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Nostra culpa

24 October 2011 By Hugo Dixon

To: Barack Obama

From: Humboldt Pye, Chairman of First Reform Bank

Dear Mr. President

I’m writing an open letter to you and other G20 leaders on behalf of the chairmen of the world’s leading banks to say sorry.

We do not think banks are to blame for every ill the world currently faces, as the Occupy Wall Street protests and their kin in other countries suggest. A balanced audit would attribute responsibility to policymakers too: you and your predecessors set the rules of the game that we so craftily exploited. Even the public had a hand in the current mess: excess spending in some countries and inadequate taxpaying in others allowed people to consume too much.

But we are not in a position to lecture the rest of society. During the bubble years, we focused first on our own pay packages and then on profits for our shareholders. Insofar as we thought about the wider interest, we comforted ourselves with the belief that financial markets were efficient and free markets were the best way of generating wealth. So, as we pursued our self-interest, the world must by definition get better.

There were many flaws in this intellectual edifice. But contrary to popular belief, the weakness was not so much the failure of the market as the failure to apply the market. Central banks, especially the U.S. Federal Reserve, were always cutting interest rates at the first sign of trouble. The belief that Nanny was always there to rescue the markets lulled us into taking excessive risks. Second, the notion that governments would always bail out banks meant our bondholders didn’t bother to rein us in. Finally, our compensation practices amounted to “heads I win, tails you lose” bets. If our gambles paid off, we went laughing all the way to the bank. If they didn’t, the tab was ultimately left with taxpayers.

Our apology, though, can’t stop here. How we behaved after the bubble burst was arguably even worse. If it wasn’t for the extraordinary government and central bank assistance we’ve received (and still enjoy), most of us would have gone bankrupt. Despite this, we have kept paying our staff mega packages.

Our greed has enraged the people. Countries have imposed special taxes on the industry and pretty much everywhere the regulatory noose has tightened. We are not so naive to think we can swim against this tide, but we have sought to delay and dilute the most significant changes to capital and liquidity rules, which really hit our bottom line.

We have tried especially hard to wriggle out of anything that smacks of nationalisation. Those of us who haven’t avoided this fate have had tough controls imposed on bonuses and dividends. The rest of us have therefore preferred to do anything to escape the state’s embrace, such as shrinking our balance sheets rapidly, which allows us to boost capital “ratios” without issuing extra equity. Given the binge of the bubble years, deleveraging is appropriate. But rushing the process is probably tightening credit conditions and worsening the economic difficulties.

During this whole process, we’ve communicated terribly. Not that even a great orator like you, Mr. President, would have found this easy. The public assumes that everything we say is self-serving. But a leadership vacuum compounded this problem. Most of us were too cowardly to speak up. The few who did got pilloried – like Goldman Sachs’ Lloyd Blankfein when he made a bad taste joke about how he was doing “God’s work”.

That pretty much left JPMorgan’s Jamie Dimon to fill the void. For a while, he did a valiant job of speaking up for the industry in a down-to-earth manner. But too many flattering profiles about how he was a latter-day John Pierpoint Morgan saving the financial system may have gone to his head. His verbal assault on the Bank of Canada governor, Mark Carney, at the International Monetary Fund meeting in September shocked even other bankers.

We would now like to press the reset button in our relationship with society. At the heart of this will be the regulatory regime you are developing – in particular, measures to make sure that no bank in the future is too big to fail. Our pledge is that we will cooperate as you institute these changes, rather than fight them every step of the way.

We will also try harder to explain what we do. If we can’t show how what we do helps society, we should stop doing it.

We do not, of course, expect the public to believe our protestations of better behavior. So our senior executives are forgoing bonuses for at least two years. We are also going to squeeze cash compensation for other staff. We hope the public will in time appreciate that this leopard can change its spots.

Yours sincerely

Humboldt Pye


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