It’s no wonder that ordinary people, all over the world, who have lost their homes, businesses, jobs or pensions, or who are now facing massive government cuts, have come out on to the streets. They have emerged to vent their anger against their government’s policies in response to the ongoing global financial crisis, largely caused by ‘casino banking practices’. Many are furious that their governments are forcing them to pay such a price, while the fat cats running major banks and financial institutions are getting richer.
In February, British activists protested about the bailed-out UK banks, while across the pond, American activists targeted the Bank of America, the recipient of a US$2.3 billion (Dhs8.5 billion) bail-out. In April, students rallied against banks in Rome’s financial district – and last month there were violent protests in Madrid and Barcelona against politicians and bankers.
Even during these cash-strapped times, when would-be home-owners can’t reach the first rung of the housing ladder and business people are prevented from injecting new finance into their companies due to tight lending restrictions, bankers are still paying huge bonuses to themselves and their employees.
Take Britain for instance. In spite of a property slump and mega high street chain stores being forced into administration, UK banks, which were bailed-out with almost £1 trillion (Dhs3.68 trillion) of taxpayers’ money, remain tight-fisted to preserve their own liquidity.
You don’t have to be an economist to figure that if the banks won’t open their purse strings, the chance of economic recovery is dim. A spokesman for the UK Federation of Small Businesses explained that banks are even rejecting loan requests from viable businesses with solid business plans.
The UK government has made efforts to rein-in the banks by setting lending targets, which have largely been ignored. It is also considering ‘ring-fencing’ the British banks – splitting up the banks’ retail arms from their investment arms – to protect customer deposits. But the banks are railing at any government interference, warning they will shift their operations to friendlier climates.
It’s evident that the bankers take no responsibility for the malpractices that led to the recession. This is exemplified by the devious circumvention of a government ban on cash bonuses by a major British bank, in which the taxpayer is a major shareholder. Instead of cash, the bank gave its employees 650 million new shares in the bank as part of a deferred bonus, half of which were sold on the market in June, thus reducing the taxpayers’ share in the bank. Worse, in March this year, one of Britain’s best- known banks, which rejected a bailout from the taxpayer but did accept emergency funding from the Bank of England and the US Federal Reserve, rewarded its Chief Executive with £6.5 million (Dhs24 million) and gave £33m (Dhs121.3 million) in shares to the co-head of its investment arm, while five of the banks’ executives and brokers received bonuses totalling £38 million (Dhs214.7 million). Last year, the bank reported a payout of £554 million (Dhs3,130 million) to just 231 key employees, which is nothing short of an obscenity in the current belt-tightening climate.
In April, the same bank announced a nine per cent decline in the first quarter pre-tax profit just hours before its AGM, which saw its shareholders seething. One furious private shareholder told the Dow Jones Newswire that he had been a shareholder for 50 years and didn’t feel he had been treated fairly in sharing the pain. “The shares have plummeted; the dividend is 20 per cent of what it had been; while the high earners are back to where they were,” he complained.
When banks everywhere are vulnerable due to their incestuous relationships at a time when the Euro Zone is in danger due to the weakened Greek, Irish, Spanish and Portuguese economies, governments should intervene to stop the culture of greed that riddles the entire banking sector – still being managed by the same selfserving individuals whose questionable dealings triggered the downturn. Indeed, some American banks admitted misdealing and agreed to pay sizeable amounts to the SEC, when sued. The banking sector needs new brooms, to sweep away old mentalities.
Since the banks won’t regulate themselves, it is up to the governments to control the system with an iron fist or else to abandon their economies to the banking executives who are more concerned with fattening their own bank accounts than satisfying their customers and shareholders, let alone worrying about the fate of their nation.
Such regulation should be agreed upon at a global level to prevent unfair competition from unregulated banks. In fact, the G20 has been seriously focusing on reform, in particular, effecting more severe monitoring procedures; introducing mandatory levels of capital and establishing limits on leverage, but some member countries are less keen to proceed than others.
Some analysts would like the industry to step back in time to a less complex and codependent era when the banks primarily served domestic economies and adhered to lower-risk investment strategies; in other words – to go ‘back to basics’. This may not be as profitable for banks during boom times but would lessen the worldwide contagion and protect countries with steady economies from becoming part of a toppling house of cards. With the US, the UK and the Euro Zone doing their utmost to keep a double-dip recession at bay, the banks in less unstable parts of the world and those in emerging economies must be prudent.
In my own country, the United Arab Emirates, the biggest problem for individuals and businesses is the high interest rates on loans, which have rocketed to an unsustainable 20 per cent in some instances. Such exorbitant interest is adversely affecting large companies and small businesses alike, not to mention employees on moderate fixed wages, looking to buy a home or a car. There must be a balance between capitalising banks with boosting the economy as a whole. In the long run, high interest rates will depress business, place a cap on new projects and result in lenders ultimately defaulting on repayments.
It seems the 18th century-born British businessman Josiah Stamp was right when he said: “If you want to continue to be slaves of the banks and pay the cost of your own slavery, then let bankers continue to create money and control credit.” It’s about time that governments took note. If, as some gloomy analysts predicts, there’s another financial crisis on the horizon which will make 2008 look like a walk in the park, the governments and the banks must work closely together to prevent poverty, unemployment and homelessness on a scale never before witnessed.