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No Banking Bonanza And No Bankers Bonuses

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Bank Bonanza? Forbes Says Don’t Bet On It

Earnings season won’t be an apocalypse. But boom times? Hardly.  Don’t let a little accounting change fool you; banks will still struggle to eke out profits this year.  Rising loan defaults and the gloomy economic conditions are largely to blame, despite factors seeming to work in banks’ favor.

It may be that Forbes is missing the big picture.  After all we have just had the G20 summit.  The world’s press has given a largely positive reaction to the G20 summit’s efforts to tackle the global financial crisis.  But some newspapers express fears that the G20′s measures do not go far enough.

The London-based Financial Times described the detail on future fiscal stimulus and cleaning up the banks as “disappointingly thin”.

The weakest part of the package is the financial element. Banks are still gravely wounded. The financial crisis lit the fuse for this recession. It may also prolong the fire; the crisis will last much longer if major countries refuse to clean up their banks. Given the range of countries at the G20, a one-size-fits-all bank rescue policy was never feasible. But the absence of detail about a common approach to cleansing the banks of their toxic assets is extremely disconcerting. Stating vague commitments only serves to create fears that little substance lies behind the words.

Here is a brief rundown of the measures announced at the G20 meeting in London on April 2:

  1. An additional US$1.1-trillion program to restore credit, growth and jobs in the world economy
  2. To increase regulation and oversight to important financial institutions, instruments and markets, including hedge funds, and to focus regulators on “macro-prudential risks”
  3. Financial Stability Forum is renamed the Financial Stability Board and given wider mandate to promote financial stability, set financial guidelines and collaborate with the IMF
  4. Endorse and implement the new principles on pay and compensation and to support sustainable compensation schemes
  5. To take action against uncooperative jurisdictions, including tax havens
  6. To extend regulatory oversight and registration to credit-rating agencies
  7. To refrain from raising new barriers to investment or to trade in goods and services

Items 3 and 4 in that list may well have real teeth.  There is public outrage at the details that have been revealed about bonuses and the circumstances under which they are often awarded and paid out.  One might have hoped that corporate governance and individual morality might have made such bonuses the exception rather than apparently the rule. 

In that light it is most satisfying to see what Henry Mintzberg is writing on Executive Compensation: It’s time to call the bluff of those highrolling CEOs.  He is the Cleghorn Professor of management studies at McGill University. He suspects that when it comes to executive compensation, corporate boards are finally ready to take a stand.  He offers the following win-win advice:

Dismiss out of hand, without one second’s hesitation, any candidate for a CEO position who seeks a compensation package that would single him or her way out from everyone else in the company. In fact, terminate discussions immediately at the mere mention of the word “bonus.”

These prove the candidate has no business running a business of co-operating human beings. (Should this person not comprehend, cite his or her mention a few moments earlier of the importance of “teamwork,” and how “people are a company’s greatest asset.”)

This proposal will save tons of money and send a positive signal to everyone else in the company for a change, and the firm might just end up with a CEO who is a real leader. Imagine that.

Great advice.  It is a sad commentary on business when such wise words will be seen to be somewhat provocative. 

Nevertheless the outrageous behavior of some members of the financial communities in both the USA and the UK and the global publicity about them mean that the world can never be the same.  Banking bonanzas there may be in the future but it is essential that all stakeholders benefit rather than just a privileged and unworthy few.

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Bankruptcies Soar And There Will Be More

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As a confirmation of the depth of the recession around the world the numbers of filings for bankruptcy seem to be soaring wherever you look.  Here are just some of those headlines.

Canadian bankruptcies soar 47 percent in December

The Office of the Superintendent of Bankruptcy said Monday 8,299 individuals and businesses went bankrupt in December, up from 5,659 for December, 2007, a jump of 46.7 percent.  The latest numbers are a staggering sign of how quickly the Canadian economy has slowed.

Japan company bankruptcies soar

Corporate bankruptcies rose 16 percent to a six-year high for the month of January, and the number of bankruptcies among listed companies is already at a record high for any financial year since World War Two, research firm Tokyo Shoko Research said.

Personal bankruptcies ballooned in Mass. US, last year

“There were 11,638 filings under Chapter 7 of the US bankruptcy code last year, up from 8,245 in 2007 and more than double the number in 2006 when there were 4,698 filings,” the Warren Group, a Boston firm that tracks such data, said in a press release. “Nearly all of the filings, or 98 percent, were by individuals.”

Record numbers are declared bankrupt in the UK as recession bites

The number of people being made bankrupt hit an all-time high during the last three months of 2008, as the country’s worst recession in three decades left thousands of individuals unable to pay their debts.

The increase in the number of people declaring themselves insolvent was particularly high in Scotland and Northern Ireland – jumping 75 and 39 per cent respectively in the final quarter of 2008, compared to the same period a year ago. In England and Wales, there was an 18.5 per cent jump in personal insolvencies. In total, 35,694 people declared themselves insolvent across the UK during the quarter.

Numbers are up for both personal and company filings for bankruptcy.  However given the recent fate of Iceland, questions are even raised about the bankruptcy of countries.  The Huffington Post suggests that the UK Will Be Hardest Hit By Global Recession: IMF.

World economists predicted today that the UK would be hit harder than any other developed nation by the worst recession in more than 60 years.  The International Monetary Fund’s (IMF) grim outlook showed the economy shrinking by 2.8 per cent this year, more than twice as bad as it previously thought and well above the 2 per cent average for advanced countries.

The Institute for Fiscal Studies (IFS) also predicted that swollen levels of public sector debt would not return to pre-crisis levels for more than 20 years.

It may be a overly pessimistic view but Web TV Hub suggests that Britain itself may be on the road to bankruptcy.  You can read the details of its arguments in the following three part series on Bankrupt Britain:

Part 1: Europe Blames America While U.K Warned of Bankruptcy

Part 2: U.K Government Destroying Britain to Help Banks?

Part 3: Is the BBC Hiding Britain’s Bankruptcy?

With this concern for the possibility of the U.K government becoming bankrupt, the series suggests that many U.K news organizations are failing to inform the public of the issues in this argument.

The strength of an economy depends in part on the confidence that the government can generate in the nation.  Clearly in the US, President Obama has been able to create a confidence-building stimulus deal.

Obama’s success at steering a stimulus package from promise to reality is a confidence booster, in and of itself, almost without respect to the actual content of the package. A couple more accomplishments like this, and he might begin to create the illusion that he is an effective leader who can get things done. For a nation shell-shocked after eight years of fiascos, that could be a pretty key step toward facilitating an eventual recovery.

One hopes that other national leaders will be equally effective in building confidence through the economic actions they are taking to counter the recession.

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