Your editorial comments (13 April) were well made. There are a number of areas that urgently need to be addressed. First, how is it that none of these banking issues appear to have been identified by the auditors, in their “going concern” assessments. Is it reasonable to expect regulators to know more about what is going on inside an organisation than an auditor? Regulators can help protect consumer interests through pricing regulation but, if they are really involved with detailed internal process assessment, what are the auditors doing? Perhaps the auditing function should also have a formal responsibility to customers, as well as to shareholders.
Second, there is scope for a major investigation into how banks actually add value to society. In essence, the sectors’ profits and bonuses are ultimately paid for by their customers.
Third, there is a need to investigate the extent to which “selling” is, almost by definition, unprofessional. The concept of being professional should mean that the interests of the customer/client come first. Where the seller operates within an incentive structure that benefits both the seller and others in their organisation, the net result will almost inevitably be defined as mis-selling.
The horrific consequences that have arisen in such areas as PPI etc, probably also apply to much of the pay-day loan industry, as well as a significant part of international lending. A major inquiry into the nature and future of the finance sector is long overdue, but there are also many important questions urgently in need of further research.
Emeritus professor Bruce Lloyd
South Bank University
• It is obvious many of the top executives of the failed banks had no actual financial expertise; they are like someone pretending to be a doctor, or a fake architect whose buildings collapse, guilty of misrepresentation. The regulator may be surprised no bank bosses have faced charges – we all are.
• As a research and advocacy group that has for years called attention to the murky world of tax havens, we welcome your report (Leaks reveal secrets of the rich who hide cash offshore, 4 April). But you should also have dispelled the myth advocated by some proponents that tax havens promote greater tax efficiency through competition; the evidence in economic literature is scanty at best. What is clear is that this benefit has not been enough to prevent tax havens from going bankrupt.
In September 2009, the Cayman Islands, one of the largest, faced bankruptcy and was unable to pay its government employees. Britain, which oversees the territory, was forced to bail out the Cayman authorities. Recently, Cyprus went belly up and had to be rescued by the EU, ECB, and IMF.
Investors need to realise that the lack of prudential regulations and oversight allows tax havens to pass on the cost-savings to them as higher returns. But with higher returns come higher risks. They implicitly accepted those risks when they invested in tax havens. In the event the financial risks pile up – as they inevitably must – and the house of cards comes crashing down, investors should not expect taxpayers to foot the bill.
Lead economist, Global Financial Integrity, Washington DC
Brent crude fell below the $100 a barrel mark overnight as concerns grow over the global economy
Sharon Connor stands to lose upwards of €50,000 after her profits from a house sale remain frozen in a bank on the island
Tragedy first struck Sharon Connor when her husband, Gary, was killed by a heart attack in January last year. He had just turned 54. From running a successful scuba-diving business on Cyprus, the mother-of-two found herself catapulted into a world of grief, unable to even visit the ornate, two-storey villa the couple had bought on the island.
“It took me five months before I could set foot in the place,” said Connor, who was on her own when she found her husband dead in bed. “I still have flashbacks and see it in my head all the time.”
In March the widow decided to put the property on the market. In the space of three days she had found a buyer, located a new home in the UK and a job outside London. “I was trying to move forward with my life,” the 55-year-old told the Observer from Kent, “until I found myself caught up in the nightmare scenario that has befallen Cyprus”.
This weekend the Briton faces the prospect of financial ruin following the shattering news that the proceeds from her house sale – €181,000 (£155,000) – will remain frozen in the Bank of Cyprus as a result of capital controls enforced to contain the crisis.
As the size of Cyprus’s bailout requirements swelled from €17bn to €23bn, she learned that the money, deposited in a special account for the purposes of the transaction, could not be transferred to the UK. Now she lives in fear that, like other depositors with more than €100,000 in Cyprus, she will also fall victim to the raid on savings that the Cypriot government has been ordered to implement as the price of international aid.
“It is totally unfair. My funds should not be frozen, as they are not savings that have been accruing interest,” said Connor, whose misfortune was that the money hit her account two hours before the close of business on 15 March.
“It was money from a real estate sale that was supposed to be in the bank for a single day. The same day it went in, I sent an email instructing the bank to transfer the funds – some of which were in euros and some in sterling – to the UK, but on Saturday morning the news broke that Cypriot banks were in major financial difficulty.”
