence and police failures, particularly through the Daily Mail’s persistent challenging of those injustices. A Conservative Prime Minister’s words could similarly make a big difference in the mainstreaming of the issue of inequalities of opportunity. What action should follow words? Between now and next year’s party conference season, that must will now be the test for this Conservative government – and for their political opponents too. 

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.