Why we need to introduce a Glass-Steagall-style law into British banking!

I wish to acknowledge the work of James Rickards, a hedge fund manager in New York City and the author of "...Currency Wars: The Making of the Next Global Crisis..." I have borrowed heavily from his work in writing this piece and all the text in italics is taken from his website.

The (global) financial crisis might not have happened at all but for the 1999 repeal of the Glass-Steagall law that separated commercial and investment banking for seven decades. If there is any hope of avoiding another meltdown, it's critical to understand why Glass-Steagall repeal helped to cause the crisis. Without a return to something like Glass-Steagall, another greater catastrophe is just a matter of time.

Following the Great Crash of 1929, one of every five banks in America failed. Many people, especially politicians, saw the unbridled market speculation engaged in by banks during the 1920s as a cause of the crash.

In 1933, Senator Carter Glass (D-Va.) and Congressman Henry Steagall (D-Ala.) introduced the historic legislation that bears their name, seeking to limit the conflicts of interest created when commercial banks are permitted to underwrite stocks or bonds. In the early part of the century, individual investors were seriously hurt by banks whose overriding interest was promoting stocks of interest and benefit to the banks, rather than to individual investors. The new law banned commercial banks from underwriting securities, forcing banks to choose between being a simple lender or an underwriter (brokerage), thus putting a legal wall between retail and investment banking.

The Glass-Steagall Act passed after Ferdinand Pecora, a politically ambitious former New York City prosecutor, drummed up popular support for stronger regulation by hauling bank officials in front of the Senate Banking and Currency Committee to answer for their role in the stock-market crash.

It is of some interest to look at the similarities between the reasons behind the banking crash of 1929, and the global crisis which began in 2008.

The subprime crisis which was the catalyst for the global financial crisis came about in large part because of financial instruments such as debt securitization where banks would pool their various loans into sellable assets, thus off-loading risky loans onto others. (For banks, millions can be made in money-earning loans, but they are tied up for decades. So they were turned into securities. The security buyer got regular payments from all those mortgages; the banker off loaded the risk. Securitization was seen as perhaps the greatest financial innovation in the 20th century.)

Rating agencies were paid to rate these products (risking a conflict of interest) and invariably they gave them good ratings, thus encouraging other people to invest in them. 

Banks borrowed even more money to lend out so they could create more securitization. Some banks didn’t need to rely on savers as much then, as long as they could borrow from other banks and sell those loans on as securities; bad loans would be the problem of whoever bought the securities.

Some investment banks like Lehman Brothers got into mortgages, buying them merely in order to securitize them and then sell them on.Some banks loaned even more to have an excuse to securitize those loans.

Running out of investors to lend to, banks turned to the poor; the subprime, the riskier loans. Rising house prices led lenders to think it wasn’t too risky; bad loans meant repossessing high-valued property. Subprime and “self-certified” loans (sometimes dubbed “liar’s loans”) became popular, especially in the US.

Some banks evens started to buy securities from others, while high street banks got into a form of investment banking, buying, selling and trading risk. Investment banks, not content with buying, selling and trading risk, got into home loans, mortgages, etc without the right controls and management.

The problem was so large, banks even with large capital reserves ran out, so they had to turn to governments for bail out. New capital was injected into banks to, in effect, permit  them to lose more money without going bust. That still wasn’t enough and confidence was not restored.

Shrinking banks suck money out of the economy as they try to build their capital and are nervous about loaning. Meanwhile businesses and individuals that rely on credit find it harder to get. A spiral of problems result. It had depressing similarities to the era of the Wall Street Crash in the USA in 1929.

 After the Depression of 1920-21, the United States embarked on a period of economic prosperity known as the Roaring Twenties. It was a time of innovation, especially in consumer goods such as automobiles, radio, and refrigeration. Along with these goods came new forms of consumer credit and bank expansion. National City Bank (forerunner of today's Citibank) and Chase Bank opened offices to sell securities side-by-side with traditional banking products like deposits and loans.

As the decade progressed, the stock market boomed and eventually reached bubble territory. Along with the bubble came market manipulation in the form of organized pools that would ramp up the price of stocks and dump them on unsuspecting suckers just before the stock collapsed. Banks joined in by offering stocks of holding companies that were leveraged pyramid schemes and other securities backed by dubious assets.

