Thursday, 10 February 2011

Project Merlin: a Mickey Mouse deal

“Anger and retribution will not bring one percentage point of growth or create one single new job? Britain needs to move from retribution to recovery.” George Osborne

The Government’s long awaited deal on banking reform was under fire from all sides last night as critics dismissed it as a damp squib. “Project Merlin” began to unravel almost as soon as the deal, negotiated by Chancellor George Osborne and former Barclays chief executive John Varley, was announced. Banks will agree to lend £190 billion to businesses including £76bn to smaller companies, and have their lending scrutinised by the Bank of England.

They have also said they will show “restraint” over bonuses and Lloyds and Royal Bank of Scotland will pay less than last year. Details of the pay of the top five managers at banks under board level will be published. But cast-iron commitments on this most contentious of issues was lacking and no details will be given on the bonuses of high earnings traders – dubbed “casino bankers” – whose pay can be many times higher than even that of bank chief executives.

A further £200m will be advanced to finance the so-called “Big Society Bank” that will fund community projects. However, this amounts to a loan, with the money eventually intended to come from so called “dormant accounts” which have often been held for many years with no activity by banks.

The deal has been signed by Lloyds, Royal Bank of Scotland, Barclays, and HSBC – Britain’s four biggest lending banks. Spain’s Banco Santander, the number five bank in Britain though its ownership of Abbey, Alliance & Leicester and Bradford & Bingley, said it would agree only to the lending commitments.

Announcing the deal George Osborne – who on Tuesday increased his banking levy by £800m – called for an end to “banker bashing” so that the banks could help the economy to grow. He admitted the public would remain angry with the bankers but said: “Anger and retribution will not bring one percentage point of growth or create one single new job? Britain needs to move from retribution to recovery.”

As the Chancellor trumpeted the banks’ promise to boost lending to small firms, his aides warned that a tax on bonuses could be revived next year if the banks did not meet their side of the deal. “The commitment is that we won’t tax bonuses this year,” one Treasury source said. “If the banks don’t deliver, we reserve the right to look at it again.”

Cracks within the Coalition emerged when Lord Oakeshott, a Lib Dem Treasury spokesman, said it was “not a good deal” and that the Treasury’s negotiating team had “an awful combination of arrogance and incompetence”. Lord Oakeshott said: “They’ve done the best they can, but I’m afraid when you look at the small print, it’s really not as good as it looks? A multi-million pound bonus is still a multi-million pound bonus, even if you've got to wait two years to buy the yacht.” He added: “If this is robust action on bank bonuses, my name’s Bob Diamond and I’m going to claim my £9m bonus next week.”

Ed Balls, the shadow Chancellor, said: “Mr Osborne’s cosy deal with the banks is unravelling by the hour. The small print of the agreement has a clear get-out clause which allows the banks to do whatever they wish to enhance the interests of their shareholders.” He described the lending agreements as “toothless”.

This view was reflected across much of the business world. Manufacturers expressed “frustration” at the deal. Their trade body, the Engineering Employers Federation, said: “Industry will feel today’s statement on Bank lending did not go nearly far enough. The new targets may lead to some increase in lending to SMEs, but the track record of previous agreements is not a good one.

“Today's statement left untouched the key issues of lack of competition amongst the Banks, insufficient transparency in lending decisions and the lack of understanding of its customers. Until these issues are resolved, access to finance will remain the weak link in the government's strategy for growth.”

Smaller firms – singled out as major beneficiaries of Merlin – also said they needed more. John Walker, National Chairman of the Federation of Small Businesses, said: “Today’s announcement should not be allowed to let the Government or the banks off the hook, and is a preamble to what we hope will be bigger announcements from the Independent Banking Commission. While we welcome the intention to lend more to small businesses, we still need to see a major restructure of the sector.

“To achieve robust economic recovery, the smallest firms and start-ups need to have access to finance, but today’s commitments – as with previous lending targets – are unenforceable.” But Angela Knight, chief executive of the British Bankers Association, hailed the deal saying: “This is an unprecedented set of statements from Britain’s big four lending banks. There has been a determination to work together and that is shown by what we have seen here.”

Royal Bank of Scotland also said chief executive Stephen Hester’s salary will be frozen for 2011 at the level set in 2008. He will receive no cash bonus but will still be paid £2.04m in shares, all deferred with the full value received after 3 years. The bonus pool for its highly paid investment bankers will be lower than 2009 at less than £950m for 2010. Cash bonuses paid in March will be capped at £2,000. The same will apply to Lloyds, which plans to pay outgoing chief executive Eric Daniels £1.45m in shares.

Both Mr Daniels and Mr Hester stand to make huge sums of money from those shares, however. City analysts say the shares will likely soar if the Independent Commission on Banking report later this year steers clear of the most radical break-up options, potentially producing a huge windfall for both men.

The Independent