Yesterday, Ed Miliband said the chief executive of Royal Bank of Scotland, Stephen Hester should not receive a bonus this year.

If Labour wanted control of executive pay of state owned banks, then they should have made renegotiation of contracts a condition of the bailout when they were in power.

Labour should have also demanded that all front office investment banking staff in those banks had to re-apply for their jobs, without any guaranteed bonuses.

Labour left the coalition toothless to deal with the issue. Once the banks returned to operational profitability, they lost the legal financial justification for placing investment banking front office staff under consultation to review pay and conditions.

Today, Vince Cable has proposed a series of measures to give shareholders a binding vote on executive pay, and crucially, given Sir Fred Goodwin’s deal at RBS, exit packages.

Vince Cable found himself unable to address high pay at RBS, Lloyds and HBOS, thanks to Labour’s failure to address the issue when it bailed out the banks.

Vince has done what Alistair Darling should have done, and proposed the legislation he needs to get the powers the government needs.

As the largest shareholder in RBS and other banks, the government will now be able to control the executive pay at those institutions, and fix the problems Labour created.

During the 2010 General Election, a campaign got under way in support of a ‘Robin Hood Tax’.  The suggestion seemed to have fizzled away but has been gaining some steam recently.  In particular, the Archbishop of Canterbury has come out in support of the proposal, in the midst of #Occupy movement’s presence at St Paul’s Cathedral.

The proposal on the face of it, has merit, focussing a tax on high risk speculative casino banking that created the Credit Crisis, the worldwide recession and the continuing troubles in the global economy.

However a deeper analysis shows that the Robin Hood Tax (RHT) is actually counter productive when it comes to reforming the banking sector, preventing a similar crisis in future and getting our economy moving again.

Firstly, a disclaimer.  I spent 10 years working in the IT departments of Investment Banks in the City of London, before leaving 7 years ago.  However there is no love lost between myself and the City.  Whilst I have friends from my time working there, particularly those in IT, I have little sympathy for the poor risk management that led to my former colleagues prompting the credit crisis.

What is the Robin Hood Tax?

The Robin Hood Tax is a type of ‘Tobin Tax’ whereby a tax of 0.05% of the transaction value would be levied on all banking transactions, where the financial institution is speculating with its own funds, as opposed to investing customer’s money.

The arguments in favour are that this could raise £250bn globally, and £20bn in the UK alone.  As the tax is only on trades that banks make with their own money, the tax cannot be passed on to their own customers.  Supporters want the tax to donated to charity and to help banks repay the damage they have done to the global economy.

Criticism has focussed on whether it would drive the Financial Services sector away from the UK, a crucial part of our economy and the need for it to be implemented globally to be effective.

Objectives for Banking Reform

There are some clear objectives that need to be reached by global banking reform, and any proposal needs to be assessed against them. The objectives must be to:

• Ensure that a similar crisis cannot happen again by reducing high-risk investment
• Get Banks lending to sound UK businesses to stimulate growth
• Recoup the money invested in bailing out the banks
• Protect our savings from the excesses of high risk banking
• Address the ‘bonus’ culture within the banking sector

Unfortunately, on examination, the Robin Hood Tax is actually counter productive on the first three of these and unhelpful for the other two.

High Risk Banking

Now, 0.05% does not sound like very much, does it?  Until you realise that the profit margins on low risk transactions are between 0.1 – 0.2%, which means that the Robin Hood Tax would be a 25-50% tax on profits.

Sound implausible?  If you look at the RHT website, it claims that the £20bn raised in the UK will be based on taxable income of £90bn, i.e., a 22% tax on profits.  This would be on top of 20% Corporation Tax.

Crucially, the tax is levied whether the bank makes a profit or not.  Given that the amount of tax raised is based on the amounts traded, rather than the profits, this means that in a bad year for banks, they would pay £20bn in tax, even if they were to make a loss

I am not arguing that we should feel sorry for the banks or that a higher level of tax on profits would be unfair or unjustified (although I do object to major taxes on companies that are not in profit).

The important thing to realise is that this will prompt banks to make more high risk investments, not less.

To understand why, we have to understand the recent history of investment banking.  As banking went global, electronic and hugely profitable through the 80′s and 90′s, the large amounts of money being made led to a lot of healthy competition, that in turn led to profit margins on trades being squeezed right down to 0.1% of transaction value.  Banks were still able to make large profits, because the amounts being traded were so huge.  A single £20m trade could still give a profit of £20,000.  The RHT would then take £10,000 of this.

To maintain profit margins, banks invented new investment products, for which they were able to charge a hefty premium.  When first introduced, products like Swaps, Convertible Bonds and Credit Derivatives were able to command profit margins of up to 2%.  However the cycle always repeated and increased competition squeezed profit margins.

This cycle has led to banks inventing more and more exotic products, that were increasingly risky.

And here is the nub of the issue.  Adding a 50% tax on profits on low risk, well understood, well managed banking transactions will simply drive banks to trade higher risk, higher profit margin products, just as increased competition has led them to do over the last 30 years.

