SEPTEMBER 2015 / NO. 2
TAGS: JORIS LUYENDIJK, IT CAN’T BE TRUE, CRISIS, CITY OF LONDON, TRADERS, INVESTMENTS, BANKS, MANAGEMENT, LAYOFFS, COST-CUTTING, ING, RABOBANK, ABNAMRO, ANAT ADMATI

Highlights from “It Can’t Be True”

“Imagine you sit in an airplane, relaxing with a glass of wine, and when looking out of the window you see the engine is on fire. There is no cabin crew. In the chaos you make your way to the front of the plane and open the door of the cockpit only to find that there are no pilots”
This is how research journalist Joris Luyendijk describes the current situation in the financial sector in his book “It Can’t Be True”. Nothing has changed since the start of the crisis in 2008!

“It Can’t Be True”

The book, published in February 2015, was based on 2 years of research from over 200 in-depth interviews in the City of London. In his book. Luyendijk makes comparisons with the world of animals: traders are baboons, investment bankers are tigers, back-office employees are hard-working beavers and the departments of compliance and risk management are ants. The majority of the employees in the sector are therefore beavers and ants whose task is to control the tigers and baboons. Mission impossible!
One crucial conclusion is that the entire structure of the social status focused financial sector is driven by trying to earn as much as possible. Every year banks dismiss some of their worst-performing employees in addition to regular layoffs and cost-cutting. In this environment, it is take what you can for as long as you can. Everyone fights everyone else to try and get their share of the bonus pool. Long-term solidarity and good fellowship are seen as handicaps.
Since the start of the crisis in 2008 nothing has changed and the main culprits of the crisis are the traders and investment bankers.

What about the Dutch banks ING, ABNAmro and Rabobank?

The situation in the City isn’t fundamentally different from that at the three major banks in the Netherlands. Research from the Dutch newspaper NRC (14 March, 2015) showed that ING, ABNAmro and Rabobank wrote off € 30 billion in ‘bad loans’ since the 2008 crisis. They recovered from this huge loss by decreasing interest rates on savings and increasing the interest rates on credit. The banks made provisions for ‘expected problems’ on potential problems with loans but not for ‘unexpected problems’ such as Grexit and the related crisis in the euro-system. For the financial sector, Grexit is a Grey Swan, not least because the levels of equity at these banks show up on their balance sheets as 5-6% on average, on total assets which are far too low.
In Section 20, we discussed the vision of Anat Admati, Professor of Economics at Stanford’s Graduate School of Finance, who stated that the requirement of equity at banks needs to increase to 20-30 percent of total assets! Banks still argue that economic growth will suffer, but they should ask themselves why Europe is still in crisis since 2008. If banks become smaller, it should be easier to get new capital. Banks are too large, inefficient, difficult to manage and difficult to regulate.
At Rodenberg Tillman & Associates, we are optimistic and a little paranoid by nature, because we are active in strategic intelligence. However, after reading “It Can’t Be True”, we are not positive about the future of banks. We expect that the ‘millennials’ will break down the banks in the end, so that one of my statements in my first book on competitive intelligence (published in 2000) will come true: “banking is necessary, banks are not”.
“It’s insane that banks still pay dividends to shareholders. By doing this, capital is flowing out, it should, however, be used to strengthen their own equity”, Professor Anat Admati
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