“Project Merlin” Flags a New Phase of the Bankers vs Regulators Showdown

I was reining myself too much when I wrote this. Or rather, I just wasn’t going far enough. On reflection, two or three more bullet points from the malodorous Treasury press release are worthy of comment, and there’s some extra context to add.

First, the purported object of Project Merlin was to achieve a new understanding between banks and government after the 2008 crash, the 2008-9 bailouts, and the 2009-2010 bonus rows. A Magna Carta-like settlement of rights and responsibilities, perhaps. So you’d think there’d be some public undertaking by the banks, promising never to screw up so mightily again: not to drift stupidly into massive dependence on market-based funding, perhaps, or simply, to manage credit risk better; or not to incentivize risk taking via heads-I win-tails-you-lose bonuses; or not to award performance-unrelated bonuses immediately after massive infusions of taxpayer support.

Oddly, none of that is in the Treasury press release; in fact, the only undertaking offered about “not screwing up again” is this:

not repeating in 2011 the one-off bonus tax announced in Budget 2009.

That’s right – the “mea culpa” on offer, implicitly, is by the government, on behalf of the previous government, which had at least tried to do something to stem the conversion of implicit and explicit taxpayer support into bankster loot. The only thing to admire about this bit of cravenness is its acrobatic combination of grovelling and fingerpointing. That’s unmistakably the handiwork of George Osborne, right there. If you look at the banks’ version of the Merlin Agreement, the banks actually give up a tiny bit more on the bonus side than the Treasury cares to mention; see 3.2; but if it was contrition you were looking for, forget it.

The other bullet points I wanted to revisit are these two:

  • promoting a strong and proportionate regulatory system, securing international agreement where appropriate;
  • implementing and applying European and international rules to create a level playing field in both policy and practice whilst protecting and maintaining the particular strength of UK financial services, and without pre-judging the outcome of the Independent Commission on Banking (IBC).

Well, I interpret “strong and proportionate regulatory system” as “not breaking up any more UK banks”; and  “implementing and applying European and international rules” as “just sticking to whatever comes out of Basel III and not doing anything more radical”. “International agreement” is pabulum: it just means “not frightening foreign banks away by regulating heavily”. Then “without pre-judging the outcome of the Independent Commission on Banking (IBC)”, which will indeed be considering more radical reforms, is just an attempt by the Treasury to pretend they didn’t just say what they just said. If you look at the banks’ version of the Merlin Agreement none of these regulatory policy points are mentioned at all.

So the rather contorted additional promises in the Treasury press release might be unsolicited giveaways by the Treasury, or the fruit of last-minute off-the-record discussions between the Treasury and banks, or sheer ineptitude. Whatever, banks (or is it mostly just Barclays?) are parading their political strength; that is really the point of Merlin.

In the mean time, the elected politicians are in a bind. The contortion in the Press release reflects  Osborne’s dilemma: per my Wednesday post, he is trying to face two ways at once:

So I think Osborne is in a pickle now. If he wishes to clear the way for acceptance of minimal bank reform, as damp a squib as this miserable, cosy “Project Merlin”, he will have to make sure the Independent Banking Commission report by Vickers is as feeble as possible, then push his way past King, head of the independent Bank of England, and then chew his way through the rest of the BoE hierarchy. I don’t think he is brave enough or well-enough backed for that.

But a more direct attack on radical regulators is underway too. Earlier in the week Yves & I discussed the NYT piece on Mervyn King. For the well-connected anonymous blogger London Banker, the appearance of that article is already enough to flag up a whisper campaign; and he is confident as we are that King’s line on banking reform is the cause of the animosity:

Since little appears in the American Pravda by chance, one wonders what and whose agenda is served by such a one-sided and un-journalistic attack on a Governor who has done pretty well in preserving Britain’s financial sector, economy and currency when basket cases surround Britain on all sides (westwards not excepted). No one quoted as critical of Mr King in the hatchet piece is a working banker, I note.