In 1929, the music stopped, the stock market crashed and the Great Depression began. It took eight years from the start of the boom to the bust. Subsequent investigations revealed the extent of the fraud that preceded the crash. In 1933, Congress passed Glass-Steagall in response to the abuses. Banks would be allowed to take deposits and make loans. Brokers would be allowed to underwrite and sell securities. But no firm could do both due to conflicts of interest and risks to insured deposits. From 1933 to 1999, there were very few large bank failures and no financial panics comparable to the Panic of 2008. The law worked exactly as intended.

In 1999, Democrats led by President Bill Clinton and Republicans led by Sen. Phil Gramm joined forces to repeal Glass-Steagall at the behest of the big banks. What happened over the next eight years was an almost exact replay of the Roaring Twenties. Once again, banks originated fraudulent loans and once again they sold them to their customers in the form of securities. The bubble peaked in 2007 and collapsed in 2008. The hard-earned knowledge of 1933 had been lost in the arrogance of 1999.

Now, when memories are fresh, is the time to reinstate Glass-Steagall to prevent a third cycle of fraud on customers. Without the separation of banking and underwriting, it's just a matter of time before banks repeat their well-honed practice of originating garbage loans and stuffing them down customers' throats. Congress had the answer in 1933. Congress lost its way in 1999. Now is the chance to get back to the garden.

That is an informed US viewpoint. The same risks are still prevalent in the British banking sector, and Government must think very carefully about ring-fencing the role of retail banking in the UK and put a clear demarcation between them and the casino banking practices which have caused so much damage to our finances and our economy. We cannot trust the banksters to agree to this reform, they must be driven to accept the inevitable.

The recommendation of the Vickers Commission is that UK banks’ retail operations should be “ring-fenced”. Banks will be required to establish a separate legal entity within their corporate group to provide retail and commercial banking services in the UK.  The purposes of this subsidiarisation are, first, to insulate retail banking operations from riskier financial activities and risks inherent in the global financial system and, secondly, in the event of failure, to ensure the continuous provision of retail banking services by ring-fenced banks, with reduced bail-out costs for taxpayers.

Such a reform must be insisted upon and become an electoral issue!

Just when you thought it was safe to go back into the water you get an SFO enquiry - The continuing alleged criminal dilemma at Barclays!

The SFO website can be really quite helpful.

Their uncompromising mission statement reads;

"...Our aim is to protect society from extensive, deliberate criminal deception which could threaten public confidence in the financial system.  We investigate fraud and corruption that requires our investigative expertise and special powers to obtain and assess evidence to successfully prosecute fraudsters, freeze assets and compensate victims..."

Its criteria for taking on an investigation are clear and precise. They state:

"...We only take on the most significant cases  and the key factors we consider before taking on a case are..."

·         Does the value of the alleged fraud exceed £1 million?

·         Is there a significant international dimension?

·         Is the case likely to be of widespread public concern?

·         Does the case require highly specialised knowledge, for example, of financial markets?

·         Is there a need to use the SFO's special powers, such as Section 2 of the Criminal Justice Act?

In addition to the above criteria we look for factors such as:

·         Whether the case involves or is linked to organised crime.

·         Whether the fraud will impact on the integrity of the financial market.

·         Whether there is a wider group than shareholders or creditors who have lost money as a result of the alleged fraud.

·         Whether the fraudsters have targeted financial institutions and government (local or central) or other public serving authorities.

·         Whether the case involves multiple countries.

·         Whether the evidence to be obtained during the course of the investigation will be found in multiple locations (within the UK or in other countries).

·         Whether the case involves multiple and complex financial transactions, for example involving many companies, accounts, Trusts and countries.

·         Whether the investigation will need to involve a large accountancy analysis.

Imagine therefore how the main board members at Barclays Bank must be feeling right now, in the knowledge that the SFO are investigating them yet again. If I were a middle ranking employee at this criminogenic bank, I would be wondering how much longer I could bear to go on working there. If I were a junior working on the counter, I would find it very difficult to look my customers in the eye. If I were a customer, I would be seriously asking myself if I should move my accounts! I mean, this is getting silly, how many criminal investigations do you need to have before someone gets the idea that this institution is just a nest of crooks?

