(7g) Payments for former partners and new crisis looming

Companies pay former partners

Even politicians start to get fed up with incompetence. PwC (PricewaterhouseCoopers) paid former partners for a total of about £100 million, thus people who no longer work for the company. This at a time when it seems they were incompetent to check certain companies so they failed while afterwards the same PwC earned millions to overlook the dismantlement of one of these company and thus PwC earns twice: first to overlook companies whereby they fail to notice mismanagement so the company goes bankrupt and thus little if anything remains for shareholders while other companies probably have to pay more when they want to buy viable parts of the company. Indeed, accounting companies should be forced to split their audit and consulting businesses into two separate companies without any link to avoid abuse of powers.

Indeed, being ruthless and without compassion is the only way to work at such accounting companies. These companies also calculate the cost of e.g. pensions to advise governments that people should work longer to keep the system affordable while their own partners can retire themselves at the age of 53 so they can still work elsewhere while continue to receive huge payments from the company they left, i.e. in the case of PwC three times the average UK salary.

And thus, former partners who now work in the regulatory industry that overlooks the sector cannot be considered to be without interest and thus independent, even when they wish to be independent as these payments seem to suggest they are still working in the interest of their previous employer and thus may hide what should not be seen by most people. Indeed, people with such connections with the accountancy industry should not be allowed to take decisions in control organisations although they can sit as advisers as can journalists and any other person with interesting views whereby they write reports that will be made public together with a declaration of interest of these people so elected politicians can make well-informed decisions to write laws for which they are paid while civil servants control whether these laws are followed and if not they can inform the justice department with evidence to prosecute those who abuse the system. Being strict is also in the interest of people working at lower levels in the financial sector and for other companies as a good functioning financial sector and related companies are essential for the economy.

Possible new crisis looming

But, as little changed, the previous head of the Bank of England Sir King is warning we are on our way towards a new crisis. Just as the IMF warned us only a few days ago. But, it is normal that after a period of heavy growth a period of decline follows that should not result in panic but instead be allowed to happen in an orderly way and this by having rules that flatten extremes.

Indeed, after the 2007-2008 financial crisis, the financial sector should have been reformed and as I wrote before but it changed only a little as the sector resisted changes. As a result, also the rest of the economy continued in their greatness of grandeur and created a debts-laden economy. And thus, if true than after another financial crisis, the current financial sector needs to be completely dismantled and rebuild under strict government and social control as it was decades ago and thus no longer self regulation and independent central banks that can block democratic powers their policies or change of policies as during the past about 20 years.

Essential financial sector reforms

This rebuilding includes a strict separation between "household" and "investment" banking.

(1) Household banking includes debit and saving accounts and related issues that can be considered to be save and for which banks can use part of our money to support investments such as mortgages so people can buy a house or apartment but also for investments in small businesses and insurance, i.e. low risk.

(2) Investment banking specialises in larger investments and in such a way that people request banks to invest a certain amount of their own money in specific larger projects, close at home or further away with a risk it fails. But, banks should not be allowed to take people's savings to invest in risky projects or compensate for losses made during investments because above to type of banking should be strictly separated to prevent that one banking activity uses money from the other banking activities and thus may undermine it.

Indeed, even when investments go wrong such as irregularities by a company or a worldwide crisis, this should not affect ordinary accounts unless it may do so in extreme circumstances. And to prevent to a maximum that things go wrong, businesspeople should know they instead of the company where they are employed will be punished for wrongdoings while investors should control companies adequately or they can lose money when companies fail because of bad management. But, victims such as clients and delivery companies will be the one who should receive refunds instead of investors. And when banks fail, savings of clients should be repaid or at least up to a certain high threshold so people can continue to buy and thus stimulate the economy. Of course, any failure needs to be investigated at each level to determine what caused it. During the financial crisis it was mismanagement and even corruption by the financial and building sectors and thus this should be corrected.