…if you aren’t fluent in British innuendo, what LB means is – the bankers are behind it. LB goes on:

This little propaganda reminded me that I wanted to blog one of Mr King’s bravest speeches. Perhaps bringing what he said to light will help to explain the animosity of those behind the whisper campaign.

Go and read London Banker’s piece, which includes a long excerpt of King’s speech.

In the mean time, another sighting vindicates London Banker’s conclusion – according to the Daily Mail, there is definitely plenty of anti-regulator whispering going on; and someone in Whitehall (a Lib Dem?) isn’t too delighted with that Treasury press release on Merlin:

The long-awaited Project Merlin deal will not eclipse the wide-ranging probe into the industry conducted by the Independent Banking Commission, Whitehall sources told the Mail.

The IBC is currently considering whether to recommend a breakup of the banks to increase competition, which has been vastly diminished in the wake of the financial crisis.

Many bankers had hoped that the armistice deal would effectively pull the rug from beneath the Commission with a pledge to increase new lending to business to £190billion this year.

But a high level government source said bank bosses have been told that the Merlin pact will not ‘prejudice’ any of the investigation’s findings, including a possible dismantling of the sector.

According to the source, the bosses of Britain’s main High Street lenders had been ‘busy trying to undermine the Commission’ during last month’s World Economic Forum in Swiss ski resort Davos.

Naturally, we’ll be on the lookout for more whispers.

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  1. nickj

    OT, I notice some of the Kaupthing chickens are cominig home to roost

    From http://www.guardian.co.uk/business/2011/feb/13/tchenguiz-property-kaupthing-peverel, inter alia:

    “Moreover, these agreements contain so-called “change of control” clauses which give these banks the right to call in loans if Tchenguiz fails to keep control of the corporate structure. Receivers from Grant Thornton, appointed by Kaupthing, could therefore officially take control of the underlying businesses at will. They have not technically done so, however, for fear of triggering a chain of defaults which could leave the shares that Kaupthing took as security from Vincent Tchenguiz three years ago valueless.”

    So extend and pretend is alive and well?

  2. Cro

    Yves, with all due respect lets make a few assumptions.

    1. Banks exist to make money for their shareholders. Therefore, they are inherently selfish institutions.

    2. Banks hire people who they think will try hard to make money for them. Not out of any sense of love toward the shareholders mind you, they do it because,

    3. Bank employees (thinking CEO’s, managers of various sorts, traders, etc) are people who work there to make money for themselves. In fact they probably got into banking because they wanted to make LOTS of money. They are in a word, selfish actors.

    4. Given 1, 2, and 3 it would seem surprising only if every actor DIDN’T act in a selfish way. Bank employee, division head, CEO. Self first. I don’t think even the stockholders think most people in the industry nowadays are more loyal than their own self interest leads them to be, near or long term. Why do you think there has been so much effort in the past to make sure the top management is made of major stockholders? How much effort is put into making sure people INSIDE a corporation put the company before themselves? Laws and contracts, golden parachutes, fat bonuses, I could go on. Why else would there be such an outcry that if we don’t allow for multi-million dollar bonuses a brain drain will immediately occur sucking all that beautiful talent to some better paying sector?

    5. 1 through 4 lead me to propose this for a working model of the economy: Just as Dawkins describes an organism (human or otherwise) as a vehicle for selfish genes and selfish coalitions of genes (geneplexes in his terms) to get reproduced producing what is likely to be a selfish being in the end, why not view humans as selfish economic actors who band together in groups or in companies to attain their selfish ends? The company, bank in this case, is a vehicle to achieve their selfish ends. Why not treat the company as a selfish organism made of selfish parts all trying to maximize their share? Sure coalitions form, but if sacrifices are made are they not to increase the long-term individual share one receives? Are banks not selfish organisms looking to maximize their share and make sure they reproduce themselves by continuing to work as a going concern?