It seems that every time you open a newspaper, Barclays are being investigated for yet another criminal allegation. There is already one major SFO investigation going on into the criminal manipulation of the LIBOR interest rate. Now, the SFO have announced another investigation into payments between Barclays and Qatar Holding, adding to an already ongoing regulatory investigation into dealings between the two parties. It relates specifically to fees paid to the Qatar Investment Authority on deals in June and November 2008, when Barclays raised 11.5 billion pounds.

Barclays said on Wednesday that the Serious Fraud Office (SFO) started an investigation into "payments under certain commercial agreements" between it and Qatar, confirming an earlier report. The Financial Services Authority (FSA), Britain's financial watchdog, is already investigating the bank and four current and former senior employees, including finance director Chris Lucas, on whether sufficient disclosures were made about the fees it paid in a 2008 capital raising.

The SFO probe differs as it is examining the bank, rather than the bank plus four individuals. The bank did not reveal which payments between it and Qatar were being investigated by the SFO, although the FSA is expected to share information with the SFO that it has obtained, and both are expected to ask for further information from the bank.

Qatar Holding, the entity involved in the investigation, is a unit of the Qatar Investment Authority, which is the largest shareholder in Barclays with a 6.65 percent stake, according to Reuters data.

The bank is already staggering after being fined £290 million by British and U.S. regulators in June for rigging Libor interest rates, sparking criticism about its culture and risk-taking and forcing its chairman and chief executive to quit.

In July 2012, Barclays admitted that the FSA had started an independent investigation into the Bank on the topic of fee payments, when the bank admitted its finance director Chris Lucas was one of four current and past employees being scrutinised over the fundraising. The bank said at the time that it had satisfied its disclosure obligations and that it will co-operate fully with the FSA.

The investigation by the FSA will now run alongside that of the SFO, which is understood to involve a broad look at the company's conduct with the Qataris. The Guardian is quoted as saying  '...A source close to the inquiry said: "The SFO is looking into the role of the company [Barclays]. I wouldn't discount anything..."

In June 2008, Barclays raised £4.5bn through an issue of new shares and in November 2008 it raised more than £7bn. Much of the focus appears to be on information provided in the June 2008 fundraising that describes "an agreement for provision of advisory services" by Qatar to Barclays in the Middle East.

Qatar Holding is a unit of the Qatar Investment Authority, which is the largest shareholder in Barclays with a 6.65% stake, according to data compiled by Reuters.

The June fundraising outlined an agreement "to explore opportunities for a co-operative business relationship" with Sumitomo Mitsui Banking Corporation of Japan. The fees disclosed for this fundraising totalled around £100m.

In the November 2008 fundraising, Barclays provided five separate disclosures of fees that amounted in total to around £300m. The Daily Telegraph of 30th August discloses that a figure of £110 million was paid to Sheikh Mansour Bin Zayed al Nahyan an Abu Dhabi royal,.

One of the Middle East investors who helped Barclays avoid a government bailout in 2008, the sheikh effectively sold his remaining stake in the bank in October 2010 after cashing in a total profit of about £2.25bn. Sheikh Mansour was one of three Gulf investors who helped Barclays raise £7bn in 2008 at the height of the financial crisis. The cash injection, the bulk of which came from Qatari investment vehicles, helped persuade the UK Government that Barclays could survive without a state bail-out. 

The revelation of these payments were tucked away at the bottom of page 87 of Barclays’ results.

"...Under other disclosure matters the statement was made that "...The FSA has commenced an investigation involving Barclays and four current and former senior employees...The FSA is investigating the sufficiency of disclosure in relation to fees payable under certain commercial agreements and whether these may have related to Barclays capital raisings in June and November 2008.

Barclays considers that it  satisfied its disclosure  obligations and confirms that it will cooperate with FSA's investigation..."

So what might this be talking about? It appears to relate to the two big capital raising exercises by Barclays in June 2008 and October / November 2008, when the bank raised nearly £12bn

This money came primarily from sovereign wealth funds and, in particular, from Qatar Holding and Sheikh Mansour Bin Zayed Al-Nahyan, a member of the Abu Dhabi royal family who in his spare time just happens to own Manchester City football club.

