The Unspeakable In Pursuit Of The Class Struggle

All history is the history of the class struggle - the political class struggling to oppress the people

The cynicism is breathtaking. Lord "we're intensely relaxed about people getting filthy rich" Mendacity now says:

�If you look at Bob Diamond, who took �63 million in pay � that to me is the unacceptable face of banking. He hasn�t earned that money, he�s taken �63 million not by building business or adding value or creating long-term economic strength, he has done so by deal-making and shuffling paper around.�

Needless to say, the �63m figure is untrue. But more fundamentally, it is chokingly obvious why Mandy has come out with the communist manifesto this morning. It's because the latest public school educated NuLab Tristram he's forced down the throats of a local Labour Party up North has proved a Tristram too far. There is open rebellion, with the chairman of the local party pledging to stand against Trist in the election. Worryingly, it's a rebellion that could spread.

So Mand has a bash at the bankers: "there you are, you simple  plebs up North, I believe in the class struggle too - trust me - I'm right there on the barricades with you".

Yeah, right.

Almost as cynical as Bliar buying the support of his left-wing MPs for his illegal war with a ban on fox-hunting.

Bankers are of course fair game. Cam and Dave have happily laid into them, St Vince has made banker bashing his stock-in-trade, and bankers are the villains of virtually everything that appears on the BBC.

And of course, the bankers have not behaved well. They have happily gorged themselves during the emergency support operations over the last 18 months, despite the fact that taxpayers are screaming in pain all around (although we should note that Bob Diamond is actually one of the bank bosses who has waived his personal bonus this year).

But we do need a sense of perspective here. Banking and its offshoots have been by far and away Britain's most successful industry over the last two decades. As last week's Treasury Select Committee Report reminded us:

"More than one million people work in the industry, each contributing to GDP more than double the average for all employees. The industry accounts for around 8 per cent of UK output and contributes 14 per cent of tax revenues."

Yes, true, the financial crash has exposed taxpayers to a big loss. But even that loss - estimated at $200bn by the IMF - isn't that big when set against these gains. In sterling terms a loss of �130bn should be viewed against tax revenues from the financial sector which reached �67bn pa before the crisis broke (see here).

And oddly enough the guys that work in this industry don't altogether like being bashed. As BOM's correspondent on the Wharf so elegantly put it in a recent email:

"Fecking Peston was always a communist as far as I'm concerned. As is the sainted Martin Wolf. They all agree with Adair Turner that bankers are "Socially Useless". Let's see how fecking far they get without them then."

Which is why, along with his neighbours, said Wharfman is currently reviewing his wider options.

Interestingly, the Treasury Select Committee asked Turner to explain on what basis he could possibly judge banking to be "socially useless". He replied:

"to determine in concrete terms what is valuable or not is incredibly difficult, but at least if you are aware that the financial system is capable of generating activity that does not have value added for the economy... you are on your guard... It does not provide you with a nice, easy rubric to determine what is and what is not socially useless... but it means we are not open to the alternative argument that everything that exists must exist."

Er... well... thank you for that my Lord. Most helpful. Some bankers' activities may not add value to the economy, but we have no practical means of working out which.

Brilliant.

Almost as brilliant as My Lord Mandy.

PS As we've noted before, Tyler has developed an unhealthy addiction to podcast lectures delivered by left-wing academics. He's currently listening to another lecture course from Berkeley, this time on European history given by Prof Margaret Lavinia Anderson (see here - available free from iTunes U). It's excellent - wide ranging, well informed, and entertaining. And it's really stimulating to hear a serious account of history recounted from the left's perspective. The latest lecture was on Capitalism and its Critics, focusing on early socialists like Robert Owen. Anderson naturally presents the man as a hero, standing up for oppressed working people against the evil capitalists of Coketown's industrial revolution. But in doing so, she also mentions a couple of things that have been showstoppers with socialism ever since. First, its grotesque inefficiency and vulnerability toproducer capture and outright fraud - as happened when the naive Owen got defrauded out of his fortune while trying to establish his grandiose model town of New Harmony. And second, its inevitable progression to Stalinism - Owen believed children should be removed from their parents to be educated in state boarding schools, where young minds could be shaped in the paths of righteousness. We've since had plenty of opportunities to see how that one works out.

