Until the end of last week, some bankers and investors were still suggesting the “devil was in the detail” of government-led bank rescue plans. Well, it patently is not. The devil is everywhere but in the detail. The devil is in what might happen if men in suits spend too long arguing about the detail.
Britain’s bank bosses and regulators probably did not have time to listen to the radio phone-ins over the weekend. If they had, they would have taken away a clear message: the public wants blood. People may not understand how the financial crisis happened, or even who was responsible. Bank customers certainly will not admit that they were even partly to blame for wolfing down the debt that was served up to them.
But that was then. If bankers were too busy to tune in, you can bet that politicians were not. They will have heard the voters’ anger. As a result, the government should today start to extract the 50-billion-quid pro quo for its £50bn or more of state support. The diabolical detail remains sketchy, but the time for codes of conduct and quiet conversations about capital ratios lasted about 48 hours and has gone. Codes and conversations may come later, putting a retrospective stamp of regulatory approval on deals struck in the heat of the crisis. But the government is taking a more direct route to enforce banks’ commitment to rein in dividends and bonuses, to promote lending and to ensure it gets management it wants. It is a route that was almost unthinkable a week ago: acquire a direct stake and appoint your own people to the board.
Bank executives would not simply be replaced by a commissariat of the Socialist Workers party. The nationalisation of Northern Rock, following the run on the mortgage lender in September 2007, now looks like a mere dress rehearsal for the use of the state’s strong arm. But it showed there was no need to restock a state-controlled company’s board and senior management with apparatchiks. There is a pool of clever, trained, private sector managers prepared to run and oversee banks in a new world of tight regulation and even tighter lending controls.
But the Rock was supposed to be a temporary blemish on the private sector. The government had better be prepared to assume more lasting public control. A simultaneous capital-raising at Lloyds TSB, HBOS, Barclays and Royal Bank of Scotland will preclude full participation by institutional investors. Existing shareholders simply will not be able to stump up the cash in one go. Similarly, the onerous conditions will themselves encourage investors to shun the offer. That is likely to guarantee that at least a part of some banks will fall into government hands.
The outcome is hard to welcome. Heavy-handed regulation, governmentmandated controls on private enterprise and roughing up of shareholder rights are anathema to many in the City. It is also worrying how convinced the government seems to be it has both the right plan for the banks, and the skills and resources to carry it through. But this crisis requires the suspension of normal rules of engagement. The power of bankers to negotiate the detail of their deals, the structure of their balance sheet, the terms of their remuneration, even the timing of their own departure is dwindling fast.