The self-serving financial 'services' industry

The £160m pay-off to failed Merrill Lynch chief Stan O'Neal (left) has higlighted the obscene sums pocketed by individuals working at investment banks.

I could devote this whole article to the obscenity that is the pay-off of $160m to failed Merrill Lynch chief Stan O'Neill. This will no doubt be mirrored by something equally disgusting for Chuck Prince as he leaves the scene of Citigroup's multi-billion dollar loses. But I will not insult your intelligence.

These people have not founded the business. They are not entrepreneurs who have been prepared to work for years without reward in pursuit of a dream. They have not invented something that has made the world a better place. Had they not been in their posts others would have led their organisations with no more nor less success.

Chief executive officers they may be. But still they are merely hired hands, who through a ruthless scramble up the slippery, back stabbing world of investment banking have managed to increase their personal rewards from the very high to the absolutely grotesque. You don't need me to tell you that this should not happen.

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But what strikes me as remarkable about the $20bn of losses that have been written off by these two firms is simply that they can afford to do so. And why? Because, in the fat years, these organisations have made such a thumpingly huge amount of money.

Merrill Lynch and Citigroup are not alone. Banks, brokers, fund managers, and all other member of the great money merry-go-round reap huge profits in good years. Where does it all come from?

From you and me.

These financial institutions create nothing. They contribute nothing to the well-being of mankind. There is not any one individual in the whole of Wall Street or the City of London who could not be replaced without it making one jot of difference to the world at large.

They are all tiny cogs in a huge, huge wheel that as its turns screws money from the rest of the economy into its own hands. Every savings account, every bank loan, every high net worth or low net worth individual, every merger, every rights issue, every commodity and every letter of trade finance is a source of profit for the beast of banking.

City spin

The financial services industry', it likes to call itself. An industry that serves the wider world. Merrill Lynch espouses a principle called Responsible Citizenship'. This, it says, is more than a principle. It is a way of life Through our global philanthropic efforts,' Merrill gushes, we combine our financial resources and expertise with our greatest asset - our people - to build brighter futures in the communities throughout the world in which our employees and clients live and work.'

Can anyone really believe that a single Merrill Lynch employee outside the corporate PR department gives a thought to this principle? Citigroup offers similar. We want to serve clients better we want to be agile enough to take advantage of opportunities anywhere in the be a company that acts responsibly, with employees who are proud and contribute to the economies in which it operates'.

Does anyone see any evidence of this? Or do we see institutions that saddle hapless citizens with debts that they cannot afford to repay, that are ceaselessly creative in finding ways of taking a slice out of the world's wealth and slipping it into their back pocket.

In Stan O'Neal's message of departure he thanked Merrill Lynch for providing me with opportunities that I never could have imagined growing up.' Yes, Stan, those would presumably be opportunities to shovel huge amounts of money into your own bank account.

And yet this great financial machine has an unexpected, an unplanned, but possibly a consequence for the good. Maybe it has become the shock absorber of the global economy. Banks are supposed to be simply a mechanism through which cash is passed from those with it to spare to those who are in need of it. The banking system was invented to oil the wheels of commerce. But is has become much more than that. Banks are not content to simply take deposits and lend money.

They are driven by their own greed and by the demands of shareholders to make money in whatever way they can. So now they do a lot more than just lend money. They invest in companies. They manage investment funds. They package securities, or debts or other pieces of paper, put them into neat little parcels and then trade them with one another. They see that their clients want to buy dollars. So they buy them first, and then pass them on at a higher price to their clients.

If there is money to be made they make it. This is not a service industry. Banks want to appropriate as much of the available profit for themselves as they can and in this they have been mighty successful. In good times they have raked in the profits like never before. They have allowed just a little to slip through their fingers to those whose capital they use just to give the illusion of good citizenship. But actually they have found more and more ways of keeping the profits for themselves.

Their rapacious hunger for profit has had one further consequence. They have become more and more aggressive in their lending. They have extended the boundaries of sensible lending until, like a rubber band stretched too far, it has come snapping back to hurt them. That is why we now have a crisis. But the good news is that, thanks to the fat creamed off in the good years, the banking sector can take a big hit. This, at least, is what central bankers, businessmen and investors around the world are hoping.

This article is taken from Tom Bulford's free daily email Penny Sleuth'.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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