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From The Times

April 30, 2008

Mervyn King: Banks paying price for their greed

Gary Duncan, Economics Editor and Grainne Gilmore

The days of City “hubris” must come to an end, the Bank of England cautioned yesterday in an extraordinary attack by Mervyn King, the Governor, on excessive pay packages and heavy risk-taking.

Mr King said that the £50 billion bail-out extended to cash-strapped banks should not be seen as an opportunity to continue paying multimillion-pound bonuses to executives who gambled with other people’s money.

“Banks have come to realise in the recent crisis that 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, and I would like to think that would change,” he told MPs. Mr King urged the financial sector to learn from its mistakes and not return to the “hubris and excessive lending” seen in the run up to the credit squeeze.

He told the Commons Treasury Select Committee that the £50 billion credit-crunch solution was not designed to help banks and mortgage companies to return to the days of 100 per cent lending and risk taking. It should eventually filter down to mean lower borrowing rates for consumers.

“We’re not doing this because we have an interest in the financial position of the banks as such, but their ability to finance growth in the rest of the economy,” he said.

The sector was also luring young workers with attractive salaries, according to Mr King. “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 type of career,” Mr King said.

He added: “When I look at the firms which impress me most, it’s not the large institutions in the City, it would be small and medium-sized firms and often private companies which are paid far less than people in the City.”

Mr King effectively dashed the Government’s hopes that the bail-out, announced last week, would break the mortgage deadlock and revive the housing market. In an embarrassing blow to the Chancellor, Mervyn King told MPs that government hopes that the funding lifeline would end the crippling mortgage drought were exaggerated.

Mr King said: “It \ is not designed to kickstart the mortgage market. This is designed to restore confidence in the banking system, not to regenerate any aspect of the mortgage market, or achieve anything else.”

With the Government under intense pressure over the economy, Mr King’s blunt comments will also embarrass Alistair Darling. Just a week ago the Chancellor said: “The idea behind it [the Bank's rescue plan] is that it . . . will begin the process of opening up the mortgage market, which will help householders.”

Last night a senior Bank of England official from its rate-setting committee called for drastic cuts in interest rates to stave off recession, and to prevent a drop in house prices of up to one third.

“We face a real risk that the UK may fall into recession, and aggressive action is required to prevent this from occurring,” Danny Blanchflower said in Edinburgh.

“The credit crunch is starting to hit, and hit hard. My biggest concern now is that the credit crisis will trigger a rapid downward spiral in activity.”

Professor Blanchflower appeared to be at odds with Mr King and other more hawkish members of the Bank’s Monetary Policy Committee. Yesterday Mr King told MPs: “We should not cry gloom and doom.”

He also dampened hopes of further cuts in interest rates soon, as he again sounded the alert over dangers from inflation.

Mr King conceded that tougher times lay ahead, predicting that the economy would be weaker for the next two years than it has been in the long-run. But he insisted: “That is not a disaster in itself.”

Fears that the credit crunch could turn the housing market downturn into a crash intensified yesterday as the Bank’s own figures showed that the number of new home loans approved in March tumbled to a near-record low, at 64,000.

Too little too late. Mr King and the other members of the MPC are equally culpable for leaving the base rate too low for too long (right up to the present).

Paul, Coventry,

The banks have gambled and lost money. Now they turn the screws on joe public as we are the only thing in the system that actually make anything real. Increased mortgage costs, bank charges its their way of getting there money back from them messing up!

k lowry, Bangor, Northern Ireland

If the banks do not converge LIBOR towards the general interest rate within 28 days the 50 billion should be returned on the basis of a failed exercise. it is wrong for taxpayers money to be given to banks so they can speculate it in the global casino.

Michael, Lowestoft, england

Well done Mr King! For once someone has stuck his head above the parapet. We need to work with the ECB and keep the fight against inflation in mind. There will be pain but 'no gain without pain" as the UK readjusts and skews away from unsustainable consumerism.

Steve Marchant, Broadhempston, UK

Fair comment, I think Mr King has hit the nail on the head.

