Tomorrow morning I expect substantial equity injections by the UK government into at least four major banks. In exchange we should be seeing a raft of appointments to the Boards of these banks to protect the investment made by the government.
Those appointments must be of awkward people: people who are willing to ask difficult questions. I've already suggested some names. What will be wholly unacceptable is that they be recruited form the ranks of existing non-exec directors. Even the President of the ACCA has accepted those people have much to answer for in the creating the current crisis. The 'old boys' club cannot provide these people.
But whoever they are, what are they going to do? I have imagined myself accepting such an appointment. This would be my agenda:
1) The Board should meet. The chairmanship of all important committees should be passed to the new appointees.
2) Current bonus arrangements of all existing directors should be suspended, as should all share options: there is no room for such arrangements at present when the base salaries of many of the board members comfortably exceeds £500,000.
3) I'll want all minutes of all meetings of the last years made available for my immediate inspection. All discussions relating to risk assessments should be highlighted. I will, in particular want copies of all audit committee meetings and copies of all auditor reports for the last two years. I will ask the auditors to supply copies of their risk profile assessments from their last audit. If they don't want to supply it they should assume they are sacked. I will, in any event, be asking Parliament to pass legislation allowing the National Audit Office to take over this role. It is clear the existing audit functions have failed.
4) I'll want a risk profile of current finances by business sector and location. I will in particular want to know exposure by country: the capacity of a government to bail out interbank balances is right now crucial. I will want to know exposure to private equity and hedge funds. These are the next sectors to fail (and they will, let me assure you). I will want to know how much is held in offshore arrangements. I will want it repatriated and the exposure unwound. I will want to know the exposure on assets for which the bank cannot ascertain underlying value, such as sub-prime, derivatives, etc., and the provision made, with reasons, by market. I'll want to know how fast the bank can extricate itself from certain markets, such as derivate and currency trading on its own account, investment banking, private equity support, hedge funds and structured finance (which with losses around is not going to look so attractive right now). I'll want an assessment of profitability by product and country. I'll want to know where the bank faces biggest bad debt risk. On mortgages I'll want to know what chance there is of a debt for equity swap. I'll want to know how much exposure there is to the same risk in other sectors, and have people appointed to begin negotiating such arrangements, now. And I'll want to know what assets can be ring-fenced to protect depositors as far as possible. And I'll want those supplying answers to provide critical feedback, including suggestion as to the completeness in scope of the questions I have asked. I suspect that few, if any, senior managers in any bank have the courage to say this to any board member right now. I have a strong suspicion brown nosing of the board is the order of the day. But the power of the non exec is that this is not your whole career; you can ask the unaskable, and you can expect answers, and can treat them in confidence. I bet that does not happen now.
5) Then I'll want to see plans: where is the new capital to be used? There is no point pouring it into a pot. It has to be used to best effect. Which business lines should continue? What can be sold? I suspect it's not much right now. What can be spun off? The breaking up of these institutions is vital for the future security of our banking system. So, investment banking is broken out, is possible. Pension and life companies are spun out. Mortgages might go the same way, using existing brands. They may be mutualised: mortgage holders may get shares in their mortgage company. Banking will be just that: a deposit and lending activity subject to strict ratio arrangements. Speculative trading will be consigned to history: that is not a banks role.
6) Intensive care arrangements will be needed for customers in trouble. Bailing out the bank is not enough if it cannot keep its customers going. I'll want to know what arrangements are in place to achieve that, what skills are missing and how they can be acquired.
7) Remuneration will be reassessed: ratios of earnings from top to bottom will be set. Bonuses will be reconsidered. They will be based on supporting clients, not speculative profit. The focus will be on the long term, not making bucks on the turn of an exchange rate or other meaningless deal where there is no intention to ever actually take possession of the commodity traded.
8 ) The basis of future customer charging will have to be reviewed. Clean and safe banks may cost customers more. Packages will have to be designed to make sure that those on low earnings can have access to accounts without being penalised by this.
9) The rebuilding of long term stability on the basis of a strong national base will be key: the global reach of the enterprise is highly likely to be reduced. The current crisis has shown banking is still related to the regulation of the country in which a bank is based.
10) A review of culpability will be undertaken. If it is shown to exist it will require compensation to be paid.
11) A future based on transparent reporting of exactly what the bank does where, and how it manages its risk, will be the policy required. Never again should the public have to bail out banks.
12) Banking will become boring. That is exactly as it should be. But then it was always meant to be the servant of productive enterprise. It has limited wealth creation possibility in its own right, because the fundamental message will be cash is king when it comes to solvency, but generating cash in a bank is not the same as generating wealth, and it's real wealth that meets real people's needs, and banks can only earn from servicing wealthy economies. Anything else is an illusion.
I stress: this is an agenda written in 30 minutes. It could be refined. It would be within two hours of beginning the implementation process. But it's something for all those who get the task tomorrow to think about, I hope.
And I must admit that having written this I realise it's a task I'd relish. But I'm not expecting the call.