Without Touching The Sides

Worth �30 mill of anyone's money

When cuddly Alan Sugar was chairman of Tottenham Hotspur, he precisely captured the big problem with football club economics: all the money gets pooped out to overpaid prima donna players, passing straight through the club "without touching the sides".

Which is why one of the key "metrics" employed in analysing football club finances is the wages/turnover ratio. During Sugar's time at Tottenham the average wage/tunover ratio across the Premier League soared from forty-something percent up to a scary sixty-something:

We can all see how it happens - revenues ultimately depend on footballing success, and footballing success ultimately depends on the prima donnas on the pitch. Nature therefore ensures that the money gravitates down through the alimentary canel and deposits itself in their greedy ingrate offshore accounts. And that's how in 2001-02 the Italian clubs ended up paying a totally bonkers 99% of revenue in wages.

And talking of greedy ingrate prima donnas, it's bank bonus season again.

So what percentage of bank revenues do you reckon get paid out in pay and bonuses? 60%? 70%? Given all the noise and fury, you might even guess an Italian job 99%.

But no. A recent analysis by the Wall St Journal reckons that although bankers pay and bonuses will soar by an average 18% this year, the overall cost of compensation and benefits will total an extraordinarily modest 32% of bank revenues, down from 40% in 2008 (figures refer to the 38 largest US banks and securities firms, but you have to guess the position won't be very different here).

Wha!??! you squawk. That can't be right! The WSJ must be lying on behalf of its evil capitalist paymasters!

Hmmm... maybe. But most of these banks are public companies and the true information will be in the public arena soon enough to make lying unattractive.

The fact is that bankers' pay is sky high not because they as individual bankers are holding their employers to ransom, but because bank revenues are up so strongly. Revenues have jumped 25% not in comparison with miserable 2008, but in comparison with booming 2007. Here are some current headlines:

Now, you and I and most of the non-banking world, understand that this extraordinary earnings boom is not down to the prima donnas on the pitch, but to us - the poor bloody taxpayers. We're the ones who've provided the loans, guarantees, and low interest rates from which the banks are profiting so handsomely.

And we did it not so the prima donnas could get wedged even more comprehensively, but so the banks could rebuild their capital reserves and start lending again to those famous hard-working families and viable small businesses. We are being taken for schmucks.

So what to do?

The idea of the moment is St Obama's new $90bn tax on banks. Yes, it's political, and yes, the cost may eventually get passed onto bank customers, but actually - and Tyler is amazed to hear himself agreeing with the Saint - it's A Good Idea Ltd.

As we've blogged many times, we taxpayers ultimately have no choice but to guarantee the banking system, and it's only right that they pay us a proper insurance premium to compensate us for the risk. Yes, the costs may get passed on to the customers, but as in any line of business, customers should always pay the true cost of the service - we should not subsidise banking any more than we should subsidise manufacturing.

And good for George for today embracing the insurance idea - he should step a plane across to Washington soonest to coordinate some details with the yanks.

But, as we've also blogged many times, we need to go further (eg see here). We cannot afford banks that are too big to fail, and it is a dangerous delusion to think we can solve the problem through better regulation. As we saw from the clownish antics of the FSA and the SEC during the bubble years, our regulators will never be that smart.

One widely canvassed idea is to increase the cost of being big. Either through higher percentage insurance premia/bank taxes for megabanks, or through more onerous reserving requirements, Big could be made so expensive that it became commercially unattractive. The banks would then break themselves up into smaller units which we could afford to see fail.

There is some merit in that idea. But we do need to remember the key historical lesson retaught to us by the Crock - failure can never mean retail depositors losing out. Otherwise the entire banking edifice collapses in a maelstrom of pavement queues and piles of cash stuffed away under mattresses. Only a bank's equity holders and wholesale depositors/bond holders can be allowed to go down.

Another idea - one we've supported many times (eg here)- is to split High Street retail banking away from investment casino banking, ie a new Glass-Steagall Act. The High Street banks would continue to enjoy a taxpayer guarantee on the bulk of their liabilities, but would be subject to significant retrictions covering both borrowing and lending. The casinos could do pretty well whatever they liked within the law, but if they got into trouble they could not come crying to taxpayers for a bailout. They'd be left to sink.

One thing's for sure, the banks cannot be allowed to carry on biz as usual. We taxpayers have had enough. And if the Saint and George are to be believed, our politicos have at least now realised they need to take some action. Another dose of political posturing will not be enough.

