Saturday Essay: If you imagine that the myth of the canny Scottish moneyman was destroyed only last autumn, think again and remember the City of Glasgow Bank, writee Ian Bell.
The City of Glasgow Bank is well remembered in some quarters, but not in a good way. If you imagine that the myth of the canny Scottish moneyman was destroyed only last autumn, think again. RBS and HBOS did their worst, no doubt, but there was no telegram (or e-mail) sent to branches with the fateful words: "Bank has stopped payment, close your door at once and pay nothing whatsoever, other banks will pay the notes."
The City of Glasgow debacle of October, 1878, was a catastrophe for Scotland, wiping out 10% of the country's banking capital at a stroke. In an age of unlimited liability, it also destroyed shareholders. When the liquidators turned up, 1249 people - spinsters, grocers and the like - were told they had liabilities of £6.2m. A fantastic sum.
Yet as the writer James Buchan puts it in Frozen Desire, his book on the nature of money, City's directors - a rogue named Salmond among them, amusingly - had "appeared to be sound men, of a certain age, severe and whiskery of face and sober of dress, pillars of their kirks and Masonic lodges". On paper, their bank was solid. Paper was its only foundation.
In June of 1878, City of Glasgow's 133 branches claimed assets of £11.9m. The fact that no-one had bothered with a proper audit hardly seemed to matter when £100 shares were trading at £240 and net profits were running, supposedly, at £140,000.
The shares, meanwhile, were returning a very decent 5% at a time when inflation was nil.
But there were no real assets. The directors had made large advances to themselves, and loans to individuals speculating in the emerging markets of Australia, New Zealand and India. When these loans ceased to pay interest, more loans were issued. Then, desperate, the bank itself indulged in Australian land speculation. Shortly before the collapse, loans outstanding to a mere three individuals amounted to £5.37m. These were on the balance sheet as "government securities".
Finally, for the sake of cash, in breach of every principle and law, the chancers at the helm began to redeem the bank's bills with new bills. The game was up. In a last effort to save City of Glasgow, the directors turned to the Royal Bank of Scotland, no less, for funds. Try that in 2009.
So what does the story tell us? Bankers rewarding themselves lavishly. Bankers laying claim to probity and unrivalled expertise. Bankers claiming that all is well while dodgy loans with toxic consequences accumulate. Bankers spared proper scrutiny or regulation. Bankers wallowing in self-regard while busily betraying trust and destroying lives. Ring any bells?
There was an enormous outcry in the aftermath of the collapse, of course. There were sermons, a long trial and general misery. So what might our forebears have said if the directors of the City of Glasgow Bank had insisted that their contracts entitled them to a nice bonus, no matter what?
And what would the response have been if those responsible for the calamity had threatened to quit for New York in search of appropriate remuneration if they didn't get their way? And what if their friends had recommended those culpable for an almighty mess as the only people capable of clearing up the mess?
The real lesson of history is that there are always those who refuse to learn the lessons of history. The crash of 2008/2009 will be remembered as the Collapse that Couldn't Happen. Risk had been eliminated; 1929 had been studied in depth; Nobel prizes had been won for explanations of "rational" economic behaviour. Greed was good and bonuses were better.
If "variable pay" turned out to involve gigantic sums, this merely proved that all was well and bankers were clever.
It used to be known as normal. Now, it seems, banking wants to return to what passed for normal, discredited or not, as quickly as possible. Vast quantities of public money have been secured to achieve that end. A fantastic assumption - that only bankers can sort out the banks - is again in vogue. Regulation is again held up as antithetical to wealth-creation. And the God-given (or Mammon-given) right by which executives distributed rewards among themselves is again, with straight faces all round, an issue of principle.
Lloyds and RBS, both deep in hock to the taxpayer, are preparing for a return to the bonus culture. Barclays intends to pay £1.7bn to employees it inherited when it bought the carcass of Lehman Brothers, and similar amounts to the geniuses at Barclays Capital who cost the bank billions.
Even a relatively minor player such as Richard Pym, executive chairman of Bradford & Bingley (£750,000 pa), is in line for more than £320,00 in bonuses this year. These are guaranteed, regardless of performance, good or bad. B&B, you will recall, is now state-owned.
How dare they? Very easily. First, because our government seems disinclined to stop them. A "crackdown" is promised, perhaps one that ties bonuses to shares and long-term performance, but the banks seem determined to beat any deadline. Secondly, perhaps because the City has bamboozled politicians for decades, there is a reluctance to follow President Obama and cap wages (at $500,000) at any company receiving state aid. Instead, Lord Mandelson warns the banks not to risk bad publicity.
The response suggests that good publicity might be some way off. Many bonuses are written into contracts, it is said, as though a contract can never be renegotiated. Bonuses help to retain and attract good staff, they add, as though the financial job market in the US or Europe is buzzing. A cap on earnings, according to one sympathetic observer, might "encourage mediocrity", as though intellectual mediocrity played no part in the banking catastrophe. Finally, we are reminded of the need to "incentivise". The donkeys must have their carrots, otherwise they will refuse to pull their weight.
In many walks of life, that attitude leads to dismissal, but the City and life as most know it do not coincide. In the former world, neither success nor its absence necessarily determines reward. That's when tempers fray among the commonality. Bonuses after the year we have just seen? Most people can understand logic well enough. If a Barclays trader makes £100m free and clear for the bank, a 1% reward is not astonishing. But how does a £1m bonus stand when a mere £100m loss is a blessed relief?
Markets, they say, establish value. How are banking executives to be valued? Social utility? Providers of essential services? Nurses, refuse collectors, teachers and many more meet the definition and are rarely "incentivised". Wealth creation? Given that money has turned out to be a chimera, and given that sensible bankers never risk their personal supply of the stuff, big bonuses are an absurdity.
Banking folk would argue that no-one was complaining when the going was good and their companies were returning astounding profits. Grumbling shareholders were few and far between. Instead, the markets demanded returns, the bigger the better, the quicker the better. So are we, therefore, supposed to prize the venal, the demonstrably stupid? The ghosts of the directors of the City of Glasgow Bank are probably nodding contentedly.
If bankers refuse to learn, we must learn for them. Fantasy finance wrought havoc in the real world. It will do so again if it is rewarded with fantasy wages.