However speaking as one who recently got out of The City, the comment that graduates choose to work there for the money struck me as odd. Long hours, the bullying culture, selling your soul - else would you do it but for the money?

Mike, Tunbridge Wells, UK

Double Talk: On the one hand King tells us that it's the silly old banks and their golden handshakes that are to blame, on the other he bails them out when they make a mess.

The problem of course is not big payouts to execs, but rather that land/house inflation are not included in treasury sums.

joe, Duns, Berwickshire

Yes - let's cut back on bonuses so that all our bright people go off to the USA to work.

Gerard, London, UK

So the BoE is giving the Banks £50bn of taxpayers money to fund the Banks bonus scheme right?
Meanwhile Company pension schemes are being raided.
Welcome to ZanuLabours Britain.

Bry Barnes, Somerset, Uk

Now we see the background to Mr Kings argument against creating a "moral hazard" when he refused to maintain liquidity in the market back in August. Why it is nothing more than salary envy!

Mr King - kindly try to remain objective and do your job as the Fed and the ECB are.

M Jeffs, Bucks, UK

Many people have mortgages with Northern Rock which is now effectively run by the Government. Isn't this an excellent opportunity to carry on lending at a reasonable mortgage interest rate, thus helping many people who would otherwise start having financial difficulties with rates as high as 7.9%.

Billy Bop, London, UK

About time too, Mervyn - but what happened? Were you too scared to say this during the boom?

I disagree with regulation or salary caps but here's a good one: Allow shareholders to sue management, in person, for losses where gross incompetence can be shown. Shall we start with Mr. Applegarth?

Claire, Herts,

I have read a lot of praise for Mervyn King's words here. I am surpirsed. If he had said these words at any other point over the last 10 years (whilst to bubble was inflating) I would have been impressed. For him to state the obvious now, when it's far to late, just reeks of blame shifting.

Jason , Warwick,

It's a easy solution - Put higher tax on those sky high bonuses!

John yu, London,

Something more like sense from King for a change - shame for the country that his thinking on the credit crunch and naming and shaming of NR was so poor.

David, London,

Mervy, you're an absolute star, a voice of deceny and good sense in world of greed, arrogance and excess (that's the City not the BoE!)

Private sector more efficient and competitive than the public? Give me a break - first sign of trouble and they come bleating for taxpayers money ....

James Connolloy , London,

And will these fine words change anything in the banks' boardrooms? I think we all know the answer to that.

Tony Jones, Grantham, Lincs

While I partly agree with a a lot of people who blame the banks for this mess, I feel the govt. should take full responsibility as they could have stopped this lending to anybody philosophy. BTL should never have been viable to people which would have helped keep houses reasonably priced for all.

Neil, Birmingham, U.K

Laxed lending lead to the appearance of high profits and huge bonuses for the bankers. We have since discovered that those lending decisions were in act flawed and those profits have been replaced by huge write-downs and calls for help from those very same banks. Are the bonuses going to be repaid?

Donovan Wright, Reading, Berkshire,

Cheek!
I hold him 90% guilty for the crisis- caused by the NR debacle; it is no wonder banks are scared to lend.
No good blaming the known to be useless FSA, . King had the chance to take proper action but was scared and froze;and after thought up an excuse, state aid, which was an obvious lie

john, whitehaven,

Banks should be free to set their own salary policies and employees should be free to accept or go elsewhere. What banks shouldn't be able to do is call on the public purse when times are bad. Let's have a free market in banking - we sure ain't got that now!

Sam, London,

Similar to a previous post.
I believe bonuses should be designed to reward 5 years post the year they are agreed. They should not exceed 100% of annual salary and should be performance bench marked against detectable and quantifiable benefits of thier management.
Also a max 100 times minimum wage.

