FRFI 213 February / March 2010

‘You have brought this country to the greatest financial panic in history’.

US Senator Smith Brookhart

‘We brought this country, sir, to its standing in the world through speculation’.

Richard Whitney, Banker and President of the New York Stock Exchange

(Hearing of the Senate Committee on Banking and Currency in 1932 on the causes of the great crash, cited in The Observer 17 January 2010)

While the large corporate banks contemptuously flaunt their vast profits once again by distributing massive bonuses to their partners and bank employees, politicians have to attempt to assuage the anger of millions of people who are suffering from the deepest recession since the 1930s. The speculative activities of the multinational banks are seen as the root cause of this crisis and it has been only an historically unprecedented intervention by capitalist states to support the banks that has led to national income of the main capitalist countries starting after a year or more, very tentatively, to grow again. That is why the ruling class has to show it is willing to consider measures to curb the speculative activities of the banks in an attempt to prevent such a financial crisis of the capitalist system happening again.[1] DAVID YAFFE reports on how the ruling class is confronting these problems in Britain.

During the crisis the losses of financial institutions were socialised and transferred to government balance sheets. The result of this and the fiscal stimulus – tax cuts, higher government spending etc – necessary to lift the major capitalist economies out of recession has been some of the highest public sector deficits seen in peace time. These deficits will be severely cut back by all major capitalist governments over the next few years, driving down the living standards of millions of working people. How quickly these cuts can be implemented is a major dispute among the ruling class. Cut too quickly and risk driving the country back into recession. Cut too slowly and risk the countries’ credit rating on the international markets, making it more expensive to finance public borrowing. Whatever is decided by the various capitalist governments, the vast majority of their populations face years and years of austerity ahead. This is the context in which governments have been forced to take some action to deal with the speculative activities of the large international banks. In Britain, because of the dominant role these banks play in the British economy and the very high public sector deficit, the proximity of a general election has ensured that these issues have become particularly contentious.

Curbing the banks?

Britain, precisely because of the role the financial sector plays in the economy, has been the last of the major capitalist countries to come out of recession, registering a growth rate of 0.1% in the fourth quarter of 2009.[2] Financial services dominate the economy of Britain.[3] The City of London is the world’s leading financial centre. Half of the world’s top 100 banks, 46% of asset managers and 46% of top insurers have a presence in Britain. 80% of Europe’s £440bn hedge fund assets and around 60% of its private equity firms are in Britain. The assets of UK banks are five times Britain’s GDP. Britain’s foreign assets are also around five times Britain’s GDP and 60% of those assets in 2008, £4,261bn or nearly three times the GDP, are loans and deposits abroad by UK banks. Financial services are vital for Britain’s balance of payments, accounting for 70% of the large surplus on services trade. One quarter of corporate taxation comes from the financial services sector. It is simply not credible that any of the main ruling class parties will take measures to curb the financial sector that would undermine the City of London as the engine of British imperialist interests throughout the world.

In early January the Prime Minister, Gordon Brown, insisted that the government had ‘no intention’ of sacrificing the UK’s leading role in financial services. ‘There is no question of choice being made between financial services and manufacturing’ (Financial Times 9 January 2010). This was a clear rebuff to those who might believe the supertax on bankers’ bonuses above £25,000 this financial year, announced in the pre-budget report in December 2009, and the 50% tax rate on high earners’ incomes to be introduced in April 2010 represented some return to so-called ‘core values’ for the Labour Party. When the Chancellor Alistair Darling announced his bonus tax he explicitly linked it with public outrage about bankers’ pay. ‘I say to the bankers: if you want to get off the front pages, for goodness sake show some of the restraint the public want you to’ (Financial Times 25 January 2010). His concern is the approaching general election and he must show he is in tune with a public that is increasingly infuriated by bankers openly parading their wealth during a recession. This is not an attack on the City of London and its global role. Lord Myners, the City Minister, made this clear when he supported large bonuses for the Royal Bank of Scotland (RBS). Speaking to the Scottish Affairs Committee in mid-January, he said it was important that RBS could compete globally and was able to recruit and motivate staff. ‘We are going to see major banks paying very high bonuses, and if we want RBS to play in a global world it has to sell itself appropriately’ (Financial Times 14 January 2010).

Kraft’s debt-financed £11.9bn takeover bid for Cadbury demonstrates how the interests of the financial services sector are paramount in the British economy. Fees of some $390m (£250m) were shared out between banks, advisors and lawyers as a result of the deal. Hedge funds, which bought shares as the bid got underway, made a quick profit. The chief executive of Cadbury, Todd Stitzer, will receive around £12m in cash and shares from the sale. Cadbury’s group employs 6,000 people in the UK and job losses are inevitable as Kraft will cut annual running costs by $675m (The Guardian 20 January 2010).

