Satirists John Bird and John Fortune offer their take on the boom and bust, the bankers and the bonuses in an FT video

Jean-Claude Trichet, European Central Bank president, on Thursday told banks to return to their “traditional role of providing a service to the real economy,” saying they have focused too much on“unfettered speculation and financial gambling.”

Trichet was speaking to association of German bankers in Frankfurt, on the day that the top US investment bank Goldman Sachs reported another impressive quarter of earnings from trading income, which the ECB president would term gambling.

In the last nine months, the bank set aside about $16.7 billion for compensation and is expected to to pay each of its 31,700 employees an average of close to $700,000 this year - - about double last year earnings. Top producers are expecting multimillion-dollar paydays.

Goldman has benefited from the demise of rivals but unlike a standalone hedge fund, it has also been a beneficiary of government bailouts.

Some $12.9 billion of taxpayer money went from the bailed-out insurance giant AIG, to Goldman in late 2008. There was no pressure to cut a deal. The then US Treasury secretary was a former head of the bank.

Goldman is a well run operation but there are legitimate fears that other firms will try to emulate its model.

Look what happened Merrill Lynch and Citi!

SEE: Finfacts article Oct 14, 2009: Wall Street firms set to break new records in 2009 with pay rising to $140bn; Bailed-out insurance giant AIG paid “retention bonuses” to kitchen staff

Trichet said on Thursday that the basic role of the financial sector is to channel funds from savers to investors, from lenders to borrowers. This facilitates the efficient allocation of resources and the efficient diversification of risk both within an economy and across borders.

"But looking back on the years before the crisis erupted, we can see that there was a dramatic shift in focus in large parts of the financial sector - - away from facilitating business, trade and real investment towards unfettered speculation and financial gambling,"he said.

While acknowledging that financial liberalisation, deregulation and innovation all have the potential to make economies more productive and resilient, he said the current crisis developed because individual risks in the financial sector were underpriced and systemic risk was underestimated. Several authorities, including some central banks, had warned about the possibility of abrupt repricing in the financial sector. These warnings date back to 2006. However, while it was perceived that a storm was brewing, it was not known exactly what would trigger it.

"Looking forward, the financial sector will have to return to its traditional role of providing a service to the real economy," the ECB president said. "This, above all, requires a change in mentality within the financial industry itself."

He said more specifically, the financial industry has to increase transparency, strengthen its management of liquidity and risk, and make its business models more robust. It will also need to align the incentives of its employees to longer-term success rather than short-term profits.

"Our fellow citizens will not tolerate a relapse into excessive risk-taking at the expense of taxpayers," Trichet said.

Financial regulation and supervision will be significantly enhanced and will have to focus on strengthening banks’ capital buffers, making compensation more consistent with long-term success and improving the transparency of financial instruments. Financial supervision will have to focus on detecting developments in the financial sector that could eventually lead to systemic crisis.

"This brings me to my second point, namely that there is an overwhelming need to implement reform simultaneously and homogeneously at the global level," he said. "The crisis has shown that no country can escape the shock waves of a financial meltdown. Accordingly, any reform effort that stops at national borders will prove futile."

Trichet said institutional reform within the European Union follows a two-pronged approach: first, there is the creation of the European System of Financial Supervisors. This is aimed at achieving better coordination among national authorities responsible for financial regulation, in particular with respect to how they coordinate the monitoring of activities of European financial institutions that cross national borders.

Second, there is the creation of the European Systemic Risk Board. This new body will endeavour to provide early-warnings and issue recommendations that will help to prevent a renewed build-up of excessive risk in the financial system as a whole.

"The ECB and the National Central Banks in the EU will play a key role in this new institutional framework. But close cooperation must not halt at Europe’s borders either. Given the strong interlinks between financial centres, a global approach is essential," he added.

On credit availability in the Eurozone, Trichet said that the results of the survey in June and July this year of more than 6,000 firms, reported that they were having difficulties in finding customers;  their turnover and profits were falling and bank loans were harder to come by. The survey also indicated that the crisis has been at least as severe for small and medium sized firms as for larger ones.

Around three out of five small and medium-sized firms that had applied for a bank loan in the first half of 2009 received the requested amount in full. Around one in five received the requested amount in part. And only about one in ten had the loan application rejected.

"Such results do not point to a severe rationing of credit, although both this survey and surveys of banks indicate that credit standards have been tightened," Trichet said.

US regulation moves

On Thursday, in response to political pressure from community bankers, the House Financial Services Committee approved an exemption for more than 98 percent of the US banks from oversight by a new agency created to protect consumers from abusive or deceptive credit cards, mortgages and other loans.

Only 200 of the nation’s 8,200 banks - -  the biggest - - would be subject to the agency’s examiners.

Earlier in the day, the committee approved on a nearly straight party-line vote of 43 to 26, tougher regulations over the derivatives market. That provision, too, contained exemptions for many businesses.

The legislation’s provisions on derivatives would impose new regulations and capital requirements on dealers, and would force more trades onto exchanges or electronic platforms. However, in a major concession to businesses, many trades intended to hedge risks by companies like airlines, manufacturers and energy interests would be exempt from trading through exchanges or clearinghouses.

The New York Times reported on Thursday that in a lobbying season already booming with business from battles over health care, firms are also closely monitoring the debate over Washington’s response to the market crisis. The financial services industry has poured more than $220 million into lobbying in 2009, much of it in anticipation of this Congressional effort now beginning.

The United States Chamber of Commerce, which claims a membership of more than three million businesses, is conducting a $2 million advertising campaign against the planned consumer agency.

The chamber joined 17 other trade associations, including the Financial Services Roundtable and the Business Roundtable, in a letter sent this week to House members opposing the agency.

In the last decade, banking and other interests that now oppose the agency’s creation contributed more than $77 million to the members of the House Financial Services Committee, according to the Center for Responsive Politics, a nonpartisan research organization that studies the influence of money on policy.

Two of the largest recipients of money from the financial sector over the period have been its chairman Barney Frank, whose campaigns have received more than $3 million, and Representative Spencer Bachus of Alabama, the senior Republican on the committee and a leading critic of the administration’s plan.

In the past year, one of Frank's staff members has got a job with Goldman Sachs as a government affairs liaison i.e a lobbyist.

SEE Finfacts article May 27 2009: America may be the most corrupt developed country