Sunday 24 January 2010

Obamabanking 2

I always seem to end up writing about banks and their place in the economic situation – I suppose it’s because I know something about them, and to be fair they are important at the moment.

Obama announced a change to the framework of how banks should operate during the week – cynics would say it was a populist reaction to the Republican gain of one of the senate seats for Massachusetts. It probably was, but that doesn’t make his ideas bad. In brief, he wants to reduce the risky activities of banks taking customer deposits. In essence, this should reduce the size of banks so they are not too big to fail and mean riskier ones could fail without ruining the financial system. His announcement obviously covers US banks; given the US political system it’s too soon to have full details of the plan, and too soon to guess how it will end up after Congress has had its say. But in principle, I think it is one of the essential steps to reforming the financial system.

Yet our Government is briefing against it – saying that America should not act alone, and that the work of the G20 could be damaged. The Sunday Times has a big interview with Alistair Darling along these lines.

How sad: the G20, through which our Government claims to lead the world in resolving the financial crisis, has actually done nothing. Nor has it shown much evidence of ideas to do anything. In the last month, Obama has announced two useful changes (this, and the levy on net assets). Fortunately the US is big enough for its ideas to be followed by other major economies.
As I’ve noted before, I think there are two other things which should also be done: tighter capital regulation and a serious competition review to tackle the profits banks make.

The Evening Standard had an article on Cadbury’s takeover by Kraft as an interesting example of how banks make big profits. And an interesting example of how an effective competition review would be hard to do. The takeover, which has a decent chance of damaging Kraft as well as Cadbury’s business, cost Kraft and Cadburys about £240m in fees. That’s a lot of money for not a lot of work – the reason it’s so much is because the deal mattered so much to Kraft and Cadbury. The importance of winning mattered so much that neither company particularly cared about the cost. And of course, the shareholders, not the managers, pay.

1 comment:

Troy said...

I was awaiting with interest your views on the Obama bank reforms. They looked like a good idea to me but it is helpful to get an insider's view.

M&A fees seem disgraceful. Apart from genuine out-of-pocket expenses such as paper, ink and postage the rest (vast majority) must equate to some obscene hourly rates.