July 12, 2012 8:24 pm
Why the bankers should take a walk
Based on the recent dramatic events at Barclays and JPMorgan Chase, I would like to offer a bit of advice for our readers in banking: the time has come for many of you to take a hike.
As readers of the FT undoubtedly know by now, Barclays agreed to pay $450m to settle allegations that it manipulated the London interbank offered rate – Libor – and its chief executive, Bob Diamond, then resigned. JPMorgan, meanwhile, is struggling to explain how its chief investment office, which was supposed to make safe investments, managed to lose billions of dollars on some of its trades. (The bank should provide an update when it reports earnings Friday.)
I would recommend good walking shoes for financiers because these twin setbacks highlight one of their industry’s most pressing challenges – closing the woefully wide gap that has developed between leading bankers and the rest of us.
Both the Barclays and JPMorgan situations say to me that bankers need to get back to where they once belonged – that territory called the real world. You used to find them there years ago before finance grew so automated and electronic markets began playing an ever-larger role in connecting savers with borrowers.
The problem today is that the emblematic New York or London banker is a creature of the trading floor, sitting in front of a computer and moving mountains of money with keystrokes. If it weren’t for the conventions of skyscrapers, these people wouldn’t even need windows in their offices. They live by the lines and numbers on their screens.
The Barclays case reveals the bad habits that can develop in such situations. As a parent of a teenager myself, I recognise the tendencies. Left to their own devices, kids today just want to close their doors and play around with their computers.
The Barclays bankers were pretty much the same. The bank’s settlement with regulators depicts traders and managers living in their own private world. They brazenly manipulated Libor – a benchmark for many derivatives contracts – to benefit their trading positions and celebrated on email. “Dude! I owe you big time!” one wrote to another. “Come over one day after work and I’m opening a bottle of Bollinger.”
A glimpse of another modern-day banking netherworld emerged when JPMorgan revealed the big losses at its chief investment office. It was a terrible accident: as Jamie Dimon, chief executive, told a US Senate committee, “the bulk” of the CIO’s responsibility was to invest the bank’s “excess cash” – the difference between its deposits and its loans – in a “conservative manner” (which on Wall Street means putting money in fixed-income instruments that can be easily traded).
The mindblower was the size of the portfolio. Mr Dimon noted drily in his Senate testimony that the CIO managed approximately $350bn – a figure that dwarfs the gross domestic products of Singapore, Finland, Israel, Hong Kong and most of the other countries. The more I think about it, the crazier it sounds. On what planet exactly is $350bn “excess cash”? I suspect that if bankers did a little more walking around they might find better ways to use such sums. It couldn’t hurt; the current market valuations of the big banks suggest investors remain wary of backing these screen jockeys as they push their massive piles of money around in the financial markets.
Speaking purely as a customer, I suspect the banks’ next step could involve following in the footsteps of other big US companies – such as Apple or Costco – that have done well by making life easier for people. I know I could use help managing my finances. I bet the same goes for many of my neighbours.
I realise in saying this that these are tough times for banks to step back into their communities and put money to work. The world economy is a mess. Interest rates in the US are low. Consumers are still getting out from under the debts of the last decade.
But bankers have done this before. During the financial crisis, Paul Volcker, the former Federal Reserve chairman, liked to joke that the most important financial innovation he had seen in the past 20 years was the automated teller machine and, as time has passed, I have grown to believe he was on to something.
ATMs are great (I was running up bar bills before I had a debit card, so I know). Surely someone at some big bank could wander around one town or another and think of a way to use the institution to do something more useful than rigging a trade or squandering excess cash. It could be a wonderful life, if you give it a try.
.
As readers of the FT undoubtedly know by now, Barclays agreed to pay $450m to settle allegations that it manipulated the London interbank offered rate – Libor – and its chief executive, Bob Diamond, then resigned. JPMorgan, meanwhile, is struggling to explain how its chief investment office, which was supposed to make safe investments, managed to lose billions of dollars on some of its trades. (The bank should provide an update when it reports earnings Friday.)
I would recommend good walking shoes for financiers because these twin setbacks highlight one of their industry’s most pressing challenges – closing the woefully wide gap that has developed between leading bankers and the rest of us.
Both the Barclays and JPMorgan situations say to me that bankers need to get back to where they once belonged – that territory called the real world. You used to find them there years ago before finance grew so automated and electronic markets began playing an ever-larger role in connecting savers with borrowers.
The problem today is that the emblematic New York or London banker is a creature of the trading floor, sitting in front of a computer and moving mountains of money with keystrokes. If it weren’t for the conventions of skyscrapers, these people wouldn’t even need windows in their offices. They live by the lines and numbers on their screens.
The Barclays case reveals the bad habits that can develop in such situations. As a parent of a teenager myself, I recognise the tendencies. Left to their own devices, kids today just want to close their doors and play around with their computers.
The Barclays bankers were pretty much the same. The bank’s settlement with regulators depicts traders and managers living in their own private world. They brazenly manipulated Libor – a benchmark for many derivatives contracts – to benefit their trading positions and celebrated on email. “Dude! I owe you big time!” one wrote to another. “Come over one day after work and I’m opening a bottle of Bollinger.”
A glimpse of another modern-day banking netherworld emerged when JPMorgan revealed the big losses at its chief investment office. It was a terrible accident: as Jamie Dimon, chief executive, told a US Senate committee, “the bulk” of the CIO’s responsibility was to invest the bank’s “excess cash” – the difference between its deposits and its loans – in a “conservative manner” (which on Wall Street means putting money in fixed-income instruments that can be easily traded).
The mindblower was the size of the portfolio. Mr Dimon noted drily in his Senate testimony that the CIO managed approximately $350bn – a figure that dwarfs the gross domestic products of Singapore, Finland, Israel, Hong Kong and most of the other countries. The more I think about it, the crazier it sounds. On what planet exactly is $350bn “excess cash”? I suspect that if bankers did a little more walking around they might find better ways to use such sums. It couldn’t hurt; the current market valuations of the big banks suggest investors remain wary of backing these screen jockeys as they push their massive piles of money around in the financial markets.
Speaking purely as a customer, I suspect the banks’ next step could involve following in the footsteps of other big US companies – such as Apple or Costco – that have done well by making life easier for people. I know I could use help managing my finances. I bet the same goes for many of my neighbours.
I realise in saying this that these are tough times for banks to step back into their communities and put money to work. The world economy is a mess. Interest rates in the US are low. Consumers are still getting out from under the debts of the last decade.
But bankers have done this before. During the financial crisis, Paul Volcker, the former Federal Reserve chairman, liked to joke that the most important financial innovation he had seen in the past 20 years was the automated teller machine and, as time has passed, I have grown to believe he was on to something.
ATMs are great (I was running up bar bills before I had a debit card, so I know). Surely someone at some big bank could wander around one town or another and think of a way to use the institution to do something more useful than rigging a trade or squandering excess cash. It could be a wonderful life, if you give it a try.
.
Copyright The Financial Times Limited 2012.
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