Ever since then Connor, who was due last week to buy a three-bedroom semi in Kent, has been battling to get her money released. She has written to “everyone who is anyone”, including David Cameron and Angela Merkel, and started a Facebook campaign called “Gary and Sharon v Merkel”.
“Every day is a struggle,” said the widow, who is from Welling in south-east London. “I was set on moving on after Gary passed last year and had everything in motion when, overnight, my world was turned upside down again … it is a scenario that had made me physically ill.”
Connor has calculated that she could lose €50,000 (£42,000) as a result of the emergency levy that Nicosia must now enact to qualify for financial assistance from the EU and the International Monetary Fund. Revelations that the beleaguered Cypriot government will have to find almost double the amount to meet the terms of the €10bn bailout – amid signs that the EU’s wealthy north has tired of rescuing the bloc’s heavily indebted south – have only sharpened her anguish. “Now I live in worry that with the latest news that Cyprus’s bailout requirements are going to be much bigger than thought, depositors will suffer even more,” she said.
Connor had hoped to be exempted from the levy – along with other special cases – but her appeal for dispensation was turned down by the island’s central bank last week. On Friday she was told by the Bank of Cyprus that it was seeking clarification. “I asked my representative at the Bank of Cyprus to put forward my appeal to the central bank, and in turn they asked for the contract of sale and solicitors’ details,” she recalled. “Last week the central bank committee declined the request. I was also told that I cannot transfer any funds from my accounts to the UK.”
In a cruel twist of fate, the sale was due to have been completed a week earlier. “A document was missing from the necessary paperwork that prevented the deal from being closed,” she said. “Had the transaction gone through as originally planned, the funds would now be in my British bank account.”
Connor, who also has five grandchildren, has now been forced to cash in her two private pension schemes to make ends meet. “I have my furniture in storage with no way of knowing when, or if, I can purchase my own property,” she said. “The local council will not put me on their housing register as I have funds from the sale of a house in the bank, albeit I cannot access them.”
Had it not been for the help of friends and family, she says, she might not have got through the ordeal. “If it was not for the goodness of my sister, Theresa, and other family members, I would be homeless,” she said. “I live in hope that common sense will prevail and I will receive what is rightfully mine. This is money that my husband and I have accumulated and worked for our whole lives.”
The Peter principle has it that men are promoted beyond their competence. Now the Paula principle says the opposite happens for women. So who is to blame for slow progress towards more women directorships?
Back in 1969, a book called The Peter Principle was published, and became something of a classic in management texts. It may have influenced the odd change in the way businesses operated but, more memorably, it made readers laugh: its central premise being that employees are eventually promoted to jobs at which they prove incompetent.
So the excellent salesman, whose naturally charming patter compensated for his administrative weaknesses and won over thousands of customers, proves a disastrous sales manager who can’t understand why his team of less enchanting but harder-working colleagues don’t pull off his trick. Worse, he remains in that job, blocking anyone better qualified from doing it properly.
Now a chap called Tom Schuller is writing a book with a modern twist. It is called the Paula Principle and it argues that most women get promoted to a level below their competence. Far from rising to a position their talents don’t deserve, they languish below what they could easily manage.
The Paula Principle is a clever joke – only with a rather serious point. It is 45
• Euroland nightmare weighs on UK
• BP and ‘on target’ results
• HBOS hubris
• Lord Green visits Latin America
→It is tempting from a UK perspective to regard events in Cyprus as a case of domestic violence within the eurozone that doesn’t much affect us.
That would be mistake. The serving of “poison” to Cyprus, as the country’s parliamentary president put it this week, amounts to another statement by Germany that the hard way is the right way. There will be no slackening in the austerity message ahead of September’s election, and thus no meaningful debate on how creditors and debtors are going to live in harmony. Minor accidents like Cyprus, it seems, will simply be allowed to happen and eurozone lenders will try to minimise the bill for themselves.
Progress on banking union, supposedly last year’s big step forward, has been negligible and there’s an unfilled hole at the centre. The European stability mechanism (ESM) was intended to deal with insolvent banks, but then it turned out the fund would not deal in “legacy” issues. That’s not an advance.
Thus every bailout remains an ugly scrap in which, as in Cyprus, heroic assumptions are made about recovery and business confidence across the continent is jolted. Is the next crisis Portugal mark 2, or Slovenia? Only then will companies and large depositors discover whether a Cypriot-style savings-grab is the new template.
