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And for my next trick … a bonus for 10!

At a leather-decked boardroom table in the backwaters of Whitehall a group of smart City gentlemen meet with some rather scruffy governmental characters to talk about a deal.

For the purposes of this story, we’ll call the smarts Eric, Bob, Stephen and Stuart, and the scruffs George, Andrew and Mervyn.

Bob, with heavy American overtones: “So George, we got a deal or have we got a deal?”

George, with Etonian inflections: “Well Bob, I don’t quite understand the deal you are offering.”

Bob: “I think it’s pretty obvious George”, slightly exasperated. “You let us take our money, dish it out and enjoy the spoils of our game with the economy, and we’ll make it look like we’re helping you out.”

Andrew: “Bob, this doesn’t seem fair. We control the economy, not you.”

The spivs smile sympathetically.

Eric, with soft American undertones: “You may believe that’s true Andrew, but you know it’s not.”

Andrew: “Look Eric, you’re retiring soon, so don’t get into a bust-up when you’ve reached the end of days.”

Eric, with menace in his voice: “Andrew … you may think I’m out of here, but my new role in the regulatory authorities may cause you some issues in the future if you maintain that tone with me.”

Andrew looks away and George pipes up again: “so what exactly is the deal you guys are offering here?”

Stephen decides to see if he can broker the liaison: “Well George, we’re all trying hard to restart the economy.”

Nods all around.

“You’ve got your austerity measures, tax hikes and public sector cuts.”

Grimaces all around.

“And we’ve got shedloads of cash to lend to anyone who wants it.”

Expressions of surprise all around.

“So we’re going to release our shedloads of cash …”

George’s mouth drops open a little.

“… as long as you let us take a massive amount of money too.”

George’s mouth closes again, and with a slight stammer he asks: “how much money are we talking about here Stephen?”

Stephen responds: “£200 billion.”

Now Andrew and Mervyn’s mouths drop open a little, as George’s face darkens: “what, you guys are going to take a £200 billion bonus this year … I can’t let that …”

Stephen cuts George short: “no, that’s not the bonus pot George. That’s how much we’ll lend if you let us have our bonus.”

George stammers: “and h-h-h-how much are we talking when you say ‘bonus pot’.”

Bob now cuts in: “Six billion.”

Andrew looks crestfallen, Mervyn’s impassive and George is bewildered.

“Where’s this money coming from?” George asks.

Bob immediately cuts him off: “Profits.”

George can’t let it go: “And where are these profits coming from?”

Bob: “Oh, here and there.”

Mervyn decides to illuminate the room, and begins a long forensic dialogue about quantitative easing, toxic insurances and structured vehicles.

No-one understands what he’s talking about, so Andrew gives it a go to try to interpret his missive.

“If I understand Mervyn correctly,” he begins, “we, the government, gave you, the banks, a massive amount of money that we created out of thin air.”

Everyone nods.

“And that was called Quantitative Easing, or QE.”

More nods, especially from Mervyn.

“Now you, the banks, have made so much money out us, the government, through QE that you, the banks, now have shedloads of cash you can use to restart the economy to help out us, the government.”

Major nodding movements all around the table, as everyone feels that someone’s finally got it.

“And you, the banks, are prepared to lend that money on behalf of us, the government, as long as we, the government, let you, the banks, take your cut of these profits in the form of bonuses.”

The bankers’ heads move up and down so vehemently that one is reminded of the nodding dog in the Churchill adverts.

“But none of this money would exist if we, the government, hadn’t created the money out of thin air in the first place.”

Big nods, and this final comment triggers Mervyn to mutter: “By jove, I think he’s got it.”

Even George looks impressed as he digests this analysis.

Unfortunately, Andrew always has to go one step further.

“And that’s why this is called Project Merlin I guess.”

Slightly perplexed, George asks Andrew to clarify.

“Well George, by creating almost a trillion pounds of money out of thin air, we’ve managed to generate loads more money which can be used to cover lending and bonuses.”

George is now exasperated: “you just said that Andrew.”

“I know George”, Andrew immediately responds, “but it’s called Project Merlin because it’s all made up. None of this money really exists. We just created it all out of nothing.”

“Oh”, says George.

“In other words”, Andrew continued, “like King Arthur’s Merlin, we’ve just achieved the greatest magician’s trick ever.”

“And what’s that?” says George.

“Creating an economic recovery out of nothing”, replies Andrew.

At which point, the room disappeared in a puff of smoke as everyone realised none of this was real anyway.


Oh yes, if you're wondering what the hell I'm talking about …. from the Guardian:

Nothing wizard about Project Merlin, by Nils Pratley

The big day approaches. Project Merlin – the fruit of weeks of negotiations between the banks and the government – will soon be unveiled. This will be ground-breaking stuff, you might assume.

Prepare to be underwhelmed. At its heart, Project Merlin comes down to something unspectacular: the banks will say they are committed to lending a big sum, about £190bn according to the whispers, to UK business over the next year and their chief executives will agree to see their bonuses linked in part to the achievement of this goal.

There is nothing objectionable about this arrangement – it won't do any harm. But, please, let's not pretend that the business of providing loans to UK business will be transformed.

For a start, the £190bn figure (or whatever it turns out to be) will not be a firm commitment. It's more like an intention. The banks will say that they intend to lend the sum as long as creditworthy borrowers are forthcoming and economic conditions remain stable.

Those are sensible conditions, of course, since it would be counter-productive (for the banks and for the government) to encourage unthinking lending. But the implication is that the £190bn is a wishy-washy figure. Everybody hopes that it will be achieved, but everybody also understands that life doesn't always run smoothly.

Nor should bank bosses fear for their bonuses. It seems that the banks' own remuneration committees will judge whether the intention to lend has been honestly and vigorously pursued. Bank non-executive directors, we know, tend to be understanding. When the Royal Bank of Scotland last year missed its government-imposed lending targets, the pay committee decided there were sound explanations for the shortfall and awarded a bonus to RBS's chief executive, Stephen Hester, anyway. (He didn't take it, but that's not the point.)

The banks may be marginally more discomforted on the question of disclosure of pay. One suggestion is that the rewards of the top five earners should be published, as happens in Hong Kong. That is a change but it falls a long way short of Sir David Walker's original recommendation that all remuneration of £1m or more a year should be listed on a no-names basis.

We shall see. George Osborne and Vince Cable may yet have a surprise up their sleeves, but Project Merlin looks like a lobbying triumph for the banks. After this "settlement", ministers will feel obliged not to stamp their feet when the likes of Bob Diamond at Barclays and Stuart Gulliver at HSBC accept £9m bonuses. It's "hands off" on bonuses from now.

Hopes for radical reform rest with the Independent Commission on Banking, which is reviewing the structure of the industry and considering a break-up of the largest banks. It appears to have grasped the essential point that the state cannot indefinitely back-stop institutions that are big enough to rip a hole in the UK's balance sheet. Everything else, including Project Merlin, is a dance around the houses.


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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