Boomer Banker

As readers of this blog know, there is often a focus on compensation culture within banks. Or rather a focus on the apparent inconsequential compensation culture of many banks. A very good example of this issue came up in a store in 5 March 2021 Financial Times report on the compensation provided to their new CEO, Ralph Hamers. As readers may recall, Mr. Hamers was already a topic in this blog on 16 December for issues related to his work at ING Bank in The Netherlands.

It appears that UBS has decided to highly compensate Mr. Hamers for his work in the last quarter of 2021. The article noted that “Ralph Hamers has been paid SFr4.2m ($4.5m) for his first four months of work, more than his entire annual earnings during his time as the head of Dutch bank ING.” But what makes this payment most interesting is that Hamers began his role at UBS on 1 September 2021 and took over as CEO on 1 November – already one month into the 4th quarter for which he was handsomely paid. The article goes on to quote the UBS annual report: “Ralph Hamers decisively led UBS as group CEO through the fourth quarter and delivered very strong results, thereby successfully completing the year and contributing to achieving the best results for UBS in a decade.”

With all due respect to Hamers who has been a very good bank manager over many years, it seems a bit unusual that he is paid so highly for results in a quarter when he was only in charge for 2 months. Furthermore, one could ask how much impact his leadership or the leadership of any bank CEO has on earnings in a quarter where they are just beginning their role. Does the UBS Compensation Committee really believe that his efforts in 2 months were so significant that such a payout is justified? Or is this just another example of why cynicism regarding compensation of bankers is justified?

On 28 February in the Financial Times, Martin Sandhu writes about the need to “clean up global finance” citing two recent reports. He notes further that “(a)ccording to (one) report, the world’s governments lose more than half a trillion dollars annually to tax manoeuvres that circumvent the intentions of legislatures by exploiting loopholes and discrepancies in the law.” Clearly these are resources that are needed as governments seek to address economic consequences of the COVID-19 crisis.

The first report Sandhu cites is form a UN High-Level Panel on International Financial Accountability, Transparency and Integrity. Their report was issued on 25 February. In this report’s Executive Summary,  the key conclusions can be found in this paragraph: “Illicit financial flows (IFFs) — from tax abuse, cross-border corruption, and transnational financial crime — drain resources from sustainable development . They worsen inequalities, fuel instability, undermine governance, and damage public trust . Ultimately, they contribute to States not being able to fulfil their human rights obligations.”

Whilst not directly mentioning banks, specific comments are certainly directed towards the role of banks in the international financial flows:

• The global financial system must be reformed, redesigned and revitalised so that it conforms to four values – accountability, legitimacy, transparency, and fairness.
• Policies shaping the global financial system and furthering financial integrity must be redesigned to adhere to the values of accountability, legitimacy, transparency and fairness.
• Enablers should be held accountable to agreed standards; the media should be protected; and civil society should be included in policy-making.

The second report cited was issued by the Center for American Progress. It includes a preface endorsed key legislative leaders from the US, the UK and the EU:

• Sen. Robert Menendez, Chairman, U.S. Senate Foreign Relations Committee
• Tom Tugendhat MP, Chairman, U.K. Foreign Affairs Committee, and
• David McAllister MEP, Chairman, EU Parliament Committee on Foreign Affairs

The key conclusions can be found in this paragraph from the Executive Summary: “The emergence of kleptocracy as a threat to global democracy has occurred in tandem with the growth of poorly regulated and ungoverned spaces in the global financial sys- tem, which in turn has birthed a shadow economy that now contains immense flows of anonymous wealth. The rise of financial secrecy has enabled the “globalization” of corruption, empowering kleptocratic states and actors on the world stage by offering them new tools and access to foreign markets. This trend toward globalized corruption has been enabled in crucial part by regulatory asymmetries among key international economic actors and a lack of resources and political will in law enforcement.”

From both of these reports it is clear that the role of banks, especially large international banks, will and should be under scrutiny for their role in facilitating flows of funds of a dubious nature. As with KYC and AML regulations, banks will need to look at their practices and more importantly their cultures to ensure they are not contributing to a problem but rather are part of the solution.

Recently the Chicago City Council has taken to task the larger banks providing banking services for their lack of support for community lending in Chicago – especially for home mortgages. The efforts of the City Council were well detailed in a recent report by WBEZ, the Chicago public radio station. Whilst banks tend to be very liquid at the moment, the amount of money on deposit from the City of Chicago is still meaningful as it is around $500 million. In addition the city uses the banks for operational services for which it is likely that fees are also paid. But from the article it would appear that that banks prefer not to discuss the issue as they refused to attend the council hearings relative to their track record. They also did not provide comments to WBEZ for their report.

