Learning from Lehman
“Here’s your money,” is the near universal refrain from the bankers to the politicians. “We want our laissez-faire economy back. If you won’t give it to us, we won’t lend and there won’t be any recovery. And if that’s the case, it will be your fault.”
People have pondered long and hard since last September whether the US government was right to allow Lehman Brothers to collapse. Some believe that it was a reckless act that imperilled the global financial system. Others think it was a necessary shock that gave us at least a chance of changing behaviour in the financial system and checking the bubble mania of recent years.
I am in the latter camp, but find myself increasingly feeling that the opportunity to reform the financial system has been fumbled. We have had the pain without the gain, so to speak. The view now seems to be that the crisis of last autumn was so scary that it is imperative that the system should be shored up quickly, even at the cost of effective reform. Hence the queue of banks on either side of the Atlantic clamouring to repay their government money. They want to get back in the game as fast as possible.
The Lehman crisis was supposed to shock the financial system into behaving better—to force it take fewer risks with investors’ (and ultimately taxpayers’) funds. But far from cowing the bankers, who have recovered their bounce, it has cowed the politicians, the very people who were supposed to take charge and enforce new rules. The best hope for change now probably lies with the central bankers. Let’s hope they rise to the challenge.
This article first appeared in “Crisis Watch” in the July issue of Prospect
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In the July 2009 print edition of Prospect, the author extended the above article to comments under the sub-head “Excessive Roaming Charges”. He referred to the Directors’ Remuneration Report and lamented that the shareholders’ vote on the Report is advisory and not mandatory. Consequently Arun Sarin left questions about the justification for his remuneration from Vodafone unanswered.
It is open to any company to resolve, by special resolution, to amend its memorandum and articles of association to report or be bound to act to a standard above the legal minimum. Usually, no one shareholder has a reasonable prospect of securing the 75% majority for such a change without the agreement of the existing board.
In the case of Royal Bank of Scotland and Lloyds Banking Group, UKFI (The Treasury’s public shareholding management company) has 60%+ and 40%+ of the shares respectively. Its lead would be followed by private shareholders and its message would be understood by institutions. It is unfortunate that UKFI has refused to use that power. Its pusillanimous conduct creates the very situation rightly criticised by this columnist.