    We should not be surprised that banks attempt to maximize their profits at the expense of anyone whether they do or don’t realize that is what they are doing. We should assume it is human nature and govern them and all human enterprises accordingly. Government, churches, you name it. But really, if their SOLE stated purpose is to make money, we should really just assume they will try anything to bend, break, or get around rules. In fact the only way I can think a bank would NOT try those things is if they did not think doing so was in their interest and the employees felt that managing a bank in that manner would not be good for their careers.

    Hence the need for an active, nosy, regulatory system where regulators get ahead by by doing an incredible job regulating and don’t get ahead by getting in bed with bankers…

    1. attempter

      1 through 4 lead me to propose this for a working model of the economy: Just as Dawkins describes an organism (human or otherwise) as a vehicle for selfish genes and selfish coalitions of genes (geneplexes in his terms) to get reproduced producing what is likely to be a selfish being in the end, why not view humans as selfish economic actors who band together in groups or in companies to attain their selfish ends? The company, bank in this case, is a vehicle to achieve their selfish ends. Why not treat the company as a selfish organism made of selfish parts all trying to maximize their share? Sure coalitions form, but if sacrifices are made are they not to increase the long-term individual share one receives? Are banks not selfish organisms looking to maximize their share and make sure they reproduce themselves by continuing to work as a going concern?

      That’s accurate. And you correctly didn’t try to argue that these sociopathic parasites serve any productive purpose whatsoever, or that they do anything but steal and destroy.

      That leads me to propose this working prescription for the economy: Let’s get rid of the big banks (and corporations) completely.

      The post’s example of the Magna Carta is a good one: It highlights how we’re supposed to look for some agreement with a parasite which shouldn’t exist at all, in order to try to get it to behave better.

      But why would we need a Magna Carta? Let’s just behead the king.

      1. Cro

        I appreciate that you agree with my premises on the banks, but I’m afraid I’m going to have to disagree with the idea of getting rid of them in full. Banks have their uses too. Capital formation, a ‘safe’ place to place money, a decent place to make some sort of ‘profit’ off your savings. The ability to deposit and withdraw your holdings from nearly any location through the banking network, etc. You COULD flip the necker cube as it were and argue I am a parasite drawing sustenance from THEM. Though I and most would consider this backward, that’s because I like to put MY interests first.

        My point is closer to this: The banks represent one of many species, one of many actors in the social/political/economic ecosystem. ANY species or actor in it is capable of the actions I describe the banks with. In fact my point is that they ALL act in this way including myself and the dear readers of ‘naked capitalism’. What I was trying to say is that THESE particular selfish entities have gotten out of control at their level of organization in the ecosystem and now need to brought back into it by ‘government’ another actor in the system. My analysis says that banks will simply try to ‘naturally’ avoid the consequences of this as best they may. I claim that it is ‘natural’ for them to do so. I also claim that at the ‘sub’ level of individual actors operating within the ‘vehicle’ of the banks, it is in THEIR self-interest to not change the way they do business yet. It is still in their individual self-interest and their career’s to continue to find ways around any government constraints put in place. I also claim that part of the problem is that it is currently in the self-interest of actors operating withing the government ‘vehicle’ not to make things too difficult for the banks as it is often in their future or present self-interest to do so.

        It is in the government’s interest to allow the banks to continue to exist. They receive more benefit in general than expense. This is still true in the United States and most other countries. Banks have successfully co-opted their place in the overall marketplace to make this true. The government will play along as long as they think it is still in their interest or tolerate it or if it is in the interest of enough decision makers within the government regulatory apparatus to continue the status quo.

        What we have to do on our part is make sure that the actors in the ‘vehicle’ of the government do not see that it is in their self-interest to continue to allow these behaviors we wish to see change in the banks. Those actors include bank regulators, but are above all else the regulator’s bosses: Congressmen and congresswomen who ultimately can control Now, if only groups of voters have more say than campaign donations from the banking group…

        1. attempter

          Sorry, I’m a human being, and not the kind of monster you describe there. And none of those bogus “purposes” you give for why big banks allegedly need to exist have any relation to a democratic, human economy where the productive people own, manage, and distribute what they produce. The things you describe are endemic to the depraved, criminal, anti-human system “capitalism”.