PS Other people's pay is endlessly fascinating. The world's highest paid footballer last year was reportedly a certain Mr Becks Golden Balls Beckham on �32.4m (�28.7m), although the vast bulk of that came from off-pitch ads for pants (pic). The highest paid on-pitch was Lionel Messi of Argentina and Barcelona, on �28.6m. Britain's best paid banker is reputed to have been Roger Jenkins of Barclays Capital, who is said to have coined �75m in 2006 (although in fairness, that slumped to a derisory �40m in 2008).

Rich At Our Expense

Purrrrrrrr

By a strange coincidence, this year's Public Sector Rich List from the TaxPayers' Alliance is published just as the row over bankers' bonuses explodes once again.

The Rich List first. This year, the TPA has discovered 805 public employees earning more than �150,000 pa (and that excludes local authority employees, who are covered in the TPA's companion study, The Town Hall Rich List). Among the "highlights" (data relates to 2008-09):

• 8 people got more than �1m pa
• 333 earned more than the Prime Minister
• The group's average pay rise was 5.4%, compared to 2.7% for a nurse and 2.3% for a teacher
• The group's average total remuneration is �226k per annum; by comparison, according to the Institute of Directors, a managing director of a private organisation with a turnover of between �50 million and �500 million (about the size of a typical quango) could expect to earn �141k and an executive director �87k.

And for the first time, the Rich List includes executives from our nationalised banks (but note it's only board members - ie it doesn't including all those high rolling traders and investment bankers who remain anonymous because they are not on the boards). There are 30 of them, including the List's top earner, Mark Fisher of the Royal Bank of Scotland, on �1.4m.

Which brings us back to those banker bonuses, with over 5000 of the varmints apparently in line for over �1m apiece - ie a total bill in excess of �5bn just for the top guys.

Should we care?

You bet we should. As my Lord Myners was explaining all day yesterday, these bankers have been bailed out with squillions of taxpayer dosh. Apart from the effectively nationalised banks (ie RBS and Lloyds), all the other UK banks are being propped up with open-ended taxpayer guarantees on their liabilities. WTF should we allow them to walk off with barrowloads of our cash?

So what of their threats to resign and go off to work for Goldmans?

Call their bluff, we say.

Look, the key reason we're still in this mess is because Brown has not grasped the nettle we've blogged about so often (eg here). However it's dressed up, we need to split high street retail banking away from investment banking (aka a new Glass-Steagall).

High street banking should go back to being a low risk utility type operation, fully guaranteed by taxpayers but heavily regulated and subject to a hefty annual insurance charge to pay for the guarantee. Pay packets would soon return to the the more modest levels that always used to exist in our high street banks.

In contrast, investment banking should be much less regulated, a thousand flowers should continue to bloom, but there should be absolutely no taxpayer guarantee, either explicit or implicit. Investment bankers should pay themselves whatever they like, but if their bets go wrong, they should be left to incinerate.

We desperately need to get on with this. The existing arrangements are not only grossly unfair to taxpayers, but over time they will hobble our nationalised banks into oblivion. Whatever they decide to do, they will not be able to match their competitors bonuswise, because we won't let them. They will inevitably go the way of all nationalised industries before them - second-rate and a drain on national prosperity.

So what would we do right now?

Irrespective of international agreement, we'd announce our own Glass-Steagall. From say, end-2011, any bank wishing to offer UK high street accounts guaranteed by the taxpayer would have to comply with new regulatory requirements. And those requirements would include complete separation from any entity offering investment banking services (there would be other restrictions as well, covering such matters as asset and liability liquidity).

Meanwhile, we'd say to our nationalised banks yes, you can continue to pay bonuses, but they have to be in the form of deferred equity in your new post-2011 offspring. Cash? Forget it.

Throughout history, so-called "rent seekers" have sought to capture government so as to extract unwarranted financial gain at the expense of taxpayers. But whether in the public sector or the private, taxpayers should not be expected to underwrite the riches of others.

