A good place to start a history of the current economic debacle would be Nick Leeson’s destruction of Barings. It should have sounded the alarm for bankers, regulators and governments alike with its demonstration of the dangers of opacity in the financial system, the perils of undeclared trading and the leveraged toxicity of the derivatives themselves. But the Barings case may also suggest a solution.
Some years before Leeson’s spree, I interviewed one of the Baring brothers at the firm’s London office, whose walnut display cabinets held memorabilia of the firm’s venerable M&A history. The cabinets did not, however, display any relics from 1890, when Barings pioneered the concept of ‘too big to fail’ and the British government had to rescue the bank after its Argentinean loans evaporated.
Barings was also pioneering in other ways. The brother explained how, in 1969, fearful of being nationalized by the Labor government, Barings had basically given itself to charity in the form of the Baring Foundation. The family controlled the foundation, which owned the bank, which in turn the family managed. The charity actually put some money into good causes, but not nearly as much as the partners paid themselves in salaries and bonuses.
Barings did not list its shares, so its situation was different from the current state of all those major banks on Wall Street. Or was it? One independent analyst estimates that in general, US bank employees took ‘65 percent of the value created in good years, and even more in bad years, so there is only 15 percent to 20 percent for the shareholders.’
Now that shareholders are down to widows’ mites for their stock values, that managerial looting is of huge concern, even more so for taxpayers than shareholders. The rush to pay off troubled asset relief program funds, and thus set free bonuses, substantiates that. Bank executives know once they have the government off their back they will face few constraints from complaisant shareholders, even allowing for the legal obstacles investors face in exercising any real ownership of their corporations.
Could this be because so many institutional portfolio managers are paid on a similar basis and so have no incentive to rock the gravy boat? One would be shocked indeed if it were so. But it is amazing how the same pattern of diversion of earnings from shareholders to management has been spreading out from the financial industry to others. The trend is one of dividends down, perks up.
Nonetheless, with all Washington’s Bolshie talk about shareholder rights, the shareholder worm may be about to turn. Surely it is time for the US banks to follow in Barings’ footsteps and deed themselves to a 501(c)3 corporation so they can carry on as normal? The holding foundation would need a genuinely charitable purpose, but there are lots of good causes, such as relief of down-on-their-luck prisoners like Bernie Madoff, saving the art collections of companies in Chapter 11, or preserving historic corporate aircraft.