          And it’s circular logic – “We need banks because the kind of economy the banksters impose upon us requires banks.”

          Which leads back to the obvious solution to break out of that vicious circle. (And the same goes for governments. “We need government because the kind of polity the government imposes upon us needs a government to administer it.” No, we don’t.)

          1. Cro


            How do you know you’re not that kind of ‘monster’? I don’t think it’s going too far to say that we’re the reproductive result of biological systems trying to do whatever it takes to reproduce again, conscious of that effort or not. It doesn’t mean we can’t be loving, compassionate people either, but it does mean we have to be self-conscious as to the real motivation for our actions. Mainly so we can avoid saying things like “We’re doing God’s work” when we’re clearly in a relentless quest for more money. Don’t worry, admitting that we are fallen creatures means that the hardest part of critiquing the opposition because we are willing to admit our own faults.

            Second quick question too; When was there ever this ‘democratic, human economy’ where everyone happily participated in and received their ‘fair share’ of the pie? When were humans ever so enlightened that they didn’t try to exploit eachother or the ‘other’? I have a hard time thinking of any system used so far that did not countenance great crimes against humanity. Just some that did grossly more and some that did less.

          2. attempter

            People have tremendous capacities for good or evil, but tend to rise or fall to the level of their environment. You’ve let corporate Social Darwinist propaganda convince you that the inertia of the social conditioning they impose represents human nature itself, when it’s really an artifical degradation. That’s a version of the Status Quo Lie.

            Historically there have been innumerable tribal societies where such human cooperation and stability were sustained. I’m not aware of any which broke up on account of internal discord or unsustainability. All were destroyed or corrupted from the outside.

            As for modern examples, we saw high-functioning ones in the 1871 Paris Commune, the 1905 and 1917 soviets, the Mahkno society during the Russian Civil War, the workers’ and other types of councils of Germany in 1919, Italy in 1921, and Hungary in 1956.

            Most spectacularly, the real proof of concept, were the anarchist collectives of the Spanish Revolution. These maintained a high level of production, enthusiasm, and happiness under the most extreme pressure.

            These, and all the other examples I gave, were destroyed by violence. Otherwise they would have continued to evolve and their already superior functioning would have continued to improve.

        2. psychohistorian

          The problem I have with your posting is the lack of context. These corporations and banks that you talk about as “individual persons” are actually owned by the elite rich of the world. They hire, fire and set policy for their subordinates.

          In my mind the point of going forward is to take control from these sociopaths and hire, fire, and set policy for the masses instead of the elites.

          1. John Merryman

            (The correct reply button was absent. Hope you see this.)

            You are correct that any individual actor is inherently looking out for their own interests. The larger reality is that all such actors exist in a general state of equilibrium, such that the actions of any one individual, or even group of individuals, is counterbalanced within the larger context. Otherwise the ecosystem in which these individual organisms exist becomes unbalanced, frequently resulting in mass die-offs of many of the individuals within that ecosystem. Even and especially the top predators, as they have evolved to rely on a sufficiently large and healthy ecosystem.

            There was a time when social structures were fairly simple and the lines of control depended on individual abilities. As societies grew larger, stable cultures and legal systems provided the lines of control, though generally to a particular group of individuals within the society. As societies did grow ever larger though, the interests between these leading elements and the states they controlled became separate. When it became evident these leaders were of less benefit than cost, they grew increasingly isolated and eventually lost control of the lines of power. Societies then developed methods of selecting leaders. Often a messy and inconclusive process, but with the benefit of constant rotation, so that feedback loops between the governed and governors remain open. Thus we went from politics as private control to public trust.

            Banking, on the other hand, is a slightly different situation. In order for any market above barter to function, it needs a medium of exchange and processes to direct the flow of this medium. If government is analogous to the central nervous system of the society, banking is its circulatory system, with currency as the blood flowing through those veins and arteries.