PS And talking of rent seekers, the furore over Climategate is gathering pace. The conflicted tax-funded global warming industry has now woken up to the threat, and is trying to argue that lies and distortions from East Anglia aren't that important to the case - loads of other "respected" scientists have come up with the same results independently. Except of course, it isn't like that. As the splendid Prof Philip Stott pointed out on R4 Today this morning, the whole global warming biz is an inverted pyramid, resting on the work of about 40 scientists. And 39 of them work at East Anglia. Well, no, I made that last bit up, but it is only around 40, forming a very tight groupthink mutual support network. But like the man said, you can't fool all of the taxpayers all of the time.

Splitting The Megabanks

The idea of splitting our megabanks between their high street and casino components is fast becoming mainstream.

We've blogged this many times of course (eg here), and last night the Governor of the Bank of England amplified his own call for such a split. Calling our open-ended taxpayer guarantees "the biggest moral hazard in history", he says:

"Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are...

The aim of policy should be to minimise or eliminate that subsidy. Separation of activities helps not hinders that objective, not least because it is the mixture of activities that reduces the robustness of the system."

And we need to get on with it. As we blogged here, zero interest rates and QE mean that the next bubble is already well on the way. This morning the FT's Martin Wolf - labeling our international megabanks cuckoos in the nest - says:

"We must focus on the core issue. Trying to make financial systems safer has made them more perilous... There is a danger that this rescue will lead to still greater risk-taking and an even worse crisis at some point in the not too distant future.

Either we impose a credible threat of bankruptcy, or institutions we have to support are made safer, or, better, we have both of these. Open-ended insurance of weakly regulated institutions that take complex gambles is intolerable. We dare not return to business as usual. It is as simple � and brutal � as that."

Yes, the G20 and the international banking establishment want us to focus on better regulation (such as so-called macro-prudential regulation). And that certainly has a role to play. But we are fooling ourselves if we think our regulators will ever be clever enough to cover all the necessary bases. Governor King is someone who's seen the difficulties of regulation up close and personal, and he says:

"The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the �too important to fail� question. The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion."

Naturally the megabankers don't want to be broken up - which is why their own economists and pundits issue all those dire warnings about how break-up would undermine the British economy.

But we taxpayers simply can't afford to go on as we are. Relative to GDP, the financial crash hit us harder than any other major economy. As Wolf reminds us, the IMF says UK banks are facing writedowns on bad loans of around $600bn, which is 60% of the US total in an economy that is well under 20% of the size. Bearing risks of that magnitude is not sustainable either for taxpayers or our economy.

So if we're all clear about that, the next question is why are our politicos still in the dark?

Well, of course, they're not really in the dark at all. The reason they don't want to split the banks is that for the last 30 years the financial sector has been the UK's big success story. Broadly defined, it has created 6 million jobs (see this blog), and generated huge amounts of tax revenue. Given our rocky future, politicos of both main parties don't want to accept the Golden Goose may have turned into a cuckoo.

But that just won't do. Yes, there are risks in splitting the banks - especially if we do it unilaterally - but inaction runs the very real risk of an even bigger catastrophe just down the road.

Moreover, we don't reckon a split would lose us the entire investment banking industry. We'd still have the skilled labour force and infrastructure (including the English language) most other European countries lack.

And we could substantially soften the move with some accompanying measures designed to keep the bankers here - eg rescind the new 50p tax rate (see this blog), pledge to end retrospective bank windfall taxes, and promise to continue light touch regulation for non-high street banks. We should have no problem with bankers getting rich - as long as they don't do it at our expense.

Come on George. Think of us taxpayers. Surely you can't be that dependent on megabanker subs?

Breaking The Bank

The original bank breaker was 91 when he filmed this

What about those bankers, eh? What are they thinking of? No sooner do we bail them out, then they're stuffing their pockets again.

As we've blogged before, we have no problem with highly paid bankers.

Highly paid bankers, we like. As far as we're concerned, they can pay themselves as much as they can stagger home with.

It's just their huge subsidy we don't like. We don't see why we should subsidise them to make a fortune at our expense.

To reiterate (see here for fuller version), our bankers have always got a whacking great subsidy from the rest of us via the explicit and implicit guarantees we provide on their debts. Which, as long as they were laying all those lovely golden tax revenue eggs, we were prepared to turn a blind eye to.

But when a whole batch of those eggs smashed open and we saw they weren't real gold, we naturally got somewhat pissed. Especially when the IMF told us it would likely cost UK taxpayers $200bn.