Add up the austerity, the mixed messages and the backtracking and it’s no surprise that the IMF expects the euro area GDP to contract 0.2% this year, after contraction of 0.4% last year. For the UK economy euro recession is impossible to ignore. “Engineering a recovery while our main trading partner is in a downturn is a difficult undertaking,” said the Bank of England governor, Sir Mervyn King, in January.
You bet. The economy is not rebalancing in favour of manufacturing. Britain’s trade deficit in goods widened to £9.4bn in February, we learned this week, and factory production is back at levels seen last September. A government desperate for growth – any growth – is reduced to trying to pump up the housing market by underwriting sub-prime mortgages. Stagnation and indecision in euroland are infecting not just the economy but economic policy.
Hope springs eternal that Germany, after the election, will finally decide how far it is prepared to go to save the single currency. Well, maybe. But it’s a reasonable guess that markets, currently understanding of Angela Merkel’s political bind, will demand a quick answer. And a post-election mini-revolt in the eurozone debt markets would be no bad thing: the current muddle-through approach is leading nowhere.
→BP’s pay structure, according to remuneration chief Antony Burgmans, employs a “relatively simple” system. Relative to what, he doesn’t say, but it’s a challenge for ordinary mortals to keep track of the moving parts. The annual cash bonus scheme alone has 13 “measures and targets”. Then there’s the deferred bonus, and the performance share scheme, not forgetting basic salary and pension.
Thankfully, somebody is paying attention. He is Guy Jubb of Standard Life Investments, who told the board at this week’s shareholder meeting to “raise its game”. He’s right about the complexity, and he’s also right when he says the executives have the potential to receive “significant rewards for achieving unchallenging performance targets”.
The giveaway is the table that illustrates what chief executive Bob Dudley should receive in a year in which he achieves merely an “on target” performance – a cool $10m (£6.5m), even if the share price went sideways.
How is that possible for a middling performance? It’s because long-term incentive plans (LTIPs) have become vastly inflated over the years. Once upon a time, 100% of salary for an LTIP was seen as the largest carrot that could be offered to an executive. These days Dudley can earn 550% of salary under his LTIP. In cash terms, today’s “on target” performance equates to yesterday’s hit-the-ball-out-of-the-park performance.
Jubb calculates that by merely coming third out of five in a league table of oil companies ranked by total shareholder return (TSR), BP’s chief executive can receive shares equivalent to nearly two-thirds of his $1.7m salary. Third out of five? If BP really believes that’s worthy of a £1m bonus it should drop the pretence that Dudley’s package is driven by tough performance targets.
The company was very pleased that 94% of voting shareholders backed the pay report. The reason for that, one suspects, is that executive payouts from incentive schemes have been depressed by the Deepwater Horizon disaster in 2010. Now that the effect of the disaster on the share price will drop out of the three-yearly TSR calculations, Dudley’s generous rewards for “on target” results are much more likely to materialise.
Complexity and the redefinition of success are how boardroom pay outstripped shareholders’ gains in the past. It’s happening again. BP is probably not unique.
→HBOS famously ignored a cardinal rule of banking: never take an equity stake in a company to which you are a lender. If you do, you are no longer a bank but a private equity house and there’s trouble in store in the event of a restructuring.
Some of HBOS’s early loan-plus-equity adventures turned out spectacularly well, such as Sir Philip Green’s takeover of Arcadia, the Top Shop group, in 2002. But that doesn’t deflect from the wisdom of the basic risk-management principle that lenders should not dabble in the shares of a customer.
Less remembered is how far HBOS was prepared to go. Ray Perman’s lively book – Hubris: how HBOS wrecked the best bank in Britain – recalls the detail of Green’s attempt (eventually abandoned) to buy Marks & Spencer in 2004. In that case, HBOS would have been a major lender in the £9.5bn offer. But the bank’s chairman, Lord Stevenson, was also lined up to be a non-executive director of Green’s bid vehicle. It is hard to think of a more glaring example of a conflict of interest.
Perman reports that arrangement caused one of the few rows within the HBOS board. It also caused a fuss in the outside world at the time, but should have caused more. It was an early clue that HBOS directors had deluded themselves that traditional rules of banking didn’t apply to them.
Less than a month after deal was agreed bailout bill has risen to €23bn – larger than entire year’s output from country’s economy
Cypriot politicians have reacted with fury to news that the crisis-hit country will be forced to find an extra €6bn (£5bn) to contribute to its own bailout, much of which is expected to come from savers at its struggling banks.