            In the transition from monarchy to democracy over the last three hundred years, finance largely remained on the private side of the divide, for natural reasons, but like private governance, it has lost sight of the fact its function is to serve the larger organism and not consume it. If our economy could be compared to an individual body, it would have blocked arteries, high blood pressure, a weak heart and rapidly metastasizing cancer. Yes, they are being selfish actors, but as attemptor rightly points out, they are also being parasitic to the host organism and are asking for a serious reaction.
            Just as monarchy had to be replaced by a system of public governance, so to does our economic circulation system need to be made a public function.
            There was a time when banks issued and were responsible for their own currency, but with central banking, this responsibility has been fobbed off on the public, while private banks retain the rewards for managing it. So we are actually half way to a public system. Since the public has been given the responsibility, per those trillions spent propping up the banking system, it is time to take over the rewards as well.
            The fact is that money is not a store of value. It is a contract with everyone, by everyone. Much like government is a contract among its participants. By the Federal Reserve’s own logic of reducing excess money by selling debt, surplus currency is in the hands of those with a surplus of wealth. Since the Treasury sells far more debt than the Fed does, the government actually controls inflation with deficits.
            The law of supply and demand applies to capital, so it is the demand which determines how much supply can be sustained and after thirty years of supply side capitalism, the pendulum is swinging back the other way and all that bad debt is going to wipe the slate clean of much of that notational wealth, forcing us to start over again.
            My prediction is that banking will revert to individual states setting up their own banks and using the proceeds of recycling local savings back into local investment, as public funds. Since the dollar is being destroyed, they might even have to create their own currencies.
            In that case, those high flying bankers are going to be like a bunch of sabertoothed cats, stuck in the tar pits.

  3. William Young


    I have not seen any mention on your site about the firing of Lord Oakeshott last week as an economics spokesperson in the House of Lords for the Lib-Dems. He has been relegated by the Lib-Dem leaders to the back benches after speaking out forcefully against Project Merlin– he angered a party that has shed all of its principles in order to get into bed with the Tories. He was especially critical of the way government negotiators caved in to the bankers, and he accused these people of “not being able to negotiate their way out of a paper bag.”

  4. Opinionated Bloviator

    The simple fact is “business as usual” will continue until it cannot. Hence the relentless rise in the price of precious metals and the increasing demand for physical.
    Spend, Bailout, Print until we slam into the concrete wall at 200mph. Get ready, it will be arriving soon.

  5. Cro


    Can’t really argue with someone who thinks primitive societies were very happy ones, or that the communes you used as examples worked especially well. I have no real education on the modern communes and so will not counter them. As for the primitive societies I’d suggest any modern anthropologist work past the ‘noble savage’ phase of romanticism in their own work. That is if they ever went through that kind of phase in their work. I think Paul Ehrlich is liberal enough to cite here without fear of being accused of coming from the right. In ‘Human Natures’ he makes a good case that if you truly live in one of these primitive societies you’re probably going to die of murder and the strong really do rule by brute force or fear over the weak. But then again, I guess you’d say this bank conversation means we haven’t really come that far.

    John Merryman,

    I enjoyed that post and don’t really have any issue with it save for this, I DO think that as a whole, whether we are entirely aware of it most of the time, both corporations and government work as an entity looking out for their own best interest and seeking to reproduce themselves. I think our society as a whole does the same thing. Sometimes we REALLY show it. Wasn’t that what we were trying to do in all of our many failed development projects during post-war period? (Not that we didn’t have some great successes in countries that were already developed) Trying to apply solutions that might or did work in our society to other societies where they might not work nearly as well? Wasn’t that George W. Bush’s rational going into Iraq? (‘They’re just like us! Remove those bad guys at the top and Peace, Love, and Democracy will break out!’ Who knew Bush was a liberal? An especially militant liberal, but his expectation really screams more liberal than conservative there. Sorry don’t mean any insult to good liberals by that)