The action of the City Council was driven by a comprehensive report also developed by WBEZ in cooperation with the non-profit City News Bureau and released in June 2020. This report includes a particularly good graphic showing that the lending for home mortgages is highly concentrated in the wealthier neighbourhoods, which coincidentally (or not) are primarily White. Black and Latino neighbourhoods showed considerable lower levels of lending. In fact four primarily White neighbourhoods received more lending that all the Black and Latino neighbourhoods on a combined basis. Even if adjusted for housing price differentials, the actual number of loans tells a similar story by a ratio of 4 to 1.

For many in the US the path to basic wealth accumulation has gone through the route of home ownership. If there is no mortgage funding for acquiring homes, there can not be an effective growth of wealth for Black and Latin families. And so the wealth gap in the US based on ethnic background continues to be driven by choices made by banks. Perhaps the efforts of the Corporate Social Responsibility departments of these very large banks should focus their efforts on improving the lending approach of their banks instead of producing polished reports on all the good work their banks do. That change would lead to results that count in improving the lives and wealth of people of all backgrounds.

A recent Financial Times article regarding regulation of subprime lending to individuals in the US raised interesting thoughts that also apply to Microfinance lending. The core of the article covers the potential for predatory practices that subprime lenders in the US have used ensure that borrowers stay in debt and pay relatively high levels of interest rates for that privilege. This issue is one which occurs frequently in Microfinance lending as well.

The core of the dilemma was outlined in the article as follows: “There is little doubt that instalment loans land some borrowers in trouble. The harder thing to determine is whether there are offsetting benefits.” The article than quotes a lawyer who works for subprime lenders noting that these loans are made to individuals who desperately need money, usually for an emergency that has cropped up in their lives. Unexpected and uninsured medical expenses, car repair issues, and so forth are clearly a threat for the poor in the US given that most poor people also lack savings. As noted in a Federal Reserve study, 30% of the US population did not have resource to make a $400 emergency payment.

However, perhaps the discussion is about the wrong topic. The real issue may be that those using predatory credit are just not earning enough to build up financial security for themselves and their families. Perhaps the real solution is not more regulation of predatory lenders but policies such as an increased minimum wage or support for children as proposed by Mitt Romney so that families are not forced to use the predatory credit that keeps them forever in debt at high interest rates.

No sooner had I posted my comments yesterday than an essay from Tom Peters appeared in the Financial Times. Peters spent part of his career at McKinsey and his remarks were generated in part by the McKinsey settlement regarding their work with pharmaceutical companies (and especially Purdue Pharma) for increasing sales of opioids. But he uses that example to focus on much larger issues plaguing the business world today.

He is especially critical of the current business school model that focuses on marketing, finance and quantitative analysis. But as he notes: “The “people stuff” and “culture stuff” gets short shrift in virtually all cases.”  He further links this problem to the focus of too many corporations on only making profits as preached by Milton Friedman. An issue covered by me in an earlier post.

But perhaps the most important point I took away from Peters’ remarks relate to his early fame when he preached managing by walking around. For Peters this insight made in 1980 focused on the value managers receive from walking around their companies and finding out what is happening with their employees. But perhaps this insight should be extended to managing by walking around in society. Would the McKinsey consultants continued to press for more sales of opioids if they had seen the destruction in communities where overuse of opioids ruined families?

Perhaps a real issue to be addressed is getting our professional cohorts more in touch with the real world and not just the world in which they live. A world filled with other professionals isolated from how most people live. A world with schools that can teach remotely to children with their own laptops and mobile devices? With state of the art internet connections? With the ability to hire tutors as needed? With advantages that will only lead to further inequality?

Two recent articles highlight bad behaviour among professionals – a source of serious concern in our society and especially for banks. On 4 February the Financial Times had a detailed article regarding a settlement between McKinsey and a variety of US jurisdictions regarding McKinsey’s work for pharmaceutical companies relative to opioids. Perhaps the most telling comment was from the Colorado attorney general who noted: “The partners who tried to cover up their actions placed profit over responsible behaviour and acted reprehensibly.” Although his remarks related to the coverup which included potential destruction of evidence, the core of the message relates to professionals who put profit before responsible behaviour.

