Project Merlin doesn’t do what it says on tin

In Blog by Ian Fraser4 Comments

8 February 2011

Project Merlin, the wizard scheme originally dreamt up in 2010 by ex-Barclays chief executive John Varley and RBS chairman Sir Philip Hampton, in the hope of  appeasing the government and drawing a line under the “banker bashing”, has descended into farce.

The project started as bankers believed that, if they promised to show some “restraint” where pay and bonuses were concerned, they might magic away their reputation as social pariahs. And that the government would remove some of the uncertainty over future taxation and regulation of their sector.

But then the government went and spoilt things by introducing new demands, including that the banks should also step up their lending to UK small and medium-sized enterprises. Then came the idea that top bankers’ remuneration should somehow be linked to whether their banks meet a state-decreed target of lending £190bn to UK SMEs.

The bankers don’t like this at all. Last week I spoke to one senior banker (who is probably one of the ‘good’ guys). He said that incentivising bankers for lending more money to SMEs, at a time when the UK economy and banking sector are in desperate need of “deleveraging”, is absurd and reveals the economic illiteracy of chancellor George Osborne and business secretary Vince Cable, the politicians behind the scheme.

Faisal Islam, the economics editor of Channel 4 News, has also picked up a quote from a senior banker about “Project Merlin’s” absurdity:

“We have got ourselves into a bit of a muddle in the UK, because the UK has to deleverage, and there’s absolutely no way that the banks will be able to meet the Basel 3 [Capital] requirements without deleveraging. On one level the UK as a whole has to deleverage, on another the key banks have to deleverage because they don’t have the liquidity and they don’t have the capital, so there’s a sort of Canute-style quality to this debate.”

Today BBC business editor Robert Peston reported that the bosses of Lloyds Banking Group, RBS, HSBC and Barclays are “livid”, “furious” and considering “throwing their toys out of the pram” (i.e. scrapping Project Merlin altogether) as a result of Osborne’s surprise decision to raise the banking levy by £800m this year. This will cause large banks to pay between £100m and £150m in extra taxes this year — a tiny sum when compared to what they intend to pay out in bonuses.

Whilst this seems to have been a shameless political gesture on the chancellor’s part — given it is seen by some commentators as a mechanism to deflect attention away from the massive tax breaks and subsidies given to banks and other transnational corporations by the UK government (see articles by George Montbiot and Yves Smith) — it may give the bankers a useful excuse to scrap Merlin, from which Standard Chartered has already walked away.

If the bankers really do terminate the  “Project Merlin” talks they will, for once, have my sympathy. “Project Merlin”, has turned into meaningless PR drivel, a charade designed to give the impression the government is doing something to sort out the UK’s dysfunctional banking sector — when the reality is it is not doing very much at all.

Even though many of them remain wards of the state, the bankers remain determined to award themselves £6bn to £7bn in bonuses for their performance in 2010. Even those working for the part-nationalised RBS and Lloyds. And last weekend it emerged that the chief executives of HSBC and Barclays are each in line for bonuses of close to £10m each. Some. Restraint.

Serious and carefully-thought-through structural reform of the banking sector is what’s required, and this is unlikely to come from the lightweight Osborne or bank-o-phile Cameron — both of whom have been known to buckle the moment that the bankers start rattling their sabres. It’s much more likely to come from Sir John Vickers’ Independent Commission on Banking and from Mervyn King’s Bank of England. More on that later.

Update: February 9th, 2011 8.45pm

The Merlin deal we’ve all been waiting for was published earlier today by the UK government — and as expected it is limp-wristed, gimmicky, and a sham.

Writing in today’s Guardian, Nils Pratley described it as a comprehensive victory for the bankers.  The deal has also been comprehensively rubbished by Lord Oakeshott (pictured left), the Liberal Democrat treasury spokesman in the House of Lords, who told BBC News: “If this is robust action on bank bonuses then my name’s Bob Diamond”.

Oakeshott said: “I’m afraid when you look at the small print, it’s really not as good as it looks,” and that the agreement contained “weasel words”. He also accused the Treasury’s negotiating team of having “an awful combination of arrogance and incompetence”, and said they couldn’t “negotiate their way out of a paper bag”. For this intemperance and insolence, Oakeshott was effectively fired on Channel 4 News by first secretary to the Treasury, Danny Alexander (who was being interviewed by Jon Snow).

The coalition government may as well have rolled over and asked the banks to tickle it’s tummy. In what seems like wishful thinking, the Financial Times is claiming that Osborne has drawn a line under “banker bashing”.

Update: February 9th, 2011 9.15pm

Naked Capitalism’s Richard Smith has written a blog post on the Merlin deal which accuses the Treasury of issuing a “mendacious press release”. Smith also writes: ” One can’t help suspecting that there will next be a determined push to ensure that those other r-words, reform and regulation, get left as far behind as possible” before ending on a more upbeat note. Channel 4 News’s economics editor Faisal Islam has published a more positive blog post based around and interview with Merlin’s patient architect John Varley.