    I still like the human body metaphor in this case and it can even be used without losing meaning in this argument/counterargument. What I think most people don’t understand is that in an organism the group of genes that make the ‘heart’ and ‘circulatory system’ really ARE competing with other organs and their genes to grab a greater share of the resources the body takes in. So are all of the other organs and genes in the body. What we get hung up on and take for granted as fully functioning single organisms is that you can’t have a life that is very fulfilling without the right ‘balance’ that allows for overall systemic ‘success’ in an organism. If you wanted to take the evolutionary population genetics route you’d say, ‘Whatever get the genes in that organism the most reproduction. If the body fails to reproduce as a vehicle for the genes inside it’s a fail’. Now as an individual you might have your own idea about what constitutes ‘success’ and that is up to you, but without children you will find in MOST cases to have very few people who are impacted or who take on your ideas as their own. The exceptions of those who manage to have their ideas adopted by societies at large be it Marx, Keynes, Smith, Newton, Jesus, Buddha, or Justin Bieber are a very interesting conversation, but that is going to far off topic for this.

    So back to the ‘human body’ and ‘overall societal’ system analogy. Yes, I agree with you that one part of the system can selfishly cannibalize the rest of the system for its’ own advantage to the point that the entire system is threatened. I just think ANY part can do it. And yes then ‘cancer’ becomes an apt comparison. I don’t think the feds or for that matter the American people will go for state issued monies…not yet and I think the ‘problem’ will actually get fixed before that. But not before open heart surgery.

    It’s funny how we agree so much on the problem but disagree so much on how to diagnose the patient. Probably because it means so much when treating the patient. Oh well, at least I’m not blindly quoting Milton Friedman.

    1. John Merryman


      I do very much agree with your general thesis, that life is essentially a bottom up process and there is no ideal toward which we are going, or ever passed through. The absolute is basis, not apex, which makes the most stable, fundamental state the essence from which we rise, not an ideal from which we fell. Physical reality is a disturbance of that equilibrium.

      That said, with every cycle of expansion and contraction, new levels of complexity are added to the mix. Life overcomes this inevitable breakdown by dying and regenerating at a steady rate. Our political and social functions do the same as well, but we try to push them out as far as possible and the resulting crashes are that much greater. Given that, any belief system we currently hold is vulnerable to change, so the notion we cannot change our assumption of what money is, is extremely relative to the current reality, where we have been expressly educated that money defines everything and is the ultimate arbiter. People who hate government, love the money, yet it’s the government which effectively backs the money. Go figure.

      We do have another public circulatory system in this country, that of the roads and highways. Which most people willingly accept are a form of public commons that we all must support and to which anyone obeying the laws of the road is entitled to use. We are quite capable of understanding that the cars, houses, businesses, etc, using and lining these roads are private property and cannot be legally trespassed on, but the roads are public.

      Because the roads are public, there is little inclination to pave more than is necessary, yet because we treat money as a form of personal property, which it isn’t, there is the natural inclination to trade any value out of our personal property for it and this enables the banks and government to have maximum control over our lives. If people understood that money is a form of public property, they would be much more careful what value they do convert into it. Much as they are careful what they are willing to see paved over.

      If anyone doesn’t think it already is public property, just try printing some and see who holds the copyrights and how willing they are to defend them.

      Another large problem with treating money as personal property is that everyone feels they are entitled to as much as possible, yet the economy can only support as much as needed to exchange for value. That is why we have these enormous extraneous circulation systems, from government debt to derivatives, in order to support the value of excess money. When it all blows up, where do we go from here? Back down to barter and local currencies and start building the economy again?

    2. John Merryman

      Yes, elements of the body do compete. Frankly, so do elements of the mind. Yet there is a feedback loop. If I’m out in the cold, my hands get cold, long before my head will, because the brain will take all the heat. Yet is it then the brain’s job to figure out how to get the hands warm again, as they are sending ever more intense signals to the brain to do so. Mubarack and a long line of dictators before him, ignored all the feedback for as long as possible and look where it gets them.

      As my aunt used to say, it’s ok to talk to yourself, even answer yourself, but just try not arguing with yourself. Which of course, we all do, all the time, whether we admit it or not.

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