A similar story of profit before propriety was seen in a Financial Times article covering issues at Credit Suisse in its private bank. In this case the information came to the surface only by accident when a clerical error allowed a confidential report of the Swiss market regulator, Finma. Normally those reports are not publicly available but this one surfaced most likely as part of a lawsuit. As noted in the FT article: “About a dozen senior Credit Suisse executives — including top management — were aware of concerns over Lescaudron and repeated rule-breaking by him, the report said.” Perhaps that is the reason the report like other Finma reports are not made public. One could ask why a governmental body such as Finma is allowed to hide this information from the people who pay for its services.

A series of articles and opinions in the Financial Times at the end of January and beginning of February are indicative of how much has changed vis-a-vis sustainability.  Gillian Tett started this chain off on 28 January with practical insight on the need to think “olive.”  Whilst this focus on achievable change may not meet the demands of serious environmental activists and may not be enough to avoid climate change disaster, it does provide a route for many companies to start to make the needed change. It may well be that after taking initial and inadequate actions to address their carbon footprint, companies may discover they can and must move even faster and more fundamentally.

Ms. Tett followed up a few days later in an overview of how climate change is now seen as a profit opportunity – especially for Wall Street firms. She focuses on how Larry Fink of BlackRock realised in his personal experiences that climate change was real and a real threat to the economy. She goes on to highlight the challenge the environmental movement has had working with Wall Street and major corporations but notes a mindset change beginning around 2018. She now predicts that “2021 is likely to be the year that green meets Wall Street greed and fear. Finance sometimes moves in strange lines.”

But there can be roadblocks to this shift if boards are not adequately prepared to address the issues of climate change. Pilita Clark in the Financial Times at the end of January notes the lack of expertise at the board level. Corporate boards have long had a focus on diversity but it is clear from her discussion with someone knowledgeable about board composition, that this diversity push has not focused on the need for experience on environmental issues. I suspect boards are going to regret this lack of diversity in the very near future as they face increased demands to be environmentally positive.

Finally the Financial Times editorial board took up the critical issue of climate reporting standards at the beginning of February. Whilst covering the myriad efforts to create standards, they go on to note that “accounting standards that accurately reflect what risks companies are taking have a vital role to play in speeding up the transition to cleaner energy.” Clearly this reporting will be sorted out and investors and society will be able to judge on a standardised basis who is helping to address the climate risks we face and who is harming.

So 2021 begins with hope for a future in which money is channeled to address climate change risks. But hope tempered with the fear that it may be too little, too late.

The ongoing shift to a focus on sustainable investing and getting banks to focus on climate change reflects a significant change. As always progress is not always only in one direction and there was a meaningful effort in the US at the end of 2020 to take a big step backwards. The US Comptroller of the Currency issued a rule that in essence required banks to continue to lend for fossil fuel projects and companies. As reported in Axios, this rule was finalised just before the change of administration despite opposition from many including the editorial board of the Financial Times. It is interesting that with General Motors now stating that they will stop selling fossil fuel powered cars by 2035 why there should be a bank rule requiring banks to lend for a product that will increasingly no longer be needed. The image of buggy whips comes to mind.

But despite this backward movement by the US Comptroller of the Currency, there are numerous examples of increased focus by banks, investors, regulators and governments on the need to address climate change. The year began with Christine Lagarde positioning the European Central Bank as a leader in addressing climate change as outlined in a survey by the Financial Times of a large group of economist.

And pressure on specific banks and initiatives by varied banks continue to move the banking industry towards a focus on financing that addresses climate change. HSBC will face pressure from its owners at its April shareholders meeting as reported in the Financial Times. Clearly other banks are feeling similar pressure as they try to demonstrate their commitment to addressing climate change. The Financial Times provided a very good summary of these efforts in an article in early January.

On the regulatory front the European Union continues its efforts to standardise reporting on sustainable finance as noted in the Financial Times. The Financial Times further noted the political pressure arising from this effort but it is clear that the ultimately there will be standard reporting that will allow investors to make informed choices relative to climate change action. In the US there was also a call for the Securities Exchange Commission to start requiring climate change reporting as noted in an opinion article in Slate. Given the many remarks from President Biden on the importance of addressing climate change, it is likely that this call will be answered.

So whilst it is not a purely positive picture, the pressure to put climate change as a priority for investors, companies and banks will surely be a key theme in 2021.

As noted in my review of 2020, bankers behaving badly is a significant theme. And the beat goes on in 2021 with stories reflecting this unfortunate trend. It is my opinion that until banks create cultures that value and celebrate ethical behaviour, this trend will not stop. Unfortunately for far too many banks the only culture they seem to create is one focused on making money regardless of the behaviours used to do so.