The first £4.5bn capital raising in June 2008 was controversial because it largely bypassed existing investors and instead raised more than £1.7bn from Qatar Holding, as well as significant amounts from Sumitomo Mitsui Banking Corporation, China Development Bank and Temasek Holdings, the Singaporean fund.

The second deal, announced at the end of October 2008 and completed in November was more controversial – in particular because the bank paid hundreds of millions of dollars in fees to three investors in exchange for their investment of around £5.4bn in Barclays, on top of the punitively high cost of the funding exercise.

Barclays raised £4.3bn in ‘mandatory convertible notes’ of which £2.8bn was taken up by Sheihk Mansour, Qatar Holding, and a company called Challenger (a Qatari vehicle set up in the British Virgin Islands for the express purpose of investing in Barclays), and which paid out a lucrative 14% coupon.

It also raised £3bn of ‘reserve capital instruments ‘ – effectively warrants – from Qatar Holding and Sheikh Mansour, which paid out 9.75% in the short-term.

These two issues came with some very unusual fees attached.

Qatar Holding received £12 million,  Challenger received £12 million and Sheikh Mansour received £112 million by way of commissions for investments they had agreed to make.

Qatar Holding and Sheikh Mansour each received a further £30m million each as commissions for other investments they agreed to make.

Qatar Holdings received a fee of £66 million for arranging certain subscriptions.

Credit Suisse and JP Morgan Cazenove each received £11.3 million in fees.

The two banks each received a further £900,000 each for assisting Barclays.

Quite why Barclays felt they had to pay these huge fees in exchange for the three investments in Barclays on extremely generous terms is not clear. It is  unusual to say the least, investors don’t  normally get paid sweetheart fees for the privilege of investing in something on which they expect to realise a vast profit.

These fee payments could only have been agreed at the very highest level of the bank, indeed it was the culture in the bank to refer every contentious decision upwards to the top. Speaking exclusively to The Independent in July 2012, a former senior Barclays employee exposed the “culture of fear” that operated at the bank. 

It is certain that Bob Diamond would have been aware of his subordinates' activities in making these payments.

Speaking on condition of anonymity, the banker said that senior Barclays bosses would have been told about every important issue such as Libor concerns and other important matters because staff were drilled to pass anything untoward up to their managers. Failure to do this meant the sack.

"Libor fixing (as well as all important decisions) was escalated by several people up to their directors, they would then have escalated it up the line because at Barclays if you don't escalate, and it is found out that you haven't, it is grounds for disciplinary action. You will be dismissed."

The banker also describes the dark side of working for Mr Diamond's bank. He spoke of management by intimidation, even physical threat, punishing hours and a ruthless grading system that left workers in terror of their annual appraisals. Employees were often reduced to tears by the end of a day, but only when they had departed from the building. Such weakness would not be tolerated inside.

It is not hard to understand why ordinary workers, fearful for their jobs in a time of serious recession would sooner turn a blind eye to anything untoward rather than get involved by bringing themselves to notice.

So there you have it. What we do know is that Barclays paid a total of around £400 million in fees to raise capital to support their balance sheet in 2008, instead of having to rely on British Government funding, in a way similar to that which shored up RBS. Asking the Government for financial help would have tied their hands considerably in terms of continuing to make their own investment decisions, and would have subjected their business dealings to some significant scrutiny and inquisitive oversight. Raising the money independently from helpful shareholders was probably a more palatable option.

What we do now know is that there are alleged suspicions surrounding those payments, so serious as to demand the special investigatory powers of the SFO to be employed. We also know that the SFO only intervenes in the most serious of financial crime cases, particularly in cases of fraud and corruption, where their " aim is to protect society from extensive, deliberate criminal deception which could threaten public confidence in the financial system..."

Hmmmmm!

The Exclusionary Impact of Convicting White Collar Criminals Why Banksters fear being convicted of crime

"...Go where you will, in business parts, or meet who you like of businessmen, it is - and has been for the last three years - the same story and the same lament. Dishonesty, untruth, and what may, in plain English, be termed mercantile swindling within the limits of the law, exists on all sides and on every quarter…"

No, this is not a comment from a contemporary website, it is taken from an editorial published in Temple Bar Magazine, of 1866. It was written when England was experiencing a plethora of fraudulent offerings in Railway shares, but the tenor of its complaint is as relevant today as it was then!