In the third week of January the very high profits of the major US banks and the large annual bonuses for their bank employees in 2009 were reported. Goldman Sachs actually claimed it was showing restraint by cutting the share of its revenue allocated to pay from 48% to 35.8% – the lowest proportion since the bank became a public company in 1999. The compensation pool was in fact $16.2bn and the average pay packet was $498,000 per employee. Some partners would get millions. Its top London-based partners, in a supposed act of restraint, had their bonuses capped at £1m. Other partners, as well as non-partners, could still expect multi-million pound payouts. Average payouts for other banks ranged from $94,000 at crisis-ridden Citigroup to $378,000 at JP Morgan Chase. The resulting public outrage forced the politicians to respond in a more concerted way.

President Obama led the charge. Trying to seize back the political initiative after the loss of a senate seat in Massachusetts, he said he wanted to cut down the size and scope of the banks. ‘Never again will the American taxpayer be held hostage by a bank that is too big to fail’. He is already seeking to impose a 0.15% levy on banks’ assets over $50bn to raise $90bn over ten years from the largest 50 financial institutions as compensation for potential losses made from bank bailout programmes. Now he is calling for a ban on banks’ proprietary trading – betting/speculating with their own funds to make profits – and a ban on owning, investing in or sponsoring hedge funds and private equity groups. This is a move in the direction of a separation of retail banking and investment banking. He also proposes more generally to limit the size of banks. Bank shares and stockmarkets fell, and bankers expressed outrage after Obama’s speech, but much of this is gesture politics and will have little impact in reality once the commotion dies down. The major banks will take measures to avoid the impact of the new rules should they get through Congress. The concentration and centralisation of banking capital will not be reversed. Indeed, during the financial crisis it was the policy of both US and UK governments to force the mergers of stronger banks with failing ones.

Obama’s proposals became part of a somewhat spurious debate in Britain. Lord Myners, while calling for a review of investment banking and the ‘greed is good’ culture said that he didn’t see ‘anything in Obama’s proposals’ that would change the British approach of higher capital requirements for banks and ‘living wills’. The latter would allow banks to be broken up without the need for taxpayer support should they collapse. Alistair Darling told the Sunday Times (24 January 2010) that Obama’s proposals would not have prevented the crisis. He rejected limiting the size of banks and separating their activities. This is not surprising. RBS, now 84%-owned by the state, is a very large diverse bank which has some 22,000 investment bankers. Darling made it clear he would do nothing to ‘disadvantage London relative to the rest of the world’.

The Conservatives chose to use Obama’s intervention to hit back at the government. But their proposals are empty of real content and even contradictory. Shadow chancellor George Osborne wants to separate retail banking and investment banking but only at the ‘riskiest end’ of the market and then as part of an international agreement. David Cameron, the Tory leader, said the banks should not be stopped from offering the opportunity to speculate. The Tory shadow financial secretary, Mark Hoban, told a London Chamber of Commerce meeting in mid-January in relation to the banks: ‘You don’t encourage a more balanced economy by cutting down the tallest flowers – you allow others to grow.’ In reality, if they get back into power, the Tories, like the Labour Party, would not fundamentally change anything.

Paying for the crisis

In the third week in January Alistair Darling told the Financial Times (19 January 2010) that he will order his ministers to start work on the most swingeing cuts in public spending in a generation. Some departments face cuts of more than 16% over three years. Halving the deficit in four years, he said, was ‘non-negotiable’. The extent of cuts in each department would be revealed in the Budget before the general election. In the same interview he stressed ‘the importance of London as a financial services sector’ and made it clear that the 50% supertax on bankers’ bonuses would not be repeated. He even suggested that the new 50p top rate of income tax would eventually be removed, saying it was not introduced ‘as a matter of ideology’ but to counter the ‘extraordinary’ conditions affecting public finances. It is clear where the Labour government stands.

Already, in the pre-Budget report, Darling has capped public sector pay at 1% for two years from April 2010 and frozen personal allowances and tax thresholds. VAT, a regressive tax, has been put back to 17.5%. The extent of the departmental cuts needed to halve the deficit will mean that it will be working people paying for the financial crisis, with the poorer and more vulnerable sections of the working class suffering most.

Darling attempted to use the fragility of economic recovery in the last quarter of 2009 to hit back at the Tories and support his claim that the opposition would drive the country back into recession by cutting the public sector deficit early in 2010. This is, as we argued in the last issue of FRFI, simply electioneering. It matters little who will be in power after the general election as both parties share the same intention to slash the public sector deficit. With either party in power, it is clear that the interests of the financial services sector and the City of London take priority, as always, over the needs of the mass of the population.

1 Regular readers know that FRFI argues that the fundamental cause of the crisis is rooted in the crisis of capital accumulation and imperialism and the speculative activities of the banks are its product. See the articles on our website: www.revolutionary under FRFI newspaper, Imperialism and Crisis.

2 This figure is provisional and could be revised up or down in the coming months. However it demonstrates the fragility of the upturn in the British economy and was well below expectations.

3 See FRFI 194 and FRFI 210 on our website for articles on the parasitic character of British capitalism.