So given that, and given the fact that some of these banks are now in direct public ownership, and given the fact that their profit surge reflects the extraordinarily low interest rates implemented to shore up the banking system, you might have thought they'd go easy on the old bonus bonanza for a while.

Wouldn't you?

Nah.

No chance.

So what should we do?

As we've said many times before, the obvious and necessary step is to break retail high street banking away from investment casino banking (a new Glass-Steagall). We continue to guarantee (and heavily regulate*) high street banks, but investment banks are on their own. Granny's high street bank deposit is safe, but the Bastard Corporation's super-enhanced Teir 2 capital notes are not.

And we announce it loudly to the world. We say: "London remains the global centre of casino operations, and we will do everything to enhance its position, including light touch regulation. We celebrate and embrace its high rolling players. They can snuffle up as much as they like; they can buy up Holland Park and Oxfordshire; we will never impose punitive personal taxation upon them. But... and this is an important but... nobody should assume we are guaranteeing them at the tables, because we are not. If they lose your family fortune, it stays lost. Buyer beware."

Ah, you say, that's all fine and large. But Lehman was already a pure investment bank, yet when it went down it brought down the roof. So would a new Glass-Steagall actually work?

Sure, Lehman was a pure investment bank, so in theory its collapse should not have brought the world down. But the problem was that everyone had assumed the US government would stand by it. Nobody had ever said what we're proposing is said now, so when Paulson pulled the plug, it came as a huge shock. Nobody was any longer sure of anything.

If the rules were spelled out clearly in advance, we wouldn't have that problem. And because their cost of capital would increase, investment banks would find it much harder to grow so big they could never be allowed to fail.

Focusing on bankers' bonuses is focusing on entirely the wrong issue.

*Footnote - We've heard it argued that experience with the Crock shows that splitting investment and retail banking isn't the real issue - after all, the Crock was a pure retail bank. But actually, all the Crock proves is that our retail bank regulator was incompetent. The FSA did a truly shocking job of regulating Northern Rock, as the subsequent enquiries showed. And that experience ought to make us even more wary of assuming those same stumbling regulators are somehow capable of regulating global megabanks which incorporate both retail and investment banking under one roof. It's pure fantasy.

Law Facing Yet More Disrepute

What we really need is a law against vacuous speeches

No time for a proper blog today, but I've just taken a quick skim through Darling's conference speech. I wanted to find the detail on his two pre-announced Big Announcements, ie Labour's new laws to "crack down on bankers' bonuses", and to ensure "fiscal responsibility".

Here's what he told us:

1. Bankers bonuses

"... in the next few weeks we will introduce legislation to end the reckless culture that puts short-term profits over long-term success. It will mean an end to automatic bank bonuses year after year. It will mean an end to immediate pay-outs for top management. Any bonuses will have to be paid over years, so they can be clawed-back if not warranted by long-term performance."

Riigghht... but how exactly?

How will Labour's long-term bonus arrangements differ from the long-term bonus arrangements already in place for top management in all real world city firms? Doesn't Darling know that top management's principal bonuses are almost always geared to long-term (ie 3-5 year) targets?

And how will the claw-back work exactly? And if short-term profits turn bad in the long-term, will companies be able to claw back the corporation tax they initially paid? If not, why not?

In reality, using the law to control bankers' bonuses doesn't have a prayer of working. At best, it will simply provide a boost to the off-piste remuneration industry. At worst, it will drive the bankers abroad (remembering that pre-Crash the City was contributing nearly �70bn pa to the Treasury's tax coffers - or more than the whole of VAT receipts this year).

An unambigous lesson from the 70s is that incomes policy does not work. Bringing the law into wage setting merely brings the law itself into disrepute*.


2. Fiscal Responsibility Act

"We must keep the public finances on a sustainable path. The long-term health of our economy depends on it. That is why we will introduce a new Fiscal Responsibility Act to require that the Government reduces the budget deficit year on year, ensuring that the national debt remains sustainable in the medium term. But we need to do that rationally, in a way that is right for the economy, not driven by dogma."

Ah well, rationality vs dogma. A big welcome back to the strawman.

But a Fiscal Responsibility Act? Given our long-standing enthusiasm for fiscal rules, surely we should welcome that?

No. We certainly want a stated medium term fiscal strategy, complete with rules (including the Third Fiscal Rule eg see here). But bringing the law in would muddy the waters catastrophically.