There is a growing groundswell of informed opinion among modern commentators that financial regulators should be far more willing to bring criminal charges against those financial practitioners whose actions should be construed as more than just negligent or incompetent.

I have never understood why white collar criminals should be treated in a different manner from working class criminals, but the fact remains that they are treated differently, and have been for many, many years.

The phenomenon was first recorded in a paper entitled 'White Collar Crime', published in 1949 by the American criminologist Edwin Sutherland, in which he pointed out;

"...‘There is a consistent bias involved in the administration of criminal justice under laws which apply to business and the professions and which therefore involve only the upper socio-economic group..." 

In 'White Collar Crime', Sutherland argued that the behaviour of persons of respectability, from the upper socio-economic class, frequently exhibits all the essential attributes of crime, but that it is only rarely dealt with as such. This situation arose, he said, from a tendency for systems of criminal justice in Western societies to favour certain economically and politically powerful groups and to disfavour others, notably the poor and unskilled who comprise the bulk of the visible criminal population.

"...Probably much more important however, is the cultural homogeneity of legislators, judges and administrators with businessmen. Legislators admire and respect businessmen and cannot conceive of them as 'criminals’; businessmen do not conform to the popular stereotype of the 'criminal..."

Another American sociologist William Chambliss put it this way;

"...One of the reasons we fail to understand business crime is because we put crime into a category that is separate from normal business. Much crime does not fit into a separate category. It is primarily a business activity..."

In his research, Sutherland discovered that the white collar criminal has no real fear of the regulators appointed to control the activities of the businessman, a state of affairs which he felt impeded the proper control of their activities. He discovered that actions by the regulators were considered to be an unfortunate interlude, but carried very little exclusionary status.  He identified that;

"...the violation of the laws designed to regulate business behaviour does not necessarily mean that the violator will lose social status among his business associates.  Although some members of the industry may think less of him, others will still admire him..."

It was very clear that the actions of regulators which were seen as a bureaucratic part of a governmental process, were not considered to possess a status which would diminish the perpetrator in the eyes of his social peers. He said;

"... white collar criminals customarily feel and express contempt for law, government and regulators in a way similar to that in which professional thieves express contempt for policemen and judges. Businessmen characteristically believe that the least amount of government is the most desirable state..."

My own experiences of dealing with white-collar criminals had demonstrated very similar findings and during some academic research I undertook, I decided to study whether or not the finding of a guilty verdict for a criminal offence of dishonesty would have an exclusionary impact upon a financial practitioner.

One financial criminal had said to me rather ruefully '...the white collar sector always assumed that its wrong-doing would be treated somehow differently from other crimes...'

George Robb (1992) in what is by far the most systematic discussion of nineteenth century business crime to date notes the reluctance of the legal and criminal justice systems to intervene in the social differentiation of the treatment of white collar criminals. He states;

"...From the mid-nineteenth century through the early decades of the twentieth, the law put few obstacles in the paths of white collar criminals, trusting instead that the free market would regulate itself and that good business would drive out bad. The liberal outlook was taken up by the law courts which neglected business frauds and treated white collar criminals with comparative leniency. Throughout much of this period, cultural perceptions of 'criminality' remained focused on the 'dangerous classes' while elite misconduct was seen as a relatively minor social ill..."

He notes that the harshest sentences for white collar offences were reserved for embezzling clerks rather than leading businessmen. He adds another factor, directly associated with the high status of the business community.

"...Another reason frequently given for the lenient sentencing of most white-collar criminals was that the shame and social disgrace attendant on criminal conviction were punishment enough for middle-class persons. Exclusion from polite society was viewed as a more serious penalty than imprisonment..... For white collar criminals prison was seen as ancillary to their personal sense of shame and loss of social status..."

I wanted to test how effective the social exclusionary impact would be for a financial practitioner being found guilty of a crime. My research set out to establish how financial practitioners would respond to the news that one of their social and commercial circle had first been suspected of, and then convicted for committing offences of insider dealing (a regulatory issue in their eyes) as opposed to an offence of theft (a criminal offence in their eyes).

In so doing I wanted to test Sutherland's assertion that regulatory offences were considered less important than criminal offences and would not carry the same degree of social and commercial exclusion.