Further and as before, banks should again be more local and thus without the need to be competitive at a worldwide scale as that results in more risk taking but also ordinary people become unimportant. If banks want to grow more internationally than a failure in one country should not result in the collapse of the bank elsewhere. This is possible when banks aren't allowed to use people's savings to invest abroad but instead keep it local. In contrast, people should be able to invest their money locally or internationally whereby banks shouldn't be allowed to invest their clients money in anything different than the wishes of clients. An example: when a person wants to invest in renewables than banks shouldn't use the money to invest first short term in fossil fuel or weapon industries to make first profits for themselves as happens but they should immediately invest in what their clients want. Banks will make profits because they can charge people a small fee for their services. I even think that in future more people will invest less via intermediates such as banks but directly buy shares via stock exchanges where they also pay a small fee. This is only possible when companies are open about their budgets so others such as banks, professional investors and journalists can inform the general public so the public should know what they do when they want to invest although these budgets should even be open to the general public in case they wish to study them before making decisions to invest.

Limits on bonuses, and certainly not very high ones for a few as every employee is involved to make a success of businesses although I acknowledge that managers can earn up to three times higher bonuses on condition not only investors but also the employees agree and this up to 5 years after they leave the company to prevent companies make profits when they reorganise, i.e. fire employees that now often result in share rises and thus high bonuses. Indeed, I think it's wrong when bonuses are higher than wages as that encourage risk taking. But certainly shares should not be given as bankers have inside information. It should even not be possible for people working in the financial sector to buy shares as that are conflicts of interests because bankers have prior and insiders knowledge and can abuse this knowledge.

Indeed, future reforms will be in such a way that the financial sector will be under severe scrutiny by governments and control agencies as well as shareholders that includes the general public and employees so they too are involved in decision making by the management as banks guard everyone's money and thus can't misbehave. Also national banks such as the European Central Bank or the Federal Reserve in the USA can't be as independent as today but instead are under the control of parliament and whereby they should implement policies of democratically elected governments and parliaments whereby the latter can change the rules if they wish to do so. Thus, the financial sector must have completely open budgets and any new products must have the approval of control agencies and/or parliaments. The financial sector is too important to allow any self interests as it concerns not only people's savings but also the existence of companies and even countries as banks can bankrupt countries when things go wrong. Further, companies are under control of the financial sectors as the latter provides money to companies and first need to invest whether the money can be given while the financial sector must also report possible corruption as governments are not able to control all companies on their own while the financial sector will be under close watch by control agencies but also shareholders to determine whether the financial sector fulfill their duties that includes reporting corruption and not providing information on how to cheat in a legal way. If some don't work as can be expected than those persons and no longer companies should be punished to be sure those who work at the financial sector are correct and companies aren't damaged by having to pay to much although it may be the company has to compensate victims of their misbehaviour. When individuals will be punished, including higher hierarchy when they don't stop and report colleagues who misbehave, the financial sector will install internal control mechanisms to prevent possible corruption.

And, as in most businesses, employees (that include management) receive a monthly wage to do what needs to be done, i.e. work while they can lose their job if they refuse to work while now they assume they need bonuses. I'm not against a minor bonus when a group (and thus no longer individuals to stimulate good work ethics) works well but no longer enormous bonuses for a few or that some work long hours because they wish to have larger bonuses while in that situation it is more likely they make errors. See above. Indeed, in case people need to work longer hours, that may suggest more people should be employed. Working more relaxed will also be good for family life and to relax with friends and thus less burnout. And this is possible when profits are not wasted on bonuses but on more employees who work for acceptable wages while charges for clients can remain acceptable.

In conclusion

Yes, the financial sector is too important to allow that selfish people rule it as its (near) collapse can also bankrupt other companies while impoverish countries. The financial sector needs to check society and individuals to be sure mortgages and loans are correctly awarded and investments are made as the owner of the money requests while society must control the financial sector to ensure it is correct. However, autonomy and self regulation for the financial sector is not possible as it failed the test to great harm of the global economy and to individual tragedies and thus society, including control organisations and parliaments, needs to control it very well while strict rules must prevent employees plunder the company such as decent but not over-the-top wages, no shares as those working in the financial sector have inside knowledge and acceptable bonuses shouldn't be higher than wages and equal under employees in case bonuses can be paid so it will stimulate a culture of working together with colleagues instead of against each other.

Many of this can apply to other companies.