By Yalman Onaran Bloomberg News
NEW YORK — The world’s largest banks need to shrink or be broken up in order to regain investors’ confidence after four years of scandals, high-profile trading losses and financial crises, according to a Bloomberg poll.
Almost 60 percent of respondents said they were not confident or “just somewhat confident” that banks are taking prudent risks and conforming to the law, and getting smaller was seen as the top fix in the Bloomberg Global Poll, with 29 percent choosing that remedy. Changing the compensation structure was the No. 2 way to improve trust, with 23 percent.
After injecting $600 billion to rescue failing banks during the worst financial crisis since the Great Depression, governments around the world have tried in the last four years to strengthen banking regulations to prevent a similar outcome. Those efforts have been stymied by conflicting laws and increasing complexity, making the changes harder to implement and reducing their effectiveness.
Solutions suggested so far are “a grab bag of minimalist Band-Aids to patch up the self-inflicted wounds” of the financial system, said Lew Coffey, a poll participant and a fixed-income analyst at Windsor Capital Management in Phoenix. “What’s required to re-establish investor confidence is a series of basic measures to simplify the business, isolate different kinds of risks into different boxes and increase transparency to outsiders.”
Coffey, who’s been managing money for more than 35 years, suggested reinstating the 1933 Glass-Steagall Act, which separated commercial and investment banking, and limiting the size of banks’ balance sheets. Both ideas have been proposed in Congress since 2008 and failed to garner enough backing.
The United States and other countries have considered alternative ways to separate risky activities from the more plain vanilla functions of banks. The 2010 Dodd-Frank Act bans depository institutions from making short-term bets with their own money, while Britain is weighing how to wall off the trading units from commercial lending operations. The European Union is discussing a possible combination of the two measures.
The EU also is considering limiting executive pay at banks. In an effort to tie employees’ compensation to long-term performance, the largest firms have extended how long it takes for stock awards to vest. Many have instituted claw-back provisions to reclaim bonuses from employees whose bets end up losing money, though no bank has yet to invoke such a provision.
“You can de-risk activity more effectively if you limit the incentive portion of compensation, most likely a cap as to percent of salary,” said Vincenzo Galli-Zugaro, managing partner of Seven Pillars Capital Management in London and another poll participant.
The Jan. 17 survey of the 921 investors, analysts and traders who are Bloomberg subscribers also showed that trust in the largest banks has failed to recover four years after the crisis. A majority said they lacked or had little confidence that the biggest institutions are taking prudent risks and conforming to laws.
Half said their opinion of the world’s largest lenders hadn’t changed over the past year, while 61 percent said legal troubles such as the Libor scandal had affected their view.
When big banks break the law, they’re treated more leniently than individuals doing the same, said David Wren- Hardin, a trader at Ronin Capital in New York. Banks caught laundering money for criminal clients were allowed to “get off with a slap on the wrist,” he said.
“The banks could regain my confidence by turning over the people who allowed these decisions, all the way up to the CEO level, to the federal government for criminal prosecution,” Wren-Hardin, also a survey participant, said in an email. Prosecutors shouldn’t shy from charging banks criminally for fear of potentially putting them out of business, he said.
The Bloomberg Global Poll was conducted by Des Moines, Iowa-based Selzer &Co. and has a margin of error of plus or minus 3.2 percentage points.
Several respondents contacted for follow-up questions said their trust in big banks initially eroded with the 2008 crisis. The meltdown showed that the whole financial system was a Ponzi scheme, said Henry Littig, the founder of Henry Littig Global Investments AG in Cologne, Germany.
“This Ponzi scheme has produced a lot of wealth worldwide,” said Littig, author of the 2012 German-language book “Welcome to the World after Capitalism.” “It has to end sometime. The financial system is in the last third of its lifespan.”