A leaked draft of the updated rescue plan, which emerged late on Wednesday night, revealed that the total bill for the bailout has risen to €23bn, from an original estimate of €17bn, less than a month after the deal was agreed – and the entire extra cost will be imposed on Nicosia.
Visiting Athens, the Cypriot parliament’s president, Yannakis Omirou, said the tiny island nation had been “served poison” by its EU partners.
Cyprus’s politicians had already faced intense domestic political pressure for agreeing to impose hefty losses on savers at two struggling banks to fulfil its eurozone partners’ original demand that they contribute €7bn.
But after a more detailed “debt sustainability analysis” showed that the black hole in the island nation’s finances is far deeper than first thought, the total cost for Cypriot taxpayers and depositors has now been set at €13bn, with €10bn to come from its eurozone partners and the International Monetary Fund. The €23bn overall bill is larger than an entire year’s output from the Cypriot economy.
Jonathan Loynes, of thinktank Capital Economics, said the rising cost echoed the pattern in other bailed-out states. “They don’t know where there might be more black holes: I wouldn’t be that surprised if there were to be another shock in the next week or so,” he said.
The new draft bailout plan, which will be discussed at a meeting of finance ministers in Dublin on Friday, underlined the botched nature of the initial agreement, which was hurriedly cobbled together in March and had to be redrawn after the Cypriot parliament rejected the idea that depositors holding less than €100,000 – whose savings are meant to be insured – would face deep losses.
A new decree that will remain in place for seven days lifts all restrictions on transactions under €300,000 to re-energise cash-starved domestic businesses that had difficulty paying suppliers and employees. Moreover, the daily limit on transactions outside of Cyprus not requiring prior approval is raised from €5,000 to €20,000.
However, a daily cash withdrawal limit of €300 remains in place, as well as a ban on cashing checks. The decree also introduced a new restriction on opening new accounts in banks where customers had never done business before.
Much of the extra €6bn is expected to come from savers – though Cyprus is also expected to be forced to sell €400m of gold reserves, renegotiate the terms of a loan with Russia, and impose losses on Bank of Cyprus creditors. There was also a suggestion that holders of €1bn worth of Cypriot government bonds could be urged to agree to a debt swap, reducing the country’s repayments. That could signal a messy period of negotiation and uncertainty.
“Instead of solidarity from our European partners we have been served poison,” said Omirou.
In Nicosia, the island’s divided capital, the reaction was no less ferocious, with many predicting that the sheer burden of the bailout for a country whose economy is shattered would inevitably spur calls for Cyprus to leave the single currency.
“We will resist. Every alternative scenario for the exit of our country from the troika and the memorandum now has to be studied,” said Giorgos Doulouka, spokesman of the main opposition Akel party. “They are eating us alive. What Greece suffered in three years, Cyprus is experiencing in a matter of weeks. All the extra measures that the government will now have to take will be at the expense of ordinary people. It is outrageous.”
It also emerged on Thursday that Mario Draghi, president of the European Central Bank, has waded into the increasingly febrile debate about the country’s future, by warning the government in Nicosia against ditching the governor of its central bank, Panicos Demetriades. In a letter to the president, Nicos Anastasiades, Draghi warned that sacking a central bank governor without due cause is against EU law.
Some analysts pointed out that the projections for Cyprus’s economy on which the bailout plans are based could prove to be over-optimistic, as has repeatedly been the case in Greece, potentially prompting a fresh bailout.
Cyprus’s economy is expected to suffer a deep recession, with GDP contracting by 8.7% in 2013, and 3.9% next year. However, a government spokesman in Nicosia last week suggested the downturn this year could be far deeper, perhaps up to 13%, which could throw the bailout plans off course within months.
Simon Derrick, chief currency strategist at BNY Mellon, questioned the projection that the economy would recover within two years, recording growth of 1.1% in 2015. “Why would confidence return and make people want to put money into Cyprus?” he said. “The economy is three things – banking, property and tourism. You’re not going to rebuild an offshore banking industry in Cyprus; and in tourism it’s competing against Turkey, where the currency is down 50% since mid-2005.”
Capital controls imposed to prevent deposits flooding out of the country look likely to stay in place for some time, at least until the hefty “levy” is imposed on savers to recoup the costs of the rescue. “The history of these things is that once you have got capital controls, it’s extremely difficult to get rid of them,” said Loynes.
Finance ministers meet in Dublin to discuss crisis in Cyprus and Slovenia situation – with extensions to bailouts for Ireland and Portugal reportedly on the agenda