Reputation loss: Rato, Mervyn and Dimon
The growth myth
If raw capitalism is about creative destruction, we have undoubtedly seen a lot of destruction. It is not yet clear how creative it will be.
On the back of the financial crisis there was a first wave of people such as Dick Fuld of Lehman Brothers and Sir Fred Goodwin of Royal Bank of Scotland.
We are now seeing the second wave. Mervyn King has lost his reputation as a competent governor, although he won’t lose his job. The Governor’s consistent refusal to commission a study of what went wrong at the Bank of England; a series of in-depth articles detailing his rejection of dissenting opinions; his antipathy towards the City; his obsession with monetary policy at a time when financial stability should have been high on the list; these have all massively eroded his credibility.
The much-criticised independent Court of Directors has now countenanced three separate studies on the issue, surely an embarasse de richesse. Those who argue the Governor ensured each study has a very limited brief are right, but the fact that they are taking place is itself a most vehement slap in the face.
The destruction of the stellar career of Rodrigo Rato, Spain’s much-lauded Finance Minister in better times and subsequently Managing Director of the International Monetary Fund, is further advanced. It has now imploded with Bankia’s effective bankruptcy. The third largest Spanish bank by deposits was effectively nationalised and its chairman fired. The bank spent many months without a ceo as no banker of note was willing to serve under a man who had never been a banker yet whose views reigned supreme.
Jamie Dimon, the embattled head of JP Morgan Chase, is still in his post following $2bn of declared trading losses at the chief investment office. Market and press estimates put the loss at a probable $7bn. More importantly, this raises doubts about the bank’s risk assessment. Dimon’s fate has yet to be decided, but calling the trades “an isolated event” is surely tempting fate.
Is there a common theme linking these three personalities? None of them have been felled by personal scandals. They are all intelligent and all acted and are acting with the best intentions. They have been justifiably acclaimed for years. But we are living in exceptional times. What they perhaps all lack is the capability to allow strong characters around them, the capacity to accept criticism and the flexibility to change behavior accordingly.
At least what happens to those who fall from grace these days is less violent than in ancient times. Julius Caesar, whose dictatorial tendencies were upsetting his peers in the Roman Republic, was assassinated by Brutus and others. He needed a jester, much beloved of later European monarchs, who was armed with permission to mock and thus keep the ego and ambitions of royalty and others within bounds.
According to Roman historian Suetonius, Caesar’s final words were not the famous “Et tu, Brute?” (And you, Brutus?); rather, he spoke his last words in Greek, the language he used for family and intimates: “Kai su, teknon?”(Even you, my son?).
Caesar was rumoured to be Brutus’s father as his long affair with Brutus’s mother was well-known.
The Financial Services Authority will exist for only a bit longer in its current form. It is now a source of destruction, liberally doling out fines and reputational damage as it seeks to cover its former laissez-faire sins with a tsunami of action.
At Robinson Hambro we quacked with fear at the return address on the envelope that came through the office door: “Unauthorised Business Department, Financial Services Authority”.
Our Board Search boutique looked set to bite the dust. All the hard work – be it finding Chairmen for companies, to hosting high-powered dinner parties, to dealing with Ambassadors and family offices – was to be in vain.
We quacked as we opened the letter. Had we mistakenly told a retailing Chairman that a few more women on his board would be a good thing? Had our Ambassador turned out to be a much-married fraudster with children scattered all over the world? Had the blue of our corporate logo infringed a new regulation?
Once the shaking of the hand that held the letter stopped, it turned out to be a warning that we were being targeted by fraudsters. As the FSA warned, in bold, “Remember: if it sounds too good to be true, it probably is!”
The new conventional wisdom, that growth can be easily combined with austerity is just that: too good to be true. There is worthy growth, based on structural reforms and investment and moderate spending, and bad growth.
Far be it from me to question the wisdom of the International Monetary Fund, which in this week’s report on the UK suggested a further lowering of interest rates from the base rate’s 0.5%. Nevertheless, when you are bumping along the bottom, shaving off half a percentage point makes little difference. Take a look at Japan.
As for its suggestion of infrastructure spending, anyone who has tried to move around London, where traffic is paralysed by road and building works, would think enough is being done. For future spending, with no money in state coffers, it will be tempting to finance increased infrastructure investment via private finance initiatives (PFI) or public private partnerships (PPP). These are often accounting gimmicks to keep government liabilities off-balance sheet. The UK has merrily exported these to the rest of the world.
Additionally, infrastructure spending takes quite a bit of time to make its way through the system.
There is, of course, a more radical solution. As proposed by the Institute of Directors and the Taxpayers’ Alliance, a single income tax rate of 30% would put money in consumer’s pockets. It would lead to a surge of spending. Combine that with another radical measure, the raising of interest rates, and savers would be rewarded after years of being the losers compared to borrowers. This would create enough confidence at a micro level for increased spending.
Simplistic, you say, gentle reader, with no thought for the other implications of such policies? Right you may be, but the IMF prescriptions are no less so. Pushing a cut in interest rates and more quantitative easing, when there is no evidence of what the medium term effects are, leaves a lot to be desired.
Perhaps, though, a new “growth” strategy from the government will be enough to boost confidence, just as perceived austerity took it away. Headlines on new spending are perfectly timed for mid-term. The coalition government’s management of public relations is looking good.I have my own jester, keeping my feet on the ground. My son’s Norfolk terrier, Sasha, a small golden bundle of fun, pines to be a source of destruction – with no creativity thrown in. He has now taken to dementedly barking at all and sundry, especially larger dogs who could eat him in two easy gulps.
Having tried everything from rolled up newspapers to shouting, it was suggested I try spraying his nose. Armed with a spray bought in Avignon a few summers ago, we set off on our walk. Encountering a German Shepherd, I maniacally spritzed Sasha’s button nose with lavender spray. The smell of many a Provencal summer wafted tranquillity onto me. The little dog continued his snarling and baying for blood. The German Shepherd disdainfully walked on by.