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Where power now resides | Archive News:2013


Banks & the three p’s: press, public and political opinion

Guests at the Lorünser Hotel in Zürs pay the equivalent of the value of a “small car” for their stay, in the words of a former senior partner of Freshfields Bruckhaus Deringer, a prestigious international law firm. Yet the hotel, built in 1927 in the Austrian Alps, lacks the glamour associated with the Palace Hotel in Gstaad or the Grand Hotel du Cap in Cap Ferrat.

What distinguishes it is the combination of the gemütlichkeit atmosphere, excellent service and unchanging guests. The same families stay during the same weeks every year; sojourn in the same room; sit at the same table in the dining room. The only variables are due to births, deaths and divorce.

Rumour has it that some guest pregnancies are carefully planned to ensure the birth does not interfere with the traditional room allocation. Undoubtedly the same applies to some divorces. For beware if you cancel, say, your family’s traditional Christmas booking for four rooms. Next Christmas you will find there is no room at the Inn. If you are lucky, two years down the line you are allowed back in to a set of rooms overlooking the road, while your assigned dining table is now in Siberia.

He who pays the piper calls the tune is a saying that does not apply to a number of family-run hotels in the Arlberg region of Austria. Power resides in the third generation owners, not the paying guests.

I could gripe that it wasn’t like this in the days when my grandfather stayed at the hotel. But then power is not static, be it in hotels, geopolitics or finance. The winners are those that adjust to the new regime, rather than moaning about it and harking back to the good old days.

The financial and economic crisis has shifted power in financial services, among other sectors. Here are two issues where this is relevant: sovereign ratings and banks.

Ratings – Reform of the rating industry has foundered, even as opinion is unified in blaming the big three (Standard & Poors, Moody’s and Fitch) for their major contribution to the financial crisis through their misguided AAA ratings of packaged subprime mortgages. An excellent recent Financial Times article however, failed to point out that their power has substantially decreased, most obviously when it comes to the impact of their sovereign ratings.

The UK is under warning from the agencies that it may lose its triple A ratings this year. Chancellor George Osborne has – counter-productively for the Coalition – insisted this matters. In truth, when it likely happens, there may be a blip in government debt prices, but this should be short-lived. France already experienced its downgrade last year, as did the US, which is rated AA+ by S&P. Neither saw interest rates rise. Only a downgrade to junk would be a different matter.

Why? There is a combination of circumstances. Investors are relying more on their own models. Some have lowered their investment criteria from triple A to investment grade, not least because countries with triple A ratings are becoming an ever smaller minority. Long-term overseas holders such as the Chinese government or the Norweigan oil fund are becoming more important and they are constrained in their choices of where to place huge funds with ample liquidity.

Banks – Bankers would tell you their license to operate in a country is granted by a regulatory authority, be it the soon-to-be-defunct Financial Services Authority in the UK or, in the US, one of three regulators including the Federal Reserve.

In truth, public opinion and the media have become just as important. In the US, the politicians, the media and the public have moved on from focusing on and blaming the banks. Only 32% of the US public rate banks’ performance as poor, according to a recent global survey on trust. This allowed Goldman Sachs to pay out US bonuses early to minimise tax. Not even a whisper of condemnation was heard.

Yet in the UK, Goldman was lambasted for wanting to pay out bonuses in the next financial year to benefit from a drop in the top rate of income tax to 45% from 50%. It reversed course rapidly following public opprobrium, which was accompanied by Bank of England Governor Mervyn King calling it a “depressing” and “clumsy” move.

Goldman was not the only bank seeking to minimise its employees’ tax bills in this way. The Inland Revenue in the UK expected to lose millions from other financial institutions taking advantage of the decline in the tax rate. It gave guidance that this would be acceptable.

Yet in the UK around 60% of the public rate banks’ performance as poor or very poor, according to the he 2013 Edelman Trust Barometer (Edelman Trust Barometer)

That is what the banks are failing to focus on. What is legal is not necessarily acceptable. Political judgement is missing. Highly paid political and public opinion advisors are being ignored or are simply incompetent – presumably a mix of both, since these public relation disasters continue to occur regularly.

Robinson Hambro has written in the FT on the need for a diversity of experience on bank boards (RH piece in the FT). We believe they should be like football teams, with a mixture of different talents. Crucially, one non-executive director, and one executive director, should have an understanding of the three p’s – press, public and political opinion. That is where power now lies.

The power balance in skiing, which is after all the reason to head to expensive hotels in the Alps, hasn’t really changed. Huge advances in the development of equipment give false comfort to the punters. One should never forget that the mountain is in charge. Avalanches still kill.


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