In the course of a questionnaire which was completed by 93 financial services practitioners, I posed the following questions.

"...A person in another company who you have known socially for a long time and with whom your company has done business for many years has been reported in a serious newspaper as being suspected of Insider Dealing. How would this report impact on your social dealings with them..?"

48% responded that it would place a strain on their social relationship.

The question then asked how would it affect their commercial relations with them.

49% responded that it would place a strain on their commercial relationship.

They were then asked how a report of the other person being suspected of theft would affect their social dealings.

50% said it would place a strain on their social relations.

The question then asked how it would affect their commercial relations.

Again 50% said it would place a strain on their commercial relationships, while 38% said it would cause them to avoid any business dealings with them.

They were then asked how the fact that the person had been convicted of insider dealing would affect their social relationship.

In social dealings 38% said it would place a strain on their social dealings while 28% said it would cause them to avoid the social relationship. However, 18% said it would make no social difference at all.

In business dealings 78% said it would cause them to drop the business relationship altogether.

Finally when asked how a conviction for theft would affect their social dealings,  36% said it would cause them to drop social dealings altogether, while another 30% said it would cause them to avoid them socially.

When asked how it would affect their commercial dealings, 92% said they would drop the commercial relationship altogether.

It was clear that insider dealing generally did not attract the same degree of social opprobrium as theft. Significantly, more respondents said that in social dealings, a report that a person was suspected of insider dealing would make no difference to their relationship than if that person was suspected of theft. More respondents thought that suspicion of theft would place a greater strain on their relationship than suspicion of insider dealing.

A very similar pattern emerged in social attitudes towards persons convicted of theft and insider dealing. Again, insider dealing did not attract the same degree of opprobrium and the difference between those who would avoid the social relationship in either case and those who would drop the social relationship was remarkably similar.

In business dealings however the figures were dramatically different from those identified in social dealings. Again, insider dealing generally did not attract the same degree of opprobrium as theft, but nevertheless, the percentages of respondents who would drop the business relationship altogether for persons convicted of theft or insider dealing was significant.

What was very clear from these responses was that in business dealings, conviction of a criminal offence places the convicted person in a very defined capacity as far as financial practitioners are concerned, which is in  a marked contrast to their social position.

These figures clearly demonstrate that while financial practitioners are more prepared to tolerate breaches of the social code, borne out by the fact that a greater percentage are prepared to continue a social relationship with a convicted person, in business, the vast majority are unable to continue any relationship with a convicted person. It is felt that these figures provide support for Sutherland's theory that breaches of the business code are considered more seriously than breaches of the social code and it is submitted that the breach identified here is not so much the specific offence for which the individual is convicted but the fact of the conviction itself.

I believe that these statistics prove categorically that the financial sector sees little to fear in the actions of regulators, because whatever the outcome, the penalties do not lead to social or commercial exclusion from the financial sector. Fines have no impact on the individuals in the banks, instead, their impact is only felt by the shareholders.

The much-trumpeted theory that reputational damage is caused does not seem to have too great a degree of preventative effect.

However, what clearly works beyond any other measure is a conviction for what could be termed 'an ordinary criminal offence'. It immediately places the defendant in the ranks of ordinary common criminals, and its commercial exclusionary impact has been amply demonstrated in this article. Being convicted of a crime is the route to the door marked 'exit', and it means that the convicted person can never come back into the City because no-one will be willing to work with him or employ him in future.

It must be hoped that we will not have to listen to any more special pleading on the part of the regulators that there are other, better methods of regulating the financial sector, methods which have a greater deterrent effect, because there are none!

In addition, criminal convictions lead to asset confiscation orders, and financial recovery proceedings, so ill-gotten gains can be recovered from the criminal. The proceeds of the crimes become launderable and any other person who has facilitated in their distribution or dissemination can be prosecuted for money laundering.

For these reasons, we must insist that Government implement an urgent review of the powers of the regulators to bring criminal prosecutions, and their relationship with the SFO and the Crown Prosecution Service to be upgraded and given far more flexibility, in the hope that we shall see many more banksters being forced to grip the rails at the Old Bailey.

A few selected prosecutions and convictions will send such a shock-wave through the ranks of the hitherto spoiled and arrogant financial practitioners so that they will quickly lose the mistaken perception that they are a 'protected species'.

