Editor’s blog: The dark arts of banking

I’d say the financial sector had been supping long and deep in the last chance saloon for many months before today’s bombshell from SocGen landed on our heads. Five billion euros gone missing. That’s three point eight billion pounds sterling. Say it slowly. Let it sink in.

Many have now completely lost what little faith they had left in the banks – both those who work in them and those who run them. For the last few years the bankers’ art has become darker and more arcane as their financial instruments become ever more abstruse and their risk-taking ever more outrageous. The man in the street’s uneasy suspicion of swaggering, bonus-laden fat-cats now threatens to develop into a widely-held contempt and anger that their excesses threaten to drag us all under. And who can be surprised when the explanation for today’s SocGen calamity is couched in gobbledygook language like this: ‘his positions were in vanilla futures hedging on European equity market indices’ that were ‘beyond his limited authority’. What in god’s name does this mean? In fact, he was actually up to something relatively rudimentary.

As the BBC’s Robert Peston correctly observes: ‘Here’s the scandal: many of the bankers who created this poison trousered massive rewards, running to tens of millions of dollars each. They can sit on a beach and need never work again, whereas we are paying the price.’

And when you have dry-as-dust commentators like the FT’s Martin Wolf expressing doubts that the banks can keep their own houses in order when it comes to remuneration levels, you know there’s a proper swell waiting to come ashore. They have been allowed to get away with it for too long because the rest of us just didn’t understand what they were all up to. As Wolf says, banking is sui generis: ‘In no other industry is it as hard for outsiders to judge the quality of decision making.’

In other words, they are far too smart for the rest of us to understand. But what we do understand is their indignation if we get upset when they come a cropper and get the rest of us to bail them out. As Wolf notes sourly: ‘No industry has a comparable talent for privatising gains and socialising losses.’

I cannot pretend to know what the solution is. Beer and sandwiches at Number Ten with the heads of Goldman, Merrill Lynch etc plus a couple of representatives from the TUC to discuss what will be acceptable traders’ bonuses for 2008? I don’t think so.

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    Not only do I think Matthew’s comments suitably insightful, but they are also incredibly refreshing to read. With psychological superstructures such as “banking” and “finance”, there is a tendancy to forget that there are a group of people who are ultimatley paid vast amounts of money to not only safeguard the economy but to also be accountable when these things go wrong. These “bank managers” are able to turn their own incomes into fortunes by very simply being in these trusted positions, something I don’t think most of us have a problem with. But when things go wrong, surely they should also take a share in that misfortune? Nowadays it seems almost imploitical to suggest they are fallible human beings – seen as they are to be able to amass such wealth. However, if those of us in positions of trust in the “real world” reneged so extensively on our contracts not only would we be professionally disgraced and sacked without a penny to rub together, we could expect serious – even criminal – investigations to be launched. This is a clear “one rule for them and another for us” situation, and, as MT so brilliantly points out in today’s lead article, it really does stick in the craw.