Products like Futures, Options, Swaps, Swaptions and Convertible Bonds, were once high risk, poorly understood, high profit transactions.  They are now the staple of Investment Banking and most banks can trade them perfectly safely.

Credit Derivatives and complex securitisation structures are the high risk, high profit exotics that have brought the world economy to a stand still.  And we should not be encouraging banks to trade them until they are better understood and managed.

So the Robin Hood Tax would prompt banks to trade higher risk investments, not lower.

Liquidity and Volatility

Unfortunately here I need to add in some banking jargon.  Liquidity measures how easy it is to buy or sell in the market.  The more buyers and sellers there are, the easier it is to buy or sell something.

Volatility measures whether prices go up and down smoothly and gently, or jump up and down dramatically.

When a product is liquid, and you need to sell to avoid making a loss, then it is easy to do so and the price does not change dramatically.  If a product is not liquid, and there is a major problems, the market will slump quickly, and you cannot sell easily, leading to major losses.

For example, the current UK housing market has very few buyers and sellers.  The result is that no-one really knows how much houses are worth.  You can put your house on the market for what you think is the right price and end up having to sell for a lot less, potentially losing money.  Try to buy in a good school catchment area, and you can find you have to pay through the nose.  The market currently has low liquidity and high volatility.

Simplistically, liquidity is good, volatility is bad. In fact decreasing liquidity increases the riskiness of a product.

The Robin Hood Tax by definition is intended to stop banks trading as much of their own money.  As a result this will make products that are currently reasonably risk free, less liquid, more volatile and in fact more risky.

There is a knock on effect, in that other, non-banking investors will shy away from investments that they cannot sell out of easily, decreasing liquidity further.

Again, the RHT will prompt increased risk, not decreased.

Get Banks Lending and Investing in Business

As well as retail banks directly lending money to small and medium sized businesses, the investment banks also provide crucial credit and capital to larger businesses through buying shares and buying corporate bonds.

These are not always high profit investments by banks and form the more mundane part of an investment bank’s business operations.

Again, an additional 0.05% tax on the buying and selling of shares and corporate bonds will likely mean less investment into British companies.

And again, there is a knock on effect with other financial institutions.  If banks are not buying when companies either go public and sell shares, or when they try to raise money through corporate bonds, then they price per share will drop or the rate of interest for borrowing will increase, due to the lower demand.

An added knock on effect is that venture capital funds are less likely to support start up businesses, unless they are confident that there is a vibrant market for them to go public.

The Robin Hood Tax, by discouraging banks investing with their own money, particularly in low profit investments, will lead to a decrease in investment and lending to businesses.

Getting Our Money Back

The UK Government borrowed eye watering amounts to bail out and buy a number of UK banks to stop them collapsing.  Given the scale of borrowing, the only way to recoup this money is to sell the banks back into private hands.

Unfortunately, the markets are fully aware of this and know that at some point in the future, the Government will be selling large quantities of bank shares.  The markets know exactly what price the UK government paid for the banks, and the shares in banks have continued to trade under that price since 2008.

The share price of any company is directly linked to its profitability.  Taxing an additional 25-50% of profits will lead to a dramatic fall in the share price of the state owned banks.

Which means that the Government will struggle to sell off the banks and get back the money they have invested.

Frustrating as it sounds, we need our retail banks to be healthy and profitable to help get the country’s finances back on track.

So the Robin Hood Tax would make it harder for the UK government to get back the money it has invested in the banks, and at £20bn per year, it will take years to recover that money through the tax, and that is only if none of it is given to charity.

Protecting our Savings

The Robin Hood Tax does not in any way address the need to protect our savings from speculative trading by banks with their own money.  In this case it does nothing to harm it, beyond encouraging riskier trading.

Investment banks have merged with retail banks to take advantage of the large holdings of the retail arm to borrow more heavily and more cheaply for speculative trading.  The key is to split up the investment and retails arms to stop the investment arms ‘leveraging’ our savings for high risk trading.

Bonus Culture

Again, the Robin Hood Tax does nothing to address the bonus culture within banks. At this point, I should state that I have no objection to bonuses linked to profits, preferably long term profits.  However there is a case, I believe, to end guaranteed bonuses, whereby a trader gets paid a substantial amount, irrespective of their trading performance.

In the next two articles, I will address a couple of key questions.  If the Robin Hood Tax does not address our objectives for banking reform, what will?  I will also look at the causes of the banking crisis, other than the banks, which are increasingly ignored by the ever more emotional coverage of the banks.

In the wake of the Adam Werritty scandal surrounding Liam Fox MP, the Labour party are apparently demanding a lobbying register.  It might surprise you to know that such a bill was introduced to the House of Commons by the Lib Dems in 2006 and it was voted down by 284 Labour MP’s.

You will be pleased to know that just such a register is in the Coalition agreements from 2010, as demanded by the Lib Dems.

Gareth Thomas MP, Shadow Cabinent Office minister said:

“David Cameron has still not introduced the compulsory register of lobbyists he promised.

“In the wake of the Adam Werritty and Atlantic Bridge activities it is now essential we have greater transparency.