As in the past Deutsche Bank continues to be a leader in this area. On 8 January the Financial Times reported that Deutsche Bank would be paying yet more fines – this time $125 million.  The underlying issue for most of the fine was the use of “business consultants” who were paid fees that were used to conceal the payment of bribes to acquire business. And on 25 January the Financial Times reported that Deutsche Bank had started an internal probe to look at the potential mis-selling of products to clients with the potential that some of the profits realised by Deutsche Bank were shared with co-workers of the clients. This time Deutsche Bank was taking the lead in the investigation and keeping its regulators informed but nevertheless the culture of the bank becomes a question. What a shame that the energy and knowledge of the bankers involved were not focused on helping clients rather than looking for easy (albeit illegal) ways for the bank and its employees to make money.

On a different front we learned through the Financial Times on 24 January that MasterCard has seen fit to increase fees for transactions that due to Brexit are now seen as crossing legal boundaries. Whilst one could say that this action was an appropriate response to the decision of the United Kingdom to leave the European Union, it is an example of financial organisations looking constantly for ways to increase revenues. It is unclear that the costs of clearing transactions for MasterCard increased due to Brexit but they did increase the costs by nearly 500% with that increase going to the banks that process the transactions. Once again clients being forced to pay for bank profitability without receiving a substantially better service.

But I think it is useful to see that it is not only banks and bankers that have a culture issue. In a late 2020 article the accounting profession was also brought to account for its behaviour. The Financial Times noted that KPMG was being investigated for its role relative to the efforts by a buyout fund to avoid responsibility for the pension liabilities of an acquisition. As with banking there are many opportunities to “legally” take steps to increase profits but what about the morality of reducing the pensions of the c0-workers of the company involved in this transaction. The need for a higher standard of conduct by well paid individuals seems to apply not just to bankers but also to professional services firms.

And finally a bit of cheer on this subject. Today the Financial Times reported that Goldman Sachs has reduced the compensation of its CEO, David Solomon, by $10 million to a “mere” $17.5 million. Goldman noted that Solomon was not “involved in or aware of the firm’s participation in any illicit activity at the time . . . the board views the 1MDB matter as an institutional failure, inconsistent with the high expectations it has for the firm”. A step in the right direction of holding senior management responsible for what happens on their watch.

Now that we are almost halfway through January, I realised it would be good to look back at the themes of Boomer Banker in its first year. And what a year to begin a blog. I suspect many will regard 2020 as a historic year of events ranking up there with 1968 and 1848. In looking at my posts, I realised that there were three large themes throughout the year – themes we are likely to continue to see in 2021. These are:

• A visible shift among investors to focus on more than short term financial returns,
• A clear consensus that climate change is real and banks must do their part to address it, and
• Bankers behaving badly – when will banking culture lead to better banker behaviour

Relative to the investor focus I think my post on 13 December provides the best summary of the change. This post focused on the essays published by the Booth School and edited by Luis Zingales. Clearly a milestone in investor thinking when the home of Milton Friedman takes on a nuanced challenge to his thinking. My very first post (actually in December 2019) covered research sponsored by Deloitte, European Investment Bank and the Global Alliance for Banking on Values that shows banks with a more sustainable approach provided better financial returns. This conclusion was further covered in my post of 7 December that referred to a useful opinion piece in the Financial Times noting financial returns are not everything.

Climate change has generally moved up in importance for setting bank strategies albeit with some retrograde actions from US regulators. A book on the little ice age provided me with some new insights on climate change as noted in a post in February. Finance Watch came with specific actions banks could take as covered in a June post. And development of standards moved forward as noted in September. But along with this progress on making climate change a key issue for banks, there were two actions by US regulators covered in August and November that are intended to make it more difficult for banks to be activists in addressing climate change.

Bankers behaving badly kept surfacing throughout the year. The year began with a post on how banks use clever legal structures to effectively steal taxes from governments. Throughout the year there were posts on questionable banking practices at Wells Fargo, Deutsche Bank and Goldman among others. In September I posted on the importance of culture to address these issues – spending more on compliance will never solve the problems of bad behaviour.

But perhaps the most personally important post was not about bankers behaving badly but rather about how the banking system can be a source of positive change. Noting the passing of Sir Fazle Abed in January was meaningful to me as I had the honour of working with him and learning from him whilst at the Global Alliance for Banking on Values. He represents what bankers, and individuals, should be.

So a year has passed and 2021 started with ongoing stress from COVID-19, economic turmoil and political unrest. And the climate keeps getting warmer. I am sure there will be no end of topics to cover this year as well.