What would happen if the government failed to hit its legislated fiscal targets? Would the Chancellor go to jail? Would there be a big fine? Who'd pay it? More to the point, who'd pay the lawyers to conduct the five years' worth of hearings?

No, the consequences of failure should continue to be financial (via the market reaction), and of course, political.

Once again, bringing in the law would inevitably bring it into disrepute.

What is it with Labour? Do they really believe the answer to everything is more laws? Do they really believe you can legislate away child poverty, "irresponsible" bankers bonuses, and profligate politicos?

Somehow, you'd think that a government whose Attorney-General has been busted for breaking her own law would be rather more circumpect.

Thank God they're finished.

*Footnote - What would we do about banker bonuses? Nothing. We have no idea what bankers should be paid. But we would break up the megabanks into their high street and investment banking components, and make it crystal clear that our taxpayer guarantee only applies to high street bank deposits. And the high street banks would be heavily constrained in terms of the risks they could run.

We Should Invent A Cure For All Known Diseases

Job done. Not.

I've just read the much trailed G20 open letter Brown has signed jointly with Angela and Sarko. It says the G20 should "design an international regulatory framework for the financial sector that puts it at the service of the real economy".

Er, yessss... only, if we knew how to do that, we wouldn't need the talcum powder.

Well, OK, they do go on to say banks should have better remuneration "governance", more remuneration transparency, more emphasis on the long-term, and bonuses that can go down as well as up.

But how exactly? Do they seriously imagine banks don't already have remuneration governance systems? Do they think current bonus structures ignore the long-term, or can't deliver cuts as well as increases?

And who's going to decide whether bonuses are "excessive"? And how would governments possibly enforce any limits?

The truth is that this letter is a purely political document, aimed solely at domestic electorates. As it says:

"Our citizens are deeply shocked at the revival of reprehensible practices, despite taxpayers' money having been mobilized to support the financial sector at the height of the crisis."

Translation: we, your leaders, are on the side of the citizens and the angels against the evil bankers; we go to the G20 meeting to fight for you; it won't be our fault when the arrogant self-serving yanks veto the whole deal.

But as we've blogged before, tackling bankers' bonuses is tackling the symptom not the disease.

The fundamental issue we face is the so-called "Iceland problem" - we taxpayers are collectively guaranteeing a banking system that has grown far beyond our capacity to back that guarantee. Worse, we are providing the guarantee at virtually no cost to the banks. As the Prof puts it in his first post-vacation blog:

"The financial sector is too big throughout the overdeveloped world in part because much of it enjoys a free state guarantee against default on its unsecured debt. Retail deposits are explicitly insured, but at premiums that imply a taxpayer subsidy. Other counterparties of banks and other systemically important financial institutions also benefit from implicit default guarantees. The cost of capital to the banking sector is subsidised, causing the sector to be too large."

So what can we do?

As we've blogged before, we'd start by separating high street retail banking from wholesale "casino" banking. The taxpayer guarantee would be explicitly confined to retail depositors, and in the event of a bank insolvency, any wholesale depositors or bond holders would be on their own.

Once wholesale creditors understood that, minds would get concentrated. High risk banks would suddenly find their access to cheap funds severely curtailed. The whole issue of risk would be much more centre stage.

In that world, banks and their investors would have a much greater incentive to rein in their traders and loans officers. Bonuses would be recast by the banks themselves, rather than by a bunch of blundering incomes policy bureaucrats.

Of course, for such a regime to be effective, the authorities would have to show they really were prepared to let an insolvent bank go (by which we mean allowing it to be taken over by a so-called "special resolution regime", run by the authorities themselves and designed to liquidate the failed bank in an orderly way).

Which brings us to the case of Lehmans.

Because as we recall, it was the US Treasury's decision to let Lehman go in September 2008 that triggered the near-collapse of the entire global financial system. Even though it had no retail depositors and might in some sense have been easier to let go, the ensuing panic in the wholesale markets showed that everybody had been assuming the US taxpayer guarantee applied to all Lehman's liabilities, including wholesale. And if a player as big as Lehman could go, nobody was safe.

So does that mean we can never let a big bank go? That in reality we're locked in, whatever the niceties of our banking regulations may say?