“The government should bring forward as a matter of urgency plans for a compulsory register of lobbyists with records being kept of meetings between lobbyists and ministers.”

Read the full article on the BBC by clicking here.

Every Lib Dem member, supporter and MP agrees.  Which is why we have been calling for regulation of lobbying for years.  In fact we introduced a bill to the House of Commons calling for a reporting of corporate expenditure on lobbying and putting a cap on their lobbying expenditure.

Remember, this is all before the Stephen Byers “Cab For Hire” incident.

Any guesses for Labour MP’s who voted against the motion?  You guessed it Ed Milliband, Ed Balls, Yvette Cooper, and one Gareth Thomas.

Also of note, the Conservatives did not bother to vote.  And 5 of the 6 SNP MPs also voted against the Lib Dem bill, including Angus MP, Mike Weir.

You can see full details of the Bill and all those MPs who voted against it by clicking here.

Image from BBC.

Angus North and Mearns Liberal Democrats launched a local  campaign to Save Our Police this week-end across the constituency.

Reacting to plans by all three other major parties to centralise the police to a single force, Sanjay Samani, Scottish Liberal Democrat candidate for Angus North and Mearns, commented:

“In my view the fight against crime in Scotland is now under threat from plans by the SNP and the other parties to centralise our police. Under their plans local police forces would be disbanded and every police officer would be allocated according to national directions not local policing need.”

“I am particularly concerned that by creating a national police force, the chief constable will come under the political control of a government minister and will lose their links with local communities.

“In addition, the cost of centralisation, building a new HQ and new IT systems will costs a fortune and will cost police jobs. The SNP has refused to answer repeated questions about how much their plans will cost, fuelling fears that police officers will lose their jobs to pay for the changes. Some chief constables have estimated it could cost the jobs of 4,000 police officers.”

Angus and Mearns Liberal Democrats want to keep policing local, help the local police to work with the local community and to keep the number of officers high.

“In the course of the next few weeks we will be distributing thousands of leaflets about our campaign across the constituency,” Sanjay continued, “and I would urge residents to sign and return our petition by Freepost, so their voice can be heard.”

“You can also support the campaign on Facebook at http://www.facebook.com/SaveOurPolice.”

Commenting on the proposals to centralise police decision making, by Holyrood, Scottish Liberal Democrat leader Tavish Scott said:

“This is a slippery slope to one police force. For 150 years people in this democracy have worried about the government gaining political operational control over policing. The First Minister refuses to see that a National Police Board, appointed without debate in this Parliament – and with no basis in law – moves us down that dangerous road.”

“We need a police service that is responsive to local needs not subject to central diktat and centrally imposed targets.”

I was very disappointed to read of the Scottish Prison Service’s decision not to release information relating to Noranside Open Prions under the Freedom of Information Act, on the pretext that, “it would not be in the public interest”.

It is extremely unfair on the staff at the prison for them to be treated in this way. Staff deserve some certainty and clarity from the SNP government about the future of their jobs. They also deserve to know how the decisions around the prison have been reached.

Not only do they have a right to know how the SNP government came to its decision to close the hugely successful prison, but also why they were assured last year that there were no closure plans, and why the decision has now been delayed until after the election.

The SPS must honour its obligations under the Freedom of Information Act and release details of any documents relating to the decision to close Noranside.

Click here for Robert Brown’s response on The Courier website.

The Economist has a blog post about the timing of Ed Milliband’s speech to the March 26 rally.  Whilst there is an interesting analysis of why Mr Milliband spoke so early, far more interesting is 3 paragraphs that neatly sum up the range of opinion about how and when to get the public finances back under control:

I think Mr Miliband’s problem boils down to this. Most people in this country, including a lot of people I met on the march today, think that Britain faces a period of painful decisions and choices, because the country has been spending too much. Within that majority, there are people who are (for variously selfless and selfish reasons) attracted to a Keynesian argument that deep, front-loaded cuts are counter-productive, and so some painful decisions should be postponed. That is an intellectually respectable argument: this newspaper does not agree with it, but there are people of goodwill on both sides of the debate.

Then there is a hard core of people who simply do not accept that the money has run out. These flat-earthers think that there need not be any cuts, because if you only taxed the banks/bankers/multinationals/tax avoiders/the rich a lot more, you would unearth a hidden money pot filled with so many billions that we could keep spending as before. I don’t think Mr Miliband agrees with them. I don’t think most voters in Britain agree with them. I don’t think even most of the marchers in Hyde Park agree with that hard core.

But that hard core has a firm grip on Labour’s base, as could be seen on Friday in Nottingham. And Mr Miliband, by endorsing the wider anti-cuts movement, risks becoming associated with that hard core and their breathtaking lack of realism. He said again in Hyde Park that he was proud to be addressing the “mainstream majority”. But he did not look proud: his nerves gave him away. “It is so important that this be a peaceful protest,” he said at one point, almost pleadingly. The crowd seemed pretty indifferent to his presence, in return.

Read the blog post “Ed Milliband shunted off television news by anarchists” at The Economist website by clicking here.