Joe, Geelong, VIC Australia

Two sayings when I was young: "Avoid insurance brokers: they invest your money on the strock exchange." and "You pay a building society for 20 years buying a house but after 10 you cannot pay, you lose everything, so you have not bought o n e brick in that time." They can then sell a valuable hou,

peter, London, london, england

A noticeable absence from the rhetoric is the old fashioned title "Savings Institutions" who once held the savings of the nation for reinvestment back into the industrial base of the nation. We need a completely new, free enterprise based, (Non VC Non M&A), free marketplace for equity capital.

Chris Coles, Medstead, Alton, United Kingdom

Greed is rife in most Cos. Huge salaries, run the business poorly? Get a huge pay-off! Share price crash? Renegotiate terms of share incentive scheme terms! Why incentives? Large salaries should suffice! Problem is large insurance Cos and pension schemes are too close to them so no boat rocking

Garry, Swindon, UK

How fantastic that Merv wants to help borrowers!
Tough that reducing rates would mean destroying savers as he lets inflation rip.
Fortunately, I think that savers have more clout, and the BoE is impotent in the face of the hurricane these economic butterflies have stirred up.

Tony Peterson, kendal,

Great, but I believe we need to go furthur. I believe any bank lending 100% LTV should give 5% of turnover to an emergency fund to be held in case of another northern rock. Any bank lending 95% LTV should pay 3% and all banks lending 90% or less should pay1%.

john, bath, uk

They said this after Barings! They said that the collapse was due to the senior management's lack of knowledge of financial products and the way their staff behaved.

Austin Tassletine, South West, UK

I have been wondering for a while if lending one's employers money recklessly in order to create short term paper profits and therefore exaggerated bonuses for oneself is fraudulent? Any advice welcome.

Tony, Lechlade, Gloucestershire

The Law is your tool here. Make all golden handshakes strictly illegal. Make the highest wage possible no more than 20 times the lowest. Forbid executives to own or trade stock in any company. Make "full reserve lending" mandatory for all banks, including the central banks. Jail bent bankers

victor compton, Cherbourg, France

At least someone is attacking the banks for their profligacy. I just don't understand why there isn't more criticism on the banks and their role in all of this, although the recent report about the FSA failings in Northern Rock certainly points towards poor regulation.

duncan, Wokingham,

Hurray. Well said Mr King, someone with some straight talking, unlike this pathetic government.

It isn’t just banks, too any companies now are run mainly for the benefit of the executives; shareholders, lower echelon employees and customers come far behind.

Ray Harvey, Hitchin, uk

Bravo Mr King, at last a credible champion for poor, downtrodden Joe Public !

david, Margate, UK

In making the extra liquidity available, did the Bank impose any stiplulations about what the banks can or cannot do with the cash? Probably not. Given half a chance and in what they deem a favourable lending environment, the banks will indulge again in reckless lending and excessive pay packages.

Nigel Grimshaw, Cambridge,

Mervyn King deserves credit for speaking up. Its unlikely, however, that renumeration committees will take action along these lines.
There is surely a big doubt as to whether bosses who are motivated by personal greed have the best interests of those whose money they are putting at risk at heart.

Malcolm Williamson, WGC, UK

It's all a Giant Fraud, Money costs Pence to print and credit is simply thin air.
http://www.youtube.com/watch?v=OnwLgrSJZKs

Adrian Peirson, Luton, UK

As long as King and the government keep bailing banks out with unduly low interest rates and tax payers money, they can and will continue to pay big bonuses. Its win-win for the banks.

A Harris, Kettering, UK

Finally - someone who tells us what we need to hear, not what we want to hear.

Paul Francis, Brisbane, Australia

At least someone is showing a bit of sense about the credit "gloom", albeit rather late in the day.

It is in all our interests that experienced and conscientious opinion comes ahead of the the fleeting expediency of failed politicians who will not be with us much longer anyway.

Well said, Mervyn.

Martin, London, UK

For once the governor of the Bank of England has spoken up, and correctly, for as he well knows, the bosses at the banks are on a win/win situation. When they gambled and it goes pear shaped, there is always the Bank of England to bail the out just as with North Rock. If it comes off, big boneses.

george, london, uk