The Trusty Servant

[Bufo Americanus, photographed in Deep Creek Lake State Park, courtesy of Aneta Kaluzna]

The evolutionary tree developed by Darwin’s successors is an elaborate structure. The standard semi-professional work is the Five Kingdoms by Margulis and Schwartz, although this will no doubt be succeeded in due course by a web reference. It gives the five kingdoms as Bacteria, Protoctista (the simplest organisms based on eukaryotic cells), Fungi, Plantae and Animalia. Moving downwards through the levels we have Phylum, Class, Order, Family, Genus and Species. Margulis’ work has a section on each of the phyla: 14 bacterial, 30 protocista, 3 fungi, 12 plants, and 37 animal.

It is mainly speculation and nonsense, of course. The only well-defined term is the species: two organisms are different species if they cannot procreate. This only works for sexual reproduction, but more importantly it only works for species that are extant. Part of the process is trying to get a classification which covers extinct species as well as extant, in order to trace the path of evolution from the putative first cell. Inevitably this has mainly been a botany-type process, counting petals or other easily discernible features. For fossils that usually means bones. Maybe as the cost of sequencing the genome continues to plummet, we will eventually be able to adopt a classification with rather more theory behind it.

The actual names are mainly Latin, or rather a curious kind of dog Latin that sometimes transliterates more colloquial terms. The common toad is Bufo bufo.

I hope you have been paying attention, because you are going to need this stuff soon when we move on to John Varley’s recent pronouncements on why his bonus should not be cut. The crux of the matter is the toad, but not the common or garden toad or even a weird American cousin. We are interested in Bufo mendax:

[detail of mug by Sherry Dole, available here]

or possibly Bufo buffoonus. Either way, I think it traces back to here:

They reached the carriage-drive of Toad Hall to find, as the Badger had anticipated, a shiny new motor-car, of great size, painted a bright red (Toad’s favourite colour), standing in front of the house. As they neared the door it was flung open, and Mr. Toad, arrayed in goggles, cap, gaiters, and enormous overcoat, came swaggering down the steps, drawing on his gauntleted gloves.

‘Hullo! come on, you fellows!’ he cried cheerfully on catching sight of them. ‘You’re just in time to come with me for a jolly — to come for a jolly — for a — er — jolly — – ‘

His hearty accents faltered and fell away as he noticed the stern unbending look on the countenances of his silent friends, and his invitation remained unfinished.

The Badger strode up the steps. ‘Take him inside,’ he said sternly to his companions. Then, as Toad was hustled through the door, struggling and protesting, he turned to the chauffeur in charge of the new motor-car.

‘I’m afraid you won’t be wanted to-day,’ he said. ‘Mr. Toad has changed his mind. He will not require the car. Please understand that this is final. You needn’t wait.’ Then he followed the others inside and shut the door.

[Wind in the Willows, by Kenneth Grahame; original illustrations, but not text, unfortunately still in copyright.]

I mention all this because of an interview on Channel 4 by John Varley, the Barclays CEO, on Monday. He was touring the studios, partly to boast about Barclays’ interim results for the six months to 30 June 2009, but also to try to fend off any attempt to hive off Barclays’ investment banking operations into a separate group.

This idea has been getting considerable traction because of the patient and persistent lobbying by Vince Cable, the only politician with much credibility on the issue. His point is simple. Bankers know that the government cannot let large “retail banks” (providing payment services and basic deposit taking and lending services to individuals and businesses) become insolvent, because of the damage to the wider economy. Investment banking is both inherently risky and not essential to the wider economy. Therefore it should be excluded from the institutions that carry an implicit or explicit taxpayer guarantee.

There is no good argument against this. But, of course, it is unwelcome to senior bankers. The senior bankers in an “integrated bank”, including the CEO and chairman, form a cosy club. They can use the lending capacity of the retail bank to fund their high risk investment banking, which will give them big bonuses when it pays off. The occasional disaster will be sorted out by the taxpayer.

Surviving as an independent investment bank, like Goldmans, requires a lot more talent and many of those in the integrated banks are afraid they would not make the cut. Hence all the wonderful special pleading.

Do not misunderstand me. Varley is a class act. I am not accusing him of making false statements. It is just that what he says is misleading, mainly because of what he does not say.

Here is my transcript of the interview. It is worth reading in full. Unless the someone gets their act together, this kind of eminently plausible nonsense is going to win the day.

Q: The government’s bailout. How had Barclays benefited?

A: Well, there are two ways in which I would say the system as a whole benefited generically. One was in the injection of liquidity, undertaken by the Bank of England. And a new structure was put in place in March of 2008. And the other was the making available of guarantees from government for funding undertaken by banks.

Q: Because you said that said at the time of the credit crunch that you felt humbled by it.