Certainly there are plenty of people who reckon US Treasury Secretary Paulson made a huge error over Lehman: if he didn't understand the bank was too big to fail he was an idiot (just like his boss). Indeed, regulators in this country even try to excuse their own lamentable failures here at home by fingering Paulson. In all seriousnness the FSA's Hector Sants says:

"...it was a mistake to let Lehman fail... Without the future market shock created by Lehman Brothers' collapse, RBS may not have failed."

But we've just had an interesting insight into the circumstances of that Lehman weekend (HTP Jeremy P). According to Paulson himself, the real culprit, the man who really broke the bank, was none other than our own A Darling Esq.

As you recall, over that weekend Barclays was negotiating to take over at least the good bits of Lehman (see here for useful account). But they and the UK authorities would only go ahead if the US Treasury offered to guarantee a big chunk of Lehman's liabilities.

Unfortunately, they omitted to make that crucial point clear to Paulson until the very last moment:

"Paulson has blamed Lehman's demise on Alistair Darling's failure to let Washington know of his misgivings until it was too late. Paulson has told journalists that during a transatlantic phone call the chancellor said he was not prepared to import the American "cancer" into Britain � something Darling strongly denies."

Now of course, Paulson has an axe here, but his account has a ring of authenticity. Brown/Darling's misgivings would never have been an easy message to convey to Paulson, and there is every likelihood they avoided voicing them until the last possible minute - that would be typical of the spineless way this government conducts itself (cf Brown's entirely inconsistent messages to the Libyans and the yanks over the Lockerbie bomber's release).

On the more general question, we agree with Bank of England Governor King: if a bank is too big to fail, it is too big. Which is another reason why our regulators should focus on breaking up the big megabanks into their retail and wholesale components. We simply can't afford banks that are too big to fail.

Unfortunately, as the spat between Paulson and Darling highlights, the chances of the G20 agreeing anything meaningful on that or any other aspect of bank regulation are approximately zero.

Which is a worry.

PS As widely reported, yesterday's updated GDP forecast from the OECD shows the outlook starting to improve in most major economies with the 2009 decline in G7 GDP revised from -4.1% to -3.7%. The glaring exception is the UK, where the OECD have shaded their 2009 numbers down further, from -4.3% to -4.7%. So much for Gordo's green shoots. And the OECD warns: "Countries need to prepare for the removal of the exceptional degree of support afforded by current monetary and fiscal policy stances. In this regard, [they need to prepare] credible exit strategies and fiscal consolidation plans now." We couldn't agree more (eg see this blog).

Socially Useless

According to FSA head Lord Turner, much of the activities of the City of London are "socially useless".

Er... how does he reckon that?

Unless Tyler has got this wrong, the City has long been Britain's big success story. It has generated a large chunk of our national income, paid humongous taxes, and provided hundreds of thousands of highly paid jobs. It's also paid for all those cheap clothes and tellies we now import from China:

Doesn't sound useless. In fact Tyler reckons it sounds jolly useful indeed.

What's that?

The cost of the bank bail-outs has negated all the apparent benefits?

Well, yes, you certainly have point there. The IMF reckons the bailouts will eventually cost UK taxpayers $200bn, which we could certainly live without.

But even if you accept - as we do - that we need radical new safeguards against a recurrence (eg see this blog), taking a long view, net net we're still well in profit on the City.

Long-term, we'd be much worse off without it. We never earned much of a living from turning out Austin Allegros, even though back in the 60s and 70s the commissars virtually to a man considered manufacturing to be far more socially useful than mere "paper shuffling" in the City (who can forget the damage inflicted by Wislon's notorious Selective Employment Tax directed against our useless service industries?).

So the head of our financial regulator should not be shooting his mouth off about swathes of the City being "socially useless". Especially since - as we noted earlier in the week - at this very moment many of the City's movers and shakers are actively considering moving and shaking themselves out of Britain altogether. Which they could easily do.

Turner is in the unfortunate and frustrating position of presiding over an organisation that has bogged up bigtime (eg see here for its appalling lapses over the Crock disaster), has zero credibility, and which will soon be abolished. Presumably organisational morale is rock bottom.

But that is no reason for him to tour leftwing political salons talking the City down. There are plenty of others around to do that - most of whom, like the BBC, have seized on his Lordship's remarks with glee.

Someone needs to tape his gob shut soonest.