Regulating the Banks - What must Government do now?

The British banking sector, certainly as it impacts the big banking conglomerates, is an obsolete and broken edifice. It is now damaged beyond any kind of meaningful repair, and it needs a radical reform of its function, its role, its systems, its employees and management, and above all, its criminogenic culture.

Paul Moore, the whistleblower who exposed the criminal goings-on inside HBOS, and who was sacked for his temerity has put the problem in these terms;

“...The whole banking system is broken and needs total reform. We need a fully transparent, forensic no-holds-barred inquiry in which everyone with a vested interest in further cover-ups, which includes existing and past politicians, existing and past regulators, any City of London grandee, must be barred from taking part other than as a  witness. It should be presided over by three judges and three ordinary British people voted onto the tribunal.”

Included in the list of persons who should be debarred from having any part in this debate except as witnesses would be all accountants, lawyers, Big 4-type consultants, recruitment agencies, and any other agency that derived an income from serving the banking sector, and whose commercial interests were served by the continuance of the status-quo.

Something very bad has happened to the British financial sector, something deeply corrosive and cynical. I trace it back to the era of 'Big Bang', the revolution in financial trading systems, and the emergence of foreign banking institutions coming into London to take advantage of the regulatory free-for-all, which arrived in the wake of de-regulation.

In his article, "...Mavericks at the Casino: Legal and Ethical Indeterminancy in the Financial Markets...",  Christopher Stanley identifies the development of this new phenomenon within the previously ordered environment of the City of London.

       "...The New City reflected the ideological aspirations of a system of political administrations which disrupted the post-war consensus of relations between polity and economy. It also reflected the Casino or Disorganisation of Capitalism: an international financial system in which gamblers in the casino have got out of hand. The New City was international, technological and subscribed to the Enterprise Culture ethos which placed individual success and self-reliance as the primary indicators of excellence. The structural changes which the Government introduced, in terms of trading practice and regulation, operated with the new financial products and markets to ensure that the particular elite of the Old City, which was (now) perceived as a dangerously destabilising hegemonic counterforce as a result of the tension between Establishment and Disestablishment, was dislodged in the face of externally imposed change. Thus settled norms of conduct were open to disruption'..."

      

      "... Pursuing the 'Legitimation of Deviancy' theory, Stanley draws upon the concepts of the 'Anomie of Affluence' to attempt 'explanations in this formulation of individual conduct within this particular field of moral and economic deregulation.' He posited a vision of a market in which money no longer possessed any intrinsic value as a benchmark of the underlying value of the commodity traded, but became a 'free-floating signifier detached from the real processes to which it once referred...there is therefore a transition in its nature as a commodity to which moral or ethical values can be attached. In addition the artificiality of electronic money enables the further disappearance of the victim and the possibility of justification through reference to prevailing economic rationality ('Greed is Good').

Put more succinctly, the old settled ways of the City of London had been replaced by a culture of 'get rich quick and the devil take the last person holding the parcel when the music stops'. The banks had ceased to be institutions with defined roles and functions. Whereas before they had placed significant focus on the prudent management of the public's limited savings, providing them with a clearing system which enabled the ordinary citizen to conduct his personal financial business in a safe and efficient manner, now the emphasis rapidly passed to the focus on 'casino'-style banking, proprietary trading on behalf of the parent bank, gambling in the open market to make vast profits.

So profitable did this business become at the height of the boom, that even politicians were bamboozled into believing that it could go on and on. Gordon Brown was more bedazzled than many, and in his slavish adherence to the power of these markets, he waxed lyrical in their praise.

An example of Brown’s dewy-eyed adoration for financial alchemists can be read in his Mansion House speech in 2007,just before the whole edifice went belly-up! He said;

 “I congratulate you on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London ... I believe it will be said of this age, the first decades of the 21st century, that out of the greatest restructuring of the global economy, perhaps even greater than the industrial revolution, a new world order was created."

