Bankers Profit at the Expense of the Broader Community

CBA’s record result delivers Narev $7.8m pay cheque’ said a headline in the Business section of The Australian yesterday. According to the article, the CEO’s salary package rose to $2.1m compared to last year. Nice work.

Narev is not an isolated case; bankers around the world are reaping the benefits of stabilised markets courtesy of central banker intervention.

Don’t get me wrong; if someone genuinely delivers they should share in the spoils. But what irks me is the banking sector (globally) is a protected species. As we witnessed in the GFC, the financial sector is backstopped by taxpayer money. Success is theirs and failure is ours.

Globally the financial sector has grown like topsy over the past two decades and remuneration has followed suit. But has this growth added any real value to the economy?

Paul Volcker (Chairman of the US Federal Reserve from 1979–1987) had this to say recently about the value add from the financial sector: ‘The only financial innovation useful to the country in the last 20 years is the ATM.’

Volcker has been a long time critic of the hubris in the US financial sector and was recently appointed by President Obama to assist in reforming the imbalances in the system. The tiger he is trying to tame will not be easy as this is an industry that has billions of dollars at stake and powerful political allies.

There is limited data available on the growth in the Australian financial sector so the following figures are from the US. (I suspect the Australian experience will be fairly similar.) In 1965 the financial sector represented 3% of US GDP. By 2009 it had grown to 7.5% of GDP.

This disproportionate increase in the share of the economic cake was due to the continual drive by institutions to create more lending and investment products from which they could extract an ever increasing amount of fees. For example, in Australia Macquarie Bank was a master at developing a variety of infrastructure funds and receiving multi-million dollar fees for their efforts.

US GDP in 2009 was $14 trillion, so a 7.5% share of this means the financial sector accounted for over $1 TRILLION of US economic activity. What did the US economy (and by extension the global economy) get for this level of activity? The answer is the biggest financial crisis since The Great Depression. The plethora of products that were created to feed this avarice beast were the eventual undoing of the system.

The irony is the industry that created this mess has been the largest beneficiary of government guarantees and taxpayers’ funds. How perverse is that?

The financial ‘innovations’ of the past 20 years that spawned hedge funds, managed funds, sub-prime lending, credit cards, interest free retail loans, private equity funds, collateralised debt obligations (CDO’s), options, futures etc. has been a financial bonanza for a small minority at the expense of the majority.

The financial sector growth was a global phenomenon. Unfettered pursuit of profit at any cost by the British financial sector is the root cause for the severe economic downturn that country has experienced. It will take decades for the British economy to recover.

Iceland also had delusions of converting itself from a fishing village to a financial hub and we know how disastrous this foray into the money world ended. The banking systems in many European countries are in complete disarray after their ill-fated lending policies to Eastern Europe.

In Australia our banking system was rescued by the Government guarantee (of taxpayer money) and the big four banks certainly did not waste this once in a lifetime profit opportunity.

There has been much press given to the banks not previously passing on in full the RBA interest rate cuts and then raising home loan rates in excess of the official RBA increases, but very little has been said about the excess interest charges the banks have levied against commercial loans.

Graham Turner, CEO of Flight Centre made these comments when announcing his company’s profit results in 2010:

We only have small borrowings but the banks still made life hard. It was on their terms if you needed to do any borrowing in the past year, and that was for everyone, every business with borrowings. There’s only four banks in Australia, and no one else existed there for a while, but they laid down the rules and chose their own margins and those margins quadrupled almost overnight. Most businesses will have long memories as to who they will deal with again.

The banks were ‘shooting fish in a barrel’ after the GFC and this laid the platform for the ever-increasing record profit results delivered in recent years.

In addition to banking, funds management has also been a beneficiary of the burgeoning financial sector. According to research from Ashley Ormond of Investing 101, the pattern of enriching the minority at the expense of the majority is well and truly alive in the fund management world.

Using data supplied by Morningstar research, there are 620 Australian Equity funds that have been in operation for over 7 years.

According to Ormond: ‘Out of the 620 equity funds, of these only 109 funds (or only 18% of funds that have lasted 7 years) have beaten the index consistently over 7 years (i.e. they beat the index over 1,3,5 and 7 years). So 5 out of 6 funds failed to beat the market consistently over 7 years.’ Ormond calculated the average under-performance was minus 2% per annum.

The expanding financial sector has been a gravy train for many people, but the more difficult economic times we are experiencing will hopefully return some normality to the remuneration structure.

The financial sector (banking, funds management, investment banking, insurances etc.) plays a vital role in a developed economy but it must provide value for money. Excessive fee and rate gouging of clients, that is then converted into bonus payments for the privileged few, is no way to endear your industry to the broader community.


Vern Gowdie
for Markets and Money


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Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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