A: I do feel humbled by it.

Q: But you still feel humbled by it?

A: Yes. I think it has been a very humbling experience for the whole bank sector, and it has been especially humbling, I would say, for bank chief executives.

Q: Well do you feel you owe the government anything for its intervention and its saving of the banking system, or do you feel that you paid the commercial rate, and that is it?

A: No, I don’t think it is as simple as saying that we paid the commercial rate. I do think that banks have an obligation, given the action taken by this government, and governments around the world, to support the system, and thereby to support the economy, banks have an obligation in those circumstances. We take that obligation very seriously. Let me try to illustrate. We said earlier in the year, in April, that we would make £11 billion of additional lending available to British business and to British households. That was a full-year commitment, £11 billion. In our results announcement today, we have said that we have actually lent £17 billion of additional lending to British business and British housebuyers, divided about 50% between business and 50% housebuyers.

Q: The Chancellor doesn’t think that is enough, though, does he?

A: So if you ask me, have we acknowledged that we should help the British economy by being clear about our obligation to support creditworthy borrowers, and are we acting on that sense of obligation, I think that you can see it very clearly in those numbers.

Q: What about your retail business and your investment [banking] business, and the question of splitting them up? Wouldn’t the taxpayer, given how much investment the taxpayer has put into the banking system, wouldn’t the taxpayer be safer if Barclays was forced to separate off its investment arm, the risky bit?

A: You point me to a bank in the UK where its troubles have been attributable to investment banking over the course of the last two years.

Q: That is not really the point.

A: It is absolutely the point. Because, if you look at where the problems have been in the banking system over the last two years, the problems have been in narrow business models. Monolines. Whether that has been investment banking, Lehmans, or whether that has been in mortgage banks, and you have seen some examples of mortgage banks here in the UK that have not been able to cope with the environment. Actually, the history of the last two years shows you that there is risk diversification in broadly based banking groups like Barclays.

There is a view that investment banking has something to do with gambling or casinos. The idea that investment banking is gambling is simply not supported by the facts.

Q: But what you do is gambling, and it depends on the safety of your bet, ultimately. That’s why the public are very wary of investment banking. I don’t really see why you wouldn’t agree to separate it out. I mean, it would insulate you from the fury over salaries and bonuses, and it would keep the taxpayer safer.

A: Well, I think, as I said, there is no evidence to suggest that the combination of activities has provoked any of the crises that have occurred in the banking industry in the course of the last two years. There is quite a lot of mythology about that. But I ask you where is the evidence. My answer to that is that there is no evidence.

Q: Do you accept that remuneration was part of the problem?

A: Yes.

Q: And that the way that people were being paid was one of the reasons that we ended up in this mess?

A: I do accept that. And you have heard me say before, and I will say it again today, that I think that the industry has made many mistakes and that it is important that the industry apologises for that.

Q: So what will change?

A: I do apologise as a CEO of a big bank. I think that there have been excesses, but it is right for us to learn as an industry, and I think that we can learn, and are learning.

Q: But you see no problem with paying people millions of pounds?

A: I am not expressing a comment about quantum.

Q: But everybody else is! To most ordinary people, who are your customers …

A: I understand that. I absolutely understand that, but I go back to my point about our having frankly a difficult balancing act. I am trying to be candid with you. On the one hand, I understand why people are very fixated with compensation levels in banks at the moment. Of course, I understand that. On the other hand, I am also very clear that banks have to be successful if the economies of the world are going to grow again. And to be successful they have to employ good people.

Q: And pay them millions of pounds?

A: I didn’t say pay them millions of pounds. I simply said

Q: It is the truth, isn’t it?

A: The reality is that we are dictated to by the market. The market, believe me is going through an adjustment at the moment, as a result of what has happened over the last two years.

Q: So are you saying that salaries are coming down? Because a lot of base salaries seem to have gone up, to make up for the fact that the bonuses have gone [down].

A: If you ask me whether overall remuneration levels in the industry will come down over the course of the next couple of years, I clear that they will.

Q: Does morality come into this?

A: It absolutely does, because I think these are difficult ethical and moral judgments. But is it important that we are informed by a set of values that enables us to look you in the eye, and your viewers in the eye, and our customers in the eye, it very much does. And I go back to the starting point [which] is what is the role of a bank in society? Because, we ought to be able to say of the activity of this bank, and I believe I can say of the activities of this bank, that they play an important part in society. I am acutely conscious of the obligation which sits on my shoulders, on behalf of Barclays as a whole, to help the economy recover from the dire situation that it has been in over the course of the last two years. I feel that obligation strongly.

The problem is that explaining just why parts of this are misleading is not easy. Guru-Murthy (the interviewer) did an excellent job. I think I will defer dissection of Varley’s answers to a later article.