If you are reading these words for the first time, you must after the devastating market crash be wondering what planet Gordon inhabited. He has never once since felt it necessary to apologise for this lunatic analysis, or for the era of destabilisation it unleashed. Instead, in usual Brown style he sought to lay the blame for his incompetence on others, and in this case, the banks themselves. He was reported in the Guardian on 14th October 2010 as follows:

"...Brown has admitted mistakes in regulating the banks, accusing the City of lobbying against greater scrutiny before the financial crisis plunged Britain into recession. Brown had previously blamed the scale of the recession mainly on the international financial crisis and the refusal of other countries to agree to tighter international surveillance of the banks.

In an ITV interview due to be broadcast tonight, Brown admits he had been influenced by bankers' lobbying.

"In the 1990s, the banks, they all came to us and said, 'Look, we don't want to be regulated, we want to be free of regulation.' ... And all the complaints I was getting from people was, 'Look you're regulating them too much.'

"The truth is that globally and nationally we should have been regulating them more. So I've learnt from that..."

The City had once again managed to do what the City has a genius for, they had completely suckered the Labour Government who interpreted the arrogance and pushiness of the City elite, as some kind of financial expertise.  Brown was so enthralled by the financial figures which were being wafted over his desk, he was determined as Chancellor to let them have their head, and he encouraged them to carry on in the same vein.

An article in the London Progressive Journal identified yet another of the many Brown mistakes.

"...He therefore called for ‘light touch regulation,’ in other words less regulation on the City and finance capital. Before his Mansion House audience in 2007, he called for, "a risk-based regulatory approach". It was an old theme. In the same hall three years before, he pledged that "in budget after budget I want us to do even more to encourage the risk takers"  

Now of course we know better. We now know that 'light touch' regulation really means 'no regulation' and present proposals for regulatory reform do not carry any weight.

Paul Moore, former head of group regulatory risk and so-called ‘HBOS whistleblower’, who last month set up the New Wilberforce Alliance to campaign for economic and financial reform, said:  “I am a huge fan of Conservative MP Andrew Tyrie but his commission is not going to work. In the light of recent revelations and the post-crisis whitewashes and cover ups, hardly anyone in the UK trusts the politicians, the government, the regulators to handle this any more.”

Among solutions proposed by the alliance include that the fiduciary duties of the directors of publicly-quoted companies, including banks, should be amended to encompass public duties. Moore said: “There should be legal obligation not to focus solely on destructive goals such as short-term profit and share-price maximisation.”

Moore also favours a return to full-reserve banking. Under full-reserve banking, banks must retain the funds of each depositor in reserve, either as cash or other highly liquid assets, often deposited with the country’s central bank, rather than use them as seed capital for speculative trades.

He added: “We should also be looking to cut off the heads of the hydra that the banking issue has become, by breaking up the banks into smaller units, creating regional, credit-style banks like landesbanks and credit banks. There has to be a deconstruction of the ‘too big to fail’ institutions and a firm enforcement of the split between their retail and casino arms. That will ultimately deprive the casino arms of the ability to borrow speculative capital for the purposes of gambling in world markets.”

Moore also said that there should be a blanket ban on banks engaging in proprietary trading. “Proprietary trading is an abuse of a dominant position in information, often generated through conflicts of interest, mathematics, and computer science.”

Most important of all, we must in future see a regime of financial regulation which encompasses the recognition that in all cases where fraud, market manipulation, money laundering, insider dealing or any of the myriad offences of which banks have been guilty in the past, they will be prosecuted to the limit of the law.

There must be no more cosy deals done in backrooms whereby junior members of staff are offered up as sacrificial lambs, while the main board directors walk free, and the institution they manage pays up, even a large fine. It doesn't matter how much you fine banks, the only people who suffer are the shareholders.

We have to install a system of regulation whereby the regulatory agencies are staffed with young, ambitious prosecutors who have the moral courage to go up against the big institutions, with the knowledge, and the power to bring down even the most senior executive.

In the United States, it is a common way for a young and ambitious lawyer to make his or her mark by joining one of the public prosecutorial or regulatory agencies, and then taking on the very biggest cases, with a view to getting big convictions which will catch headlines. In this way, the lawyer becomes observed to be someone who is has credibility and they become a sought-after commodity, in both private practice or in public life.

We need the same brand of morally-courageous prosecutors in the UK because that will begin to dismantle the aura of 'too big to jail' which has been allowed to cling to too many financial practitioners.

What is the likelihood of any of these reforms happening under the present government? Let me know your views.