Cablegate: Ambassador's Introductory Call On Lord Turner,
PP RUEHAG RUEHROV RUEHSL RUEHSR
DE RUEHLO #2208/01 2661511
ZNY CCCCC ZZH
P 231511Z SEP 09
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 3570
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
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C O N F I D E N T I A L SECTION 01 OF 02 LONDON 002208
NSC FOR HENNESSEY-NILAND
TREASURY FOR MURDEN, SOBEL
E.O. 12958: DECL: 09/22/2019
TAGS: ECON EINV UK
SUBJECT: AMBASSADOR'S INTRODUCTORY CALL ON LORD TURNER,
CHAIRMAN, FINANCIAL SERVICES AUTHORITY - BANKERS' BONUSES KEY TOPIC
Classified By: Ambassador Louis B. Susman for reasons 1.4 and d.
1. (C/NF) Summary. In Pittsburgh, the G-20 must commit to scrutinize and enforce bank pay and bonuses practices and such practices must include claw back and deferred payment provisions, Lord Turner, Chairman of the Financial Services Authority told the Ambassador on September 22. He said the French seem ready to withdraw their demand for bonus caps, which had threatened to derail consensus in Pittsburgh. Another point of disagreement, the issue of accounting standards, he predicted will not be resolved in Pittsburgh. In the 45-minute meeting with the Ambassador, Turner expressed concern that bankers had not learned a lesson from the crisis, and were returning to "business as usual." He stated that regulators had contributed to the crisis by focusing too much on procedures and buying into the belief that markets were perfect. End Summary.
2. (C/NF) Just days away from the Pittsburgh G-20 Summit, the French seem ready to back off their demand for specific caps on bonuses, Lord Turner told Ambassador Susman during their September 22 meeting. Having spoken at length to his French counterparts on September 21, Turner said the French will insist, however, that the G-20 issue clear guidance on pay practices - that such practices should include claw back provisions and deferred compensation, for example - and that the G-20 commit to strong enforcement of those practices. The UK, said Turner, also wants to see a G-20 commitment to strictly enforce such provisions, and he strongly encouraged the U.S. to agree to such enforcement.
3. (C/NF) Turner expressed concern about the record profits being made by several investment firms this quarter and how he expected that large bonuses will be paid out in the first quarter of 2010, which will once again draw public scrutiny and ire, and raise political pressure for more drastic measures to limit bonuses. Unless bankers' get the message that profits should not immediately go into their pockets in the form of bonuses, but rather be re-invested to restore the long-term health of financial institutions and the economy, there will be another round of public and political backlash. The public anger would be particularly acute since much of the recent profits are being generated as a result of managing large government bond issuances, of issuing debt at record low interest rates, and of enjoying less competition since many firms "exited" - voluntarily or involuntarily - the business. In other words, the banks are making money from the crisis, he commented. Turner predicted that whatever action is taken in Pittsburgh will temper the worst abuses for the next year or two, but unless there is a new regulatory framework or much better industry self-regulation, there would be a return to "business as normal." He cited one prominent CEO who had recently admitted that he leveraged so high to drive returns and seemed unabashed about this action. The Ambassador also expressed concern that the banking industry has not "gotten the message." Lord Turner predicted that if the banks do not change their behavior, political leaders would have no choice but to impose pay and bonus restrictions.
4. (C/NF) Turner stated that while he did not foresee any significant disagreements in Pittsburgh, he did not expect the Summit to resolve the question of accounting standards, and whether International Financial Reporting Standards (IFRS) should be adopted as the global rules of the game. He noted the political pressures that have been brought against both the U.S. Financial Accounting Standards Board and IFRS as a result of the controversy over fair value and mark to market accounting. He said many European regulators have criticized the U.S. for its insistence on retaining its fair value principle. He disagreed with the concept requiring companies to mark the value of their assets to whatever market prices they could find - even if those markets were illiquid or the assets were truly toxic.
5. (C/NF) In response to the Ambassador's question about why regulators did not identity or prevent the worst abuses of recent years, Turner noted that over the past two decades, the belief that markets were perfect became entrenched and self-fulfilling. Regulators lacked the confidence to challenge this belief, and the political support to take such a stand. There was too much lobbying and too close of a relationship between the financial institutions, the regulators, and the legislators. The challenge now, said, was to establish an experienced, savvy cadre of regulators and LONDON 00002208 002 OF 002 give them the political support to do their jobs. Visit London's Classified Website: XXXXXXXXXXXX